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 taxes. Show all posts
Showing posts with label taxes. Show all posts
Sunday, April 15, 2018
Wednesday, November 26, 2014
Becoming a Better Investor - Whom to trust?
The financial services industry can be very confusing and intimidating. Many people either stay away or jump in blindly and get fleeced.
So how do you find someone to help and guide you?
Let's start with some titles and designations:
Financial Advisor - a very broad term which translates to someone who can help you with finance and investments.
WMA - Wealth Management Advisor - same as financial advisor but has more snob appeal.
CFP - Certified Financial Planner - a person who has taken many courses and passed a rigorous exam covering all the aspects of personal finance. They have a good grasp of money management and investing.
Stock broker - aka Financial Advisor - this person has passed the Series 7 exam, is register with the SEC (Securities and Exchange Commission) and has a good knowledge of investing.
Let's review how they get paid:
Financial advisor, WMA and stock broker rely essentially on sales. The more they sell you, the more commissions they make. (Both buy and sell orders generate commissions for the broker.) If you are being advised to buy and/or sell often, the only person making money is your broker.
A Fee Only Financial Planner prepares a comprehensive plan for you and your family. It may include buying a home, additional education for you or your spouse, education for your children, taxes and other financial goals leading to retirement. Since this plan takes many hours of gathering information and analysis the planner will charge a substantial fee - somewhere between $1000 to $2500 or more, depending how complicated your situation may be. The planner then sends you to a financial advisor or broker to implement the plan.
Another type of Financial Planner will prepare a less comprehensive plan and implement it for you. The fee for the plan will be covered by the charges for investing. (You don't get the plan for nothing.)
Remember to ask:
"What's this going to cost me? How do you get paid?"
There are ways for you to determine if a broker or investment advisor is a bad apple. Go to BrokerCheck at finra.org website or call the BrokerCheck hotline 800-289-9999. Here you will learn a broker's current license status and history, employment history and any reported regulatory proceedings, disputes and settlements.
(FINRA - the Financial Industry Regulatory Authority is the self-regulator for the securities industry.)
When you work with a financial professional it is important to know the extent of his/her expertise in the various areas of finance. Although they may exhibit a certain level of knowledge, there is no test or regulation for integrity and trust. You must seek a professional who is worthy of your trust and the care of your money.
Be $ Smart - take the time to research and interview financial advisers before you give them your hard earned money.
So how do you find someone to help and guide you?
Let's start with some titles and designations:
Financial Advisor - a very broad term which translates to someone who can help you with finance and investments.
WMA - Wealth Management Advisor - same as financial advisor but has more snob appeal.
CFP - Certified Financial Planner - a person who has taken many courses and passed a rigorous exam covering all the aspects of personal finance. They have a good grasp of money management and investing.
Stock broker - aka Financial Advisor - this person has passed the Series 7 exam, is register with the SEC (Securities and Exchange Commission) and has a good knowledge of investing.
Let's review how they get paid:
Financial advisor, WMA and stock broker rely essentially on sales. The more they sell you, the more commissions they make. (Both buy and sell orders generate commissions for the broker.) If you are being advised to buy and/or sell often, the only person making money is your broker.
A Fee Only Financial Planner prepares a comprehensive plan for you and your family. It may include buying a home, additional education for you or your spouse, education for your children, taxes and other financial goals leading to retirement. Since this plan takes many hours of gathering information and analysis the planner will charge a substantial fee - somewhere between $1000 to $2500 or more, depending how complicated your situation may be. The planner then sends you to a financial advisor or broker to implement the plan.
Another type of Financial Planner will prepare a less comprehensive plan and implement it for you. The fee for the plan will be covered by the charges for investing. (You don't get the plan for nothing.)
Remember to ask:
"What's this going to cost me? How do you get paid?"
There are ways for you to determine if a broker or investment advisor is a bad apple. Go to BrokerCheck at finra.org website or call the BrokerCheck hotline 800-289-9999. Here you will learn a broker's current license status and history, employment history and any reported regulatory proceedings, disputes and settlements.
(FINRA - the Financial Industry Regulatory Authority is the self-regulator for the securities industry.)
When you work with a financial professional it is important to know the extent of his/her expertise in the various areas of finance. Although they may exhibit a certain level of knowledge, there is no test or regulation for integrity and trust. You must seek a professional who is worthy of your trust and the care of your money.
Be $ Smart - take the time to research and interview financial advisers before you give them your hard earned money.
Wednesday, June 4, 2014
Taxable - Tax-exempt - Tax-deferred - Tax-free
Clients often ask me to explain the differences among their various accounts. Taxes play an important role in how you invest and how much money you will be able to keep after paying taxes.
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. 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. Know your tax rate. Learn about the impact of taxes on your investments.
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. 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. Know your tax rate. Learn about the impact of taxes on your investments.
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