Retirement & Financial Planning Report Issue Thursday, September 2, 2004
FEDweek is the largest information resource in the federal government with now over one million weekly readers. *********************************************************** Valuable Information for the Federal Family 2004 Interactive Federal Leave Record at http://www.fedweek.com/Services/default.asp FEDweek Weekly Electronic Newsletter Go to http://www.fedweek.com to Sign Up-FREE! Brand New Federal Manager's Daily Report http://www.fedweek.com/subscribepopup.htm Job Bulletin Board Federal Job Search http://www.fedweek.com/Jobs/default.asp ********************************************************** In This Week's Issue: 1. Munificent Munis 2. Cashing In 3. Holding Pattern 4. Loss Leaders 5. Retirement & Financial Planning Report Readers Can Get DSL-Like Speed Over Your Phone Line at Home http://fedweek.sparklist.com/t/294938573/821890/222/0/ http://fedweek.sparklist.com/t/294938573/821890/222/0/ 6. No Double Dipping 7. Philanthropic Policies 8. The Brand New In-Print 2005 CSRS & FERS Retirement Planning Guides Are Now Available For Immediate Shipment! *********************************************************** 1. Munificent Munis Many investors would do well to invest in tax-exempt municipal bonds rather than taxable bonds. Even if you're in the 25 percent income tax bracket, you probably will wind up ahead investing in munis. (In 2004, the 25 percent tax bracket begins at $29,050 in taxable income, for single filers. For married couples filing jointly, the 25 percent bracket begins at $59,100 in taxable income.) Higher-bracket investors would gain even more by investing in tax-exempt bonds. Recently, for example, high-quality, 10-year corporate bonds were yielding around 5 percent. If you are in a 25 percent federal tax bracket, you would have a net yield of 3.75 percent, after-tax: 75 percent of the 5 percent pre-tax yield. In the 35 percent federal tax bracket, you would have a net yield of only 3.25 percent, after-tax. You would be much better off with tax-exempt municipal bonds yielding 4 percent, assuming comparable maturity and credit quality. Investors in high-tax jurisdictions might want to buy locally-issued munis, in order to avoid state and even local income tax as well as federal tax. The municipal bond market can be complex, though, so you should work with a knowledgeable advisor to determine which issues will be most suitable for your portfolio. 2. Cashing In For a comfortable retirement, consider these factors: Your retirement fund must be tapped regularly, to provide spending money. If too much is withdrawn from this fund, too soon, you or your spouse might run low on spending money, during a lengthy retirement. You should start with a reasonable amount in the first year of retirement. Then increase your withdrawal each year to keep pace with inflation. Say you take $20,000 from your IRA the first full year of retirement. If inflation is then 5 percent, you'd increase your withdrawal by 5 percent, to $21,000. Keep increasing withdrawals in this manner, each year. Drawing down your retirement fund by around 5 percent in Year One is a feasible plan for many retirees. You'll be on safer grounds with a 4 percent withdrawal while starting at the 6 percent level increases the risk you'll outlive your money. However, if you have a substantial federal annuity you might consider taking more risk with a higher initial payout. 3. Holding Pattern If your investment plan includes taxable bonds (Treasuries, corporate issues, mortgage-backed securities), they should be held inside a tax-deferred retirement account such as an IRA or a 401(k). Suppose, for example, you have $100,000 in an IRA and $100,000 in a taxable account. Assume your asset allocation is divided 50-50, between stocks and taxable bonds. You should hold the bonds inside your IRA, where the tax on the interest income will be deferred. You won't have to pay that tax until you withdraw money from your IRA. You should hold your stocks in the taxable account. As long as you don't take gains, you would owe little or no tax each year. Dividends and capital gains would be taxed no higher than 15 percent, under current law. On the other hand, if you invest in municipal bonds, they should be held in your taxable account, to get tax-exempt interest. If there is still room in your taxable account, for some stocks as well as municipal bonds, you should hold dividend-paying stocks there, to take advantage of low tax rates on dividends. 4. Loss Leaders The financial markets have been so volatile lately that you probably have some losses in your portfolio, especially in stocks and stock funds. (Stocks tend have greater potential gains but also larger losses.) If so, you should realize any losses you have, for tax purposes: Up to $3,000 worth of net capital losses can be deducted each year, from your other income. Moreover, if you wind up with net losses each year you won't owe tax on realized capital gains. Excess net capital losses may be carried forward to future years. Again, they can be deducted, at $3,000 per year. Net losses that you carry forward can offset future gains so that you won't owe tax on those gains. Such losses also can reduce your tax on gains from other areas, such as real estate. Moreover, if you invest in mutual funds with loss carry-forwards, you may not have to pay tax on any trading gains for years. 