Contributions to a Roth IRA are never tax deductible on your federal income tax return, which means that you can contribute only after-tax dollars. But amounts contributed to the Roth IRA grow tax deferred and, if certain conditions are met, distributions (including both contributions and investment earnings) will be completely tax free at the federal level.

A Roth IRA, like a traditional IRA, is not an investment, but a tax-advantaged vehicle in which you can hold some of your investments. You need to decide how to invest your Roth IRA dollars based on your own tolerance for risk and investment philosophy. How fast your Roth IRA dollars grow is largely a function of the investments you choose.

For 2013, you can contribute up to the lesser of $5,500 ($6,500 if you’re age 50 or older) or 100 percent of your taxable compensation to a Roth IRA.

You may also be able to contribute up to $5,500 to a Roth IRA in your spouse’s name even if he or she receives little or no taxable compensation ($6,500 if your spouse is 50 or older). However, not everyone qualifies to use the Roth IRA. Even if you do, you may not qualify to contribute the annual maximum. The amount you can contribute to a Roth IRA (if any) depends on your modified adjusted gross income (MAGI) for the year and your federal income tax filing status.

Contact us today to help you with your retirement planning questions.  Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant South Carolina area.  We provide hourly financial planning services and asset management services.

The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2013.

Note that you can make your annual IRA contribution in a series of payments rather than in one lump sum. For example, let’s say you want to invest the maximum amount in your IRA for 2013. You can either make a lump-sum contribution of $5,500, or you can set up a savings plan whereby you invest a fixed amount each month in your IRA. Because you’re allowed to spread your 2013 IRA contribution over a 15½-month period (January 1, 2013 through April 15, 2014), you can invest as little as $354.83 per month and still end up contributing the full $5,500.

Contact us today to help you with your retirement planning questions.  Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant South Carolina area.  We provide hourly financial planning services and asset management services.

The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2013.

A 401(k) in-plan Roth conversion (also called an “in-plan Roth rollover”) allows you to transfer the non-Roth portion of your 401(k) plan account (for example, your pretax contributions and company match) into a designated Roth account within the same plan. You’ll have to pay federal income tax now on the amount you convert, but qualified distributions from your Roth account in the future will be entirely income tax free. Also, the 10% early distribution penalty generally doesn’t apply to amounts you convert.

While in-plan conversions have been around since 2010, they haven’t been widely used, because they were available only if you were otherwise entitled to a distribution from your plan–for example, upon terminating employment, turning 59½, becoming disabled, or in other limited circumstances.

ATRA has eliminated the requirement that you be eligible for a distribution from the plan in order to make an in-plan conversion. Beginning in 2013, if your plan permits, you can convert any part of your traditional 401(k) plan account into a designated Roth account. The new law also applies to 403(b) and 457(b) plans that allow Roth contributions.

Contact us today to help you with your questions in regards to whether it makes sense to convert your contributions into a Roth IRA. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant South Carolina area.  We provide hourly financial planning services and asset management services.

The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2013.

However, January 1, 2013, saw legislation–retroactively effective–pass the U.S. Senate, and then later the House of Representatives. The American Taxpayer Relief Act of 2012 (ATRA) permanently extends a number of major tax provisions and temporarily extends many others. Here are the basics.

Tax rates
For most individuals, the legislation permanently extends the lower federal income tax rates that have existed for the last decade. That means most taxpayers will continue to pay tax according to the same six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2012. The top federal income tax rate, however, will increase to 39.6% beginning in 2013 for individuals with income that exceeds $400,000 ($450,000 for married couples filing joint returns).

Generally, lower tax rates that applied to long-term capital gain and qualifying dividends have been permanently extended for most individuals as well. If you’re in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. If you are in the 25%, 28%, 33%, or 35% tax brackets, a 15% maximum rate will generally apply. Beginning in 2013, however, those who pay tax at the higher 39.6% federal income tax rate (i.e., individuals with income that exceeds $400,000, or married couples filing jointly with income that exceeds $450,000) will be subject to a maximum rate of 20% for long-term capital gain and qualifying dividends.

