The following article was pulled from the Charles Schwab Website. It describes how your taxes may change in retirement. Read on to see how this will apply to you.

Minimize Your Tax Exposure

Please visit schwab.com to view the entire article.

Your tax situation may change when you retire. The amount of taxes you pay will be impacted by the types of income-generating sources you are accessing:

Distributions from your workplace retirement plan and other tax-deferred savings plans. The money you save in your workplace retirement plan is deducted from your paycheck before taxes. Once you begin taking distributions, you are required to pay taxes on the income you withdraw. The government considers this a benefit to you because your income in retirement may be smaller than when you were working, so your taxes would be lower.

Income from Social Security. Social Security is taxed as ordinary income. If your income from all sources, including Social Security, is enough to be taxed, plan to pay taxes on it.

Income from taxable assets. Income from taxable CDs, money market accounts, investment accounts and other accounts is taxable, but not withdrawals on the principal. Once you start taking annuity income, it generally is taxable.

Income from employment. Employment income is taxed as usual, whatever age you are. But remember, if you take Social Security before your normal retirement age, earning a wage (even self-employed income) could reduce your benefit.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

It is that time of year again, tax season. The following article is about some investment strategies to help minimize the tax implications during retirement.  Read on to find out how.

How To Minimize Taxes On Your Retirement Income

To view the entire article, please visit forbes.com.

Nobody likes paying taxes. But what can be a mere annoyance while you’re working can be a major headache when you retire. That’s because taxes are generally the biggest expense in retirement and retirees often need every penny of income to make ends meet while leaving enough of a nest egg to ensure that they’re income will last as long as they will. Along those lines, we recently received a couple of questions about how to structure retirement income in order to minimize taxes in retirement. Here are some things to consider:

Location, Location, Location

No, I’m not referring to moving to a lower tax area (although that would help a lot too). I’m talking about the location of your investments. If you’re like most investors, you’ve probably made investment decisions about each of your accounts (employer’s retirement plan, Roth IRA, rollover IRA, and taxable accounts) independently.

The problem with this is that not all investments are taxed alike. Since cash and bonds are taxed at ordinary income rates, you’ll want to shield them from taxes in your retirement plans the most. Next would be mutual funds with a high turnover since stocks held for less than a year are also taxed at ordinary income rates. If you have gold or any other “collectibles,” they’re next since they’re taxed at a 28% rate.

If the lower tax on qualified dividends expires on schedule at the end of the year, you’ll want to shelter high-yield stocks and stock funds too. Since stocks held for more than a year are taxed at lower capital gains rates, individual stocks and low turnover mutual funds like index funds would be a lower priority for retirement accounts. Coming in last would be international stocks and funds since having them in retirement accounts disqualifies you from using the foreign tax credit to help offset taxes withheld overseas. The volatility of the last two groups also make them good candidates for a taxable account since you can sell them and write the losses off your taxes as long as you don’t repurchase a similar investment within 30 days of the sale.

However, don’t let the tax tail wag the dog by letting the size of your accounts determine your asset allocation. For example, if you have $300k in retirement accounts and $100k in taxable investments, this doesn’t mean you should have $300k in cash and bonds and $100k in stocks. Instead, start with the appropriate asset allocation based on your time horizon and risk tolerance. Then place them in your retirement accounts, starting with the most tax-inefficient investments. Let’s say your portfolio should be $240k in stocks and $160k in bonds. You’d start by placing the $160k of bonds in your retirement account, which allows you to invest the other $140k in your retirement account in stocks (starting with the highest turnover funds) as well as the $100k in the taxable account.

Do you have company stock in your 401(k)?

Before you start selling the stocks in your 401(k), there is a special rule to be aware of that allows you to pay the lower capital gains rate on the growth of your employer stock in your 401(k). (You still have to pay tax at regular rates on the total cost of that stock.) The key is that you have to take that stock out as an “in-kind distribution,” which basically means that you move it directly into a brokerage account instead of selling it first as most 401(k) distributions are done.  You also forfeit this option if you roll it into an IRA.

How young are you?

Speaking of IRAs, the next question might be whether to withdraw first from your IRAs, your 401(k), or your taxable account. The first timing factor is your age. If you retire in the year you turn 55 or later, you can take withdrawals immediately from your 401(k) without a penalty, but you’ll have to wait until age 59 1/2 to make penalty-free withdrawals from your IRAs (unless you take substantially equal periodic payments until the later of 5 years or when you turn 59 1/2). Keep in mind that you can always withdraw anything from your taxable accounts and the contributions from your Roth IRAs without penalty at any time and for any reason. Finally, when you turn 65, you can also access any HSAs you have for any purpose without penalty (although HSA distributions are subject to ordinary income tax if not used to pay for qualified medical expenses).

Will your tax rates be going up or down?

The second timing factor is whether you see your tax rates going higher or lower in the future. For example, if you think the lower capital gains rate will expire at the end of the year, it could be a good time to take some gains out of the taxable account. If you’re more worried about higher income tax rates, take withdrawals from your pre-tax accounts or consider converting them into Roths, which means you pay the tax now at the relatively lower rate instead of at the higher future rates. Just be aware that you may need to spread those Roth conversions over more than one year so they don’t push you into a higher tax bracket and thus defeat the whole purpose.

