Mr. Fezziwig Had a Ball -- So Can You, Even When Considering Taxes
Although there’s a wassail bowl of things to contemplate in this year’s major tax changes, you can make it fun.
I suggest you create a Fezziwig list of things to do. Fezziwig, if you will recall from Dickens’ “A Christmas Carol,” was Scrooge’s fun-loving boss when Scrooge was young, in love and not yet manacled by his lust for lucre.
Fezziwig threw a holiday party right in his warehouse. Everyone had a blast, according to Scrooge, who was revisiting the past with one of three visiting spirits.
Your Fezziwig list can include some key items for this time of year: retirement, education funding and tax planning. The year is almost over, but most of these tasks can be accomplished with a few minutes of work on the Internet or a call to your broker or financial advisor. Others require only some thoughtful contemplation about what to do in the year ahead.
Taking care of these sobering items may not make you merry, although they can make you more financially secure and preserve more of your nest egg. Like Fezziwig, once the work is done, you can enjoy any number of glad tidings.
You also can trim your tax bill. For example, securities that are held for at least a year qualify, when they are sold, for the lower, 15% capital gains rate for most taxpayers.
And you pay only 15% on qualifying stock dividends, compared with as much as 38% under the old law. I’d raise a cup of eggnog to that change.
In our Dickensian finance list, let’s start with a potentially bleak vision of the future. An updated interpretation would be an underfunded retirement. Here are some easy things to do to avoid that specter:
* Are you making a full annual contribution to your 401(k) retirement plan, which was bumped up to $12,000 this year ($14,000 if you’re older than 50)? There’s a triple bonus here: You don’t have to pay federal income tax on the money you contribute, your employer’s matching contribution (if your employer offers this) can give you a 100% return on your stake, and it all compounds tax deferred until you take it out. Just don’t take the match in company stock; diversify with both large-company and small-company stocks as well as both growth and value, and don’t forget to include bonds and perhaps real estate investment trusts.
* Are you self-employed or have a business on the side? Fully fund your SEP-IRA, solo 401(k) or Keogh plans. You can sock away as much as $40,000 a year. And your contributions reduce your -- and your company’s -- tax bill.
* Contribute to a Roth IRA if your household adjusted income is under $160,000. You can set aside $3,000 a year in mutual funds of your choice. The best part is that, unlike with 401(k)s and other retirement plans, the proceeds are tax free when you withdraw them after age 59 1/2. And you can withdraw the money anytime before that for disability or college funding without penalty.
Education funding needn’t be a dark vision of the future, either. Here are some ideas for your list.
* Find a low-cost (not sold through brokers), state-sponsored 529 college savings plan and make it a family affair. No matter where you live, you can invest in other states’ plans. Nevada, Nebraska and New York have some of the best deals because of low plan expenses. Anyone in your family can contribute. Grandparents and other relatives also can directly put up to $11,000 each a year into 529s.
* Boost savings for college through holiday (and year-round) purchases in the Upromise (www.upromise.com) or Baby Mint (www.babymint .com) programs. A percentage of every dollar spent with selected merchants, debit and credit cards goes into college savings accounts.
* The Coverdell Education Savings Account allows a yearly contribution of $2,000 per child this year. You can use the money for any kind of school bills from nursery school to college and invest in mutual funds of your choice. The major Coverdell drawbacks are the $2,000 annual limit and income restrictions: $190,000 adjusted annual income for couples filing jointly, $95,000 for singles.
* Consider cashing in or obtaining a loan from existing cash-value life insurance plans if you need college money. Any whole-life, variable or universal policy with cash value can be tapped for this purpose.
The new tax laws also made it advantageous to place bonds, which produce fully taxed income, into tax-deferred vehicles and to place dividend-paying stocks into taxable accounts.
The reasoning is simple: Most stock dividends are now taxed at the 15% rate; bond and real estate investment trust income is taxed at your marginal rate up to 35%.
Dennis Kroner, president of Pitt, Ryan & Linnear Ltd., a Chicago-based accounting and planning firm, said he was favoring dividend-paying stocks over growth stocks for his clients. “Never buy a security that doesn’t pay you back,” he says.
As the spirit of the past tells Scrooge, “We could improve our worldly fortune with our patient industry.”
Whatever you do with these ideas, keep in mind that if you take care of them before the end of each year, they’ll not haunt you in the future.
John F. Wasik, author of “The Bear-Proof Investor,” is a columnist for Bloomberg News.
