Archives for 2010

Spousal IRA Contribution Rules And Limits

Marriage. It is one of the sacred and fulfilling of institutions that we have, but, it can also be a lot of work. When you get married there is so much to be done in the financial realm including setting up joint bank accounts, bringing together disparate accounting methods, doing your taxes together. Those things can definitely be a positive or negative depending upon your situation, past life history for the partners and so on, but in my opinion coming together in all things, including financial, can only be a positive in the long run.

Among the benefits of being married is the Spousal IRA, and the ability for a non-working spouse to contribute retirement funds to an IRA. Now that my wife is staying at home with our first son, it's something that we'll be looking into. There are however quite a few rules and restrictions when it comes to these Spousal IRA accounts, so you need to be cognizant of those rules when selecting the right account for your family.

Spousal IRA Contribution Rules

When making contributions to your spouse's IRA, there are some criteria you need to meet.

Working spouse earned taxable income for the tax year and can cover contributions.
Married to your spouse at the end of the tax year.
File a joint federal income tax return.
Your taxable income must be less than that of the owner of the IRA.

Spousal IRA Contribution Limits

There are different rules on how much or if you can contribute to a Spousal and Traditional IRA, depending on who is working, how much income there is, and who is participating in a qualified retirement plan – so it is important to know the specifics depending on your situation. In general, however, a non-working spouse can contribute $5,000 for the 2010 tax year, $6,000 if they are 50 or older.

The working spouse may also contribute to an IRA as long as they meet the requirements. So for a given tax year a couple can contribute up to $10,000 in an IRA. Here are the contribution limits for the past few years.

Year	Age 49 and Below	Age 50 and Above
2002-2004	$3,000	$3,500
2005	$4,000	$4,500
2006-2007	$4,000	$5,000
2008	$5,000	$6,000
2009	$5,000	$6,000
2010	$5,000	$6,000
2011	$5,000	$6,000

Spousal IRA Phaseout Based On AGI

Spousal IRA contributions have phase outs for Traditional IRAs if you reach certain compensation limits. Once you reach the limit range your allowed contribution amount goes down and eventually phases out completely. For phaseout limits, see the table below.

Married Filing Jointly Phase Out Limits	Non-Working Spouse Phase Out Limit	Working Spouse Phase Out Limit - Covered by Qualified Retirement Plan	Both Spouses Working Phase Out Limit - Both Covered By Qualified Retirement Plan	Both Spouses Working Phase Out Limit - Neither Covered By Qualified Retirement Plan
Traditional IRA	$167,000 – $177,000	$89,000 – $109,000	$89,000 – $109,000	No AGI restrictions

So as you can see it can get to be a bit complicated. But basically it comes down to this. If you are a non-working spouse and not covered by a qualified retirement plan, your AGI phase out limit will be $167,000 – $177,000. And if neither spouse is covered by a plan, no phaseouts apply and both can contribute $5000 to the IRA.

For a further discussion of confusing phase out and contribution limits, check out this post on Spousal IRAs

Conclusion

Even if one spouse in the marriage isn't working, it's important not to forget to contribute to an deductible IRA for them as well. Down the road you'll be glad you did.

What do you think of Spousal IRA contributions? Do you take advantage of them currently, or have you been considering them? Tell us your thoughts in the comments.

Retiring Wealthy On An Average Salary: The Story Of The Altruistic Educator

By Mr. Money 3 Comments

Last week I published the first post in a series I'm calling “Retiring Wealthy On An Average Salary”. The series is intended to give us a brief glimpse into the lives of some average people who made average salaries, but still managed to retire with a net worth that we would say makes them wealthy. My intention in writing the series is to help people realize, you don't have to be a celebrity or a doctor in order to retire comfortably. Instead, you just have to work hard, have a plan, and save and invest diligently.

Last in this series, we told the “Story Of The Thrifty Engineer“. This week I want to talk about the story of a thrifty teacher who was able to save a fortune on a teacher's salary, and later give it all away to help others.

The Story Of The Altruistic Educator

Edna Diehl, was a Davison, Michigan woman who spent almost 3 decades as a teacher and counselor at the city's high school. She was known to be a serious educator that didn't take any nonsense from her students. She pressed them to succeed and do well in whatever careers they pursued. Former students have also stated that she had a soft side, and showed how she cared deeply for them and wanted them all to do well in their lives.

Edna and her husband (who had no children) were also careful with their income, and made sure to save and invest their money regularly over the years. The result was that they had amassed a fortune of well over a million dollars by retirement.

Instead of spending all of that money as some might have done, Edna decided that once she passed her fortune would be used to fund college scholarships for the district she had taught in.

DAVISON, Mich. — A woman who spent 29 years as a teacher and counselor at the city high school has left $1.3 million to the school district.