Another reason to take withdrawals from your pre-tax IRAs and 401(k) accounts first is if you’re retiring early and haven’t started collecting Social Security yet. That’s because future withdrawals from these accounts could cause more of your Social Security to be subject to taxes and push you into a higher tax bracket. In this scenario, it could make sense to reserve the taxable accounts and nontaxable Roth IRAs for when you’re taking Social Security since they won’t have the same effect.

The reverse would be true if you’re receiving income from part-time work or a side business for the first part of your retirement. In that case, withdrawals from taxable accounts and Roth IRAs could be preferable since your tax bracket is likely to be higher than when you eventually stop working. Between the two, you’ll want to tap the taxable account first and let your Roth IRA continue growing tax free.

The Bottom Line

Unfortunately, there’s no way to eliminate taxes altogether, but you can use some of these strategies to minimize their impact on your retirement income. You can do this yourself or hire a financial professional who does proactive tax planning rather than just tax preparation. Either way, I hope these techniques can make this time of year a little less taxing for you in retirement.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

While we are in the midst of the tax season, it is always nice to learn of ways to maximize tax benefits. The following article describes ways you can maximize the tax benefits from contributing to an IRA.

How to Maximize the Tax Benefits of 401(k)s and IRAs

By David Ning

To view the entire article, please visit money.usnews.com.

Tax tips are always abundant this time of year. But it often takes a lot of precious time to figure out how to squeeze a bit more money out of Uncle Sam’s share. Instead, aim to take maximum advantage of one of the biggest and most common tax breaks: tax-advantaged retirement accounts. Here are a few ways to keep more of your hard-earned money for your retirement:

Maximize tax-deferred accounts each year. A Government Accountability Office report found that only about 5 percent of 401(k) participants contribute up to the limit. But many people ought to think about being more aggressive with their 401(k) and IRA contributions because tax-deferred growth is a great deal. The exact benefit will depend on the types of investments you choose within your tax-advantaged accounts. Over time, the money you are not paying in taxes each year will add up to a significant portion of your nest egg. So don’t miss out on the chance to contribute the maximum amount each year.

In fact, you can still max out contributions for tax-year 2012 if you haven’t done so already. The deadline to contribute to an IRA is not the end of the calendar year, but actually your tax filing date. For tax-year 2012, the deadline is April 15, 2013. So there is still time to claim this tax break.

And if you’ve already contributed the maximum for 2012, you should still try to maximize your accounts as early in 2013 as possible. After all, markets go up over time, and you want the tax-deferred growth to benefit you for as long as possible. Sure, there’s always the chance that the market will drop the second you contribute, but you will come out ahead on average if you always contribute early every year.

Get to know the matching rules for your 401(k). Some 401(k) plans won’t give you the full employer match if you don’t make contributions in every pay period throughout the year due to the formula they use to calculate the employer matching contribution. The details vary with each employer, but it’s best to work with the plan administrator to make sure you are going to get the full match if you front load your contributions. Otherwise, it’s probably best to stick with the strategy that guarantees the full match that is promised.

Consider a Roth IRA, even if you think your income tax rate will come down in future years. There are no mandatory minimum distributions for the Roth IRA while the owner is alive, which means more of the money can remain in a tax-free state longer. Depending on how long you live, the benefits of getting that money into a forever tax-free account can far outweigh the taxes you have to pay now.

Remember that IRA contribution limits are in addition to the 401(k) limits. Even if you don’t qualify for a Roth IRA due to making too much money, there’s a “back-door” way to make Roth contributions and enjoy the tax-free growth. You can contribute up to $5,500 (or $6,500 for those age 50 or older) to a non-deductible traditional IRA in 2013, and then immediately convert that amount to a Roth IRA.

Check out other tax-deferred options. I-bonds, EE savings bonds and 529 plans are all good candidates for those who want to keep more money working for them instead of Uncle Sam. Just make sure you understand what you are getting into before you shove a bunch of money into these types of investments.

This is a great time of year to be thinking about minimizing your taxes. But remember that tax tips may help you one time, but the tax-advantaged growth these retirement vehicles give you could benefit you for years to come.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

The following article is from Charles Schwab’s magazine OnInvesting. The article discusses six mistakes to avoid IRA tax traps. Read on to learn how to avoid those costly mistakes.

IRA Tax Traps

To view the entire article, please visit oninvesting.schwab.com.

Americans hold a combined $5.2 trillion in assets in individual retirement arrangements (IRAs).  These accounts often provide tax benefits, which can make them a great way to build wealth for your retirement and your surviving loved ones.

Investors who contribute to a traditional IRA get an upfront tax benefit, if they qualify, by deferring taxes until they take withdrawals in the future. Others, if eligible, may open a Roth IRA and contribute after-tax money in exchange for tax-free distributions down the road.

Of course, tax rules are notoriously complex, so with these IRA tax benefits come tax pitfalls. On Investing caught up with Rande Spiegelman, Vice President of Financial Planning at the Schwab Center for Financial Research, to discuss common IRA misconceptions and the associated tax ramifications.

