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.
Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
Monday, April 9, 2018
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.
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.
Tuesday, April 14, 2015
Investment Diversification cont'd - Cash
In previous weeks we talked about the various ways to diversify your money among stocks and bonds. A third component of spreading your money is CASH. It is important to keep a percentage of cash on hand for various reasons:
- safety - the value stays reasonably consistent,
- liquidity - it's available with no hassle when you need it,
- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,
- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.
Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:
- plain old-fashioned bank savings account (FDIC insured),
- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,
- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,
- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.
Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.
- safety - the value stays reasonably consistent,
- liquidity - it's available with no hassle when you need it,
- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,
- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.
Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:
- plain old-fashioned bank savings account (FDIC insured),
- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,
- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,
- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.
Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.
Diversification in Investing
In any given day or any given year we have no idea which part of the market will perform well or under perform. The purpose of diversification (not putting all your eggs in one basket) is to have some money in several different areas to take advantage of an upward move and to protect against a downward move.
Asset allocation allows you to divide your money into:
Stocks,
Bonds,
Cash and
Alternatives.
And, within each of those categories are several smaller subcategories.
Stocks may include:
- large companies - large cap,
- mid-size companies,
- small companies.
Stocks may be bought in different "sectors" such as:
- Drugs (pharmaceuticals) & health care,
- Transportation,
- Consumer Products,
- Utilities - gas, electricity, telephone,
- Advertising, marketing, social media,
- Financials - banks, brokerage houses,
- Real Estate - office building, malls, apartment buildings.
Stocks may also cover different geographic areas:
- Domestic, meaning only U.S. companies,
- Foreign or international - outside the U.S.,
- Developed countries - in U.S., Europe, South America or Asia,
- Emerging markets, may be found in Africa, Indonesia.
And you may purchase mutual funds that include combinations of all those listed.
A diversified portfolio means holding some of these many choices so you have the exposure to both grow and protect your money. How do you know which ones to buy? It can be quite a challenge! Do the research yourself or find an advisor whom you trust to make the task easier but you still must play an active role of asking questions and reading statements.
Be $ Smart - plan a diversified portfolio for both opportunity and protection.
Asset allocation allows you to divide your money into:
Stocks,
Bonds,
Cash and
Alternatives.
And, within each of those categories are several smaller subcategories.
Stocks may include:
- large companies - large cap,
- mid-size companies,
- small companies.
Stocks may be bought in different "sectors" such as:
- Drugs (pharmaceuticals) & health care,
- Transportation,
- Consumer Products,
- Utilities - gas, electricity, telephone,
- Advertising, marketing, social media,
- Financials - banks, brokerage houses,
- Real Estate - office building, malls, apartment buildings.
Stocks may also cover different geographic areas:
- Domestic, meaning only U.S. companies,
- Foreign or international - outside the U.S.,
- Developed countries - in U.S., Europe, South America or Asia,
- Emerging markets, may be found in Africa, Indonesia.
And you may purchase mutual funds that include combinations of all those listed.
A diversified portfolio means holding some of these many choices so you have the exposure to both grow and protect your money. How do you know which ones to buy? It can be quite a challenge! Do the research yourself or find an advisor whom you trust to make the task easier but you still must play an active role of asking questions and reading statements.
Be $ Smart - plan a diversified portfolio for both opportunity and protection.
Saturday, November 1, 2014
Full Service or Discount Broker
I was with some friends this weekend and one asked me "What is a discount broker?"
As I often encourage you to invest your money to help it grow, this might be a good time to explain the difference.
A full service broker is a firm like Merrill Lynch or Morgan Stanley. Here you will find a "broker" or sales person who may be called a Financial Advisor, Wealth Management Advisor or Retirement Specialist.
These large, full service firms will give you financial advice, help determine your financial goals and your risk tolerance. They typically have large research departments or purchase outside research on various companies' stocks and bonds. They use this research to recommend to their clients a mixture of investments (asset allocation) and will direct the buying and selling of these investments - usually for a substantial commission.
The commission charged is based on the price of the stock times the number of shares. The cost to buy or sell could be hundreds of dollars. This is how they get paid.
(Remember:
"What's this going to cost me? How do you get paid?" from a previous $ Tip.)
A discount broker is a firm with many of the same functions as above but without as many services. They will offer "canned" research, something anyone can find online. They will not call you recommending investments nor will they take pains to get to know you.
These firms are more "do it yourself". They assume you know what you are doing. They will take your order to buy or to sell and they will not offer comment.
Actually, the greater discount on buying and selling is when you talk to no one and enter the trade online. (A trade is a buy or a sell.)
There is one discount brokerage that charges $5 per trade for almost any size trade (50, 100, 1000 shares). Others may charge $7.50, $10 or $20 per trade. Scottrade, eTrade, Ameritrade are some discount brokerage firms.
Be $ Smart - know what type of brokerage firm is best for you to build wealth and financial security.