Estate tax
The Act makes permanent the $5 million exemption amounts (indexed for inflation) for the estate tax, the gift tax, and the generation-skipping transfer tax–the same exemptions that were in effect for 2011 and 2012. The top tax rate, however, is increased to 40% (up from 35%) beginning in 2013.

The Act also permanently extends the “portability” provision in effect for 2011 and 2012 that allows the executor of a deceased individual’s estate to transfer any unused exemption amount to the individual’s surviving spouse.

Phaseout or limitation of itemized deductions and personal exemptions
In the past, itemized deductions and personal and dependency exemptions were phased out or limited for high-income individuals. Since 2010, neither itemized deductions nor personal and dependency exemptions have been subject to phaseout or limitation based on income, but those provisions expired at the end of 2012.

The new legislation provides that, beginning in 2013, personal and dependency exemptions will be phased out for those with incomes exceeding specified income thresholds. Similarly, itemized deductions will be limited. For both the personal and dependency exemptions phaseout and the itemized deduction limitation, the threshold is $250,000 for single individuals ($300,000 for married individuals filing joint federal income tax returns).

Other expiring or expired provisions made permanent

• “Marriage penalty” relief in the form of an increased standard deduction amount for married couples and expanded 15% federal income tax bracket
• Expanded tax credit provisions relating to the dependent care tax credit, the adoption tax credit, and the child tax credit
• Higher limits and more generous rules of application relating to certain education provisions, including Coverdell education savings accounts, employer-provided education assistance, and the student loan interest deduction
• Provisions relating to increased earned income tax credit amounts for families with three or more children are extended through 2017
• American Opportunity credit provisions relating to maximum credit amount, refundability, and phaseout limits are extended through 2017
• The $250 above-the-line tax deduction for educator classroom expenses, the limited ability to deduct mortgage insurance premiums as qualified residence interest, the ability to deduct state and local sales tax in lieu of the itemized deduction for state and local income tax, and the deduction for qualified higher education expenses are all extended through 2013
• Charitable IRA distributions (IRA holders over age 70½ are able to exclude from income up to $100,000 in qualified distributions made to charitable organizations) are extended through 2013; special rules apply for the 2012 tax year
• Exclusion of qualified mortgage debt forgiveness from income provisions extended through 2013
• Exclusion of 100% of the capital gain from the sale of qualified small business stock extended to apply to stock acquired before January 1, 2014
• 50% bonus depreciation and expanded Section 179 expense limits extended through 2013

The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2013.

The maximum amount you can contribute to a traditional IRA or Roth IRA in 2013 increases to $5,500 (or 100% of your earned income, if less), up from $5,000 in 2012. The maximum catch-up contribution for those age 50 or older remains at $1,000. (You can contribute to both a traditional and Roth IRA in 2013, but your total contributions can’t exceed this annual limit.)

Traditional IRA deduction limits for 2013

The income limits for determining the deductibility of traditional IRA contributions have also increased for 2013 (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income (“modified adjusted gross income,” or MAGI) is $59,000 or less (up from $58,000 in 2012). If you’re married and filing a joint return, you can fully deduct your IRA contribution if your MAGI is $95,000 or less (up from $92,000 in 2012). If you’re not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $178,000 or less (up from $173,000 in 2012).

Roth IRA contribution limits for 2013

The income limits for determining how much you can contribute to a Roth IRA have also increased. If your filing status is single/head of household, you can contribute the full $5,500 to a Roth IRA in 2013 if your MAGI is $112,000 or less (up from $110,000 in 2012). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $178,000 or less (up from $173,000 in 2012). (Again, contributions can’t exceed 100% of your earned income.)

Employer retirement plans

The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan has increased for 2013. The limit (which also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Plan) is $17,500 in 2013 (up from $17,000 in 2012). If you’re age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2013 (unchanged from 2012). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($17,500 in 2013 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan–a total of $35,000 in 2013 (plus any catch-up contributions).

Simple IRA, Simple 401(k) and 401(k) Profit Sharing Plans

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan has increased to $12,000 for 2013, up from $11,500 in 2012. The catch-up limit for those age 50 or older remains unchanged at $2,500.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2013 is $51,000 (up from $50,000 in 2012), plus age-50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans has increased to $255,000, up from $250,000 in 2012; and the dollar threshold for determining highly compensated employees remains unchanged at $115,000.

Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant area. The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2012.

If you don’t currently have a will, now is the time for you (and your partner, if any) to draw one up. If you do have a will, you’ll need to review it. You’ll want to nominate a guardian for your child and decide how you want your assets distributed. You may also consider setting up a trust to protect your child’s interests after your death. You should also review your beneficiary designations.

Wills
Each parent should have a will to ensure smooth distribution of his or her estate. After your child is born, you should review your will (or draw up a will if you don’t already have one) to make sure that your assets are distributed as you would like, to nominate a guardian for your child, and to choose an executor for your estate.

Tip: You may want to write a letter to your child that will be your testament (i.e., a message from you that your child can read at a future date). It can be about anything–your philosophy on life, the family history, or some advice that you’d like to give your child. You can attach a copy to your will or put it in with your important records for safekeeping.

Example(s): When her daughter Sara was born, Emily wrote a letter to her that described the night Sara was born and Emily’s hopes and dreams for Sara’s future. When Emily was killed in a car accident the year Sara turned 16, Sara read the letter and found out that her mother was proud of her and really wanted her to attend college. So Sara worked hard the next two years of school so that she could get into the local university.

Nominating a guardian
Choosing a guardian for your child is very important. If you die without naming a guardian for your child, it will be up to the court to do it for you, and the person whom the judge names may not be the person you would have chosen to look out for your child. When choosing a guardian, look for someone who will look out for the best interests of your child, preferably someone who has the time and energy to meet the demands of raising a child. Make sure that you ask a potential guardian whether he or she would like to serve as your child’s guardian. Often someone you think is the perfect choice really doesn’t want the responsibility. For this reason, you should also nominate a contingent guardian.

Periodically rethink your choice of guardian. As your children grow older, you can ask them whom they would like to live with in the event you die. Although this can be a scary subject for children, it’s important to raise the issue with them. In addition, once your children are old enough, tell them whom their guardian will be in the event you die.

Setting up a trust
Setting up a trust can be a good way of passing your assets along to your child. A trust document lists how you want any money left to your children spent, and it can ensure that your child’s money is protected. A trust can help the guardian manage assets and make sure that estate funds are used to benefit your children according to your wishes.

Insurance issues
Before your child is born, review your insurance coverage to make sure that you and your family are adequately protected. If you or your spouse is going to quit your job(s), you may cut off your life, disability, or health insurance benefits from that job, and you’ll need to buy more coverage.

Life insurance
Having a child will increase your need for life insurance coverage. Many experts recommend that you have life insurance equal to five times your annual salary.

Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant area. The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2012.

Important questions to consider:

The keys to financial success are commitment, discipline and a well thought out strategy.

1. Will you have sufficient money to fund retirement? Your child’s education?

2. If you become disabled, will you have enough income to sustain your current standard of living and still pay the extra medical costs?

3. In the even of premature death, will your family’s lifestyle be compromised?

4. Are you taking the necessary steps to minimize taxes?

5. Do you know where you stand financially and what steps need to be taken to meet future needs?

If the answers to any of these questions concern you, it may be worthwhile for you to speak with a financial planner.  We can help provide you a detailed profile of your current financial standing.

Contact us today to help you with your financial planning questions or concerns. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant South Carolina area.

Basics of Borrowing from a 401k Plan

• Keep in mind, not all 401k plans allow borrowing as an option.
• Plans may allow as much as 50% of your vested account balance, up to $50,000 dollars.
• Just like any loan, you pay the loan back, with interest, from your paycheck.
• Interest rate is usually set at prime rate plus 1 or 2 percentage points.
• Usually, you have up to 5 years to repay your loan, or longer if funds used for principal residence.

Advantages of Borrowing from a 401k Plan

• It is convenient.  No credit check or credit application form.
• Low interest rate compared to other types of loans or credit card interest rates.
• No restrictions; you can borrow the money for any reason.
• You paying interest to yourself, instead than a bank or credit card company.