Says Rande of IRAs and taxes: “IRAs are great, but can be a real tax trap for the unwary. If you run afoul of IRS rules surrounding your account—even by accident—the penalties can be severe, all the way up to the disqualification and taxation of your entire account.”

Here, On Investing lays out six of the most common mistakes investors make concerning contributions, investments and withdrawals—and ways to fix or avoid them.

MISTAKE 1
Contributing Too Much
If you contribute more than the law allows in any year—based on contribution or income limits for your filing status, or age limitations²—the IRS will penalize you 6% of the excess amount for each year in which you fail to take corrective action. If, for instance, you contributed $1,000 more than allowed, you would owe $60 each year until you corrected the mistake.

Solution: Withdraw the excess amount, plus any earnings specifically tied to it, by the due date (plus extension) of your tax return for the year the contribution was made. Alternatively, you could recharacterize the excess contribution as a contribution to another IRA type before the due date (plus extension). For example, if you’re over the limit for a Roth IRA because of income restrictions, you still might be eligible for a traditional, nondeductible IRA.

If you choose to withdraw the excess contribution, note that the tax treatment for that withdrawal depends on when the money is removed (before or after the filing of the return) and whether or not the contribution was originally deductible. Regardless, any interest or income attributable to the excess contribution will be subject to income tax and a 10% penalty if you’re under age 59½.

“In some cases, an investor might choose to leave the excess contribution alone,” Rande says. For example, the amount might be so small that the 6% penalty isn’t worth the hassle of withdrawal or recharacterization, and you can count the excess as a deemed contribution in the next year.

MISTAKE 2
Prohibited Investments
Self-directed IRA investors should be aware that rules prohibit investing in collectibles, including artwork, antiques, metals, gems, stamps and coins.

You can use your IRA to invest in certain gold, silver and platinum metal coins minted by the US Treasury Department, and also certain gold, silver, palladium and platinum bullion. But if you invest directly in collectibles, the amount invested will be considered distributed in the year invested, and will be subject to applicable tax and 10% early-withdrawal penalty if the investment took place before you reached age 59½.

Owning real estate directly in an IRA isn’t prohibited, but you could find yourself engaged in a prohibited transaction if you buy and sell individual properties and are not extremely careful.

Solution: Unfortunately, there isn’t anything you can do to fix the mistake retroactively, so this is one error you’ll want to get ahead of. If you plan to invest in precious metals or real estate through your IRA, consider a real estate investment trust (REIT), or a specialized mutual fund or exchange-traded fund (ETF) to avoid direct investment.

MISTAKE 3
Prohibited Transactions
Regardless of what you invest in, you need to avoid prohibited transactions, since they could cause your entire IRA to lose tax-deferred status. Prohibited IRA transactions include borrowing money from it, selling property to it, receiving unreasonable compensation for managing it, using it as security for a loan, and using IRA funds to buy property for personal present or future use.

If you engage in a prohibited transaction, your entire account loses its IRA status and becomes a regular (taxable) investment account. The account is treated as having made a taxable distribution of all of its assets to you based on fair market value on the first day of the year, plus additional excise taxes in some instances. “This is as bad as it sounds,” Rande says. “Engaging in a prohibited transaction could mean the end of your IRA.”

Solution: Read the fine print on your account and check out IRS Publication 590 to help avoid prohibited transactions. If you’re still unsure of what you can and can’t do, consult a financial planner to avoid this potentially costly error.

MISTAKE 4
Restricted Rollovers
You can make unlimited transfers of your IRA funds from one trustee (usually a brokerage or financial services firm) to another in any given year. It’s when you take receipt of the money yourself that you face a number of restrictions. First, you have 60 days to redeposit it into the same or another IRA before it counts as a taxable distribution (plus penalty if you’re under age 59½). And, critically, you only get to roll over your funds this way once per 12-month period, per IRA. If you deposit the funds into another IRA and then attempt another rollover with the same accounts in a 12-month period, the withdrawal is immediately taxable.

Solution: Rande says, “If you need to switch custodians, play it safe and stick to the direct trustee-to-trustee transfer method.”

MISTAKE 5
Premature Withdrawals
If you take an unqualified withdrawal from your IRA before age 59½, you will incur a 10% federal early-withdrawal penalty plus ordinary income tax on any of the amount considered deductible contributions or earnings (state penalties may also apply). And even if you avoid the 10% federal penalty by taking a qualified distribution (such as to fund the purchase of your first home or to pay for higher education), you’ll still pay income tax. More importantly, you’ll have less money working for your retirement because you will lose out on some of the potential for compounded growth.

Solution: Seek out other sources for needed funds, such as personal savings or loans, first. Rande points out that investors should consider their retirement accounts as a last resort for anything but retirement. Remember, you can only contribute so much to IRAs annually, and may never be able to make up for lost ground.

MISTAKE 6
Missing Your Required Minimum Distributions
If you’re age 70½ or older, or if you’ve inherited an IRA from someone other than your spouse, you must take required minimum distributions (RMDs) from your IRA each year. Original owners of Roth IRAs are exempt from RMD rules. The penalty for failing to take your RMD is a 50% excise tax on the required distribution amount plus applicable ordinary income tax.

