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.
Showing posts with label dividends. Show all posts
Showing posts with label dividends. Show all posts
Sunday, April 15, 2018
Thursday, January 21, 2016
Be Aware of the Kiddie Tax
Did you know that account earnings for minors - children under 18 - may have tax consequences known as the Kiddie Tax? (Full time students up to age 24 may qualify.)
In 1986 the IRS passed the Kiddie Tax to prevent adults from stashing money in their children's accounts to take advantage of the lower tax rate applied to children's earnings.
Children's unearned income - dividends, interest and capital gains - under $1050 (for 2016) is tax free. The next $1050 of unearned income pays a very low rate but any unearned income over $2100 gets taxed at the parents' rate!
The rule applies to taxable investment income not to earned income from a job. Owning stocks that don't pay dividends or tax-exempt municipal bonds, avoids this issue.
If you plan to fund an education account for a niece, nephew, grandchild or friend, a 529 plan will grow tax-deferred and money distributed tax-free for higher education. Funding an UGMA (unified gift to minors account) has the potential of producing taxable income. Plan to have a conversation with the youngster's parents beforehand to determine which account would be suitable.
Be $ Smart - Consult your tax adviser to learn if your child's accounts may be subject to the Kiddie Tax.
In 1986 the IRS passed the Kiddie Tax to prevent adults from stashing money in their children's accounts to take advantage of the lower tax rate applied to children's earnings.
Children's unearned income - dividends, interest and capital gains - under $1050 (for 2016) is tax free. The next $1050 of unearned income pays a very low rate but any unearned income over $2100 gets taxed at the parents' rate!
The rule applies to taxable investment income not to earned income from a job. Owning stocks that don't pay dividends or tax-exempt municipal bonds, avoids this issue.
If you plan to fund an education account for a niece, nephew, grandchild or friend, a 529 plan will grow tax-deferred and money distributed tax-free for higher education. Funding an UGMA (unified gift to minors account) has the potential of producing taxable income. Plan to have a conversation with the youngster's parents beforehand to determine which account would be suitable.
Be $ Smart - Consult your tax adviser to learn if your child's accounts may be subject to the Kiddie Tax.
Sunday, October 25, 2015
An Innovative Way to Buy Stock
A friend called to ask me if I would comment about the Wall Street Journal article on a new way to give stock as a gift. The concept totally surprised me as well as the fact that it has been available for some time!
A few years ago my 10 year old grandson told all his relatives he wanted stock for Christmas. That is not an unusual request knowing Calvin is obsessed with making money, always manages to have money and constantly chides his parents about the cost of things. So we all sent him cash with which his father opened an UGMA brokerage account and built a portfolio.
But NOW there is a simpler way.
Stockpile.com is a company that offers gift cards (like iTunes, Home Depot, Target, etc.) which enables you to buy a specific dollar amount of hundreds of stocks!
I am not endorsing this company as I have not made any purchases and cannot vouch for the process but I thought it important to make you aware of its existence. Here is what they offer:
- The ability to purchase the stock of hundreds of U.S. and international companies,
- Any amount of the gift - up to $1000. Whatever the amount will buy a certain number of full or fractional shares depending on the share price on the day the card is activated.
- Instant card delivery as they accept most credit cards.
- No cost to the recipient who may buy shares for the full amount of the gift but there is a gifting fee to the giver which pays the credit card fee and commission.
- A gift receipt which allows the receiver to choose a different company,
- A claiming notification to tell you when the gift stock has actually been claimed.
(Minors may own stock with a parent or someone over 18 in a Uniform Gift to Minors Account.)
A gift of stock makes a child curious especially if the stock is in a company he/she knows like Disney, McDonald's or KFC.
It takes the mystery and fear out of investing. It builds interest and confidence.
A gift card saves you from going through the pains of opening an UGMA brokerage account.
It might even make an interesting birthday or wedding gift for your friends!
Be $ Smart - start youngsters early in the stock market. It will pay a lifetime of dividends.
A few years ago my 10 year old grandson told all his relatives he wanted stock for Christmas. That is not an unusual request knowing Calvin is obsessed with making money, always manages to have money and constantly chides his parents about the cost of things. So we all sent him cash with which his father opened an UGMA brokerage account and built a portfolio.
But NOW there is a simpler way.
Stockpile.com is a company that offers gift cards (like iTunes, Home Depot, Target, etc.) which enables you to buy a specific dollar amount of hundreds of stocks!
I am not endorsing this company as I have not made any purchases and cannot vouch for the process but I thought it important to make you aware of its existence. Here is what they offer:
- The ability to purchase the stock of hundreds of U.S. and international companies,
- Any amount of the gift - up to $1000. Whatever the amount will buy a certain number of full or fractional shares depending on the share price on the day the card is activated.
- Instant card delivery as they accept most credit cards.
- No cost to the recipient who may buy shares for the full amount of the gift but there is a gifting fee to the giver which pays the credit card fee and commission.
- A gift receipt which allows the receiver to choose a different company,
- A claiming notification to tell you when the gift stock has actually been claimed.
(Minors may own stock with a parent or someone over 18 in a Uniform Gift to Minors Account.)
A gift of stock makes a child curious especially if the stock is in a company he/she knows like Disney, McDonald's or KFC.
It takes the mystery and fear out of investing. It builds interest and confidence.
A gift card saves you from going through the pains of opening an UGMA brokerage account.
It might even make an interesting birthday or wedding gift for your friends!
Be $ Smart - start youngsters early in the stock market. It will pay a lifetime of dividends.
Monday, May 12, 2014
Building Wealth One Level at a Time...
Every building project begins with a plan and a foundation. Building wealth is no exception. The base of your investment portfolio will be the broadest component providing safety and stability. As you build your portfolio, the higher up, the greater the risk - and potential reward.
Let's take a quick look at what is commonly called "the investment pyramid":
Futures, options, commodities
Real estate
Small-cap stocks, junk bonds
Mid-cap stocks, lesser rated bonds
Blue chip, dividend paying stocks, municipal and AAA corporate bonds.
The broad base holds safe money - cash, savings accounts, CD's, U.S. Treasury bills, notes and bonds.
It would not be wise to jump into a "hot stock" in the small-cap area if you had not built the foundation layers of your investment pyramid. You might be taking on more risk than you can handle.
Real estate is high on the risk ladder because it is illiquid (you never can tell how long it might take to sell and realize cash in your hand).
Junk bonds are usually backed by "a promise" to pay back the money - not by colateral.
Start at the bottom. Build steadily. Be $ smart!
Let's take a quick look at what is commonly called "the investment pyramid":
Futures, options, commodities
Real estate
Small-cap stocks, junk bonds
Mid-cap stocks, lesser rated bonds
Blue chip, dividend paying stocks, municipal and AAA corporate bonds.
The broad base holds safe money - cash, savings accounts, CD's, U.S. Treasury bills, notes and bonds.
It would not be wise to jump into a "hot stock" in the small-cap area if you had not built the foundation layers of your investment pyramid. You might be taking on more risk than you can handle.
Real estate is high on the risk ladder because it is illiquid (you never can tell how long it might take to sell and realize cash in your hand).
Junk bonds are usually backed by "a promise" to pay back the money - not by colateral.
Start at the bottom. Build steadily. Be $ smart!
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