Getting the most for your money: 12 financial tips for welding professionals
These include the importance of contributing to an individual retirement account, retirement programs for the self-employed, tax-exempt investments, $10,000/year gift tax exclusions, charitable contributions, how much money you should keep in checking and savings accounts, liquidity, and diversified portfolios.
Before you know it, 2001 will be behind us, and between football on New Year's Day and the April 15 federal income tax filing deadline, you might ask yourself, "Did I do everything I could to maximize my family's financial health by investing wisely, cutting taxes, and keeping my financial house in order?"
Whether you are employed by a large company or own your own welding business, these 12 financial tips can provide the framework for your long-term financial planning.
Contribute to an Individual Retirement Account. Individual Retirement Accounts (IRAs) offer tax-deferred growth, reduce current taxes, and the extra retirement income will make your sunset years brighter. Ask your financial adviser if a Roth IRA, in which you pay current taxes on the contribution but no taxes on the payout, is right for you.
No matter which IRA you select, fund your plan every month with an automatic withdrawal from your checking account—it comes to less than $39 per week for a maximum contribution—that you won't miss. You also will average your cost for investments (dollar cost averaging) and you won't have to come up with the entire $2,000 payment on April 15. Working couples can contribute $4,000.
Contribute to retirement programs for the self-employed. If you are self-employed, IRS rules allow you to contribute to special, qualified retirement plans, such as an SEP (simplified employee pension). You can decide how much or whether to contribute year to year based on income. This is in addition to an IRA.
Make tax-exempt investments. If you are well along in your career and in a high tax bracket, municipal bonds may make sense for a portion of your investments. Municipal bonds are considered second only to federal bonds in terms of safety. They offer interest that is free from (not just deferred) both state and federal taxes.
Present a gift. Take advantage of the $10,000-a-year tax exclusion for gifts if you want to help your children buy their first home or grandchildren pay for college.
If your net worth is more than $600,000, your heirs could be subject to an estate tax of up to 60 percent when you die. By making gifts to your heirs in $10,000-a-year increments, you not only decrease the size of your estate, but you also may receive a deduction for making those gifts.
Make charitable contributions. Many ways exist to make charitable gifts. For example, if you have stock that is highly appreciated in value, you may gift that stock to a charity. Not only do you receive a tax deduction for the full amount, but the charity may accept stock without having to pay any capital gains taxes.
Minimize balances in checking, savings. Too many people keep large sums of money in low-interest or non-interest-bearing checking and savings accounts. Liquid cash usually can earn higher rates in money market accounts, some of which offer tax advantages.
Keep sufficient liquidity. Other people do not have enough accessible funds—especially in this heated stock market environment. Usually, three to six months' living expenses are sufficient. Insufficient liquidity can force you to sell stock or other assets at a time when holding them would be more prudent.
Diversify. Time has shown that balanced portfolios — those with several types of stocks or mutual funds with fixed income — have performed better and with lower risk than nondiversified portfolios. Ask your financial adviser to help you review the actual investments and investment philosophy of your mutual funds to make sure they are giving you the diversity you want.
Be selective. Listen to the professionals. Many well-meaning friends have advised people to make poor decisions regarding the purchase or sale of investments. Top professionals can provide objective investment advice based on experience and research using the latest information.
Stay patient. Perhaps more than any other reason, those who lose money in investments lose the money because they sell low. Over periods of highs and lows, the lows have proven to be the best times to buy rather than sell. Many people who were driven by panic to sell could have realized gains from carefully selected stocks in a diversified portfolio if they had held their investments for another six months.
Give away used equipment and other goods. If you discard goods such as old tools and equipment, furniture, clothes, books, and computers, you may be missing out on a tax-saving opportunity. If the goods are usable, call a local charity. Often the charity will pick them up and provide you with a receipt to be used for tax deductions. You help yourself, the environment, and a charity by recycling usable items.
Keep current. Depending on your situation, you may need to schedule meetings with your financial consultant, attorney, and CPA from one to four times a year. Make sure your will and estate plan are reviewed and updated yearly.
Practical Welding Today
Practical Welding Today was created to fill a void in the industry for hands-on information, real-world applications, and down-to-earth advice for welders. No other welding magazine fills the need for this kind of practical information.