Sunday, April 15, 2018

Investment Tax Categories

Last week I addressed tax-efficiency in your portfolios. Here I shall review the differences among those classifications of taxable, tax-deferred and tax-exempt to make tax-efficiency more readily understood. The following are simple explanations. For expert tax guidance please speak with your accountant or tax attorney.


Taxable: an account that holds money on which you have already paid taxes - e.g. bank checking or savings accounts or brokerage accounts. These accounts may have stocks, bonds, CD's, etc. Every year you receive a 1099 of all reportable earnings: dividends and interest as well as reportable proceeds: stock or bond sales. You enter these numbers on your tax return and pay taxes accordingly.


Tax-exempt: refers to bonds (loans) issued by municipalities (states, cities, towns, counties). These bonds are exempt from federal taxes. As an incentive to its residents to buy these bonds, which finance local projects, you pay no state taxes on the interest. As a NY resident, if you purchase a NY State bond, it will be double tax exempt as you will pay no state or federal taxes on the interest. However, NY reserves the right to tax the interest earned on other states' bonds.


Tax-deferred: means you pay no taxes now but when you withdraw the money both state and federal taxes are due. IRA, SEP, 401k, 403b all grow tax-deferred. Your 401k or 403b plan from work will take money from your paycheck before deducting taxes, deposit the money into your plan where it will grow tax-deferred (you will not receive a 1099 each year). Taxes will be paid when you start withdrawing money from these accounts later in retirement. The money will be taxed, as your income is taxed, both by the state and the federal government. Hopefully, in retirement you will be in a lower tax bracket and, consequently, pay less in taxes.


Tax-free
: refers to a Roth IRA where money grows without paying taxes each year and is distributed without being taxed. Actually, the money contributed to most Roth IRA's is money on which you have already paid taxes; it is the earnings (growth) that are tax-free.


Be $ Smart - Learn about the impact of taxes on your investments. Position your assets effectively to pay less in taxes.

Monday, April 9, 2018

Make Your Portfolios More Tax Efficient

We are in the midst of tax season so this is a good time to review your portfolio to make sure it is arranged in the most tax-advantaged way.

Most investments (bonds, bond mutual funds and ETF's) that generate interest work best in a tax-deferred account.

Muni bonds are an exception as their interest is exempt from federal taxes and in many cases, exempt from state taxes as well. Hold municipal bonds in your taxable accounts.

Stocks, usually long term investments, should be held in your taxable account for several reasons:

1. long-term capital gains on stocks are taxed at a maximum 20%. Most folks will pay less, 15%. That is certainly a better rate than 25% - 30% regular income as it would be taxed from an IRA or 401K distribution.

2. losses in your taxable account can be used to balance any gains you realize. Losses cannot be taken in a tax-deferred account.

3. qualified dividends from stocks are taxed at 20%. These same dividends in a tax-deferred account are added into the overall distributions and are taxed as ordinary income - 20% -37%.

4. you may donate stock that has grown significantly to charity avoiding any capital gains tax.

5. you may pass appreciated stock on to your heirs at your death. This will give them a step-up in basis (which means the cost basis of the stock - what you paid for it - will now be the value of the stock on the day you died.) If they sell the stock immediately there will be little or no capital gains tax.

Roth IRA's are different!!
All contributions to Roth IRA's are after tax.
Distributions from a Roth are tax-free, so holding both stocks and bonds in a Roth is fine. The one problem is that you may not take a loss on any stock that may have fallen in value.

Be $ Smart - be aware of how dividends, interest and capital gains are taxed so you may position your portfolios in the most tax-efficient way. You keep more money in your pocket and less in Uncle Sam's.

Thursday, March 22, 2018

A Success Story

Earlier this year I wrote a money tip about finding lost pensions.
About a month later my daughter asked me for her dad's expired passports. As I rummaged through old papers I found a letter from one of my late husband's former employers stating that because of his employment of so many years he would be entitled to a monthly pension at age 65.

This letter started a months-long quest for the missing pension. My thinking was to act on my own advice!

The quest began in March by searching for the company that bought the firm my husband had worked for more than 30 years ago. I kept hitting dead ends as there had been several company mergers. Finally I discovered the name and address of the present firm - very different from the original. Also, the company headquarters were in a foreign country!