5. Retirement & Financial Planning Report Readers Can Get DSL-Like Speed Over Your Phone Line at Home http://fedweek.sparklist.com/t/294938573/821890/222/0/ Please continue reading for more details or go to http://fedweek.sparklist.com/t/294938573/821890/222/0/ A Few Facts: Over 50% of our readers who have called the toll Free information number 1-800 452-9201, signed up for this internet service, it's that good. You will get the fastest and most comprehensive internet accelerator on the market and unparalleled 24/7 customer service for only $13.40 per month--You'd pay more than twice that at AOL, Earthlink or any of the others. CNW has over 14,000 nationwide local access numbers to choose from compared to 7,000 Earthlink's and 4,000 AOL numbers. Use your telephone while on your dial up connection with CNW, you can't with the others. Plus you'll get Spam controls to help keep your inbox free of junk email IF you're in pursuit of a fast, reliable Internet connection, Computer Networks Inc. has partnered with RFPR to provide Internet Services to our readers at a special low rate as low as $9.45 per month with no long term contracts to sign (like most other internet service providers require). Best Choice: Turbo Accelerator Internet Service is the new CNW Turbo Internet access version 3.1 is the fastest and most comprehensive Internet accelerator available today. CNW offers DSL like speed over 56k dial-up connection and fast downloads of e-mail and Web pages--all for only $13.40 per month! For more information or to sign up today, go to http://fedweek.sparklist.com/t/294938573/821890/222/0/ or call CNW toll-free at 1-800-452-9201. This is a special offer to all RFPR readers, just another value added benefit for being a RFPR reader. 6. No Double Dipping The Savings Incentive Match Plans for Employees (SIMPLE plans) contribution limit is scheduled to rise from $9,000 in 2004 to $10,000 in 2005. Participants who are at least 50 years old can contribute another $1,500 in 2004, $2,000 in 2005, and $2,500 in 2006. Thereafter, those upper limits will be followed by inflation adjustments. However, if you have a SIMPLE plan for a sideline business while you're in a 401(k)-type plan (such as the federal Thrift Savings Plan) at your day job, the total amount you can put into both plans can't exceed $13,000 in 2004, or $16,000 if you're age 50 or over. Say you're 48 years old and you put $8,000 into your TSP account this year. Your SIMPLE contribution will be capped at $5,000. You should be aware that a 25 percent penalty applies for withdrawals from SIMPLE IRAs before age 59 1/2 in the first two years you participate. After that, the regular 10 percent early withdrawal penalty takes effect. Similarly, rollovers from a SIMPLE IRA to a regular IRA are not allowed until after the two-year period has expired. 7. Philanthropic Policies Donating an existing life insurance policy to charity is common and easy to understand. You can make a significant contribution with a relatively modest cost. Most charities will list you as a donor of the amount of the death benefit even though you're only paying the premiums. Generally, cash value (�permanent life�) policies are used. Term life policies run out at some point; when you make a gift to charity, you want it to happen, so permanent life policies work best. Suppose you have paid $50,000 in premiums on a $500,000 life insurance policy. You no longer need the insurance so you give it to charity, which will receive $500,000 at your death. The policy can be removed from your taxable estate, no gift tax need be paid, and you can deduct the $50,000 that you've paid. After such a donation, if you write checks for ongoing premium payments directly to the insurance company, your deduction can't exceed 30 percent of you adjusted gross income (AGI). Instead, you should write checks to the charity, which can pay the premiums. This latter strategy allows your contributions to be deductible up to 50 percent of your AGI. Either way, excess charitable contributions can be carried forward and deducted for up to five years. 8. The Brand New In-Print 2005 CSRS & FERS Retirement Planning Guides Are Now Available For Immediate Shipment! Plus--Get FEDweek's The Book of Answers FREE! We are Fully Stocked and Ready for Your Agency Bulk Orders. Go to http://www.fedweek.com/Publications/default.asp to place your order now or continue reading about our special FREE Offer. ******************************************************** Our 2nd Printing/Shipment of The Brand New 2005 CSRS & FERS Retirement Planning Guides Have Just Arrived From Back From the Press. ** FEDweek Reader Special FREE Offer ** Order Yours Now and We'll Ship Them Straight Back out To You--Along With FEDweek's The Book of Answers FREE! http://www.fedweek.com/Publications/default.asp That's right, when you place an order for either one of our brand new 2005 CSRS or FERS Retirement Planning Guides you will receive FREE,The Book of Answers, one of FEDweek's most sought after and sold books. Here's just a few reasons why: *********************************************************** A Few Facts About FEDweek's Book of Answers It will help you determine what you magic retirement age should be http://www.fedweek.com/Publications/default.asp This comprehensive publication contains complete answers, expert advice and guidance to nearly every question, situation or life event that a federal employee or retiree experiences, that's why this publication is appropriately nicknamed "The What If Book". What if? is a question we have heard time and again from our readers who simply don't know what effect a change in status (marriage, divorce, illness, outside work, leaving government, etc.) will have on their government job and benefits. What if I get married-or divorced? What if I leave government before I'm eligible to retire? What if I want to supplement my government salary with outside income? What if I'm sidelined by a serious medical problem? 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