Markets may have rebounded in 2009, but individual investors are still edgy and shell-shocked.

Even as the broad Standard & Poor’s 500-stock index remained up 56% since March, the U.S. unemployment rate crept above 10%, according to a Labor Dept. report released Nov. 6. “I don’t think many people are feeling very relieved,” says Milo Benningfield of Benningfield Financial Advisors in San Francisco. Many people believe the “[stock market rally] can’t last,” he says.

These remain risky times, and the last few years have demonstrated to investors the high cost of doing the wrong thing. Against that nervous backdrop, BusinessWeek asked financial advisers what common mistakes investors are making, and how to avoid them:

1. Don’t Jump In All at Once
A little optimism can be a dangerous thing. Individual investors are notorious for selling stocks when markets have already dropped and buying after they have risen. And, says Susan Elser of Elser Financial Planning in Indianapolis, “Selling low and buying high is the worst thing you can do for your returns.”

Among those who stayed away from stocks and other risky investments for the past year, many are irked to have missed out on the recent rally. But is now the right time to buy again?

Don’t rush back into the market because you worry you’ve missed the rally. “The biggest mistake is [to try] to make everything up at once,” says Micah Porter, president of the Minerva Planning Group in Atlanta.

At these levels, a 10%, 15%, or 20% correction in the stock market is entirely possible at almost any time. So, instead of buying all at once, Porter advises buying stocks gradually over the next year—or, if you have a lot to invest, an even longer time frame. That puts you in the market long-term, but minimizes the chances you’ll buy at the market’s exact peak.

2. Don’t Fall for Fads or Hype
In investing, jumping on the bandwagon is often a bad idea.

For example, television ads have appeared touting gold as an investment after the precious metal’s price has jumped higher, approaching $1,100 per ounce on Nov. 6.

Yet this could be the very time when gold prices are at or near their peak. “This is probably the worst time in my opinion to pile into gold,” Benningfield says. He also warns against currency speculation, another recent fad. “It’s really risky,” he says.

Along with other commodities, gold can be a valuable part of investment portfolios. But advisers like Steve Medland of TABR Capital Management in Orange, Calif., suggest keeping gold to less than 5% of your holdings.

Lots of marketing dollars are also pushing equity-indexed annuities these days. “It is the hot product of the day,” Elser says. But Elser, Medland, and others warn about the complexity and high fees of these annuities.

3. Don’t Use Headlines or Politics as Investing Guides
“Making [an investing] decision based on who is in political office, whether you agree or disagree, is a huge mistake,” says Elaine Scoggins, client experience director at Merriman, a Seattle-based investment advisory firm.

Since the election of Barack Obama as President, political temperatures on the right have risen (just as tempers rose among liberals during the last Administration). And that could be leading to bad investing decisions.

Based on their political beliefs, people are buying into disaster scenarios, from high inflation to a crash for the U.S. dollar to skyrocketing tax rates, Scoggins says. “There are a lot of scare tactics in the media and in politics.”

Betting your portfolio on these unlikely outcomes can be a big mistake.

“There’s incredible fear out there,” says Paul Sutherland, chief investment officer at FIM Group in Traverse City, Mich. But not all the fear is warranted. For example, he notes, a weaker dollar actually can help U.S. manufacturing or U.S. firms with overseas profits.

Politics and current events tend to spark emotions, which are a poor guide for long-term investing, Medland says. “What’s going on in the headlines doesn’t predict what is happening in the markets,” he says.

However, one political fact investors should be aware of is the likelihood of higher taxes for wealthier Americans. Though it’s hard to know when and how much rates will increase, good financial advice can help taxpayers minimize their tax bills in some cases. For example, Americans might take investment gains now, while capital gains rates are still relatively low.

4. Don’t Disregard Quality
Since March, the lowest-quality companies have had the best-performing stocks. Punished in the depths of the financial crisis, they have rebounded on hopes of a recovery. For example, banks, industrial firms, or very small companies—i.e., risky firms highly influenced by the financial crisis and the recession—have seen their shares double or triple in price.

Meanwhile, companies with stable, consistent businesses have often languished in the stock market.

Don’t expect that trend to continue. In fact, the trend may have already ended.

Consider the firms that have done best over the last 12 months in boosting revenue. According to Capital IQ, the top 100 revenue-raisers in the S&P 500 are up a median of 50.3% since the March low, while the firms with the 100 worst 12-month sales-growth records have rocketed higher by a median of 96.7%.

