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2013 Tax changes

Hey it’s tax time again and here is a short summary of some of the recent changes that you should be aware of. With the exception of payroll tax, for most people their is little to no change in both tax rates and capital gain tax rates.

I recently read an article in Money Watch and according to Money Watch:

Tax rates on ordinary taxable income. For workers with taxable income below certain levels, their tax rates will remain at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. For single filers with taxable income above $400,000, married filers with income over $450,000, married filing separately over $225,000 and heads of household with taxable income over $425,000, the new 39.6 percent rate will replace the 35 percent tax rate for income over these amounts. So a married couple with a taxable income of $650,000 will pay an additional $9,200 of income tax just due to this change.

Higher tax rates for long-term capital gains and dividend income. Like the income tax rates for people with incomes below certain levels, the tax rates that apply to their capital gains and dividends will remain the same. But for taxpayers with the higher incomes noted above, their rate increases from 15 percent to 20 percent. So a taxpayer with $10,000 in capital gains and $10,000 in dividend income would pay an additional $1,000 of income tax due to this change.

So I know after I read this, I had to ask myself, “Where’s the silver lining?” Even though Congress has ensured that workers will pay more in payroll taxes and some of us will pay more in income taxes, the good news is that many of these new tax rules that were put into place are to help avoid the “fiscal cliff” (or at least cushion the fall!) and they are permanent. This will give many of us business owners a welcome sense of stability which could open up a plethora of opportunities; whether it’s setting up a business in relation to tax implications or giving people more confidence in your current investment (or investing in general). These new tax laws may be just the push you need to apply more focus or stay focused on working your self-directed accounts (401Ks, IRAs, HSAs, Coverdale accounts) because your investments can grow tax-free or tax deferred. With the exception of Coverdale accounts, you still have until April 15th to put contributions in for both 2012 and 2013! So get your money moving, and happy filing!

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SIMPLE IRAs Explained

A SIMPLE IRA is an employer sponsored retirement plan offered within small businesses that have 100 or less employees. SIMPLE is an acronym for savings incentive match for employees. Small businesses may favor SIMPLE IRAs because they are a less expensive and less complicated alternative to a 401k plan.

With a SIMPLE IRA, the employer matching incentive is built in to the plan. The employer must either match the contributions employees make to their plan, up to 3% of salary. Or the employer can make contributions for employees of a flat 2% of salary, whether or not the employee chooses to participate in the plan. This differs from 401k plans. An employer offering a 401k plan can choose whether to match employee contributions. Many do, but in difficult economic times, matching programs can be among the first benefits cut. Employers who choose to offer SIMPLE IRAs are generally required to match, dollar for dollar, from 1% to 3% of the employee’s salary.

A SIMPLE IRA works a lot like a 401k plan. Contributions to the plan are made pre-tax, and the money in the plan accumulates tax-deferred until the money is withdrawn at retirement. If the money is withdrawn before age 59 1/2, you will pay a 10% penalty fee. Within a SIMPLE IRA, your employer will likely offer a wide variety of stock and bond mutual fund investment options. A SIMPLE IRA cannot be a Roth IRA.

If you are a small business employer, the decision to offer a SIMPLE IRA vs a 401k is often not so much about the size of your company or the number of employees, as it is about how much you as the owner want to put into the plan. The contribution limits for a SIMPLE IRA are different than 401k contribution limits. In 2012, employees can generally contribute $11,500 to a SIMPLE IRA. The catch-up contribution limit for 2012 is $2,500. That means if you are age 50 or older and your employer allows catch-up contributions, you can put an additional $2,500 into the IRA this year. If you have a SIMPLE IRA and you participate in any other type of employer retirement plan during the year such as a 401k, the limit on how much you can contribute to all of the plans is $17,000.

With a 401k, individuals can save $17,000 in 2012, or up to $22,500 with a catch-up contribution. So, you can see, there is a big difference in the amount you can sock away in 401k. Small-business owners who are highly paid professionals, such as doctors, dentists or attorneys, tend to favor solo 401k plans over SIMPLE IRAs because of the higher contribution limits offered with a 401k.