Edna Diehl died in July at 88. The Davison Educational Foundation will hold the money in trust, with the interest to be used to fund scholarships.

The district expects the interest will generate about $60,000 a year, paying for two years' worth of college for five students every year, said Kevin Leffler, a school board member and foundation president.

Diehl and her husband, Ben, who died in 1997, had no children.

She was known as a serious, sometimes even strict, teacher at Davison High School. Former students said she cared deeply and wanted them to succeed in life.

“She was pretty serious most of the time. But she could also be fun outside of school,” Connie Olejniczak, a student during the mid-1960s, told the Flint Journal.

Diehl was known for her ability to raise money for student trips, colleagues said.

“I remember her having to count money all the time,” said Dick DeLoge, a retired teacher who worked with her for about five years.

Davison is 50 miles north of Detroit.

I'm sure it must have been a wonderful feeling for Edna to be able to give such a wonderful gift to the students of her district as she did. Being able to give $60,000 a year in scholarships is no small feat, and her hard work and forethought will mean a college education for many hard working students in her district.

How Can Even A Teacher Become Wealthy?

So how does someone become wealthy on a teacher's salary? Education experts Mark C. Schug and William C. Wood offer their advice to teachers in an article on beyond-the-book.com. Their 3 rules for teachers:

Start Early: When you start saving early you have the benefit of having more time to enjoy the wonders of compound interest.
Buy And Hold: Spend less than you earn, and don't go into debt. Save your money, and purchase investments, and then don't touch them. If you withdraw your money you short circuit the gains you might have made due starting early and the wonders of compound interest.
Diversify: Don't put all your eggs in one basket, in other words, don't have all your money invested in one – or only a few stocks. Instead diversify your holdings via low cost mutual funds.

They say that since teacher salaries start lower than some other professions, it is doubly important that they start earlier than others. I think their advice would be applicable to most of us, however, not just teachers. Start early, invest regularly and make sure you are diversified.

What do you think? Does the example of the altruistic teacher give you hope that you could do the same? Do you think it's possible to become wealthy on an average salary? Tell us your thoughts in the comments.

Do The Rich Work Harder? Is The Key To Wealth Hard Work?

By Mr. Money 7 Comments

It is often assumed that because the rich have amassed a fortune, that they really don't have to work very hard, and that in general that they work less than others who are less well off. They just have others to do the work for them. It's an assumption that is even held by some of the wealthy.

British billionaire Richard Branson is quoted today as saying that the wealthy don’t work harder than everyone else–they are just fortunate.

“Yes, entrepreneurs may work hard, but I don’t think they actually work any harder than, say, doctors, nurses or other people in society, and yet tremendous wealth comes with it and therefore enormous responsibility comes with that wealth, responsibility to do good things, maybe create new businesses and maybe tackle some of the more seemingly intractable problems in the world

While I might agree that with wealth comes an enormous responsibility, I don't think that the assumption he makes about the wealthy not working harder than other people in society would bear out. Studies seem to agree:

studies on the comparative work habits of the wealthy tell a different story.

Research by professors Mark Aguiar and Erik Hurst combined the results of several large surveys (including studies where randomly chosen subjects kept detailed time diaries), and found that the working time for upper-income professionals has increased compared with 1965, while total annual working time for low-skill, low-income workers has decreased.

As David Brooks put it in a 2006 column: “For the first time in human history, the rich work longer hours than the proletariat.”

So those who had high income professions tended to work longer hours than those in lower skilled lower income professions.

I really do think that in our day and age being in poverty and having a low income has become much more tolerable than it may have been in the past. Even those who are poor and living on government benefits can have a TV, game console, a car, food to eat through local charities or government programs and the rest of their basic necessities covered. In the past, they would have had much less, and had to work much more for it. I'm not sure it is completely a good thing to have so much more available for so little.

Being Wealthy And Successful Isn't All Fun And Games

With those working so hard to become wealthy you might think that they also play hard, but research has shown that the wealthy also found less time for leisure pursuits.

Research by Daniel Kahneman, the Nobel Prize-winning psychologist, shows that “being wealthy is often a powerful predictor that people spend less time doing pleasurable things and more time doing compulsory things and feeling stressed.”

His study found that people who earn less than $20,000 a year, for instance, spent more than a third of their time in passive leisure, like kicking back and watching TV. By contrast, those earning more than $100,000 a year (more affluent than wealthy), spent less than a fifth of their time in passive leisure.

My own experience tells me that the wealthy work insanely hard. I spent Monday and Tuesday with a billionaire who got up at 4:30 a.m., held meetings and business briefings until 9 p.m., ate dinner, then worked on emails until 2 a.m. He woke up at 5 a.m. the next morning, and started all over again. Seven days a week. This entrepreneur hadn’t taken a day off in 10 years (and I checked).