In the last month, though, the performance between the two groups began evening out, and in the past week the trend has reversed entirely. In the first week of November, the median quality firm is up 0.6%, while the median worst firm is actually down 0.2%.

John Merrill, chief investment officer at Tanglewood Wealth Management, says the shift may be the result of a new kind of investor entering the market. These stock managers have been cautious for months, but now they believe they need to start buying. Still wary of risk, “They’re going to take the safest step into the market,” Merrill says.

Firms with strong fundamentals also can be more resilient long-term bets and may be selling at cheaper prices after the recent rally, Sutherland says. “There are a lot of quality companies selling at great prices,” he says.

The same may be true in the bond market. Porter warns against buying high-yielding junk bonds after an “incredible run” for the risky investments.

5. Don’t Forget What You Learned
The sudden drop in stocks in 2008 and early 2009 taught every investor what can go wrong. Financial experts say these lessons shouldn’t be forgotten, even amid a stock market rally.

“People should always be thinking about those worst-case scenarios,” says Medland. The biggest mistake in a crisis, he says, is to not have a plan in advance.

The crisis also taught investors something about themselves, about their ability to invest for the long-term without selling low and buying high.

If you panicked in March and sold all your stock, you’ve lost out on big gains. If you’re susceptible to such investing mistakes in times of crisis, maybe you should pursue a more conservative strategy, Elser says.

“People who jump in and out of the market probably shouldn’t be in the market,” Elser says. “You either have that tolerance for volatility or you don’t.”

For many investors, “one lesson is maybe they took on too much risk,” Benningfield says.

Against the backdrop of a tough job market, investors are desperate for returns from their investments. They’re still smarting from huge holes in their portfolio caused by the market meltdown. But it’s important to remember: If you lost big on risky investments in 2008 and early 2009, the solution is not to take on even more risk in an attempt to win back your losses.

Source:businessweek.com

The impetus of the 2010 Roth IRA conversion was the government’s need to get money. Traditional IRA accounts are not taxed until the money is removed. Roth IRAs are taxed before the money goes in. So, the need of the government for tax dollars could be a great benefit to individuals who want to create a retirement income that will not be taxed.

When a person converts their traditional IRA to a Roth IRA they will have to pay taxes on the value of the contribution. This is calculated using several different methods which include income of the individual, tax bracket, etc. However, once this tax has been paid and it is in the Roth IRA there will not be a need to pay taxes on it when one retires. That money, and the growth that it sees during the time it is in the account are not taxable income.

In order to get more individuals to participate in the 2010 Roth IRA Conversion the government also lifted the limitation that disqualified people making over $100, 000 in adjust gross income. These individuals can now participate in this IRA. The phase out of the ROTH contributions continues to be in place so if an individual cannot contribute because of the phase out there has been no provision made for them to re-enter the program.

The benefits of a Roth are innumerable. One is that the money in the ROTH is pre-taxed so one does not have to worry about taxes when they begin to receive benefits from it. the drawback, of course, is that there is no IRA deduction with these IRAs. Certainly a worthwhile trade off.

The next benefit is in regards to the Required Minimum Distribution that tax deferred IRAs have. When a person turns 70. 5 they have to take money from their IRA and it is taxed. If they don’t take the money out they are taxed and penalized. Since Roth’s has already been taxed it does not fall into the Required Minimum Distribution trap.

source: ezinearticles.com

The second type of insurance is cash value insurance. There are many financial products that fall under this category. They can include universal life insurance, variable life insurance and whole life insurance. Cash value insurance combine regular term insurance with a tax-sheltered savings plan that is long-term. One of the most important things to know about cash value policies is that they must be held for life, but this does not mean that premiums need to be paid for life; it is possible you only need to pay premiums for 5 -7 years. In most cases, there will be some upfront costs that are associated with setting up the savings plan, paying a commission to the agent and investing the money. Despite these initial charges, this type of tax-sheltered savings can have huge advantages, however, be aware that it may take at least 10 years for those advantages to be a benefit. If you are thinking of purchasing a cash value policy, make sure you learn about every aspect of the policy.

Understanding how a general cash value policy works is essential. Your life insurance is paid by a portion of your regular premium payment. The balance is then applied to the savings account attached to the policy. In order to build savings, your advisor should request a minimum death benefit and fund the policy over at least 5-7 years. The premiums for a cash value policy are higher than that of a term life policy with the same death benefit, but you are not buying this policy for the death benefit, but rather for tax-free savings and tax free withdrawals. For this retirement strategy, you definitely want to get the minimum death benefit to maximize the cash value growth. While the premium may seem higher, savings is the ultimate goal. The savings from a cash value policy can provide you with income that will cover all life insurance payments upon retirement. If you die, the balance of the savings and the death benefit is then passed onto your named beneficiary, which ideally will be an irrevocable trust. Depending on the type of policy, the amount passed on will be a portion of the death benefit of the insurance or in addition to that death benefit.