Solution: Make sure you take your RMDs on time. Investors must take their RMDs by December 31 each year. The one exception is the year you turn 70½, when you have the option of waiting until April 1 of the following year, though doing so means taking two distributions in one year and potentially increasing your annual income (and income tax rate).

The bottom line is, be careful. Before making any IRA decisions, do your homework, including consulting with your tax advisor. As Rande points out, “IRAs are powerful retirement tools that can help increase your wealth. But investors need to be aware of the tax traps and how to navigate around them.”

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

The following article outlines five mistakes to avoid to protect your retirement savings.

5 Ways To Lose Your Retirement Nest Egg

visit Investopedia to view the complete article

1. Making Ineligible Rollovers to Your IRAs
Rolling over funds you receive as distributions from your retirement account helps you to defer including these distributions in your income, and to ensure that any earnings on such amounts accrue on a tax-deferred (or tax free, for Roth IRAs) basis.

However, this is the case only if the amount is rollover eligible. Ineligible rollovers can result in severe penalties being owed to the IRS, and any taxable portion of the amount rolled over to your IRA must be included in your income for the year the distribution occurred.

2. Making Excess Contributions to Your IRA
IRA contributions are limited to the lesser of 100% of eligible compensation or the contribution limit for the year. Should you contribute more than the allowable limit to your IRA, you must remove this excess amount from your IRA by the applicable deadline. Similar to ineligible rollovers, failure to remove the excess amount by the deadline will result in you owing the IRS a penalty of 6% of the amount for each year it remains in your IRA.

3. Making Ineligible Roth Conversions
A Roth IRA conversion is viewed by many as a good financial planning move because earnings accrue on a tax-deferred basis, while distributions are tax-free if qualified. If you make an ineligible Roth conversion, it can be corrected as a recharacterization. Should you fail to recharacterize an ineligible conversion on a timely basis, the amount will be treated as ordinary income from your Traditional IRA and an excess contribution to your Roth IRA. Therefore, not only would you lose the tax-deferred status of your IRA assets, but you would also owe a 6% penalty for each year the excess contribution remains in the Roth IRA.

4. Failing to Distribute Your RMD
You must begin taking RMDs from your Traditional, SEP and SIMPLE IRAs, qualified plan, and 403(b) accounts the year you reach age 70.5, and must continue for each subsequent year. Exceptions apply to qualified plan accounts and 403(b) accounts if you are still employed and your employer allows you to defer beginning RMDs from such accounts until after you retire.

Failure to take your RMD by the applicable deadline will result in you owing the IRS an excess accumulation penalty of 50% of the RMD shortfall. While it is not required that this penalty be withdrawn from your retirement assets, you may have no choice but to use your retirement assets to pay it if you have no other financial resources. You may apply for a waiver of the penalty, but you are generally required to pay the penalty first and request the waiver thereafter.

5. Engaging in Prohibited Transactions
You are prohibited from using your IRAs in certain transactions. For example, your IRA cannot be used as security for a debt or to invest in collectibles. Engaging in these transactions could result in loss of tax-deferred status for the assets involved in the transaction and, in some cases, loss of tax-deferred status for the entire IRA. The following are a few examples:

Conclusion
Most taxpayers now find it natural to consult with investment advisors, tax professionals and attorneys; however, the same cannot be said for those who need assistance managing their retirement accounts. Few people seek assistance from a retirement planning professional for issues such as moving IRA assets and making IRA contributions, but they should. The number of individuals losing the tax-deferred status of their IRA assets and paying large penalties because they’ve misunderstood the portability rules and eligibility requirements for certain transactions is increasing at an alarming pace. Unless you are absolutely sure of the effect that a certain transaction will have on your IRA assets, you should consult with a financial professional who is well-versed in the rules and regulations of retirement plans. This is key to protecting and building your retirement nest egg.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Here is a list of what you might need to do before 2012 to ensure that everything is in order with your IRA.

10 IRA Tasks To Do Before The Year End

by Robert Powell
visit MarketWatch to view the complete article

1. Take your required minimum distribution

Make sure all RMDs are taken for the year.

“Look at all owned IRA accounts and employer plans for individuals age 70 ½ or older this year, as well as at inherited IRAs, employer plans and Roth IRAs,” said Beverly DeVeny, an IRA technical consultant with Ed Slott and Company.

“Beneficiaries, no matter what their age, must take distributions from all inherited accounts beginning in the year after the death of the account owner,” she said, adding that inherited accounts must be split before year end so beneficiaries can use their own life expectancies to calculate their RMDs.

2. Check for excess contributions

It might seem unlikely, given that the average IRA contribution is $3,798, but it’s possible that you contributed too much to your IRA during the year. If so, remove any excess contributions before year end. You will be charged a 6% penalty for excess contributions, said Lustberg.

The maximum amount of an annual IRA contribution for a specified tax year, and whether or not your contribution is tax deductible, varies depending on a number of factors related to eligibility rules, according to Fidelity Investments. In 2009, the maximum allowable contribution to an IRA is the lesser of 100% of eligible compensation or $5,000 in 2009, and $6,000 for those age 50 or older.

3. Is everything in place?

Take nothing for granted when it comes to your IRA. “Before year end, double check on all IRA funds that moved during the year,” DeVeny said. “Make sure that IRA funds went into IRA accounts, not non-IRA accounts or Roth IRAs and be sure that Roth IRA funds went into Roth IRA accounts. Look for any unexplained distributions during the year.”

