Average Americans earning income through wages, tips, commission or compensation through self employment constitute collectively a significant portion of the investment dollars managed by funds, trustees, insurance companies and banks. You may be surprised by the investment figures of average Americans. There are various ways to make an investment in your future even if you are not well off. Some employers offer deferred compensation programs. In this method you do not even see the money, it is deducted from your paycheck and goes into an IRA type of fund.
Other employers may provide contributions to a simple IRA-Sep investment account and you are allowed to contribute a portion of your income in addition to the employer contribution. There are various vehicles for you to become an investor. Your bank, insurance agent, stock broker or credit union manager can provide you with the nuts and bolts of setting up an investment plan. The range of products include mutual funds, annuities, stocks and certificates of deposit. The key factors are your age, income and the result you want from your investment dollars.
Traditional IRA Investment:
The traditional IRA has some advantages if you are young or mid-life. The IRS has guidelines as to age ceilings and the total amount that may be contributed. The advantage of the traditional IRA is that your annual contribution is deductible for your current tax year. The down side is that it isn’t when you take the money out. There are fees and penalties for early withdrawals. Review IRS Publication 590 for details and pay particular attention to maximum contributions for year 2006 because it is different from year 2005. Sit down and talk to your human resources benefits clerk at your place of employment or your bank or credit union. If something seems unclear you can call the IRS at their toll free number or talk to a tax preparer that has good qualifications.
The Roth IRA Investment:
The traditional IRA may have some tax advantages for you by allowing your contributions to be deducted from your current tax year. The Roth IRA, however is tax free when you take the money out for your retirement. The Roth IRA is not a method to reduce your taxable income. There are requirement of the type of funds you may participate. Most mutual funds, annuities and certificates of deposit are approved, but review the list of criteria the IRS sets forth in Publication 590. There is no upward ceiling for the age you are when you decide to set up a Roth IRA. The Roth is a flexible retirement account that allows you to invest through a managed mutual fund, bonds and annuities account. Your stock broker, any mutual fund manager, credit union manager, insurance agent or bank can provide you with what they may offer in terms of the Roth IRA. Many employers offer baskets of funds through a managed mutual fund account that will allow you to set this up at work. The important thing to remember is tax year 2006 is slightly different in the aspect of maximum contributions so you should be familiar with the current IRS Publication 590.
Disclosure Statement–IRA Investment:
The IRS requires all trustees, sometimes sponsors of the above mentioned funds to supply you with a detailed statement of the important aspects of your rights in the fund. This detailed and plain language statement must state how to revoke the IRA. It must state who to contact, their address and phone number. This statement should be given seven days before your IRA goes into effect, but at the least gives you seven days to revoke after you receive the statement.
If your revocation takes place with this period your entire contribution is returned to you and in most instances the sponsor must fill out the proper IRS form. Read this statement carefully and make sure this is what you were told by the trustee or sponsor when you initially signed up for the IRA. Ask your tax advisor or financial advisor to review the disclosure statement with you.
Self Employment Compensation
According to IRS Publication 590 compensation is the net earnings of your trade or business. The proviso is that your personal services are a material income producing factor. If you are a free lance writer your services are part and parcel to the production of income. Essentially what this addresses is hobbies and passive involvement in a business. Ask your tax preparer if you are confused.
Your net earnings from self employment are then reduced by the total deductions of a retirement plan made on your behalf and the deduction of one half of your self employment tax. Yes, there is a tax for being self employed. If you have earning from covered employment and self employment compensation, both are totaled to give you your net income.
Alert! Watch Year End Distributions by Mutual Fund Investments:
Mutual Funds are required to pass along any income and capital gains to investors before years end. Dividends and capital gains are taxed at 15 percent. The reason for this advice is let’s say you decide to take your Christmas bonus or mad money and put it in a mutual fund on December 15. If the distribution has not occurred for the year 2006, you get taxed on a gain you did not get. So, it is timing. If you invest in a mutual fund in December or early January, 2007 make sure the distribution for 2006 has already occurred.
Finally, Your Investment Attitude:
The most important tip is to read and review investment opportunities. Discuss your investment plan with someone your trust with a financial background. Look for investment ideas from banks, credit unions, brokers and human resources personnel, but remember you are the final decider of your investment future. There are a lot of investment platforms that you may consider but you have to be very careful with your options.