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.
Wednesday, June 4, 2014
Friday, May 16, 2014
Financial Jargon
Most professions have their own terminology or lingo. Unfamiliar financial terms can be very intimidating or confusing. Here are a few translations you may find useful:
Equities - stocks.
Fixed Income - bonds, CD's.
Volatility - the inevitable, daily ups and downs of the markets. (not good or bad)
Standard deviation - risk. It graphically maps historical returns.
ROI - return on investment - how much your money has grown.
Mutual funds and Exchange traded funds (ETF) - pools of stocks or pools of bonds. Vehicles which give access to multiple stocks (or bonds) at one time
Correlation - Choosing investments that do well at different times by determining the relationship of one investment to another. A way to avoid putting all your eggs in one basket.
Cap (as in capitalization) - size.
Mid-cap or large-cap stock are terms that classify the size of a company.
A way to measure the size of a company by multiplying the number of outstanding shares by its share price.
Alternative investments - other than stocks, bonds or cash. May include precious metals, art, real estate, commodities (e.g. coffee, corn, soy beans, pork bellies).
Alphabet Soup:
ETF - exchange traded fund (grouping of stock or bonds)
IRA - individual retirement account (tax-deferred savings for retirement)
SEP - simplified employee plan (retirement plan for small business)
REIT - real estate investment trust (groupings of different types of real estate- e.g. shopping malls, office buildings, senior housing).
CD - certificate of deposit (issued by banks for a set time, a set interest rate and a set amount of money).
EFT- electronic funds transfer - a means of transferring money from one account to another.
Be proactive. Learn the language or ask for a translation. Be $ smart.
Equities - stocks.
Fixed Income - bonds, CD's.
Volatility - the inevitable, daily ups and downs of the markets. (not good or bad)
Standard deviation - risk. It graphically maps historical returns.
ROI - return on investment - how much your money has grown.
Mutual funds and Exchange traded funds (ETF) - pools of stocks or pools of bonds. Vehicles which give access to multiple stocks (or bonds) at one time
Correlation - Choosing investments that do well at different times by determining the relationship of one investment to another. A way to avoid putting all your eggs in one basket.
Cap (as in capitalization) - size.
Mid-cap or large-cap stock are terms that classify the size of a company.
A way to measure the size of a company by multiplying the number of outstanding shares by its share price.
Alternative investments - other than stocks, bonds or cash. May include precious metals, art, real estate, commodities (e.g. coffee, corn, soy beans, pork bellies).
Alphabet Soup:
ETF - exchange traded fund (grouping of stock or bonds)
IRA - individual retirement account (tax-deferred savings for retirement)
SEP - simplified employee plan (retirement plan for small business)
REIT - real estate investment trust (groupings of different types of real estate- e.g. shopping malls, office buildings, senior housing).
CD - certificate of deposit (issued by banks for a set time, a set interest rate and a set amount of money).
EFT- electronic funds transfer - a means of transferring money from one account to another.
Be proactive. Learn the language or ask for a translation. Be $ smart.
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!
Monday, May 5, 2014
Protecting Your Wealth
As you build your wealth it is critical you take measures to protect your wealth.
The proper insurances - life, health, auto, home, liability - all are forms of protection against risk. Homeowner or renter's insurance provides protection in the event of fire or theft.
Life insurance is certainly essential if you have a young family or own a large home which requires two salaries to maintain it. Losing your spouse or partner can be a horrible experience but to lose your home at the same time can be catastrophic.
If you recently got married or had a child please assess your needs now, meet with an agent and put the necessary insurance in place ASAP. You are not invincible!
Older folks may not need life insurance. If children are grown and educated, if the mortgage is paid down, or if there is no one dependent upon you, then stop paying those life insurance premiums. The premiums only increase as you get older. But, if the life insurance policy is one way of assuring you have some money to leave to heirs, then that is a good reason to continue paying life insurance premiums.
Another protection is to verify your beneficiaries are correct and current. If you've recently married or divorced, or have had children please contact your bank, brokerage and HR department for Beneficiary Designation forms to make changes.
Also, is your will up to date? A will determines how your wealth is distributed. Again, major life changes (marriage, births, divorce) require adjustments to your will.
Do not try to change your will yourself. In some states, writing on a will may void it. Contact your attorney. A codicle - an amendment to a will - is appropriate for small changes. Drafting a new will may be necessary for more extensive changes.
You've worked hard to build your wealth, take the steps to protect it.
Be $ smart!
The proper insurances - life, health, auto, home, liability - all are forms of protection against risk. Homeowner or renter's insurance provides protection in the event of fire or theft.
Life insurance is certainly essential if you have a young family or own a large home which requires two salaries to maintain it. Losing your spouse or partner can be a horrible experience but to lose your home at the same time can be catastrophic.
If you recently got married or had a child please assess your needs now, meet with an agent and put the necessary insurance in place ASAP. You are not invincible!
