IRA CONTRIBUTION LIMITS RISE FOR 2013

Save a little more for retirement.

Time to boost your IRA balance. In 2013, you can contribute up to $5,500 to your Roth or traditional IRA. If you will be 50 or older by the end of 2013, your contribution limit is actually $6,500 this year thanks to the IRS’s “catch-up” provision. The new limits represent a $500 increase from 2012 levels.1

January is an ideal time to max out your annual IRA contribution. If you are in the habit of making a single annual contribution to your IRA rather than monthly or quarterly contributions, try to make the maximum contribution as early as you can in a year. More of your money should have an opportunity for tax-deferred growth, not less. While you can delay making your 2013 IRA contribution until April 15, 2014, there is no advantage in waiting – you will stunt the compounding potential of those assets, and time is your friend here.2

Do you own multiple IRAs? If you do, remember that your total IRA contributions for 2013 cannot exceed the relevant $5,500/$6,500 contribution limit.3

Your IRA contribution may be tax-deductible. Are you a single filer or a head of household? If you contribute to both a workplace retirement plan and a traditional IRA in 2013, you will be able to deduct the full amount of your IRA contribution if your modified adjusted gross income is $59,000 or less. A partial deduction is available to such filers with MAGI between $59,001-69,000.4

The 2013 phase-outs are higher for married couples filing jointly. If the spouse making the IRA contribution also participates in a workplace retirement plan, the traditional IRA contribution is fully deductible if the couple’s MAGI is $95,000 or less. A partial deduction is available if the couple’s MAGI is between $95,001-115,000.4

If the spouse making a 2013 IRA contribution doesn’t participate in a workplace retirement plan but the other spouse does, the IRA contribution may be wholly deducted if the couple's MAGI is $178,000 or less. A partial deduction can be had if the couple’s MAGI is between $178,001-188,000. (The formula for calculating reduced IRA contribution amounts is found in IRS Publication 590.)5

You cannot contribute to a traditional IRA in the year in which you turn 70½ or in subsequent years. You can contribute to a Roth IRA at any age, assuming your income permits it.1

What are the income caps on Roth IRA contributions this year? Single filers and heads of household can make a full Roth IRA contribution for 2013 if their MAGI is less than $112,000; the phase-out range is from $112,000-127,000. For joint filers, the MAGI phase-out occurs at $178,000-188,000 in 2013; couples with MAGI of less than $178,000 can make a full contribution. (To figure reduced contribution amounts, see Publication 590.) Those who can’t contribute to a Roth IRA due to income limits do have the option of converting a traditional IRA to a Roth.7

As a reminder, Roth IRA contributions aren’t tax-deductible – that is the price you pay today for the possibility of tax-free IRA withdrawals tomorrow.8

Can you put money in an IRA even if you don’t work? There is a provision for that. Generally speaking, you need to have taxable earned income to make a Roth or traditional IRA contribution. The IRS defines taxable earned income as...

*Wages, salaries and tips.
*Union strike benefits.
*Long-term disability benefits received before minimum retirement age.
*Net earnings resulting from self-employment.

Also, you can’t put more in your IRA(s) than you earn in a given year. (For example, if you are 25 and your taxable earned income for 2013 amounts to $2,592, your IRA contributions for this year can’t exceed $2,592.)9

However, a spousal IRA can be created to let a working spouse contribute to a nonworking spouse's retirement savings. That working spouse can make up to the maximum IRA contribution on behalf of the stay-at-home spouse (which does not affect the working spouse’s ability to contribute to his or her own IRA).

Married couples who file jointly can do this. The IRS rule is that you can contribute the maximum into this IRA for each spouse as long as the working spouse has income equal to both contributions. So if both spouses will be older than 50 at the end of 2013, the working spouse would have to earn taxable income of $13,000 or more to make two maximum IRA contributions ($12,000 if only one spouse is age 50 or older at the end of 2013, $11,000 if both spouses will be younger than 50 at the end of the year).6,9

So, to sum up ... make your 2013 IRA contribution as soon as you can, the larger the better.

