Month: November 2010

Taxes could soon take a bigger chunk out of your money – meaning now may be a good time to make the most of tax-advantaged investments in your retirement planning process.

The Bush administration tax cuts are scheduled to expire at the end of 2010 – and when they do, the maximum rate on ordinary income will rise from 35% to 39.6%, on long-term capital gains from 15% to 20%, and on dividends from 15% to 39.6%.

Additionally, in 2013, high-income households will have to pay more Medicare tax on wages and may also face a 3.8% Medicare levy on net investment income, thanks to healthcare reform.

While it’s possible that Congress will postpone the expiration of the Bush administration tax cuts, it’s still a good idea to plan for it and other rate hikes.

So, assuming you’re already maxing out your 401(k) plan contributions, what other steps can you take to make the most of tax-advantaged investments in your retirement planning process?

You may be able to contribute as much as $5,000 a year (plus an extra $1,000 if you’re 50 or older) to a traditional Individual Retirement Account (IRA) or Roth IRA.

If you don’t qualify for such an IRA, you can still put money in a Roth IRA indirectly by opening a non-deductible IRA (which anyone under age 70½ with earned income can do) and then convert it into a Roth IRA. If you have self-employment income, you may be able to put money in a SEP IRA or solo 401(k), which allows contributions of up to $49,000 this year (with an extra $5,000 for the solo 401(k) if you’re 50 or older).

The legal and tax information contained in this article is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither we nor our representatives, may give legal or tax advice.

You’ve likely heard the old adage about sticking to high-quality stocks.

But what exactly are high-quality stocks?

When investment professionals refer to high-quality stocks, they’re referring to those of companies that have proven their ability to deliver strong and steady results over the long term. Following are three ways to spot such companies:

High ROE: Earnings don’t tell you how a company’s doing, but return on investment (ROE) does. ROE measures how much profit a company has earned relative to what shareholders have invested. For example, if a company generated a net income of $13 billion over a one-year period and shareholders invested $63 billion in the company, its ROE would be 20%. Companies with ROEs of 15% or higher are considered very efficient.

Steady Dividends: Companies that routinely pay generous dividends are clearly generating a healthy cash flow. But companies don’t necessarily have to pay high dividends to be strong. They just have to have enough general cash flow to be able to pay dividends if they want to. This is sometimes the case with technology companies.

Good Growth Prospects: High-quality stocks tend to have competitive advantages that can keep rivals at bay – and those advantages aren’t always clear. A fast-food chain may not seem to have an advantage, given that there’s a fast-food chain on just about every corner, but if the company has significant real estate holdings, the picture may change.