4. Can you do a stretch IRA?

Check whether your IRA custodian or 401(k) plan administrator will allow for the so-called “stretch” for beneficiaries, said Ben E. Connor, an attorney with Connor Law Firm.

The stretch means that beneficiaries can use their own life expectancy for distributions. In addition, check whether the custodian or plan administrator will accept a durable power of attorney, and disclaimers.

“The answer to these questions will have substantial impact on the success of their estate plan,” Connor said. (If the custodian or 401(k) plan administrator doesn’t accept a durable power of attorney or disclaimer, you might consider another custodian or plan administrator.)

5. Who’s your beneficiary?

Here’s some well-worn but can’t-be-repeated-often-enough advice: Review your beneficiary designations. Make sure there is both a primary and a contingent beneficiary named on the beneficiary designation form.

“If there is no beneficiary named, the IRA proceeds will go to the estate and lose the tax advantage of the stretch,” said Connor. “If there is no contingent beneficiary, and the primary beneficiary has died and no new primary beneficiary has been named, then the assets also go to the estate with the same negative result.”

It’s especially worth checking your beneficiary designations if you’re divorced, recently or ever. “Make sure your ex-spouse has been deleted as a beneficiary, unless you want them to remain as a beneficiary,” said Connor. “The U.S. Supreme Court has recently ruled that the beneficiary named on the beneficiary designation form trumps divorce.”

Connor also advised against naming a “living trust” as the beneficiary. “A living trust should not be the beneficiary because the living trust must qualify as a ‘designated beneficiary’ to receive favorable stretch and tax treatment,” he said. “I find that most living trusts do not qualify, or lose their designated beneficiary status through later changes to the trust.”

Make sure your custodian has a written copy of your beneficiary designations.

6. One last chance for Roth conversions

If you plan to do a Roth conversion , “the funds must leave the IRA by Dec. 31 to be reported and taxable as a 2011 distribution and conversion,” DeVeny said. “The funds can then be rolled over to the Roth IRA up to 60 days after they are received by the account owner - up to March 1 if the distribution was received on Dec. 31.”

Contrary to what some might believe, you do not have until April 15, 2011 to do a 2010 conversion, DeVeny said.

Here’s another reason why you might want to convert some or all of your IRA to a Roth IRA: according to Connor, the Roth IRA could fund a credit shelter or by-pass trust.

“A Roth IRA is usually not subject to the trust tax rate,” he said. Also, review your power of attorney to make sure the agent has authority to recharacterize the Roth, if needed, Connor said.

Remember, too, that anyone can convert their traditional IRAs to a Roth IRA in 2010 regardless of income. What’s more, you can pay the taxes over two years, instead of one.

7. Turn wealth into income

Right about now, the Social Security Administration is sending you a report that tells you how much income you’ll receive in today’s dollars when you retire. Write down that number on a piece of paper.

Now, total up the value of all IRAs and 401(k)s in your household and multiple that number by 0.04. That number is the amount some experts say you could withdraw from your retirement in today’s dollars.

Now, add that number to your Social Security benefit figure, and then subtract that amount from your income. The results are roughly the amount of money you’ll need from other sources - such as work, pensions, reverse mortgages, life insurance or inheritances - to enjoy a lifestyle similar to what you have today.

For some, the best way to close the gap will be to contribute more to their IRAs and 401(k)s, work longer, and lower their standard of living.

8. Review your investment plan

Consider updating your investment policy statement or plan. “Make sure your asset allocation remains appropriate given your financial goals,” said Michael L. Gay, a certified financial planner with Portfolio Solutions.

Also, rebalance your IRA if you haven’t done so within the past year. It’s best to rebalance your IRA in a holistic manner. That is, look at all your assets in all your accounts, taxable and tax-deferred.

In many cases, consider putting your fixed-income investments in your tax-deferred accounts and those investments that produce capital gains and dividend income in your taxable accounts. And while you’re at it, check whether you’ve bought or sold any inappropriate investments in your IRA accounts.

“Since IRAs are tax-deferred vehicles, it makes no sense for them to hold ‘tax-preferenced’ investments such as municipal bonds and annuities,” said Gay.

Gay also suggested using your RMDs to rebalance. It could save on transaction costs.

9. Roll old 401(k)s to an IRA

If you have one or more 401(k)s sitting with former employers, consider rolling that money over to an IRA. “You’ll generally get better investment choices, lower costs and more control of your investment assets,” said Gay.

10. Recharacterize your Roth IRA

If you converted a traditional IRA into a Roth IRA and now realize that your income taxes were higher than expected due to the conversion, or you’re short money to pay the income tax or you’re unwilling to pay the income tax, consider a recharacterization, DeVeny said. That is, consider putting the money in the Roth IRA back into your traditional IRA.

“This is the last year that some individuals must recharacterize,” DeVeny said. “Those who have no choice are individuals who converted in 2009 and whose modified adjusted gross income exceeded $100,000 or who were married filing separate.”

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Several of our clients at Paragon have been asking us how we got into the debt ceiling mess. This Wall Street Journal article gives a good summarty of what has brought us to this point.