Disadvantages of Borrowing to 401k Plan

• Opportunity cost of earnings lost while borrowing the money.
• Reduction in the amount you contribute to 401k plan as you pay back the loan.
• If you quit working or change employers, the loan must be repaid back immediately.  If you can repay the loan, it is considered defaulted, and you will be taxed on the outstanding balance, including an early withdrawal fee of 10% if you are not at least age 59 1/2.

Things to Consider

• Borrow from your 401k plan as a last result because borrowing will set you back meeting your future retirement goals.
• Never borrow if you are planning to leave your job within the next couple of years.
• Never borrow if there is a chance you will lose your job.
• Never borrow to time the market.
• Never borrow to purchase some luxury item or pay for a vacation.

Contact us today to help you with your questions in regards to whether it makes sense to borrow from your 401k plan. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant South Carolina area.

Explaining Financial Planning Credentials

When choosing a financial planner, you should be aware that some financial professionals who use this title are not truly qualified to give comprehensive financial planning advice. In general, a financial planner will have one or more of the following credentials:

CERTIFIED FINANCIAL PLANNER professional (CFP®)–This is the most rigorous and prestigious credential. CFP® professionals must have a minimum of three years of related experience and have completed a course of study registered with and approved by the Certified Financial Planner Board of Standards, Inc. (CFP Board). They must also pass a two-day 10-hour exam that covers all aspects of financial planning. In addition, they must adhere to a professional code of ethics and fulfill 30 hours of continuing education every two years. Many also belong to the Financial Planning Association, a professional organization. If a planner says that he or she is a CFP® licensee, ask to see the planner’s CFP Board license or call (888) CFP-MARK to check.

Chartered Financial Consultant® (ChFC®) and Chartered Life Underwriter® (CLU®)–Some financial planners are members of the Society of Financial Service Professionals, a professional association for life insurance agents. To receive either designation, planners must have at least three years of experience and complete a course of study through the American College in Bryn Mawr, Pennsylvania. Certification is rigorous and prestigious, and planners earning these designations must adhere to certain ethical standards.

Accredited Personal Financial Specialist (PFS)–The PFS designation is granted to CPAs who are members of the American Institute of Certified Public Accountants, and who earn a minimum of 80 hours of personal financial planning education, successfully pass a PFP-related exam, and have at least two years of full-time business or teaching experience.

Registered Financial Consultant (RFC®)–This designation is awarded by the International Association of Registered Financial Consultants (IARFC) to advisors who have a college or graduate degree in financial services, or who have earned an IARFC-approved designation or professional degree. The RFC® also must have a minimum of four years experience as a full-time practitioner or educator in the field of financial planning or financial services. He or she must also meet licensing requirements, and they must complete continuing education courses, and adhere to a code of ethics.

The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2012.

Why is financial planning important?
A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you’ll be better able to focus on your goals and understand what it will take to reach them.

The financial planning process

Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:

• Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan
• Establish and prioritize financial goals and time frames for achieving these goals
• Implement strategies that address your current financial weaknesses and build on your financial strengths
• Choose specific products and services that are tailored to meet your financial objectives
• Monitor your plan, making adjustments as your goals, time frames, or circumstances change

Staying on track

The financial planning process doesn’t end once your initial plan has been created. Your plan should generally be reviewed at least once a year to make sure that it’s up-to-date. It’s also possible that you’ll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

• Your goals or time horizons change
• You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
• You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
• Your income or expenses substantially increase or decrease
• Your portfolio hasn’t performed as expected
• You’re affected by changes to the economy or tax laws
• Common questions about financial planning
• What if I’m too busy?
• Don’t wait until you’re in the midst of a financial crisis before beginning the planning process. The sooner you start, the more options you may have.

Is the financial planning process complicated?
Each financial plan is tailored to the needs of the individual, so how complicated the process will be depends on your individual circumstances. But no matter what type of help you need, a financial professional will work hard to make the process as easy as possible, and will gladly answer all of your questions.

Contact us today to help you with your IRA contributions and investments. Manuel A. Martinez is a CERTIFIED FINANCIAL PLANNER™ focused on helping families and small businesses in the Charleston and Mount Pleasant South Carolina area.

The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2012.