SIMPLE IRA rollovers are anything but simple if you have been invested in the plan for less than two years. If two years have passed since you’ve begun participating in the plan, you can move the money into a rollover IRA or new employer 401k. If you’ve participated for less than two years, you can only roll it into another SIMPLE IRA or leave the money in the former employer’s plan.

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This Little Girl Has It Right

Victoria, a 12 year old girl from Canada, has some very profound words and she is talking about Canada but the exact same situation is going on in the USA.

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Why Is It Hard To Get A Loan Modification?

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What is Crowd Funding?

Funding Launchpad Chief Marketing Officer Dave Milliken recently wrote a guest blog post for public relations firm Leverage PR titled “Crowdfunding Explain- An In Depth Look”. This post provide a brief history of crowdfunding and describes the four types of crowdfunding in broad use today.

For your reference, we have re-posted that information below.

With the passage of the JOBS Act, crowdfunding has received a lot of attention lately. In an effort to explain what crowdfunding is and how your business could potentially benefit from it, we have asked David Milliken, Co-Founder and SVP of Marketing for Funding Launch Pad to do a guest post about crowdfunding.

The crowdfunding concept dates back to the 1700s, when Jonathan Swift launched the Irish Loan Fund.[i] Crowdfunding is broadly described as aggregating funds from a broad donor base towards a common cause. This guest blog post explores the four common forms of crowdfunding.


Microfinance is when contributors align to provide financial services, often seemingly miniscule loans, to low-income clients. Recipients generally lack access to banking services[ii].

Historic examples of microfinance include Swift Irish Loan Fund, and more recently, the March of Dimes. Barack Obama’s 2008 campaign fundraising approach, accepting smaller than traditional contributions from a broader voter base, could be considered a form of microfinance.

Today’s microfinance model began when Nobel Prize winner Muhammad Yunus began giving microloans in the 1970s to help the poor in his native Bangladesh escape poverty. Kiva.org is a prominent microfinance platform, having facilitated $303 million in loans.

Peer-to-Peer Loans

Also known as P2P loans or social lending, peer-to-peer lending enables individuals to borrow from a group of lenders, without the use of an official financial institution as an intermediary[iii]. The theory is that by removing the overhead of banks, borrowers receive lower rates while lenders earn higher returns than expected from savings accounts.

P2P lending grew over 1200%, from $118 million to $1.555 billion, in outstanding loans between 2005 and 2008[iv]. P2P lending is highly regulated by a maze of securities laws. Leading platforms in this fast growing field are Prosper.com and Lending Circle.

Donation-Based Crowdfunding

Donation-based crowdfunding (DBC) has exploded in the past few years, with hundreds of platforms. DBC campaigns are often creative (movies, music, art), community, or philanthropic projects. They can also be business-oriented, like the Pebble watch that recently broke the record for largest DBC campaign[v].

When contributing to a DBC project, you are guaranteed no financial return. Instead, you generally receive a non-monetary reward related to the project, like a T-shirt, pre-released CD, credits, or unique experiences. No financial returns mean DBC campaigns are not impacted by securities laws, and are generally viewed as legal today[vi].

The DBC industry nearly quadrupled in 2011, from $32 million to $123 million[vii]. According to Funding Launchpad’s exclusive consumer research, despite hundreds of platforms, Kickstarter dominates the DBC landscape. IndieGoGo and RocketHub are also major sites[viii].

Investment Crowdfunding

With investment crowdfunding, the crowd earns securities – equity, debt, or a revenue share – in exchange for their contributions. Today, investment crowdfunding is generally considered illegal in the US[ix], but Title III of the recently passed JOBS Act will change that. The Securities and Exchange Commission has 270 days to write the rules and establish a new type of intermediary called a “funding portal” so investment crowdfunding will probably not be enacted in America until Q1 or Q2 2013. To learn more about the crowdfunding portion of the JOBS Act, please see our plain English summary.

Entrepreneurs and politicians expect investment crowdfunding to boost the American economy by giving startups and small businesses access to a new source of capital. Investment crowdfunding is the primary driver behind consultancy Gartner predicting the industry to grow to $6.2 billion by 2013[x]. Crowdfunding for securities is already an emerging fundraising tool outside the US. Leading platforms around the world include Crowdcube (UK), Symbid (The Netherlands), and ASSOB (Australia).