A short history of the entitlement state.

Taken from the Wall Street Journal online

Even without a debt default, it looks increasingly possible that the world’s credit rating agencies will soon downgrade the U.S. debt from the AAA standing it has enjoyed for decades.

A downgrade isn’t catastrophic because global financial markets decide the creditworthiness of U.S. securities, not Moody’s and Standard & Poor’s. The good news is that investors still regard Treasury bonds, which carry the full faith and credit of the U.S. government, as a near zero-risk investment. But a downgrade will raise the cost of credit, especially for states and institutions whose debt is pegged to Treasurys. Above all a downgrade is a symbol of fiscal mismanagement and an omen of worse to come if we continue the same habits.

President Obama will deserve much of the blame for the spending blowout of his first two years (see the nearby chart). But the origins of this downgrade go back degades, and so this is a good time to review the policies that brought us to this sad chapter and 14.3 trillion of debt.

 FDR began the entitlement era with the New Deal and Social Security, but for decades it remained relatively limited. Spending fell dramatically after the end of World War II and the U.S. debt burden fell rapidly from 100% of the GDP. That changed in the mid-1960s with LBJ’s Great Society and the dawn of the health-care state. Medicare and Medicaid were launched in 1965 with fairy tale estimates of future costs.

Medicare, the program for the elderly, was supposed to cost $12 billion by 1990 but instead spent $110 billion. The costs of Medicaid, the program for the poor, have exploded as politicians like California Democrat Henry Waxman expanded eligibility and coverage. In inflation-adjusted dollars, Medicaid cost $4 billion in 1966, $41 billion in 1986 and $243 billion last year. Rather than bending the cost curve down, the government as third-party payer led to a medical price spiral.

LBJ lauched other welfare programs- public housing, food stamps and many more- that have also grown over time. Last year, the panoply of welfare programs spent about $20,000 for every man, woman, and child in poverty, according to Robert Rector of the Heritage Foundation.

Social Security’s fiscal trouble began in earnest in 1972 with bills that increased benefits immediately by 20%, added an annual cost of living adjustment, and created a benefit escalator requiring payments to rise with wages, not inflation. This and other tweaks by Democrat Wilbur Mills added trillions of dollars to the program’s unfunded liabilities. Believe it or not, these 1972 amendments were added to a debt-ceiling bill.

 None of these benefit expansions were subject to annual budget review and thus they grew by automatic pilot. They are sometimes called “mandatory spending” because Congress is required by law to make payments to those who meet eligibility standards, regardless of other spending needs or tax revenues.

According to the most recent government data, today some 50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.

By 2010 such payments to individuals were 66% of the federal budget, up from 28% in 1965. (See the second chart.) We now spend 2.1 trillion a year on these redistribution programs, and the 75 million baby boomers are only starting to retire.

We suspect that in the 1960s as now-with ObamaCare-liberals knew they had created fiscal time-bombs. They simply assumed that taxes would keep rising to pay for it all, as they have in Europe.

On Monday night Mr. Obama blamed President George W. Bush’s “two wars” for the debt buildup. But national defense spending was 7.4% of GDP and 42.8% of outlays in 1965, and only 4.8% of GDP and 20.1% of federal outlays in 2010. Defense has not caused the debt crisis.

Many on the left still blame Ronald Reagan, but the debt increase in the 1980s financed a robust economic expansion and victory in the Cold War. Debt held by the public at the end of the Reagan years was much lower as a share of GDP (41% in 1988 and still only 40.3% in 2008) compared to the estimated 72% in fiscal 2011. That Cold War victory made possible the peace dividend that allowed Bill Clinton to balance the budget in the 1990s by cutting defense spending to 3% of GDP from nearly 6% in 1988.

Mr. Bush and Republicans did prove after 9/11 that the Washington urge to spend and borrow is bipartisan. Republicans launched a Medicare drug benefit, record outlays on eduacation, the most expensive transportation bill in history, and home ownership aid that contributed to the housing bubble. The GOP’s blunder was refusing to cut domestic spending to finance the war on terrorism. Guns and butter blowouts never last.

Then came Mr. Obama, arguably the most spendthrift president in history. He inherited a recession and responded by blowing up the U.S. balance sheet. Spending as a share of GDP in the last three years in higher than at any time since 1946. In three years the debt has increased by more than $4 trillion thanks to stimulus, cash for clunkers, mortgage modification programs, 99 weeks of jobless benefits, record expansions in Medicaid, and more.

The forecast is for $8 trillion to $10 trillion more in red ink through 2021. Mr. Obama hinted in a press conference earlier this month that if it weren’t for Republicans, he’d want another stimulus. Scary thought: None of this includes the ObamaCare entitlement that will place 30 million more Americans on government health rolls.

This is the road to fiscal perdition. The looming debt downgrade only confirms what everyone knows: Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept. Tax rates might have to rise to 60%, 70%, even 80% to raise the revenues to finance these promises, but that would be economically ruinous.

Yet Mr. Obama and most Democrats still oppose any serious reform of Medicare, Medicaid and Social Security. This insistence on no reform reinforces the notion that our entitlement state to afford but also too big to change politically. This is how a AAA country becomes AA, the first step on the march to Greece.

