A Common Mistake When Entering a New Job

Did you know that most people don't take full advantage of their 401k match at work? This little tip could help increase your net worth by thousands of dollars over the next decade.

Most people make the common mistake of automatically joining the 401k offered by their work. They may have a variety of reasons, including consolidating their retirement funds. Did you know that most 401k plans have hidden fees, called operating expenses?

In general 401k plans, have higher expenses than a typical personal IRA would have. For this reason, the major reason to actually contribute to your work's 401k plan would be if they offered a match.

It is common for an employer to offer a 4% match, meaning that if you contribute 4% of your salary towards your 401k, your employer will match that 4%. Now here's the kicker. If your employer matches 4%, you often need to contribute more than 4% in order to take full advantage of the free money they are offering.

Here's why. Suppose you earn $60,000 per year and you start contributing 4% towards your 401k, due to your employer match. Well, if you earn a $5,000 starting bonus and another $2,000 end of the year bonus, you will miss out on $200 because you didn't factor in the additional $7,000 in compensation ($7,000 * .04 = $200).

Over time, and over jobs, these little details can add up to thousands of dollars.

This post was reposted from http://finlit.biz/retirement-2/a-common-mistake-when-entering-a-new-job/, originally written on January 12th, 2013.

To Double Your Income, You Must Reinvent Yourself

If you keep doing what you've always done, you will always get what you've always got. Some people will say that you should stick to what you know. Whatever you believe now is undoubtedly allowing you to get the results you are currently obtaining but at the same time, it is also holding you back from your true potential. Rather than sticking to what you know, focus on what you want. Steven Covey states, "Keep the end in mind."

In Leviticus, the bible reads over and over, regarding skin diseases or other sicknesses, "They must be cast out from their people." I love this, because it doesn't say that the people must outcast the man in question. It just says, they must be cast out. This means that in order to remove the ugliness, the disease, a man may choose to separate himself for a period of time. The wilderness, the desert, is not necessarily a bad place for a man, and you will find many of the great leaders, purposely allow themselves alone time to reflect and allow the reinvention to happen.

There is a parable of 100 sheep, where 1 is lost. The shepherd goes to find the sheep, leaving the 99. Often times, the shepherd would break the leg of the lost sheep, forcing the lost sheep to stay with the shepherd and completely rely on the shepherd for all its needs. In turn, this would then reinforce the bond between the sheep and shepherd. The reason heaven rejoices, is not because the one sheep is reunited with the fold. The one sheep is, in fact, different from the 99. The 1 sheep has a newly found discovery of where its strength lies. In a sense, the one sheep, with the newly created bond, is now stronger and less lost than the remaining sheep.

What you think now, what you do now, results in your current income. In order to double that income, you need to go down to the roots, to tear out, to sort, to cocoon, to brainstorm, to reflect. When you emerge, with new thoughts, ambitions and ideas, you may put in place a foundation that will lead to doubling your income.

This post was reposted from http://finlit.biz/business/to-double-your-income-you-must-reinvent-yourself/, originally written on January 7th, 2014.

Small Business and Real Estate Expenses

Small Business Expenses are listed on Schedule C. It is good practice to keep these expenses categorized throughout the year. See www.irs.gov for more information.

• Advertising
• Car and truck expenses
• Commissions and fees
• Contract labor
• Depletion
• Depreciation and section 179 expense deduction
• Employee benefit programs
• Insurance
• Interest (Mortgage)
• Legal and professional services
• Office expense
• Pension and profit sharing plans
• Rent or lease
• Repairs and maintenance
• Supplies
• Taxes and licenses
• Travel
• Meals and Entertainment
• Utilities
• Wages
• Other expenses

Computer supplies and automobiles used for business will be "listed property" in section V of Form 4562. For example, if you purchased a computer for $832 and used it for business 50% of the time, the basis would be $832, of which $416 would be used for business, to be recovered over a 5 year period. This would allow a depreciation deduction of $84 using the HY convention. The categories for "Business use of your home" for Form 8829 are:

• Real estate taxes
• Interest (Mortgage)
• Insurance
• Rent
• Repairs and maintenance
• Utilities
• Other expenses

This expense will be determined based on the square footage of your home and the area designated for business use (such as an office). The percentage will be used to determine the expense used for business.