Older folks may not need life insurance. If children are grown and educated, if the mortgage is paid down, or if there is no one dependent upon you, then stop paying those life insurance premiums. The premiums only increase as you get older. But, if the life insurance policy is one way of assuring you have some money to leave to heirs, then that is a good reason to continue paying life insurance premiums.
Another protection is to verify your beneficiaries are correct and current. If you've recently married or divorced, or have had children please contact your bank, brokerage and HR department for Beneficiary Designation forms to make changes.
Also, is your will up to date? A will determines how your wealth is distributed. Again, major life changes (marriage, births, divorce) require adjustments to your will.
Do not try to change your will yourself. In some states, writing on a will may void it. Contact your attorney. A codicle - an amendment to a will - is appropriate for small changes. Drafting a new will may be necessary for more extensive changes.
You've worked hard to build your wealth, take the steps to protect it.
Be $ smart!
Thursday, April 24, 2014
Are you a Saver or a Spender?
Ideally, it would be beneficial to be a balance of each.
Savers love to see their money grow. It gives them great pleasure to open bank and brokerage statements and see the values increase. It can be physically painful when account values drop, even a small amount. Hence, savers avoid risk for fear of losing money. They may even deprive themselves of creature comforts and the joy of giving.
Spontaneity is out.
Spenders take bigger risks feeling somehow the money will appear. Negative consequences don't even enter their minds. They are big spenders, big tippers and very generous with friends and family. They get tremendous joy from making others feel good.
Serious issues arise when a spender marries a saver. Then the sparks fly!
Ideally, you want both aspects. Once you recognize your strengths and weaknesses you develop strategies to managing your money and spending habits.
A simple spending plan will give a saver permission to spend and set limits for the spender. Going back to "know your numbers" - knowing how much you have budgeted for clothing or entertainment puts you in control and gives you the power to make good money decisions.
Knowing you have alotted $1000 for clothing (or sports) for the year lets you buy that special dress (or golf club) without guilt. Keeping tab mentally lets you keep track and leads to a better spending decision.
You will be giving yourself a gift of confidence by striking a balance between enjoying today and enjoying tomorrow. You will truly Be $ Smart!
Savers love to see their money grow. It gives them great pleasure to open bank and brokerage statements and see the values increase. It can be physically painful when account values drop, even a small amount. Hence, savers avoid risk for fear of losing money. They may even deprive themselves of creature comforts and the joy of giving.
Spontaneity is out.
Spenders take bigger risks feeling somehow the money will appear. Negative consequences don't even enter their minds. They are big spenders, big tippers and very generous with friends and family. They get tremendous joy from making others feel good.
Serious issues arise when a spender marries a saver. Then the sparks fly!
Ideally, you want both aspects. Once you recognize your strengths and weaknesses you develop strategies to managing your money and spending habits.
A simple spending plan will give a saver permission to spend and set limits for the spender. Going back to "know your numbers" - knowing how much you have budgeted for clothing or entertainment puts you in control and gives you the power to make good money decisions.
Knowing you have alotted $1000 for clothing (or sports) for the year lets you buy that special dress (or golf club) without guilt. Keeping tab mentally lets you keep track and leads to a better spending decision.
You will be giving yourself a gift of confidence by striking a balance between enjoying today and enjoying tomorrow. You will truly Be $ Smart!
What is a Step-Up in Basis?
Often I speak with clients who wish to "gift" their home to their children or clients whose parents want to "transfer" stock, bonds or a home to them. Sometimes this can be a good idea, many times it isn't. Thorough reseach and advice from an attorney or accountant can help determine how beneificial the move will be.
When you buy a house or investments there is always a "cost". That number - the cost - is the basis upon which you will pay taxes down the road when you decide to sell. It is also the number that determines if you have made or lost money. If you have been fortunate to see the value of your investment grow, you will have a profit when you sell it, which adds to your wealth.
Of course, Uncle Sam then steps in for his share of your winnings - capital gains tax. How much tax you pay will be determined by your tax bracket. (Depending on taxable income capital gains tax runs from 10% to 39.6%)
A step-up in basis occurs when you inherit investments or real estate. The cost basis will be the value of the investment on the "date of death" of the owner or nine months later.
Say you or your parents bought a house in 1980 for $250,000. In the present market it's worth $750,000. You die and leave the house to your only child. Your child has the house appraised and sells it for $750,000. How much capital gains tax must your child pay? Zero! The cost basis of the house was "stepped up" to the value on date of death.
If, instead, you decide to "transfer" the house to your child. He is now the owner and then you die. What would the tax consequences be? Assuming he is in the 25% tax bracket, he would owe 15% capital gains tax on $500,000. He would owe $75,000. He received no "step-up in basis" because with a transfer, he assumed your original cost basis of $250,000.
The same thing happens when stocks, bonds and other investments are transferred; there is no step up in cost basis. So if today you inherit 500 shares of IBM grandpa bought in 1950 at $.25 per share ($125) and you sell those shares today you would receive $95,000 free and clear. If grandpa had transferred those shares to you instead of bequeathing them, you would owe taxes on $94,875 ($95,000 - $125) X 15% =$14,231.
