The Saver’s Credit was originally passed into law as part of the Economic Growth and Tax Relief Reconciliation Act of 2001—but with a sunset provision that would make it expire at the end of 2006. On August 17, 2006, President Bush signed the Pension Protection Act of 2006, and the Saver’s Credit was among the many important pension-related provisions of the Economic Growth and Tax Relief Reconciliation Act that were made permanent

Data from the IRS1 indicates that the Saver’s Credit was claimed on about five million tax returns, representing only about 4% of all tax returns filed each year between 2002 and 2005. With the relatively low rate of households claiming the credit, it seems that there may be a lack of awareness about the Saver’s Credit. Given the substantial participation rate in employer-sponsored retirement plans, such as 401(k) plans, many eligible individuals and households may be missing out on this tax credit. And those individuals and households who are not saving for retirement may be unaware that they could benefit from the Saver’s Credit if they do so.

Several possible sources of confusion around the Saver’s Credit exist, including:

• The 1040EZ form, the tax form commonly used by low-to-middle income taxpayers, does not provide for the Saver’s Credit. Forms 1040, 1040A, or 1040NR—along with Form 8880—must be used.
• The IRS uses the term “Retirement Savings Contributions Credit” (versus Saver’s Credit) in its publications.
• The Saver’s Credit is non refundable and may only be applied towards the federal income taxes owed in a given year. If an individual or household has no tax liability, then the Saver’s Credit would not be treated by the IRS as a refund.
• Taxpayers who prepare their taxes manually versus using tax preparation software or a professional tax preparer may find claiming the Saver’s Credit to be complicated.

* Catch up contribution is only applicable for people over the age of 50.

This article tackles a key component of being a good investor and able to achieve your long term financial goals.

Focus Beyond Short Term  
As you can see, it is easier said than done. How many times you have seen stock market turning south right after you put some money into it or contribute to your IRA? You have probably seen it few times yourself. These short-term moves could be very disappointing and discouraging and all of us would like to work out a short-term investment strategy to avoid these. However, making your investment decision on short-term results can be detrimental to your long-term financial health. After all, there’s no need to lead every mile of a marathon; all you need to do is finish well at the end.

In today’s world, there is widespread availability of investment return data that has allowed investors to keep a close watch on financial markets. You can compare results from quarter to quarter or from month to month and get a fairly good idea about certain months or quarters that have been historically bad. This could make you preoccupied with short-term results and you might be tempted to replace your long-term mutual funds or investment with the ones with good short-term results. But short-term results can be very deceptive. Remember, the days of Internet bubble? This was the time when every investment house was offering a mutual fund dedicated to investing in Internet related startup companies. Results were outstanding with 200% to 400% return year over year. But what happened in the end? Those Internet mutual funds don’t even exist 10 years later and if you invested in one of them, you probably lost enough money to derail all your retirement and investment planning. On the other hand, well established reputable mutual funds that returned 10%-15% back in that period are still providing solid return on your investment and if you would have stayed with them, you’re probably very happy today.

So what should an individual investor do? One good option is to examine how a mutual fund has held up over full market cycles – periods that encompass a series of low-to-high and high-to-low periods. The average market cycle has exceeded four years, and that figure has been lengthening. In fact, the most recent one lasted well over six years. This is important since some funds may experience stellar results during booms, but decline more precipitously than the market themselves during down markets. This is equivalent of running too fast during the first mile of marathon and then fading at the finish. Remember, stock market during a rise period is amazing but it is spectacular during fall or decline. So you would rather be with a mutual find that gains slowly as compared to the one that declines quickly.

What exactly is a Mutual Fund?
A mutual fund is a portfolio of stocks, bonds, or other securities that is collectively owned by hundreds or thousands of investors and managed by a professional investment company. The shareholders are people who have similar investment goals. Each fund has specific investment criteria, which are spelled out in its prospectus, the official booklet that describes the mutual fund. Investors then know what they are getting and can match their objective to that of a fund. The pooled money has more buying power than one investor alone, so that a fund can own hundreds of different securities. Thus, its success is not dependent on how just one or two companies perform.

A mutual fund makes money in several ways: by earning dividends or interest on the investments it owns and by selling securities that have appreciated in value. You, in turn, make money in the form of dividends and interest that are passed on to you and the increase (or decrease) in the fund’s value. The mutual fund manager keeps constant watch on financial markets and adjusts the portfolio to achieve the strongest returns. By owning part of a fund, the hard work of selecting and monitoring stocks and bonds is done for you. The majority of mutual funds available are open-end funds, which are the focus of this unit. Open-end funds can have an unlimited number of investors or money in the fund. Managers of closed-end funds, on the other hand, decide up front how many shares they will issue and when they will sell them. The only way to purchase shares in a closed-end fund, once the original shares have been sold, is to buy them from a current investor. Occasionally, open-end funds can and do close to new investors, often because of high cash inflows that cannot be invested in a timely manner. They do not become closed-end funds, however, because current shareholders can still buy additional shares from the fund company.

When investors purchase a mutual fund, they own a piece of an investment portfolio. They share in the gains, losses, and expenses in proportion to the amount they have invested in the fund. At the close of every trading day, a mutual fund company tallies the value of all the securities in its portfolio and deducts its expenses (e.g., management fees, administrative expenses, advertising costs). The balance is divided by the number of shares owned by shareholders to arrive at the dollar value of one share of the mutual fund. This value, the net asset value or NAV, is the price your fund pays you per share when you sell.