For rental properties, there are three categories: real estate professionals, active activities and passive activities. If you search for tenants and screen them yourself, and are called in the middle of the night to fix plumbing, you are most likely active in your real estate venture. In general, the more active you are, the better the deductions when the property doesn't make a profit. For example, an active investment can be used to reduce active income. On the other hand, if you use a property manager, you will have to carry the loss over into future years waiting for a profit, by using Worksheets 3, 5 and 6 from Form 8562.

The categories are:

• Advertising
• Auto and travel
• Cleaning and maintenance
• Commissions
• Insurance
• Legal and other fees
• Management fees
• Interest (Mortgage)
• Repairs
• Supplies
• Taxes
• Utilities
• Depreciation expense or depletion
• Other (Amortization)

Typically, Stamp Taxes, Title Fees and Recording Fees, all found in sections 1100 and 1200 of the HUD should be added to the basis of the home. These are added to the original purchase price of the home and include any "improvements" made to the home. The basis for a home is typically depreciated using Depreciation and Amortization Form 4562, using MACRS Depreciation over 27.5 years. See sizusfinlit.blogspot.com for more information about the HUD sections and what is not included in the basis.

Typcially, points on a home or refinance costs, should be amortized over the life of the loan (for example, 30 years for a 30 year loan).

If this article, helped, please leave comments and let us know how we are doing. We are glad to help promote small business and help stimulate the economy.

This post was reposted from http://finlit.biz/estate-planning/small-business-and-real-estate-expenses/, originally written on December 28th, 2013.

What Do Multiplication, Leverage and Delayed Gratification Have in Common?

What would you rather have, a brick of gold or a small seed?

Gold is shiny. Gold has value and is worth thousands of dollars because of its special qualities. On the other hand, a seed you must plant. You must pour time and energy into creating a fertile environment. Then, you must wait. But over time, the seed will create an abundance, far beyond the investment of resources.

"While most men would value the gold, I value things that bear fruit."

When we work ourselves, we add up the contributions from each day in a year, to get our total contributions at the end of the year.

On the other hand, when we spend our time pouring into the lives of other people, growing and developing leaders, we multiply the contributions over time, to get our total contributions at the end of the year.

The power of multiplication has been demonstrated time and time again in history. An idea sparked, in one man, who recruited a small team, delivering that message to the multitudes.

What will you deliver?

This post was reposted from http://finlit.biz/business/what-do-multiplication-leverage-and-delayed-gratification-have-in-common/, originally written on December 21st, 2013.

An Example of a 401k Rollover Followed by a ROTH Conversion

In the posts, 401k Rollovers, Where Should My Money Go? and The Deductible Traditional IRA, Non Deductible Traditional IRA and the ROTH IRA, we covered 401k classifications and rollovers, which can be used as a reference for this example.

To briefly discuss a ROTH conversion (see www.bogleheades.org), as an example, suppose you worked at a company and contributed $10,000 in tax-deferred traditional personal contributions (elective deferral) and $20,000 in after-tax traditional personal contributions into your 401k. If the 401k plan had no limitation against this (check with your employer), this could speed up your retirement contributions (see 401k Rollovers, Where Should My Money Go? for more on contribution limits).

Now, suppose the account grew to $50,000 due to the earnings from both pots of money. If you left employment with the company, you could rollover your 401k into a traditional IRA, and file IRS Form 8606, to track $20,000 as a non-deductible basis for your traditional IRA.

You would have $50,000 in a Traditional IRA, of which $20,000 would be considered a non-deductible contribution.

Let's say the account then grew to $100,000. Still, $20,000 is considered non-deductible, which is 20% of the account. If you then decided to convert $10,000 from your Traditional IRA into a ROTH IRA, you would essentially be converting $2,000 of non-deductible money (which is 20%), since the IRS requires you to convert in proportion to the non-deductible contributions over all your Traditional IRA money (even if you have multiple accounts).

That year, you would file IRS Form 8606, to reduce your non-deductible basis from $20,000 to $18,000. You would also pay taxes on $8,000, as if you received this $8,000 as income.

See retireplan.about.com for more on tracking your non-deductible basis.

z Did this article help? We'd love to hear through your comments and questions.

This post was reposted from http://finlit.biz/retirement-2/an-example-of-a-401k-rollover-followed-by-a-roth-conversion/, originally written on December 11th, 2013.

