Take a Year-End Financial Health Check
Dynamic Business Article
by Bruce Fenton
"A financial check up will help you cut taxes, cope with market
uncertainty, and start a retirement plan."
When it comes to cutting taxes, the three biggest mistakes Americans make are:
waiting until December 31 to assess their income for the year; missing out on
the latest tax-deferred pension plan benefits, and trading stocks based on tax
consequences rather than on value and growth potential.
Assess Annual Income Now
Estimate income for this year now. Those who expect a big bonus may be able
to defer payment until next year. Delay exercising stock options until next
year, if possible. Small business owners may hold off December billing until
2001 to cut current income. Pay professional expenses such as association dues
now. Give old computers to charity. Donate stock that has appreciated to
non-profit organizations and take the full value as a deduction. Bunch up costly
medical procedures such as dental work. These simple tactics can cut the federal
Take full advantage of Individual Retirement Account (IRA) rules. IRAs offer
tax-deferred growth and extra retirement saving to meet expenses later in life.
Consider a Roth IRA. Roth-IRAs require taxes to be paid for the current year,
but the build up and payout at retirement are tax-free. Married couples, filing
jointly, may participate in a Roth IRA if income does not exceed $160,000.
Limits for single taxpayers are $110,000. Those who have established a Roth IRA
and want to convert to an ordinary IRA may do so by tax filing time if income
exceeds the allowable maximum.
Don't ignore Education IRAs for minor children. These IRAs allow a $500
deduction per child, which can mount up in substantial tax savings for those in
a high tax bracket with several children.
Start a Retirement Plan for Your Business
Small business owners miss out on the biggest tax benefit in America,
setting up a retirement plan of their own. While there are 19.2 million
unincorporated businesses in the United States, less than 149,000 of them have
retirement plans, according to the latest IRS statistics available (1997). These
are not people baking cookies or building birdhouses. Total income for these
small businesses was nearly one billion dollars, showing that there is
sufficient income to fund a retirement plan.
401 (k) and other qualified pension plans available to small businesses are
generally more flexible and generous than large corporate plans.
Older wealthy business owners and professionals, whose expenses are lower due to
having grown children and paid-up mortgages, may want to consider a Defined
Benefit Plan. These plans allow them to set aside enough money on a tax-free
basis so that they can receive a retirement income of 100 percent of their
annual compensation for life (up to a maximum of $130,000 annually) indexed for
inflation. Up to $160,000 per year in compensation may be used for Defined
Benefit Plan computations.
With a Defined Benefit Plan, a professional earning $500,000 annually, who
expects to retire in less than five years, can set aside the bulk of annual
income to create a portfolio large enough to earn $130,000 annually. Younger
workers in the company must be included, but the contribution for their
retirement plan will be relatively small since their incomes are lower and their
time until retirement age is much longer. When the owner retires, he or she may
then terminate the plan and purchase annuities to cover the benefit commitment.
rules for 2000 allow those with a Defined Benefit Plan to also
participate in a Defined Contribution Plan and set aside an additional 25
percent of income, up to $30,000 annually in one of several such retirement
Take a Hard Look at Investments
Year-end is a good time to assess your stock portfolio and other assets with
regard to age, financial requirements, and risk tolerance. While tax
consequences should not dictate investment decisions, consider selling off
losing issues (how much you paid for a stock has no bearing on its value today).
However, if you do plan to sell at a loss, remember only $3,000 may be applied
against ordinary income. It may be best to sell a portion of stock by December
31 and another portion after January 1, 2001.
When it comes to investing for 2001 stick to the basics. Invest for the long
term, and base decisions on fundamental business attributes such as sales
growth, share of market, and quality of management. Don't try to go it alone,
solid advice is available and, unless you plan to be very active in making stock
picks, consider professionally managed mutual funds that meet your requirements.
Editors Note: Bruce Fenton is president of Atlantic Financial,
specializing in qualified pension plans, 401(k), and financial advisory.