I emailed the main office, and to my surprise, had a response within three days. Who was I? What did I want? Why did I wait so long?

After a few exchanges they asked for birth, death, and marriage certificates as well as social security numbers. Weeks passed. They eventually responded saying they had no record of my husband ever having been an employee of that company!! I insisted that he had and he was not just an employee but also a corporate officer, at one time the Financial Vice President. Still no records to be found. They then told me to request a Record of Earnings from the Social Security Administration.

The SSA required a form (found online) and a check to pay for the record. Four months later the earnings report arrived showing the years, company names and earnings for my late husband. It was a short walk down memory lane of our early years together.

In the meantime, to back up the earnings report, I found online the company's old annual reports existed on microfische at the 42nd Street Library. (Several of which he oversaw as corporate Treasurer.)

Bottom line - This past week the company agreed to pay me the survivor benefit of half the pension in lifetime, monthly payments.

By law, companies may not just ignore pension obligations and absorb pension money. They must make an effort to find former employees but they give up after mail is returned three times. It is up to us to pursue.

Be $ Smart
- take the initiative to find a lost pension. You will reap the rewards.

Below is a link to the brochure issued by the Pension Benefit Guaranty Corporation to help you in your search. Pass it along to friends and family. Good luck!

https://www.pbgc.gov/documents/finding-a-lost-pension.pdf

Sunday, March 18, 2018

When Should We Seek the Help of a Financial Advisor?

Many folks think financial advice is for the wealthy. Not true! In my experience, it's the not-so-wealthy who need expert guidance to move to the next level. We have not been given the tools in our formal education. Most of us fly by the seat of our pants. Many have no plan at all so the end result is haphazard.

Reading financial magazines and books helps us become familiar with the lingo/jargon of the industry and prepares us to meet and comprehend an advisor.

When should we seek advice?

- at a young age after getting our first job. Here we'll learn the benefit of saving and using a 401k/403b. Maybe even get some direction about cash flow (aka budgeting). An advisor can help us get off to a strong start!

- getting married where an advisor may offer ways of combining assets and setting common goals. Also, he/she may offer guidance about protecting assets.

- mid career when we feel we're not meeting our financial goals. We need someone to point out our mis-steps and get us back on track.
Or if our career has catapulted us into higher income, how best to invest those extra dollars.

- birth of children for suggestions how we must stretch those dollars if one partner will stay at home or how to afford the high cost of child care. In addition, where to find the extra money to fund an education account.

- inheritance (or winning the lottery)
, when extra money appears and before we celebrate too aggressively! This one-time event can be a real blessing in reducing debt, buying a house or fulfilling other dreams.

- divorce, actually prior to meeting with a divorce attorney, to receive guidance on how to structure a settlement and protect yourself.

- death of a partner or spouse to help determine how to survive as a single and the financial implications of being alone.

- prior to 55 to plan for retirement. A good advisor can help us learn if we have "enough" to retire. We may have to work longer or change our life style. Also, we'll learn the best time to file for Social Security. Prior to 55 gives us time to double up on savings or reduce spending before leaving the workforce.

- in retirement to devise a plan for tapping into our nest egg in the most tax-efficient way. We'll determine our sources of income and learn where to find guaranteed streams of income and how large our cash reserve should be.

Financial advice is for those who want to become wealthy or to retain their wealth. The best advice may come from a fee-only advisor who has our best interests at heart.

Be $ Smart - seek financial advice throughout life to grow and protect our wealth.

Thursday, March 15, 2018

Nobel Prize Winner Works for the Little Guy

Recently the Nobel Prize for Economics was awarded to Richard Thaler. He was probably one of the few winners to create an immediate difference for millions of folks' retirement.

Back in the 1980's when the first 401k's were established, they were never intended to replace pension plans. One BIG difference, which proved detrimental: the 401k was voluntary. In order to activate the account:

1. the employees had to enroll in the plan,
2. they had to contribute some of their own money to receive the employer match, which was often considered "free money",
(Some companies contributed a minimum amount with no employee contribution.)
3. AND they had to choose the investments within the account.