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What happens if tax cuts expire?

It’s 2010 all over again when it comes to Congressional wrangling over tax policy. The Bush-era tax cuts were originally set to expire Jan. 1, 2011, but were given a two-year reprieve to avoid dampening the fledgling economic recovery with higher taxes. Unless Congress acts to extend the current rules and rates again, most taxpayers will see higher tax bills starting Jan. 1, 2013. Here are some of the changes to expect and a few ways to plan now to lessen their impact on your wallet.

If the Bush tax cuts are simply allowed to expire, everyone will face higher taxes next year. The current 10 percent bracket will disappear in favor of a new bottom rate of 15 percent. All other rates will also shift higher. The current 25 percent rate will become 28 percent, 28 percent will become 31 percent, 33 percent will become 36 percent and the top rate will rise from 35 percent to 39.6 percent. For investors, higher rates on ordinary income will be joined by the elimination of favorable tax treatment of long-term capital gains and qualified dividends. Currently, gains on assets held longer than one year are taxed at a maximum 15 percent rate. This rate will increase to 20 percent if the tax-cuts are not extended. Dividends, both qualified and non-qualified, will all be taxed as ordinary income. As a result, for some taxpayers, the dividend tax rate will more than double from 15 percent to 39.6 percent. Distributions from qualified retirement plans and IRAs are excluded from net investment income and income from municipal bonds.

Minimizing the impact of these impending tax hikes will require strategies either to accelerate taxable income to 2012, before the rates increase, or reduce future taxable income. Investors should consider realizing investment gains in 2012 to lock in today’s lower tax rates. Realizing losses before year’s end may also be advantageous as these losses can be carried over to future years to offset gains that will be taxed at higher rates. Converting all or part of a traditional IRA to a Roth IRA in 2012 is another strategy for accelerating income to lock in today’s lower rates. When performing a Roth conversion you pay ordinary income tax on the amount transferred out of your traditional IRA in exchange for tax-free withdrawals from your Roth IRA in the future.

Other ways to reduce current taxes and keep income below the surtax threshold include maximizing contributions to 401(k)s and other deferred-compensation plans. Maximizing retirement-plan contributions will also help lessen the tax bite because these reduce current taxable income, a feature that becomes even more important if these salary deferrals can keep your income under the surtax threshold. Finally, it may also pay to reconsider your asset location strategy. That is, what types of investments to hold in your taxable, tax-deferred and tax-free (Roth IRA) accounts. Implementing a well-conceived asset location strategy can help boost the after-tax returns from your portfolio.

Once dividends are again taxed at ordinary income tax rates it will be less advantageous to hold dividend-paying stocks in taxable accounts. Instead, these income-generating investments may provide better after-tax results if they are held in tax-deferred traditional IRA or 401(k) accounts. Growth-oriented stocks with lower dividend yields, alternatively, may be the best asset to hold in a taxable account.

I hope this gives you some ideas to consider and to consider alternative assets in your retirement account.

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Alternative Asset Purchases In IRA

I want to get you excited about alternative asset investing by showing you some recent examples of deals done in my self directed IRA and solo 401k. I constantly wonder why people are so “stuck” on buy stocks and bonds only and don’t even consider investing in real estate, notes, private lending, tax liens, gold and so on. I know once people see the potential returns and the relatively low risk as compared to the traditional assets they will switch into alternative assets. Let’s look at a few examples of a real estate purchase, note purchase and private lending to an investor.

Real Estate Purchase

I purchased a single family house in South Carolina and after doing cosmetic repairs, the property was rented for 9 months before the tenants purchased the property for $120,000. This resulted in an annual cash on cash return of 36%.

Purchase price: $91,000
Repairs: $5,100
Rental: $1,195/mo
Rental profit: $10,755 (9 months)
Sales price: $120,000
Sales profit: $23,900
Annual return: 36%

Mortgage Note Purchase

I purchased a first lien mortgage note on a single family property in Florida. The note was purchased for $15,900 and the monthly payment was $656/month. The property value is $48,000 which gives a low loan to value of 33%. The note has great upside potential with an UPB (unpaid principal balance) of $79,000.

