Each year, individuals and business owners
should evaluate their wealth management
initiatives to make sure they have the
appropriate portfolio for their age and
investment goals. Practitioners should emphasize
the following key points to help clients
maximize their saving potential.
Maximize retirement plan contributions.
The 401(k)/403(b) maximum
contribution for tax year 2007 is $15,500, plus a
$5,000 catch-up contribution for anyone age 50 or
over. Some companies are starting to offer the new
Roth 401(k), which allows clients to invest
after-tax money into workplace retirement plans.
While they forgo the tax deduction today, the Roth
contribution plus investment gain will not be
taxed when they are withdrawn after age 59 1⁄2
(see “ To Roth or Not to Roth,”
JofA, Feb. 07, page 64). This is a great
option for younger employees as well as those who
may not benefit as much from a present tax
deferral. In addition, unlike the Roth IRA, the
Roth 401(k) is available at any income level.
Invest in the IRA that’s right for you.
Roth IRA vs. traditional IRA—which
one is better? The maximum contribution for both
traditional and Roth IRAs for tax year 2007 is
$4,000 plus a $1,000 catch-up. In general, the
Roth IRA is limited to married couples with
adjusted gross incomes less than $166,000 and
single filers with AGIs less than $114,000. For
those who qualify, the Roth IRA is an excellent
savings vehicle. Similar to the Roth 401(k), it
forgoes the tax deduction today but saves on
investment gain in the future.
Rebalance portfolios at least once a
year. Investors should have an
appropriate balance between stocks and bonds,
depending on age, risk tolerance and personal
goals and objectives. It is important to allocate
assets between U.S. and foreign investments and
necessary to have an appropriate mix between large
and small capitalization stocks and growth and
value styles. Allocations should be updated to
reflect changes in the investor’s financial
situation as well as market adjustments. It is
critical to evaluate the mix every three to four
months and rebalance at least annually.
Make year-round tax planning a priority.
Don’t wait until December to think
about tax planning for the year. Business owners
should make sure they have the best available
retirement plans for their companies to maximize
owner contributions and increase employee
participation. Individuals should work with their
CPA and wealth management provider to ensure they
have maximized all available tax strategies, such
as harvesting losses to offset gains, making every
attempt to hold a gain for more than 12 months
before selling, and utilizing tax-deferred
Have a solid estate planning strategy.
Everyone should have a will, durable
power of attorney and health care proxy. These
documents should be updated every three to five
years or anytime a major change in family status
or financial situation occurs, such as the birth
of a child, a marriage or divorce, or a change of
succession plans. In addition, make sure
beneficiaries are updated on all retirement plans
and life insurance policies to match estate goals.
Proactively manage debt.
While many people focus on the asset
part of their personal balance sheet, it is
important to pay attention to debt as well.
Consolidate high-interest credit cards and check
mortgage rates for refinancing opportunities. Many
people now have adjustable-rate mortgages. Be
aware of rising interest rates and costs for lines
Consider charitable giving.
Gifting appreciated stock is a good
way to benefit both parties. Look into
donor-advised funds. These allow a person to
donate a sum of money today and generally receive
the full deduction without committing all the
money to an individual cause at one time; you can
spread your giving over a number of years and a
number of charities.
Give to children and grandchildren.
You can give up to $12,000 a year to
any person without paying gift tax. Although gifts
to individuals are not tax-deductible, this is an
excellent way to transfer money from older to
younger generations within a family. Many
grandparents use such transfers to help fund
college educations for their grandchildren, often
through a Qualified Education Program under IRC
David Borden is principal of
CCR Wealth Management LLC, Boston.