Month: December 2013

Roth IRAs may soon assume a greater role in many people’s retirement planning, as distributions from these accounts are not subject to the same taxes as other income.

Roth IRAs are individual retirement accounts that allow you to set aside after-tax income up to a specified amount each year. Because you pay taxes on the money now, earnings on the account are tax free, as are withdrawals (if taken after age 59½.)

They have long appealed to investors with lower incomes now than they expect to have in the future, as well as investors who think taxes will rise, not fall. However, now there’s a new reason to consider a Roth IRA: the Affordable Care Act (ACA).

Under the ACA, a new 3.8 percent tax is imposed on unearned net investment income of taxpayers with modified adjustable gross income (MAGI) greater than $200,000 for individuals, or $250,000 for married couples filing jointly.

If you meet those income thresholds, you’ll pay 3.8 percent more in federal income tax on whichever is less: your investment income or the amount of your MAGI that exceeds $200,000 or $250,000.

Although income received from a traditional IRA, 401(k) or pension isn’t subject to the additional tax, it can push your other income above the threshold. Withdrawals from Roth IRAs don’t count as income, so they won’t help push you over the $200,000 or $250,000 threshold.

Your advisor will explain the tax implications of investing in a Roth IRA and help you choose what is right for you.

Inflation has not been an issue for the past several years, but eventually it’s bound to return. And, by the time it arrives, it may be too late to protect your purchasing power. Now is the time to consider your options before inflation is on your doorstep. Here are some ways to protect yourself now from inflation later:

Treasury Inflation Protected Securities (TIPS)

Most bonds pay a fixed amount of interest each year until maturity. As a result, when you invest in bonds, your income is eroded by inflation; for example, if your bond portfolio returns 5 percent per year, and inflation is 3 percent, your actual return is only 2 percent.

TIPS are different. These bonds, issued by the federal government, are directly linked to the Consumer Price Index (CPI) – a common measure of inflation. So, when inflation rises, the income you receive from TIPS rises as well.

Stocks

As you know, stock prices fluctuate. In times of economic uncertainty – such as rising inflation – those fluctuations can be more pronounced. Even so, stocks can help protect a portfolio from inflation. That’s because when inflation rises, many companies can raise their product prices to keep their profit margins high. And high profit margins often lead to high equity prices.

Real estate or REITS

Real-estate prices tend to rise along with CPI. For many investors, however, investing directly in property is too expensive. Real estate investment trusts (REITs) are another option. These are pools of properties with shares that can be bought and sold much like stocks. Just like stocks, however, they may be volatile.

While there are many options for protecting yourself against inflation, there’s one option you shouldn’t choose, and that’s not investing at all. Investors who decide to invest solely in Treasury bills, certificates of deposit, and savings accounts must accept the fact that inflation may eat away at their investment return.