Images:

1. Associated Press: With former President Truman at his side, LBJ signs the Medicare bill into law, July 30, 1965.

2. The Obama-Pelosi Blowout: *2011 estimate. Source: Office of Management and Budget.

3. Entitlement Nation: Source- Office of Mangement and Budget.

Disclaimer

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has be obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

The following article discusses when a non-deductible IRA contribution makes sense for investors depending on their individual situations and goals.

Does a Non-Deductible IRA Make Sense For Your Situation?

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If you find yourself in the position of having too high of an income to make a deductible contribution to your IRA for the year ($110,000 for joint filers in 2011, $66,000 for Single and Head of Household), you may be wondering if it’s a good idea to make a non-deductible contribution to your IRA.

There are two opposing camps on this issue, and the deciding factor is how you’re intending to use the funds in the near term.

When It’s a Good Idea

If you’re intending to convert your IRA to a Roth and your income is too high to just make the contribution directly to the Roth account, the non-deductible IRA may be the right choice for you. This way you’re effectively working around the income limitations of the Roth contribution ($179,000 for joint filers in 2011 or $122,000 for single or head of household filers).

You also have more funds available in your IRA account, which provides you with the ability to take advantage of economies of scale - certain mutual funds have higher minimum purchase amounts, for example. Since the money is in an IRA you don’t have to track holding periods, non-qualified dividends versus qualified dividends, and your paperwork is reduced.

In addition, depending upon your state laws your money may be protected against creditors since it’s part of an IRA.

When It’s a Bad Idea

If you’re not planning to convert this IRA to Roth, you’re effectively increasing the tax cost of your investment gains (under today’s law). Since withdrawals of investment gains from your IRA are taxed at ordinary income tax rates (up to 35% under today’s rates), you’re effectively giving yourself a tax increase over the capital gains rate which is 15% maximum these days.

Instead of making a non-deductible contribution to your IRA, you could just make your investment in a taxable account. Then within this account you could make investments geared toward long-term gains rather than income or dividends, therefore deferring tax until you sell the investment. And when you do sell the investment it will be taxed at the currently much lower capital gains rate versus the ordinary income tax rate (which would be applied if you made your contribution in the IRA).

Conclusion

So- depending on what you’re planning to do with the account, a non-deductible contribution could be a good idea or a bad idea. You will have to make that call. Hopefully the information above will help you with your decision.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

You’ll need to ‘early-bird special’ in these expensive places

The following article discusses the Top Ten worst tax places to live during your retirement

 To view full article, visit AdvisorOne

Some states offer attractive tax benefits for retirees, others don’t. Kiplinger runs through the worst (or “tax hells,” as the magazine bluntly states). Many are in the Northeast United States (wait, what?). If your clients are looking for a nice—cheap—place to “perform their second act,” they’d do well to avoid the following:

#1:  Vermont

The state continually re-elects the only socialist in Congress, so what did you think would happen? There are no exemptions for retirement income in the Green Mountain State, except for Railroad Retirement benefits (which are exempt in every state). The magazine reports out-of-state pensions are fully taxed. It imposes a 9% tax on prepared foods, restaurant meals and lodging, and levies a 10% sales tax on alcoholic beverages (for shame) served in restaurants.

#2: Minnesota

We were hoping to make fun of their accents, but alas, Kiplinger wisely sticks to weather. Minnesota offers retirees cold comfort on the tax front. Social Security income is taxed to the same extent it is taxed on your federal return. Pensions are taxable regardless of where your pension was earned. Income-tax rates are high, and sales taxes can reach 9.53% in some cities

# 3: Nebraska

After switching from the Big 12 to the Big 10 (those that matter will know what it means), we thought Nebraska could go no lower. We were wrong. The magazine reports there are no tax breaks for Social Security benefits and military pensions in the Cornhusker State. Real estate is assessed at 100% of fair market value. Nebraska imposes an inheritance tax on all transfers of property and annuities.

#4: Oregon

First, says Kiplinger, the upside: There’s no state sales tax in the Beaver State. But it shares the distinction with Hawaii of imposing the highest tax rate in the nation on taxable income of $250,000 or more. Oregon has an inheritance tax that applies even to intangible personal property located anywhere, such as investments and bank accounts.

#5: California

Honestly, is anyone surprised? If so, maybe dispensing financial advice isn’t the profession for you. The Golden State has lost its luster for many retirees (understatement). Although Social Security benefits are exempt from state income taxes, all other forms of retirement income are fully taxed. Californians pay some of the highest income taxes in the U.S., with the top rate of 9.55% kicking in at $46,767 of taxable.

#6: Maine

New Hampshire’s wacky libertarianism hasn’t crossed the border. Income in excess of $20,150 per year is taxed at a steep 8.5% rate. Residents of the Pine Tree State pay a 5% sales tax statewide on everything except food and prescription drugs.

#7: Iowa:

Kiplinger likes its puns. According to the mag, the Hawkeye State offers no feathered nest for retirees. Although it allows single retirees to exclude up to $6,000 of retirement-plan distributions from state income taxes, and married couples can exclude up to $12,000, the rest is taxed at rates as high as 8.98%. Iowa taxes a portion of residents’ Social Security benefits, too, although it is in the process of phasing out the Social Security tax, which is scheduled to disappear in 2014.