If set up correctly, removing money from the plan will not result in income taxes which is one of the key benefits of the policy. There are strict rules regarding taking money from the savings in the plan, but a good advisor or Estate Street Partners will walk you through those details.

In the author’s opinion, the best type of cash value life insurance is Indexed Equity Universal Life (EIUL) because it has an annual minimum return guarantee, but still allows the cash value to grow at market rates every year if the stock market has positive returns. These policies lock in the gains in up years and avoid losing money in the years the market goes negative. Usually these policies are tied to a stock index like the S&P 500.

The mechanics are simple: The insurance company does not invest in the stock market, rather they invest in bonds and some of the interest that is generated from the bonds goes to you to guarantee a minimum rate of return and some of the interest is used to buy call options on the index. When the stock market index goes up it pays off the policy at the same rate of return of the market.

There are many people who will buy a cash value policy and then cancel it. Cash value plans can provide great benefits, but you must keep that policy and not cancel it. If you think you may cancel a life insurance policy later, it may be better to purchase a term life policy instead. But there is really no need to cancel it, just stop paying the premiums and the cash value will continue to grow tax free. Unlike a Term life policy, one does not need to pay premiums for more than 5 years unless they want too.

If you are contemplating buying life insurance, make sure the agent breaks it all down. You want to know the exact benefits of each type of policy and what these benefits entail. Many agents will recommend you to buy cash value because of the savings plan attached to it. While this may be a good option for most, it may not benefit everyone in the same way; it depends on each individual’s situation. Each person has their own needs when it comes to life insurance, so make sure you get all the information needed before making a decision.

source: ezinearticles.com

Eligibility for Retirement Savings Contribution Credit (in 2008):
Single person with income less than $26,500 a year
Head of household with income less than $39,750
Joint return with income less than $53,000

These amounts change every year. Check out the IRS web site for the latest figures by searching IRS.gov for “Retirement Savings Contribution Credit.”

The credit is not available to full time students and people claimed as a dependent on someone else’s (like a parent’s) tax return.

The tax credit runs on a sliding scale, starting at 50 percent for single filers with income under $15,500 and joint filers with incomes less than $31,000. The 50 percent tax credit means that for every dollar that you contribute to your 401k, your tax bill is reduced by 50 cents. As incomes rise, the tax credit falls, until it reaches ten percent for those just under the threshold of eligibility.

Think about what this means for the lowest income workers whose companies will match half of their contributions: putting money into the 401k is free! Half the contribution is matched by the company, and the other half offsets federal taxes. It’s a great deal if you can tighten your belt a little to be able to make the contribution.

Keep in mind, however, that this is not a “refundable credit.” If you have enough deductions that you owe no tax whatsoever, you will not get cash back from the government. You’ll only benefit if you have a tax liability. (I’m NOT talking about whether you get a refund after you file your taxes; I’m talking about whether your tax return shows that you pay any tax at all.)

The Retirement Savings Contribution Credit is a very good help to lower income workers concerned about their retirement. Unfortunately, it does not apply to very many people. Those folks who are eligible often feel that they have very little discretionary income. Saving for retirement is hard for low-income workers, but it is possible. This tax credit will make the task a little easier.

source: ezinearticles.com

As a retirement investment, an Individual Retirement Account (IRA) has multiple advantages and disadvantages:

• Pros:
  • Tax deferred until withdrawal.
  • Individual, customized control of investments.

• Cons:
  • Very low yearly contribution allowance of $5,000.
  • 10% withdrawal penalty.
  • Lack of liquidity if the contributor needs the money for another purpose.

Benefits of an Individual Retirement Account (IRA)

The most significant advantage of an IRA is that it’s a tax deferred plan similar to a 401k. For example, if you are making $50,000 a year and opt to put the maximum of $5,000 a year into your IRA, your income rate for taxes will be considered $45,000. This tax deferment also means that when you withdraw the funds upon retirement, the withdrawn amount is taxed as income.

Owners of the account have a variety of investments that can be funded with their IRA account. These generally include a variety of stocks, bonds and mutual funds. Investments such as real estate have further limits set in place by the individual retirement account (IRA) administrator. Collectibles and life insurance are not permitted to be held in individual retirement accounts (IRA).