This proved too big a task for most folks. They found the requirements confusing or intimidating even when help was offered. So instead of being a beneficial tool towards retirement savings, the 401k faltered.

Richard Thaler and others working in behavioral economics found, through their studies, that employees needed more than help; they needed the task to be done for them! For years he advocated that companies "nudge" employees to enroll. That "nudge" evolved into auto-enrollment changing the process for most firms: all new employees would be automatically enrolled as part of the companies' employee orientation and benefits.

The next step he championed was "auto-escalation". The employee starts small, contributing 2%-4% of his/her salary to the plan and agrees to increase that percentage each year until they reach the maximum allowable amount. In good years, when the employee receives a bonus or sizable raise, he/she may jump the increase 2% or 3% extra to reach the maximum amount sooner.

An employee always has the option to "opt out" and close the account or discontinue contributing. Also, in a time of financial struggle, the employee may decrease or stop contributions for a period of time.

Many thanks
to Richard Thaler and other behavioral economists for their contribution to helping Americans retire well.

Be $ Smart - call your HR office to learn about auto-escalation and other saving choices to help you reach your retirement goals.

You Just Inherited an Investment Portfolio. Now What?

Inheriting an investment portfolio may come with a wagon load of feelings - sadness at some one's passing, joy of new found money and overwhelm and confusion - not knowing how to handle it.

Several things must be considered before you go on a spending spree or quit your job. Chances are the portfolio belonged to someone older who constructed the portfolio to meet his/her financial goals, like provide income in retirement. An income portfolio generates income for living expenses and along with income comes taxes. If you are working you may not need additional income or the taxes you will ultimately owe Uncle Sam.

I recommend: Stop, Think, Ask and Plan.

Stop: Resist spending that money.
You may incur serious tax consequences. Breathe. There is no hurry. There is much to learn. The stock and bond markets go up and down daily. Take your time.

Think: Review your financial goals and see how this money fills gaps in your overall financial plan. It may allow you to retire earlier or defray education costs.

Ask: talk with a financial professional to learn more about this money.

Is it in an IRA or other tax deferred account?

What are the IRS requirements for taking distributions - within 5 years or over your lifetime?

What are the tax consequences? In a taxable account the original cost (cost basis) gets stepped up to the value on the date of death so you might owe little, if any taxes. Taking money from a tax deferred account creates "a taxable event" where the distribution is taxed as if it were ordinary income (like your pay).

Plan: The urge to spend is part of our culture so plan to spend 10% of that money on anything your heart desires - but only 10%.
Where does this money fit into your financial goals?
Can it - pay down some credit card or student loan debt?
- build the down payment for a house?
- help a son or daughter graduate with less debt?
- bolster your emergency fund?
- help you retire more comfortably?
If you are not a sophisticated investor and prefer to hold mutual funds instead of individual stocks, make a plan for selling the stocks, know the taxes involved and carefully put that money back in the market to work for you.

Be $ Smart - use discipline
with inherited money. Unless you have multiple relatives to leave you money, this might be a one time opportunity to fulfill your financial goals.

The Family Bank


The past few years have been truly difficult for our young adults. With diplomas in hand they eagerly sought employment. Some were fortunate to find work but many, not so lucky, "launched" in reverse - they moved back home.

Recent statistics show 44% of parents over 55 financially aided adult children in the past year. It might be tough for the graduates to be back with mom and dad but for mom and dad it strains saving for retirement or even postpones retirement for the next generation.

Continued support for young adults can drain a well-planned retirement.
Parents want to help their offspring but some rules must be considered.
Adult children must realize parents are not bottomless ATM's.
- Room and board could be in exchange for chores: yard work, painting, simple repairs, window washing, clearing a yard or a garage.
- Money loaned needs a signed, promissory note stating the date, amount, interest and term (date of repayment).
- Clear communication of expectations by both sides, in writing, keep feathers from flying.

Yes, parents want to help their children but consider the consequences:
When parents run out of money in retirement where will they go? They will move in with their children.
Parents - do you really want to live with your kids?
Young adults - do you really want your parents moving in with you?

Be $ Smart - Make it easy for everyone. Talk about expectations; put it in writing.