#8: Wisconsin

The Dairy State exempts Social Security benefits and military-related pensions from its state income taxes, but it taxes most other pension and annuity income the same way the federal government does. Out-of-state government pensions are fully taxed.

#9: New Jersey

Its nickname may be the Garden State, but New Jersey is no Eden for retirees (ugh—again, Kiplinger’s, not us). The Tax Foundation says New Jersey’s combined state and local tax burden is the highest in the nation, thanks in part to sky-high property taxes. We’re waiting on the results of the “Christie Effect.”

 #10: Connecticut

Although some residents of the Constitution State can exclude their Social Security benefits from state income taxes, the exclusion applies only if their adjusted gross income is $50,000 or less ($60,000 or less for married couples). All out-of-state government and civil-service retirement pensions are fully taxed.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

In today’s economy, people of all ages and walks of life are experiencing new unforeseen struggles, and retired Americans are no exception. Luckily, there are several things a retiree can do to lower their tax liability and save a little bit of cash.

Top 10 Tax Tips for Retirees

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To help some of our retired readers wanting to save, we have compiled the following list of 10 tax tips for retirees. 

1. Increased standard deduction

If you are over the age of 65, or have gone blind before the end of the year, then you are entitled to a higher standard deduction. But remember, if you take the standard deduction you will not be able to itemize your return.  

2. Social security taxes

Whether you owe taxes on your social security benefits depends entirely on your income level, and income types. If social security benefits have been your only form of income and will continue to be, you will most likely not need to pay taxes or file a Federal income tax return. However, before deciding to pay income taxes or not, it is probably a good idea to get a second opinion from a tax professional. 

3. Required minimum distribution (RMD)

Retirees who are 70 1/2 or older in 2009 get the added bonus of the new tax law which has relaxed the mandatory minimum withdrawal from IRA’s. Until now, retired individuals had no choice but to take a yearly mandatory withdrawal from their IRA, even if they did not need it. However there is a new one-time-only law that takes away this requirement for the 2009 tax year, which is expected to protect retirees from being forced to lock-in large investment losses from the past year.  

4. Roth IRA benefits

Unlike taxable payouts from traditional IRAs, a Roth IRA is tax-free, making it especially useful if you have no other source of income. You can even switch a traditional IRA to a Roth IRA in what is known as a Roth conversion. You will have to pay taxes the year you convert, but it could be beneficial to you in the long run. If you are seriously considering a Roth conversion, then I highly recommend you speak with a qualified tax or accounting professional. They can help you weigh the pros and cons of the conversion. 

5. Volunteering deductions

If you do any volunteer work in your free time then you may be able to deduct any out-of-pocket expenses you incur. They must all be directly related to your volunteer activity, and the organization you volunteer for must be a qualified organization approved by the IRS. 

6. Do not forget your winnings

Some retired taxpayers get in to trouble with the IRS for having too much fun at the casino without telling Uncle Sam. Do not forget that gambling winnings are forms of taxable income. You will need to pay taxes on the winnings even if your next bet is a big loser.  

7. Reverse mortgages

Retired homeowners may consider the tax-free option of a reverse mortgage. With a reverse mortgage, your lender sends you money as a loan against the available equity in your home. The loan grows larger and larger as you keep getting cash advances. This will continue to be the case if you make no repayments, and interest is added to the loan balance. Generally, a reverse mortgage does not need to be paid back until the homeowner dies, sells the home or permanently moves out of the home, as you are only borrowing against the built-up equity. To qualify, a homeowner generally must be at least 62 years of age, own his or her home, and the home must have a very low mortgage balance or be owned free and clear. 

8. Medical expenses

If you itemize your deductions, then the IRS will allow you to deduct dozens of medical expenses. The following items are all examples of qualified expenses. 

• In-patient care at a hospital or similar institution, including meals and lodging
• Chiropractor fees
• Ambulance or other transportation service
• Laboratory fees and fees for X-rays
• Artificial limbs, eyeglasses, contacts, hearing aid (including batteries), and artificial teeth
• Prescription medicines and insulin
• Medical supplies, such as bandages and crutches
• Dental treatment, including fees for X-rays, fillings, braces, extractions, dentures, etc.
• Eye examination fees or fees paid for eye surgery to treat defective vision, such as laser eye surgery or radial keratotomy
• Cost of equipment and materials required for using contact lenses, such as saline solution and enzyme cleaner

But remember, the IRS only allows you to claim the medical expenses that exceed 7.5% of your adjusted gross income. Thus, make sure to keep track of all your expenses throughout the year to qualify for the largest deduction possible. 

9. Stock losses

Millions of people have taken losses in the stock market lately, and many retired senior citizens are having the same problem. If you claim your stock losses now, they can later be used to offset your gains. In addition to this, you can deduct up to $3,000 in capital losses a year against ordinary income. Any loss remaining can also be carried forward into future years to be used until it is depleted. 

10. Seek professional advice

With constantly changing tax codes, it can be difficult for even the most up to date professional to stay on top of every change in tax law. To be absolutely sure you are taking advantage of every deduction and credit you can, you might want to consider hiring a tax professional to help you prepare your taxes.  

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.