So apparently being wealthy isn't all unicorns and rainbows. Quite often you've become wealthy and well off for a good reason. You're motivated, disciplined and you work hard.

The number that really surprised me in the above quote, however, was the one that said those who earn less than $20,000 a year spent more than a third of their time in passive leisure, while those earning more than $100,000 spent less than a fifth of their time doing the same. That's quite a difference!

Finding A Balance Between Hard Work, Passive Leisure And Other Things

For me I think it's commendable that by working hard, being motivated and disciplined you can find success. I know that not everyone who works hard becomes wealthy and that not everyone who has a low income job spends as much time in passive leisure pursuits. Personally I think the sweet spot lies somewhere in between where you work hard, but you also play hard. You are dedicated to your career, but your family comes first. You spend some free time in leisure, but you don't become a couch potato.

I believe in moderation in most things. If you let one thing become too important in your life, like your job or like your leisure pursuits, it can have an unhealthy and damaging effect to your life. Anything can become an idol if you allow it to, and it can ruin your life.

So my motto is to love God and my family, to work hard, and to play hard. How about you?

Do you think that the wealthy work harder than those who aren't as well off? Can you see how you might be able to spend less time in passive leisure, and more in promoting your career and work life? Do you think it can be hard to find a balance? Tell us your thoughts in the comments.

Retiring Wealthy On An Average Salary: The Story Of The Thrifty Engineer

By Mr. Money 4 Comments

A couple of times on this site I have profiled millionaires who became rich through hard work and determination, and I talked about how and why they were able to rise to such success.

While those stories can be inspiring, sometimes they can leave us average folk thinking that dreams of becoming balance sheet affluent are beyond our reach because we aren't able to create a six figure income or become wealthy within a few years.

This week I decided to start a series of posts looking at the stories of more average folks who, despite making an average salary during their working years, retired wealthy and were able to help out a lot of people when they died. I'll call this series “Retiring Wealthy On An Average Salary”.

Today I want to look at the story of Jimmie Dean, the thrifty engineer. (not Jimmy Dean the sausage magnate, who also has a great story and who we profile here.)

The Thrifty Engineer

Jimmie Dean was an engineer, who was raised in a family of modest means – in Washington County Oklahoma. He believed in hard work, individual responsibility and education, and that through those things a person could achieve their goals and dreams. After serving honorably in the Navy, he worked as an engineer at Phillips Petroleum for 33 years. While he worked hard and with distinction, he never made a six figure salary. The most he ever made was around $50,000 a year. Even with such modest means, Jimmie was able to leave a substantial amount of land and money to his family, and still have enough to create a 2 million dollar scholarship fund for Oklahoma college students. How did he do it? Through being “frugal with his money” and investing in mutual funds.

A thrifty engineer from Oklahoma who died with $2 million and has set up a scholarship foundation.

Jimmie Dean (not to be confused with the sausage magnate) worked for 33 years as a technician at Phillips Petroleum. The most he ever earned was around $50,000 a year.

But he scrimped and saved and invested in mutual funds. When he died in 2008, he had more than $2 million in the bank. His bequest was to set up a scholarship fund.

“He did it through being frugal with his money,” said Mr. Dean’s nephew, Bob Boyd, who now runs the Jimmie Dean Foundation.

The foundation is handing out scholarships of as much as $10,000 to students who show hard work and a commitment to remain in Oklahoma.

Granted, $50,000 a year in Oklahoma is decent pay. Mr. Dean was married only briefly and had one son. Still, getting to $2 million on a $50,000 a year salary is worth noting.

And at a time when giant philanthropists like Bill Gates and Warren Buffett get so much attention for their largesse, it also is worth celebrating the little-knowns who saved all their pennies over a lifetime only to give it all away when it was over.

It just goes to show that even if you aren't making a six figure income, you can still retire with a nice nest egg if you're willing to do the hard work, be frugal, save and invest.

Does this story of living on an average salary and retiring wealthy help you realize that you could retire comfortably as well? Tell us your thoughts in the comments!

SEP IRA Rules And Contribution Limits: Retirement Plans For Self Employed People

By Mr. Money 2 Comments

In the past couple of years I've been considering taking a chance and becoming a self employed entrepreneur, and something I've had to consider is how I'll be saving for retirement. As a self employed person, you won’t have the option of a 401k. You do have some other options though. Among them:

SEP IRA
SIMPLE Plan
Solo 401(k)
Keogh Plan

In this post I'll be exploring one of the more attractive options for tax deferred investing for self employed individuals, the SEP IRA

What Does SEP IRA Stand For?

Before we get too far we need to set out the basic definitions. So what does SEP IRA stand for? I assumed it meant something like “Self Employed IRA” because I had encountered this type of account when reading about being self employed. SEP IRA actually stands for Simplified Employee Pension Individual Retirement Arrangement. The SEP IRA was intended as a plan for small businesses to set up a retirement plan for their employees without al lot of hte administrative and paperwork costs normally associated with retirement plans.