The Deductible Traditional IRA, Non-Deductible Traditional IRA and Roth IRA

In the article, 401k Rollovers, Where Should My Money Go?, we discussed various classifications of the 401k. We will continue the discussion to figure out how to allocate the money when working with rollovers and conversions.

When working with rollovers, the classifications become simplified: A) tax-deferred traditional 401k contributions, B) after-tax traditional 401k contributions and C) after-tax ROTH 401k contributions.

Here, tax-deferred traditional 401k contributions (A) includes the following: tax-deferred traditional personal contributions (elective deferral), traditional earnings and tax-deferred traditional employer contributions. After-tax ROTH 401k contributions (C) includes after-tax ROTH personal contributions (elective deferral) and ROTH earnings.

When rolling into personal IRA accounts, you will do the following. A) and B) will be placed into a traditional IRA. C) will be placed into a ROTH IRA. In the year, the rollover occurs, any after-tax traditional 401k contributions (B) can be tracked using IRS Form 8606, since this money will form the basis for your non-deductible traditional IRA contributions.

The article at www.investopedia.com, states: According to IRS Publication 590: "Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. In those situations, a Form 8606 is completed for the year you take a distribution from that IRA." However, it may still be a good idea to complete the form for your records.

Since after-tax traditional 401k contributions roll into non-deductible traditional IRA contributions, the IRS Form 8606 will help track these as a basis, to avoid combining this money with the earnings on this money, which is tax-deferred whether in the traditional 401k or traditional IRA.

To see an example of how this basis affects a conversion from a Traditional IRA to a ROTH IRA, read An Example of a 401k Rollover Followed By a ROTH Conversion.

Did this article help? We'd love to hear through your comments and questions.

This post was reposted from http://finlit.biz/retirement-2/the-deductible-traditional-ira-non-deductible-traditional-ira-and-roth-ira/, originally written on December 12th, 2013.

401K Rollovers, Where Should My Money Go?

We will actually cover the rollover in the next article, but to setup a foundation, we will cover 401k classifications in this article.

If you have a 401k, you may be curious as to the various income limits and classifications for your contributions. First, let's cover the classifications. The 401k money is classified as one of the following: 1) tax-deferred traditional personal contribution, 2) after-tax traditional personal contribution, 3) traditional earnings, 4) after-tax ROTH personal contribution, 5) ROTH earnings or 6) tax-deferred traditional employer contribution.

Most people contribute money into their 401k as tax-deferred traditional personal contributions (1). This money is sometimes matched by their employer as a tax-deferred traditional employer contribution (6). The money then grows, creating traditional earnings (3).

The combination of tax-deferred traditional personal contributions (1) and after-tax ROTH personal contributions (4) is limited to $17,500 for 2013 (if you are under 50). The combination of classifications 1) and 4) are commonly referred to as elective deferrals. Notice, that this limitation does not include after-tax traditional personal contributions, traditional earnings, ROTH earnings or tax-deferred traditional employer contributions.

The combination of all contributions, which is 1), 2), 4) and 6) is limited to $51,000 for 2013 (if you are under 50) and cannot exceed 100% of your salary. See taxes.about.com and www.forbes.com for further information.

You may also be wondering about the tax implications for each of these categories. Tax-deferred traditional personal contributions (1) and tax-deferred traditional employer contributions (6) are deductible, in effect, reducing the amount of money you make and have to pay taxes on. The difference between these two categories are the contributions limitations discussed above. After-tax traditional personal contributions (2) and after-tax ROTH personal contributions (4) are not deductible, in effect, meaning that you will pay taxes before making these contributions. The difference between these two categories is how the earnings are taxed, discussed in the next few sentences.

Traditional earnings (3) will be taxed when you withdraw the money while ROTH earnings (5) will not be taxed when you withdraw the money. In this situation, withdraw typically refers to retirement (and does not include rollovers).

See Can You Contribute to Both a ROTH IRA and a ROTH 401k? for additional information about ROTH 401k options. Also, continue reading The Deductible Traditional IRA, Non Deductible Traditional IRA and the ROTH IRA to see what happens to these classifications during a rollover.

This post was reposted from http://finlit.biz/retirement-2/401k-rollovers-where-should-my-money-go/, originally written on December 11th, 2013.