Note price: $15,900
Property valve: $48,000
LTV: 33%
UPB: $79,000
Payment: $656/month
Annual return: 49%
Upside profit: $63,100

Private Lending

I met a real estate investor who wanted to buy, fix and flip a residential property. The investor had a purchase and sale agreement for $36,000 and the ARV was $79,000. The property needed about $14,000 in repairs. I agreed to lend around $29,000 (a very safe position). The loan was repaid in 6 months for a net annual return of 14%.

Property value: $79,000
Purchase price: $36,000
Loan amount: $28,800
LTV: 37%
Interest rate: 10%
Points : 2%
Term: 6 months
Annual return: 14%

I really hope that these examples and high returns inspire you to go out and think big for your retirement savings plan whether it is in a solo 401k or a Self Directed IRA.


Solo 401k Advantages

The solo 401k offers a variety of advantages over the self directed IRA such as:

• Higher Contribution Limits. IRA allows only $5,000 and an additional $1,000 catch up provision (age 50+) whereas the Solo 401k allows an annual contribution limit of $49,000 with an additional $5,500 catch up provision (age 50+) and the same amount for the spouse that generates compensation from the business. Therefore, together you can contribute up to $98,000 or $109,000 if you are over age 50 if you have sufficient earned income. In addition, the Solo 401k plan contains a Roth account portion which can be contributed to without income limits (in Chapter 2 we discussed the Roth IRA income limits).

• Loan Feature. You can borrow funds from your Solo 401k up to $50,000 or 50% of the balance (whichever is smaller) for any reason and pay your 401k back at a low interest rate typically prime plus 1%. The funds can be used for any purpose. You can use them for personal needs or partner with yourself to buy a property and even buy that car you always wanted.

• Total Control of Allowable Investment Choices. Since you are trustee of the Solo 401k plan, you will be able to invest in almost any type of investment that suits you as long as it is allowed. Making an investment with your Solo 401K Plan is as simple as writing a check. As trustee of the Solo 401K Plan, you will have total control over your retirement assets to make real estate and other investments without custodian consent. This helps in your ability to snatch up those great deals before anyone else.

• Reduced Fees. Making an investment in your Solo 401k is as easy as writing a check and does not require you to get permission or have funds wired or mailed from a custodian which allows you to eliminate the expenses associated with this type of activity. This also allows you to act quickly when you find a great investment and need to move fast to take advantage of the opportunity.

• UDFI Exemption. If you buy real estate in an IRA and use funds from your plan and a portion of the funds from debt financing, typically you would incur UDFI (Unrelated Debt Financed Income) which is a type of UBTI (Unrelated Business Taxable Income) on which taxes must be paid. In a Solo 401k, you are not subject to the UDFI rules and the UBTI tax (which is typically 35%).

Solo 401k plans can accept most rollovers from IRAs, other 401ks, 403b, SIMPLE, etc. The only exception is that a Roth IRA cannot be rolled into a Solo 401k plan.


What Is A Non-Deductible Traditional IRA?

Many people make too much money to contribute to an Roth. You can get around this problem. High earners can still take advantage of the Roth IRA by contributing to a nondeductible IRA and then converting to a Roth. A nondeductible IRA is simply a traditional IRA for which there is no tax deduction, and it is available to almost everyone with wages or self-employment income.

A non-deductible Traditional IRA is a Traditional IRA that consists of non-deductible contributions. In both Roth IRA and non-deductible Traditional IRA, contributions are non-deductible, meaning that you fund them with after-tax money. The major difference comes from the way earnings are taxed. Earnings are taxed as ordinary income if you withdraw them from a non-deductible Traditional IRA. In contrast, earnings are tax free if you withdraw them from a Roth IRA.

You make non-deductible contributions to a Traditional IRA by setting up and sending money to an IRA custodian of your choice. You do not need to notify the IRA custodian that you are making non-deductible contributions. However, you do need to notify IRS that you have made non-deductible contributions to a Traditional IRA with Form 8606 Nondeductible IRAs when you file your tax return. It is your responsibility to keep track of the basis, the amount of non-deductible contributions, in your Traditional IRA. You can then convert this non-deductible Traditional IRA to a Roth IRA but make sure you get professionals help.