The SEP IRA is similar to a traditional IRA account. The biggest differences come when you talk about the contribution limits. The contribution limits for a SEP IRA are higher.

Rules For The SEP IRA

As an employer opening a SEP IRA for your business is subject to rules and regulations. SEP IRAs have a lot of the same rules as a Traditional IRA. Among the SEP provisions:

All eligible employees must be provided with plan benefits, and a separate IRA account. If you are self employed with no employees besides yourself, it isn’t an issue. If you have employees, it is something to consider.
Part time employees who are 21 years of age who have worked 3 out of the preceding 5 years, earning $500 or more annually will be eligible.
Only the employer can contribute to the SEP IRA. If you work for a company that provides one, only your employer can contribute to the account.
You have until the tax filing deadline of April 15th to establish and fund your SEP IRA.
Withdrawals from a SEP IRA are treated the same as withdrawals from an IRA account – with a 10% early withdrawal penalty, and taxes charged at your current rate.
Only income from the business can be contributed. If you have a day job as well, that income can't be contributed.

Contribution Limits For The SEP IRA

Contributions to the SEP IRA are subject to yearly limits, however, they are higher than many other similar account types.

For example, for tax years 2010 you can contribute up to 25% of an eligible employee’s compensation, up to a limit of $49,000. Extrapolated from the 25% rule the income threshold for a SEP IRA is then $196,000.

Example: Let’s say you make $100,000 a year and you’re self employed. Under a SEP IRA you would be able to contribute 25%, or $25,000 to your plan.

Older employees are not allowed catch up contributions.

Pros Of The SEP IRA

There are quite a few reasons to consider having a SEP IRA account:

Any money that is contributed by your employer (you if you're self employed), you are 100% vested in right away. The money is yours!
Your money grows tax free until retirement!
Contribution limits for self employed individuals are higher than similar plans.
Setting up a SEP IRA is usually as easy as filling out IRS Model Form 5305-SEP
Administrative costs and paperwork are minimized after the plan is setup.
Contribution levels are flexible. A good plan if cash flow for your business is variable. You can contribute 5% one year, and then 20% the next if you want.

Do you have a SEP IRA that you contribute to? If so, how do you like it so far? Are there any bad points about the plan that you don't like, or benefits that we didn't mention? Tell us your thoughts in the comments!

$1500 Energy Tax Credit For Energy Efficient Home Improvements Runs Out Soon

By Mr. Money 6 Comments

As the end of the year approaches, a lot of people are scrambling to try and schedule work on their homes that they had been putting off. The reason? Most of the tax credits for energy efficient home improvements that were passed a while back will be expiring at the end of the year on December 31st, 2010.

Details Of The $1500 Energy Efficiency Tax Credit

So here are the basic details of the credit.

Tax Credit: 30% of cost of the home improvement, up to $1,500
Expires: December 31, 2010
Limitations: Must be on an existing home & your principal residence. New construction and rental homes don’t qualify for the credit.

So what that means is that for a qualified home improvement, you would get a tax credit of 30% of the covered cost up to a $1500 total credit. For instance, if you pay $3000 for a gas furnac (excluding installation costs), your credit would be $900.

How To Claim Your Tax Credit

In order to get your tax credit, it would need to be claimed on your 2010 taxes.

For products “placed in service” in 2010, you would take the tax credit on your 2010 income taxes.

Your home improvement should have been placed in service in 2010 if you plan to claim the tax credit for the 2010 tax year.

What Energy Efficient Products Are Eligible?

The tax credit for energy efficient home improvements will apply to a variety of energy star rated products, although not all.

If you purchase an energy-efficient product or renewable energy system for your home, you may be eligible for a federal tax credit. …

Please note, not all ENERGY STAR qualified products qualify for a tax credit. ENERGY STAR distinguishes energy efficient products which, although they may cost more to purchase than standard models, will pay you back in lower energy bills within a reasonable amount of time, without a tax credit

Among the most common products to be eligible:

Biomass Stoves.
Energy efficient doors and windows. Installation costs are not eligible for the credit. Other restrictions apply.
Water Heaters. Credit includes installation costs; some restrictions for energy efficiency apply.
Insulation, whether spray foam, fiberglass, or blow-in cellulose, they’re all covered so long as they meet IECC requirements. Installation cost is NOT covered.
HVAC components, including advanced air handlers, air force heat pumps, central A/C units, boilers, propane, and gas furnaces. Tax credits include installation costs.
Metal and asphalt roofs. Credit doesn’t include installation costs.

For more details on what products are eligible, FAQs and more, check out the government site here: Federal Tax Credits for Consumer Energy Efficiency

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