The tax deferment feature of an individual retirement account (IRA) is generally popular because individuals expect to have lower yearly income in their retirement years than in their working years. In this case, being taxed at their lower income rate during retirement can save money over being taxed at the higher income rate received during their working years.

Deposit Limits of an Individual Retirement Account (IRA)

The yearly deposit limit for an IRA is $5,000 in 2008 and 2009. There is an additional “catch-up” allowance of $1,000 a year for individuals 50 or older. There is a restriction on this catch-up contribution in that the owner must have already made the maximum contribution to their Individual Retirement Account (IRA) and an employer sponsored 401k. These deposit limits are also in place for a Roth IRA and the total deposit between two separate accounts can’t exceed the limits listed above.

Withdrawing funds from an Individual Retirement Account (IRA)

As with a 401k, there is an early withdrawal limit on individual retirement accounts (IRA) if the money is distributed outside of the allowable exceptions. The IRA is open to withdrawal once the owner reaches the ages of 59 ½. At the age of 70 ½ the owner is required to withdraw the minimum amount which is calculated as a combination of life expectancy of the owner, their spouse, and any beneficiaries.

Other exceptions to the penalty include:

• Medical expenses that exceed 7.5% of the owners adjusted gross income.
• Withdrawal in order to buy a first home.
• Inability to work any longer (disability).
• Costs of medical insurance while unemployed.
• Distributions to a beneficiary if the owner dies.
• Higher education expenses of the owner, their children or their grandchildren.

Types of Individual Retirement Accounts (IRA) Available

The above information is all in reference to a traditional individual retirement account (IRA). The following is a list of non-tradition IRAs available and how they differ from the traditional plan.

Roth IRA

The primary difference is that a Roth IRA is not tax deductible and the owner pays taxes on the money before it is deposited into the account. On the other hand, the money is not taxable once the owner begins to withdraw funds. Additionally, any capital gains, dividends, and interest earned in the account are not taxable. The Roth IRA also does not have a requirement to begin withdrawals by age 70 ½. There is a maximum yearly income allowed to be eligible to contribute to a Roth individual retirement account (Roth IRA). For full contributions this limit is $105,000 for single filers and $166,000 for those filing jointly.

SEP IRA

The Simplified Employee Pension Individual Retirement Account (SEP IRA) is an IRA account specifically meant for self-employed individuals and their employees. The account is shared among all members involved and uses a profit-sharing model. The contribution limits for an SEP IRA are the lesser of 25% of income or $49,000 in 2009. All members of the SEP IRA are required to make the same contribution.

Individual Retirement Accounts (IRAs) are popular among individuals who are looking to plan out their retirement. It is important when planning for retirement to understand the different options available and how to fit them into your personal preferences. You can read more about how an individual retirement account (IRA) fits into saving for retirement and retirement investing here.

source: ezinearticles.com

What is the difference?

Here is a general breakdown of the two: SEP IRA’s allow for tax-deductible contributions as well as deferred growth. The contribution limits for the SEP IRA is 25% of your compensation with a cap of $44k. The only issue with this is that the IRS only allows you to contribute 25% of you net profit. This is where one of the major advantages come into play for a solo(k).

A Solo(k) has the same contribution limits however you can not only contribute 25% of profit sharing you can also contribute tax-deductible salary deferrals of up to $15k per year. Basically you can make very little self employed income and defer it all. This gives you an added advantage if your self employed income is your secondary income and you are looking to maximize your tax advantages. Best of all there is no UBIT on leveraged real estate or investments, and you have the ability to borrow against the plan.

You can also add your spouse to the plan and your total annual contributions can total $109k for joint filers over the age of 50!! Another key advantage is that you can separate your Solo(k) into four Sub-Accounts or ”buckets”:

1) Two Salary Deferral Buckets: Allocate up to $16.5k or $22k (if over age 50) to either:
• Roth Sub-Account (No restriction on AGI)
• Traditional Tax Deferred Sub-Acount

2) Profit Sharing Bucket: Lessor of:
• A) $49k (minus $16.5k from salary-deferral)
• B) 25% of your ”compensation” or ”earned income”

3) Rollover Bucket: All Rollovers go here, both funds are not permitted

4) A TPA is required. Pre-established relationship with Pension Benefits Consultants (PBC) In summary you can win big being self-employed and having a Solo(k).

source: ezinearticles.com

As of 2009 you can invest up to $16,500 if you are under the age of 50. If you are between 50 and 59 years and 6 months of age then you have an additional $5,000 catch-up investment you can make to prepare for your retirement.