Remember that the IRS treats all of your (but not your spouse’s) non-Roth IRAs as one giant IRA. When you make non-deductible contributions to a Traditional IRA, you’ll have the basis, the amount of non-deductible contributions, reported on Form 8606. When you convert a part or all of your Traditional IRA to a Roth IRA, the conversion amount must contain the non-deductible portion proportionally. For example, if 5% of your non-Roth IRA are non-deductible contributions, then 5% of the conversion amount must be non-deductible contributions, and the rest must come from the deductible contributions, including earnings and rollover contributions. Notice that you cannot just convert the non-deductible part to a Roth IRA.

There are a couple of ways to work around this problem. The proportionate allocation rule does not apply to rollovers from an IRA to a QRP (Qualified Retirement Plan like a 401k) or 403b plan. Instead, a distribution that is rolled from and IRA to a QRP or 403b plan is deemed to come entirely out of the taxable portion of the IRA. This exception is necessary because the nontaxable portion of an IRA cannot be rolled into a QRP or 403b plan. You might therefore consider a rollover from your Traditional and non-traditional IRA back to a 401k or if you qualify as a self-employed business owner who can open a solo 401k, you might rollover your Traditional and non-traditional IRA to a solo 401k.

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Not A Good Use Of 401k Money

A Fond du Lac man accused of murdering his wife will be able to hire an attorney. Jason E. Anderson, 35, can now withdraw about $37,000 from his 401K savings plan to help pay for representation, Fond du Lac County Circuit Court Judge Richard Nuss ruled Tuesday.

Anderson’s wife, Nicole Anderson, 33, was found dead from a single gunshot wound to the temple on Nov. 8 at the couple’s home, 312 Winnebago Drive. After the shooting, Anderson left Wisconsin and was tracked to Alabama through debit card records, according to the criminal complaint.

Judge Peter Grimm on Dec. 2 restrained Jason Anderson from using part of the couple’s marital estate to hire a private attorney. Anderson on Tuesday sat in the corner of the courtroom weeping before his case was called. During the duration of the hearing, he kept his face down and stared at his hands.

Defense attorney Robin Shellow said it is Jason Anderson’s intention to hire her to represent him. “When you lose a loved one, someone you care about, who is your soul mate and is your heart — whether it is your legal fault or not your legal fault — there’s an enormous amount of pain,” Shellow said. “He is grieving and distraught over the loss of his life partner.”

A document filed by Shellow claims Jason Anderson stated that on the night of Nicole Anderson’s death, he thought he heard an intruder, armed himself with a handgun, it accidentally discharged when the trigger guard was knocked against some furniture and the recoil caused Anderson to almost fall and for the gun to be fired a second time.

District Attorney Dan Kaminsky and Police Chief Bill Lamb responded in a press release that documentation filed by Shellow was nothing new and it would not change the charge of first-degree intentional homicide filed against Anderson. “While similar, those claims are in part inconsistent with information Mr. Anderson previously provided to investigators. Further, additional evidence recovered in the case suggests a different scenario surrounding the homicide,” the release states Shellow told The Reporter on Tuesday that it is premature to be speculating about what does and does not match in the Anderson case. “It was interesting to me that he (Kaminsky) was willing to entertain that there was some similarities,” Shellow said. “That is unusual for a prosecutor. I commend him for admitting the similarities.” Shellow said she will not “try the case in the press.”

The next step in the Jason Anderson case will be a preliminary hearing scheduled for Jan. 6. Shellow will continue defending Anderson on the basis that the death was an accident.

“It never seems to surprise us when famous people like Laura Bush and Adlai Stevenson accidentally kill a loved one, but when the ordinary man says it was an accident, the public that came of age watching five different ‘Law and Order’ (shows) on TV has been schooled that all accidents are crimes and law enforcement scurry around looking for non-existent motives,” she said.

Story found in the fdlreporter.com and written by Russell Plummer