Government Programs(a.k.a. Tax Deferred/Tax Advantaged Programs)
Government programs can be very confusing. Most of them have some level of social engineering involvement. They are put in place as an incentive to get you do do something that you may need to do for your own sake but need a little push. So we want to use this area to discuss a few of the ones that relate to most people in one way or another. If applied in the right way these programs can save you money today and allow your wealth the build with regard to the taxman. So we want to talk about the following fairly simple government programs Government Programs - IRA'sLet's talk for a minute about an IRA versus a Roth IRA. You will see shortly that for most people, a Roth IRA makes more sense. In a traditional IRA your contributions are tax deductible and grow tax deferred until you must make mandatory with-drawls by age 70&1/2. You can contribute up to $5,000.00 per year unless you are 50 or older in which case you would be allowed to contribute up to $6,000.00 per year.Early with-drawls before age 59&1/2 will incur a 10% penalty. Once you start to withdraw, you pay taxes at your then current tax bracket. For most people, you will retire into a lower tax bracket so when the withdrawls start, the tax due will be lower due to your new lower tax bracket status. The Roth IRA has some remarkable differences. You can withdraw principle at any time with no penalty because the contributions are not tax deductible. You have no mandatory with-drawl age and when you do start to take distributions, they are tax free if you follow the rules. The big negative is that there are income limits as to what you can earn in order to open a Roth IRA. Single tax filers can earn up to $105,000.00 for a full contribution which fades out at the upper limit of $120,000.00 while married couples are limited to $166,000.00 for a full contribution and this fades out at the upper limit of $176,000.00. Government Programs – College TuitionThe next investment topic that affects many of us trying to save for college education for our children. The 529 savings plan, so named for the section in the I.R.S. Tax code that allows for it.There is no federal tax on the contributions and most states also allow the same no tax consideration but you need to check with your own state. You have full control of the account, not the child and in the event the child chooses not to go to college, you can roll the account to another family member. Anyone can contribute to the account and there are no income limitations that would disqualify you from opening an account. If the child gets a scholarship, any unused money can be withdrawn without penalty...just pay the tax. The actual investments are controlled by a money management company approved by the state so that is somewhat out of your hands, but there are choices of investments to make within the plan. To read about the entire program you can
visit here.
Government Programs-401(k)The 401(k) savings program, so named for the I.R.S. tax code that allows for it, is a retirement account set up by many companies. Participation is optional. While this account is mentioned in other areas on this site, it is included here because of the importance in stressing the availability of FREE MONEY! You need to check your particular plan. What you want to be on the look out for is if your company offers a 'match' of any type. If they do, you want to take full advantage of this 'match' as it is free money. Once the account is funded, you will be given a choice of securities to invest in. This usually is in the form of mutual funds. Sometimes, you can also pick your own company stock if it is available. Just use common sense when diversifying across these different offerings. Other areas of this website will help you in your decision making process. Just remember to not put all your eggs in one basket. Please note that if your company does not offer a 'match' you should still consider participation in the plan as it allows for you to accumulate tax-deferred growth of your money.Government Programs – More InfoTwo more websites that provide a tremendous amount of information on government programs for investors: Go here to buy Treasury bills, notes, bonds, and TIPS without having to pay a brokers commission.Treasury Bills (T-bills) mature in 1 year or less Treasury Notes mature in 2 to 10 years Treasury bonds mature in 20 to 30 years TIPS (Treasury Inflation-Protected Securities) are 5, 10, or 20 year inflation indexed bonds tied to the consumer price index (CPI). The interest payment is the same every six months but when multiplied by the CPI you get inflation protection due to the increased payment.
Zero'sA word about bonds and zero's. In the early days when bonds were issued, you were given a coupon book. Once every six months you had to clip out a coupon and turn it in to get your bond interest payment which is the frequency when you receive your interest payments on bonds that you hold. Those were called bearer bonds, since the person turning in the coupon (the bearer) was the apparent owner of the bond. Then about 1982 bonds started to be registered electronically and no more coupons were issued nor needed to be redeemed in order to get your interest payment. It all happened automatically. Since there are no more coupons ( The current bearer bonds should all be gone by 2013), the term zero arose as in zero coupon bond. Today Zero's as they are called usually refers to a bond, (corporate or treasury) that is bought at a discount from face value and pays no interest until maturity at which time it pays all the accrued interest and the difference between the face value and the discount.Muni'sA word about municipal bonds a.k.a muni's. These are bond securities issued by individual states and any of it's political subdivisions. The money raised by the issuer is used for many projects that are classified as general obligations or revenue producing. They usually receive special tax treatment in that if you live in the state where you buy them, you will be rewarded with triple tax free status, that is no federal tax, no state tax and no city tax. One other nice point about Muni's as everyone likes to call them....very often they come with insurance. Muni's fit very well into a portfolio that seeks to garner current income which you get twice a year in the form of interest payments. I LIKE MUNI'S a lot!This finishes our investment guide but make no mistake that there is still a lot more to learn. The reader is advised to check back regularly for updates and expansion which will include:
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