I was browsing through a newsletter from Schwab and found certain things about retirement and investing that I found rather interesting. I just wanted to capture it in some place. Where else would it be ? Though any of these may not have a significant impact to most of us, it is a good thing to know.
Firstly, about tax implications due to President Obama’s budget. The tax is going to increase from 33% to 36% and from 35% to 39.6% for the top 2 brackets of income from Jan 1, 2011. For all other tax-brackets, it will be the same as before ( single earning less than $171,550 or married filing jointly with an earning of less than $208,850). If you think your income may exceed just a tad bit more than the 3rd bracket, it might put you in a higher tax-bracket. In that case, it is a good idea to invest extra money towards 401K if you are not making full contribution to 401K already. You not only save on your taxes, but have that money grow tax deferred in your 401K. Remember that the 401K contribution will be excluded from your income for tax calculations.
The capital gains will be taxed at 20% from the 15% that exists today (if the family joint income is greater than $250,000), again from Jan 1, 2011. If you have long term investments that you plan to sell, it is a good idea to sell it off before Jan 1, 2011 so that you don’t have to pay the extra 5%. This applies only if you intend to sell of your investments anyway.
I was surprised by a couple of facts that I read about retirement. If you file for bankruptcy, apparently, the creditors cannot come after your retirement accounts. So, point being, if you are already in heavy debt, looks like filing bankruptcy and protecting the retirement account is a good choice than liquidating your retirement account to pay off the debtors. Sounds a bit unethical… But hey, that’s the law..:)… Also, if you have loan from your 401K account (remember the 401K sayings that the interest on a loan towards 401K goes to your account and hence you don’t lose money) and if you lose your job, there is a 60 day grace period after which the loan will be considered a distribution with the penalty deducted. In other words, your loan should be repaid if you quit your job (within 60 days). One of the best alternatives to getting a 401K loan is to get a Home Equity line of credit (HELOC). Not only you can move some of your higher interest credit card debts to this low interest alternative, it also gives tax exemption on the interest paid. Remember that, if you are in the verge of losing a job, it is a good idea to get a HELOC while you still have a job (otherwise, you wouldn’t qualify for a HELOC). If worst comes to it and if you file bankruptcy, your 401K will still be intact… That’s all folks!