As I often encourage you to invest your money to help it grow, this might be a good time to explain the difference.
A full service broker is a firm like Merrill Lynch or Morgan Stanley. Here you will find a "broker" or sales person who may be called a Financial Advisor, Wealth Management Advisor or Retirement Specialist.
These large, full service firms will give you financial advice, help determine your financial goals and your risk tolerance. They typically have large research departments or purchase outside research on various companies' stocks and bonds. They use this research to recommend to their clients a mixture of investments (asset allocation) and will direct the buying and selling of these investments - usually for a substantial commission.
The commission charged is based on the price of the stock times the number of shares. The cost to buy or sell could be hundreds of dollars. This is how they get paid.
(Remember:
"What's this going to cost me? How do you get paid?" from a previous $ Tip.)
A discount broker is a firm with many of the same functions as above but without as many services. They will offer "canned" research, something anyone can find online. They will not call you recommending investments nor will they take pains to get to know you.
These firms are more "do it yourself". They assume you know what you are doing. They will take your order to buy or to sell and they will not offer comment.
Actually, the greater discount on buying and selling is when you talk to no one and enter the trade online. (A trade is a buy or a sell.)
There is one discount brokerage that charges $5 per trade for almost any size trade (50, 100, 1000 shares). Others may charge $7.50, $10 or $20 per trade. Scottrade, eTrade, Ameritrade are some discount brokerage firms.
Be $ Smart - know what type of brokerage firm is best for you to build wealth and financial security.
Friday, September 12, 2014
Dual Purpose - Roth IRA
Saving for retirement can be tough while you are trying to build an emergency fund, pay off student loans, car loans and other expenses. But we all know the importance of saving early. The earlier you start saving for retirement, the faster your money will compound and grow.
Here is where a Roth IRA (Individual Retirement Account) can serve two functions. The principal (original money invested) may be withdrawn without penalty and taxes at any time making that money available for emergencies. (It's the earnings - dividends and interest - that would be subject to taxes and penalty if you are under 59 1/2.)
Aim for three months emergency fund in a savings account and three months in your Roth.
How to open a Roth IRA:
You may open an IRA at a bank, credit union, brokerage house (e.g. Fidelity, Vanguard, Merrill Lynch) in person or online.
Questions to ask:
- What is the minimum investment?
- What fees are charged for the account and for transactions?
- What investments are available? Stocks? Bonds? Mutual funds? Exchange Traded Funds (ETF's)?
- How may I arrange for monthly automatic transfer from my savings or checking account?
Your biggest stumbling block may be the required initial deposit. Some firms require only $500 where others $1000 or $3000. Subsequent investments may be as little as $25 or $50. If you are expecting a bonus or a tax return, it may be a good use of that money. Otherwise, keep the emergency money building in your savings account until you reach the required minimum amount then open the Roth.
Using the Roth as part of your emergency fund means taking NO big risks with the money. Choose a very conservative investment for the emergency portion. As your balance grows, start to invest the difference more aggressively.
Keep in mind a Roth IRA is not for everyone. Only those individuals with earned income may contribute. And individuals earning under $112,000 and couples under $178,000 may contribute $5500 (if over 50, $6500). Remember it's not all or nothing. If you cannot contribute the max, contribute some amount.
Be $ smart - use the flexibility of a Roth IRA to your advantage in building your emergency fund.
Here is where a Roth IRA (Individual Retirement Account) can serve two functions. The principal (original money invested) may be withdrawn without penalty and taxes at any time making that money available for emergencies. (It's the earnings - dividends and interest - that would be subject to taxes and penalty if you are under 59 1/2.)
Aim for three months emergency fund in a savings account and three months in your Roth.
How to open a Roth IRA:
You may open an IRA at a bank, credit union, brokerage house (e.g. Fidelity, Vanguard, Merrill Lynch) in person or online.
Questions to ask:
- What is the minimum investment?
- What fees are charged for the account and for transactions?
- What investments are available? Stocks? Bonds? Mutual funds? Exchange Traded Funds (ETF's)?
- How may I arrange for monthly automatic transfer from my savings or checking account?
Your biggest stumbling block may be the required initial deposit. Some firms require only $500 where others $1000 or $3000. Subsequent investments may be as little as $25 or $50. If you are expecting a bonus or a tax return, it may be a good use of that money. Otherwise, keep the emergency money building in your savings account until you reach the required minimum amount then open the Roth.
Using the Roth as part of your emergency fund means taking NO big risks with the money. Choose a very conservative investment for the emergency portion. As your balance grows, start to invest the difference more aggressively.
Keep in mind a Roth IRA is not for everyone. Only those individuals with earned income may contribute. And individuals earning under $112,000 and couples under $178,000 may contribute $5500 (if over 50, $6500). Remember it's not all or nothing. If you cannot contribute the max, contribute some amount.
Be $ smart - use the flexibility of a Roth IRA to your advantage in building your emergency fund.
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