Be sure to consult an accountant or an attorney before transferring investments or real estate. You don't want to share with Uncle Sam more than necessary.
Be $ smart!
When you buy a house or investments there is always a "cost". That number - the cost - is the basis upon which you will pay taxes down the road when you decide to sell. It is also the number that determines if you have made or lost money. If you have been fortunate to see the value of your investment grow, you will have a profit when you sell it, which adds to your wealth.
Of course, Uncle Sam then steps in for his share of your winnings - capital gains tax. How much tax you pay will be determined by your tax bracket. (Depending on taxable income capital gains tax runs from 10% to 39.6%)
A step-up in basis occurs when you inherit investments or real estate. The cost basis will be the value of the investment on the "date of death" of the owner or nine months later.
Say you or your parents bought a house in 1980 for $250,000. In the present market it's worth $750,000. You die and leave the house to your only child. Your child has the house appraised and sells it for $750,000. How much capital gains tax must your child pay? Zero! The cost basis of the house was "stepped up" to the value on date of death.
If, instead, you decide to "transfer" the house to your child. He is now the owner and then you die. What would the tax consequences be? Assuming he is in the 25% tax bracket, he would owe 15% capital gains tax on $500,000. He would owe $75,000. He received no "step-up in basis" because with a transfer, he assumed your original cost basis of $250,000.
The same thing happens when stocks, bonds and other investments are transferred; there is no step up in cost basis. So if today you inherit 500 shares of IBM grandpa bought in 1950 at $.25 per share ($125) and you sell those shares today you would receive $95,000 free and clear. If grandpa had transferred those shares to you instead of bequeathing them, you would owe taxes on $94,875 ($95,000 - $125) X 15% =$14,231.
Be sure to consult an accountant or an attorney before transferring investments or real estate. You don't want to share with Uncle Sam more than necessary.
Be $ smart!
Financial Jargon Translated
Most professions have their own terminology or lingo. Unfamiliar financial terms can be very intimidating or confusing. Knowing the language can give you a great advantage. Here are a few translations you may find useful:
Equities - stocks.
Fixed Income - bonds, CD's.
Volatility - the inevitable, daily ups and downs of the markets. (not good or bad)
Standard deviation -defines risk. It graphically maps historical returns.
ROI - return on investment - how much your money has grown.
Mutual funds and Exchange traded funds (ETF) - pools of stocks or pools of bonds. Vehicles which give you access to multiple stocks (or bonds) at one time
Correlation - Choosing investments that do well at different times by determining the relationship of one investment to another. It is one method to avoid putting all your eggs in one basket.
Cap (as in capitalization) – designates size.
Mid-cap or large-cap stock - are terms that classify the size of a company.
It is a way to measure the size of a company by multiplying the number of outstanding shares by its share price.
Alternative investments – are those other than stocks, bonds or cash.
May include precious metals, art, real estate, commodities (e.g. coffee, corn, soy beans, pork bellies).
Alphabet Soup:
ETF - exchange traded fund (grouping of stock or bonds)
IRA - individual retirement account (tax-deferred savings for retirement)
SEP - simplified employee plan (retirement plan for small business)
REIT - real estate investment trust (groupings of different types of real estate- e.g. shopping malls, office buildings, senior housing).
CD – a certificate of deposit (issued by banks for a set time, a set interest rate and a set amount of money).
EFT - electronic funds transfer - a means of moving money from one account to another.
Protect yourself. Learn the language or ask for a translation. Be $ smart.
Equities - stocks.
Fixed Income - bonds, CD's.
Volatility - the inevitable, daily ups and downs of the markets. (not good or bad)
Standard deviation -defines risk. It graphically maps historical returns.
ROI - return on investment - how much your money has grown.
Mutual funds and Exchange traded funds (ETF) - pools of stocks or pools of bonds. Vehicles which give you access to multiple stocks (or bonds) at one time
Correlation - Choosing investments that do well at different times by determining the relationship of one investment to another. It is one method to avoid putting all your eggs in one basket.
Cap (as in capitalization) – designates size.
Mid-cap or large-cap stock - are terms that classify the size of a company.
It is a way to measure the size of a company by multiplying the number of outstanding shares by its share price.
Alternative investments – are those other than stocks, bonds or cash.
May include precious metals, art, real estate, commodities (e.g. coffee, corn, soy beans, pork bellies).
Alphabet Soup:
ETF - exchange traded fund (grouping of stock or bonds)
IRA - individual retirement account (tax-deferred savings for retirement)
SEP - simplified employee plan (retirement plan for small business)
REIT - real estate investment trust (groupings of different types of real estate- e.g. shopping malls, office buildings, senior housing).
CD – a certificate of deposit (issued by banks for a set time, a set interest rate and a set amount of money).
EFT - electronic funds transfer - a means of moving money from one account to another.
Protect yourself. Learn the language or ask for a translation. Be $ smart.
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