Monday, June 15, 2015

Minimize your taxes

It makes sense to find ways to reduce your taxable income. One place to start is your portfolio. Your investments generate a certain amount of taxable income each year as witnessed by the number of 1099's you receive in the new year.

If you want to reduce the taxes generated by your portfolio, put the big tax generating investments in your tax-deferred retirement accounts - IRA, Roth IRA and 401k. These include real estate investment trusts (REIT's), taxable bonds and actively managed mutual funds (which usually have high, annual portfolio turnover).

Put stocks and stock indexed mutual funds in your taxable accounts where you will be happy holding them for 12 months or longer. After 12 months, they are taxed as long-term capital gains not as ordinary income, a much lower rate. If you pass this account on to your heirs, they could pay virtually no capital gains tax when they sell.

Be careful as you reconfigure your portfolio. Do it slowly and methodically. If you sell too many investments with gains in any given year in your taxable accounts you may increase your tax obligation and push yourself into a higher tax bracket. Best to consult your account first.

Be $ Smart - re-position your investments to minimize your taxes.

Monday, June 8, 2015

Another Type of Diversification

Over the past few weeks we have talked about diversification within your portfolio. We use diversification to reduce potential risk. Another kind, tax diversification, occurs with the types of accounts in which you hold your assets and how withdrawals are taxed.

No matter how you make your money, Uncle Sam is waiting to take his share. You can structure withdrawals to be tax efficient and lower your tax burden. This is especially effective during retirement. For you to have income choices you must build these accounts prior to retirement, while you are young and in the "accumulation" phase of your life.

A well diversified portfolio will hold a mixture of assets - stocks, bonds, cash, real estate, precious metals, etc. Creating a tax-diverse portfolio means you hold assets in taxable, tax-deferred and tax-free accounts.

A trained advisor will scrutinize a retirement plan for tax efficiency. You want to minimize taxes by taking income from specific accounts.
Remember, money held in tax-deferred accounts (traditional IRA, 401k,etc.) is fully taxed as ordinary income on withdrawal paying both state and federal taxes.

If all your assets are tax-deferred, every withdrawal will count as income and could push you into a higher tax bracket. For example, say you need $60,000 a year for income, you must withdraw $72,000 to cover the 20% withholding. Add that to Social Security or pension income, you could bet bumped into the next tax bracket. But, if you could take $40,000 ($48,000 less 20%) from the IRA, $10,000 from your taxable account(paying some capital gains tax) and $10,000 from your Roth (tax-free), you maintain a lower taxable income.

Be $ Smart - build your savings in different types of accounts for tax efficiency.

Be sure to consult your tax advisor for specifics.

RoBo Advisors

In our wonderful hi-tech world you now have the option of having a robot invest for you! We have been invaded by a group of R2D2 automatons who will direct you and your money towards the future.

It is very tempting to have someone else be responsible for investing your money, especially when you don't know whom to trust. But these online automated investment platforms present their own problems. They ask a series of questions to determine your goals, level of investing experience and time horizon (just like any financial adviser would). It is still your responsibility to ask questions and know what you're getting into. Caveat emptor - let the buyer beware!

Here are some things to learn before you commit your hard earned dollars:

1. Terms and conditions? What is the time commitment, required minimum sum to be invested, and what are the fees?

2. Investment choices. From what universe are the investments drawn? May they choose funds from ALL companies or promote only their own?

3. One size fits all. Garbage in, garbage out plays the same role here as it did in early computer programs. The robo adviser will only be able to make pertinent recommendations dependent upon what you tell it. Be as specific as you can to make sure your money is properly allocated.

4. Sensitive information. Keep your personal information protected! Be wary of scams that may trick you into providing confidential financial data.

5. The "In" thing. Know that as cool as hi-tech may seem, this may not be right for you. Before you send your money, check it out with friends and relatives. Read reviews.

R2D2 won't ask how your kids are doing nor talk about the latest sports or movies. You may miss the personal touch of a real-life adviser.

Be $ Smart - before you invest, protect your assets and research Robo Advisers (automated platforms) to learn the rules.