If you are looking at this amount and thinking you’d like to add more to it than that, or you would like to diversify the money you are currently saving, you may want to look into a Roth IRA option.

With a traditional employer sponsored 401K plan money is taken from your checks before taxes are taken out and the money is deposited into your retirement plan. When you reach 59 and 1/2 years old and are able to start making withdrawals from the account you will then pay taxes on this money. If you have to pay the taxes eventually, why would you want to invest before taxes? The tax money that you smartly invested will grow and help you earn returns, giving you a healthier nest egg.

While the 401k maximum contribution is much higher than the Roth IRA option, and as I’ve mentioned above the 401K has many advantages, you may want to look at the IRAs as well.

A Roth IRA works a little differently, however. The first big difference is that an IRA, or independent retirement account, is set up by you, independently. You have more control of the account and pick your investments completely on your own, or with the guidance of the company you select to handle the account. A Roth account has the added difference that the money you invest is after taxes, which means that in retirement you won’t have to pay taxes on your withdrawals.

With a mix of the two investments you’ll be able to diversify your tax obligations and experience the best of both investment options.

As mentioned above the 401K maximum contribution is at $16,500 with a catch up limit of $5,000 for those over 50 years of age. Independent retirement accounts, as of 2009, have a limit of $5,000 with a $1,000 catch up.

source: ezinearticles.com

A traditional plan is done through your employer. The money you invest is taken from your checks before taxes are taken out of your income. The money you invest will earn returns and grow a great deal over the years.

When you withdraw money in retirement the money you invested will be taxed, though the profit earned on the investments is exempted.

When you originally put money into your plan the money that is taken before taxes is not considered taxable income until retirement. This means that the money you put into your plan gives you a 401K deduction for that year, hopefully lowering your income bracket and then lowering the percentage of taxes you have to pay that year.

While this isn’t a real tax deduction, because you will still have to pay the taxes when you withdraw in retirement, it does put off paying taxes on that income until then, and allow you to invest that money and help you grow your retirement savings.

The maximum amount of money you are allowed to invest in your traditional pre-tax plan changes every year. The government changes this amount based on the annual inflation rate and other factors. As of 2009 you are allowed to contribute up to $16,500 with a $5,000 catch-up contribution for those over the age of 50.

Even if you aren’t contributing to the maximum to your plan every bit you do contribute helps, and depending on your income bracket you may be able to lower your tax level without having to contribute that much. Before making any investment plans based on your tax needs it is recommended that you speak with your tax professional about your specific income needs, they can help you plan not just for your current tax requirements, but for your obligations in retirement as well.

As a strategy for lowering your income bracket, and raising your retirement savings in more ways than one, the 401k deduction is definitely information that more people should be made aware of, and discuss with their financial professionals.

source: ezinearticles.com

I see your still getting conflicting opinions about converting a traditional IRA to a Roth in 2010 when there are no IRS  income restrictions. And, it is still not a good financial decision.

There is actually a very easy way to decide. Ask yourself this question “would I do it if I am 701/2 years old? You probably would not. If that is your answer, then why would you consider doing it at any other age?

A 701/2 year old has a traditional IRA worth $200,000 and is in the 28% tax bracket. This individual has a choice to make: pay the tax now on a conversion to a Roth or pay it over the next 50 years – which is how long you get to pay the deferred taxes on a traditional IRA.

By converting to a Roth IRA the individual would have to come up with $56,000 to pay the tax now. Instead, put this same $56,000 into its own traditional IRA as cash – earning nothing. The individual has to take required minimum distributions as prescribed by law. The first withdrawal is 3.77% of the account balance. Amortize the $56,000 balance according to the official RMD schedule and the account would be depleted at age 120. Think about how much this account would accumulate if you could earn a return higher than 3.77%.

Lets go younger. You are 30 years old with a $30,000 traditional IRA. The Roth conversion tax is $8,400 at the 28% tax rate. If that amount stayed invested in the IRA earning 7%, it would grow tax deferred to $126,000 at age 70 ½. Put that amount in its own IRA and amortize it just like in the example above.

It seems to me that if I owed someone money, like the Government for taxes way into the future and there are no financing charges, why would I pay it off all at once now? I know there are many other Ezine articles that advocate converting to a Roth due to the tax free appeal, but most do not address the time value of money of the lump sum payment versus installment payments.

source: ezinearticles.com