Citations.
1 – www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits [11/28/12]
2 – finance.zacks.com/can-ira-contribution-carried-forward-5388.html [1/9/12]
3 – helpdesk.blogs.money.cnn.com/2012/06/06/can-i-contribute-more-than-5000-to-multiple-iras/ [6/6/12]
4 – www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work [11/26/12]
5 – www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work [11/26/12]
6 - www.irs.gov/publications/p590/ch01.html#en_US_2011_publink10002304123 [2011]
7 - www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2013 [11/27/12]
8 - www.irs.gov/taxtopics/tc309.html [12/17/12]
9 - www.creators.com/lifestylefeatures/business-and-finance/money-and-you/can-you-contribute-to-an-ira-if-you-don-t-have-a-job.html [2011]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

THE FALLACY OF PREDICTIONS

One of the more interesting myths in the investment world is that large financial institutions, with their access to mountains of data pored over by teams of staff economists, can determine where the markets are going and profit accordingly. Gullible investors believe this even though, every year, we can go back to the confident predictions of brokerage firm leaders and leading hedge fund managers and see a hard-to-explain gulf between expectation and reality.


This past 12 months, the broad U.S. markets delivered roughly a 16% return, depending on which of the indices you're measuring--a good year by any standard. So let's jump into a time machine and see whether the brokerage firms were telling us to go all-in on stocks and take full advantage of this nice little bull market run.

They weren't. Adam Parker, who serves as the U.S. equity strategist for the mighty Morgan Stanley organization, boldly predicted that the S&P 500 index would fall 7.2% in 2012. He recently said that he underestimated the impact of central bank stimulus.

Credit Suisse's "strategist" Andrew Garthwaite, Wells Fargo "strategist" Gina Martin Adams and Bank of America/Merrill Lynch "strategist" Savita Subramanian forecast essentially flat returns for U.S. equities.

David Kostin of Goldman Sachs, meanwhile, predicted that the S&P 500 would drop 25% in the midst of a Euro collapse, and boldly predicted that Europe's sovereign debt crisis would worsen "almost daily." John Paulson, founder of what may be the most famous global hedge fund, based in NY, told clients in April that he was wagering heavily against European sovereign bonds. UBS economist Jonathan Golub forecast struggling equities in the face of European recession.

In fact, the Eurozone became practically the epicenter of bad Wall Street predictions; crafty traders watched in dismay as Greek bonds surged in value in 2012, and the Euro itself strengthened about 9.4% from its July 24 low against the dollar. Germany's DAX Index managed to survive the predicted freefall by returning 29% to investors who ignored their brokers and stayed the course in Europe. The most dire predictions came from Citigroup economist Willem Buiter in London, who told reporters last February that there was a 50% chance Greece would leave the euro within 18 months. In May, he raised the risk to 75%, and cited a 90% chance of departure in July--and said he was assuming that there would be an exit by January 1.

2012 is not an isolated incident; in fact, last year a company called CXO Advisory Group--which tracks more than 60 market "gurus" (the company's term)--calculated that the average Wall Street expert forecaster had been accurate only 48% of the time over the long term. Translated, that means that a coin flip is a slightly more accurate predictor of the future than the experts you see on cable's financial TV channels.

But of course this is the season when, once again, the experts, economists and visionaries put on their gypsy shawls, get out their crystal balls, and tell you with calm certainty where the markets are going in 2013. You are about to be deluged with confident predictions from Wall Street, along with Money Magazine telling you "the smart place to put your money now," and once again it will all sound believable. Perhaps the best advice is to imagine, as these gurus come on the tube, that they are wearing tall, floppy wizard hats with a bright crescent moon inscribed on the front.

Or you can turn off the TV and pull out a more reliable guide to the future: any one of the coins in your pocket that happens to have a head and a tail.

Sources:
http://www.businessinsider.com/top-equity-strategists-forecast-2012-2011-12#goldman-sachs-1250-2
http://www.fa-mag.com/news/almost-all-wall-street-got-2012-wrong-12998.html
http://www.reuters.com/article/2012/01/05/us-gurus-predictions-idUSTRE8040QK20120105

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

THE FISCAL CLIFF DEAL & YOUR TAXES

What will change (and won't change) as a result of the new legislation.

Several tax hikes, some tax breaks. Now that the fiscal cliff deal assembled in Congress is becoming law, it is time to look at some of the tax law changes that will result. Here are the major details in the bill, which will bring significant tax hikes to some households in an effort to increase federal revenues by $600 billion over the next ten years.1

The Bush-era tax cuts will be preserved for at least 98% of taxpayers. Individuals with incomes of $400,000 or less and households with incomes of $450,000 or less will not see their federal income tax rates rise. The EGTRRA/JGTRRA cuts have been made permanent for such earners.2,3

The wealthiest Americans are looking at a major income tax hike. The top marginal tax rate will rise 4.6% in 2013 to 39.6%. Individuals with more than $400,000 in taxable income and couples with more than $450,000 in taxable income will be affected. This is the first major income tax increase on the highest-earning taxpayers in 20 years.2,3,4

Now when you take that 39.6% top rate and pair it with the oncoming 3.8% Medicare surtax, what is the impact for the wealthiest taxpayers in dollar terms? It is major. The non-partisan Tax Policy Center calculates that in 2013, households with incomes between $500,000 and $1 million should see their federal income taxes rise by an average of $14,812. What about households with incomes above $1 million? The TPC projects taxes rising an average of $170,341 for these couples and families this year.3

Practically speaking, all working Americans will see taxes rise in 2013. The payroll tax holiday of the past two years officially ends with the new bill's passage. In 2011 and 2012, employee payroll taxes were reduced by 2% as an economic stimulus - an idea that came from the White House. In 2013, the payroll tax rate returns to its old level and employees will pay 6.2% in Social Security taxes rather than 4.2%. This tax break saved a worker making $50,000 annually about $1,000 last year. Employee earnings up to $113,700 will be taxed.3,4

Estate taxes now top out at 40%. Additionally, the individual estate tax exemption falls slightly to $5 million. Both of these changes are permanent.4

The AMT has been patched - permanently. Congress no longer has to arrange an annual fix for the Alternative Minimum Tax that was never indexed to inflation. This patch is retroactive to 2012, of course.4

The Pease provision & personal exemption phase-outs are back. As a result of the deal, 80% of itemized deductions will be eliminated in 2013 for individuals with adjusted gross incomes of more than $250,000 and couples with adjusted gross incomes of more than $300,000. That threshold is also where personal exemption phase-outs will start in 2013.4

Dividends will not be taxed as ordinary income. Single filers with taxable incomes of more than $35,350 and joint filers with table incomes above $70,700 will see a top dividend tax rate of 15% this year. Dividends coming to individuals making more than $400,000 and households making more than $450,000 will return to the 20% level, 5% higher than they were in 2012. Investors in the 10% and 15% tax brackets will pay no taxes on dividends.2,4

The top capital gains tax rate is now 20%. Wealthy investors paid a 15% tax on long-term capital gains and qualified dividends in 2012. That will rise 5% this year. Single filers making more than $400,000 and joint filers making more than $450,000 will face this tax hike. Those in the 25%, 28%, 33% and 35% federal tax brackets will pay 15%, and those in the 10% and 15% brackets will face no capital gains taxes.4

Long-term unemployment benefits live on. They will be sustained through the end of 2013 for roughly 2 million people.2

Another "doc fix" has been made. Drastic cuts in Medicare payments to physicians will be avoided for 2013 as a result of the new legislation.2

The EITC, AOTC & Child Tax Credit will be extended through 2017. President Obama has long sought to preserve the $2,500 American Opportunity Tax Credit for college expenses, the Earned Income Tax Credit and the Child Tax Credit - and that will occur thanks to the fiscal cliff deal. The $250 deductions for teachers' classroom expenses will also be extended into 2013.4

50% bonus depreciation is preserved for 2013. The tax break that permits companies to accelerate depreciation schedules for major capital investments lives on for another year.4

The R&E tax credit & wind production tax credit are both sustained. Both federal tax breaks are available again for 2013.2

The charitable IRA rollover provision returns. You can practically hear the cheers ringing out at non-profits across the country: thanks to the fiscal cliff deal, people over age 70½ will again be permitted to make tax-free transfers from an IRA to a charity, university, or other qualified non-profit organization in 2013.4

The "sequester" will be delayed 2 months. The automatic federal spending cuts that were set to occur January 2 will be postponed until March while Congress tries to craft a plan to replace them.2

Citations.
1 - www.npr.org/templates/story/story.php?storyId=168366341 [12/31/12]
2 - www.cnbc.com/id/100348205 [1/2/13]
3 - latino.foxnews.com/latino/politics/2013/01/02/what-fiscal-cliff-deal-means-for-american-taxes/ [1/2/12]
4 - online.wsj.com/article/SB10001424127887323820104578216092043022764.html [1/1/13]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.