In recent years, Section 529 plans have become a popular tool for families to set money aside for future college expenses. What many don’t realize is that Section 529 plans can also serve as an effective wealth transfer tool.
Paying for a child’s or grandchild’s college education is an expensive proposition that can easily extend well into six figures. Enter the 529 plan, a tax-advantaged investment vehicle generally available to families regardless of their income level.
Named for the section of the Internal Revenue Code that authorized them, 529 plans allow investment earnings to grow sheltered from federal income taxes, and withdrawals used to pay for qualified education expenses are tax free. In addition, for parents or grandparents concerned about estate taxes, 529 plans may be even more valuable, supporting a long-term gifting strategy while still providing significant control over assets that have been removed from a taxable estate.
First and Foremost, a College Savings Tool ...
Before you consider the estate-planning potential of a 529 plan, it’s important to understand a few basics.
There are two types of 529 plans: Prepaid tuition plans, which let you lock in tomorrow’s tuition at today’s rates, and college savings plans, which let you choose from a menu of investments and offer more return potential, as well as more risk. Both types of plans are generally sponsored by a state government and administered by investment companies.
With a 529 college savings plan, the investments are typically managed by mutual fund companies. Many plans offer age-based asset allocation portfolios that automatically become more conservative as the beneficiary nears college age. Others let account owners choose from individual investment options to create a customized portfolio.
Key benefits of 529 college savings plans include:
• Federally tax-free withdrawals for qualified education expenses.
• No age or income restrictions.
• High plan contribution limits, often exceeding $200,000 or more.
In addition, withdrawals can be used to pay for undergraduate or graduate school expenses. (Withdrawals used for anything other than qualified education expenses are subject to ordinary income taxes plus a 10% penalty tax.)
Finally, remember that you are not limited to participating in your home state’s 529 plan. You can participate in national plans sponsored by other states as well. (Be aware that your home state’s 529 plan may have state income tax consequences. Consult with a tax advisor before investing in a plan.)
... With Valuable Estate Planning Potential
The IRS clearly had college planning in mind when it drafted Section 529 of the Internal Revenue Code. However, it also left the door open to use 529 plans as estate planning tools. That’s because a contribution to a 529 plan is considered a completed gift from the donor to the beneficiary named on the account, even though the account owner, not the beneficiary, maintains control over the money in the account.
Tax rules permit you to give up to $13,000 (indexed to inflation) to as many individuals as you choose each year, free from federal gift taxes. Couples can give $26,000 without incurring taxes. As a result, one method of reducing a taxable estate is to make scheduled gifts each year. That’s where 529 plans come in: The first $13,000 you contribute each year per beneficiary won’t come back to bite you, as long as you haven’t made any additional taxable gifts to the beneficiary in that year.
You can also accelerate your gifting schedule by electing to make a one-time, lump-sum contribution of $65,000 ($130,000 for a couple) to a 529 plan in the first year of a five-year period. Of course, you wouldn’t be able to make additional taxable gifts to that beneficiary during the five-year period, and if you use the five-year averaging election and die before the five years are up, a prorated portion of the contribution may be considered part of your taxable estate.
But the wealth transfer potential can be substantial: An individual who has five grandchildren could immediately remove up to $325,000 from his or her taxable estate by contributing the money to five separate 529 plan accounts. Five years later, he or she could do it again.
You Stay in Control
It’s worth emphasizing: Although the assets contributed to a 529 plan are no longer considered part of your taxable estate, you still exercise control over the money. You decide how it will be invested within the confines of the plan’s investment options and when it will be withdrawn. You also have the right to change beneficiaries, in the event that the original beneficiary decides not to attend college, for example. And doing so generally won’t trigger tax consequences if you choose a beneficiary who is a member of the original beneficiary’s family. If there isn’t another suitable beneficiary, you also have the option of closing the account and taking the money back, although earnings will be subject to income taxes, as well as a 10% penalty.
When choosing a 529 plan, you’ll need to look beyond estate planning considerations. There are dozens of plans available, and their features and rules can vary greatly. To help narrow the choices, consider working with a qualified financial professional. And be sure to consult with an estate planning attorney or tax professional before making any decisions that could affect your tax liability.
This article is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor or me if you have any questions.
An array of topics that can affect the growth and sustainability of your current and future assets.
Monday, November 29, 2010
Tuesday, September 28, 2010
Consolidate Retirement Assets With a Rollover IRA
The U.S. Bureau of Labor Statistics estimates that Americans change jobs about 10 times between the ages of 18 and 42. (1) If job changers had an employer-sponsored retirement account at just half of those positions, it would represent a significant money management challenge: multiple redundant investment portfolios and a mountain of account statements and investment documentation to sort through.
One flexible solution to simplify the task is to consolidate assets under a single account umbrella via a rollover IRA. Offered by many financial institutions, the rollover IRA can help you streamline your investments into a unified asset allocation plan.
Rollover IRAs Offer a Wide Range of Benefits (2)
As compared with employer-sponsored retirement accounts, a rollover IRA can provide a broader range of investment choices and greater flexibility for distribution planning. Consider the following benefits rollover IRAs offer over employer-sponsored plans:
• Simplified investment management. You can use a single rollover IRA to consolidate assets from more than one retirement plan. For example, if you still have money in several different retirement plans sponsored by several different employers, you can transfer all of those assets into one convenient rollover IRA.
• More freedom of choice, control. Using a rollover IRA to manage retirement assets after leaving a job or retiring is a strategy that’s available to everyone. And depending on the financial institution that provides the rollover IRA, you could have a wide array of investment choices at your disposal to help meet your unique financial goals. As the IRA account owner, you develop the precise mix of investments that best reflects your own personal risk tolerance, investment philosophy and financial goals.
• More flexible distribution provisions. While Internal Revenue Service distribution rules for IRAs generally require IRA account holders to wait until age 59½ to make penalty-free withdrawals, there are a variety of provisions to address special circumstances. These provisions are often broader and easier to exploit than employer plan hardship rules.
• Valuable estate planning features. IRAs are more useful in estate planning than employer-sponsored plans. IRA assets can generally be divided among multiple beneficiaries, each of whom can make use of planning structures such as the stretch IRA concept to maintain tax-advantaged investment management during their lifetimes. In addition, IRS rules now allow individuals to roll assets from a company-sponsored retirement account into a Roth IRA, further enhancing the estate planning aspects of an IRA rollover.(3) By comparison, beneficiary distributions from employer-sponsored plans are generally taken in lump sums as cash payments.
Efficient Rollovers Require Careful Planning
There are two ways to execute a Rollover IRA — directly or indirectly. It’s important you understand the difference between the two, because there could be some tax consequences and additional hurdles if you aren’t careful. With a direct rollover, the financial institution that runs your former employer’s retirement plan simply transfers the money straight into your new rollover IRA. There are no taxes, penalties or deadlines for you to worry about.
With an indirect rollover, you personally receive money from your old plan and assume responsibility for depositing that money into a rollover IRA. In this instance, you would receive a check representing the value of the assets in your former employer’s plan, minus a mandatory 20% federal tax withholding. You can avoid paying taxes and any penalties on an indirect rollover if you deposit the money into a new rollover account within 60 days. You’ll still have to pay the 20% withholding tax and potential penalties out of your own pocket, but the withholding tax will be credited when you file your regular income tax, and any excess amount will be refunded to you. If you owe more than 20%, you’ll need to come up with the additional payment when you file your tax return.
Potential Downsides of IRA Rollovers
While there are many advantages to consolidated IRA rollovers, there are some potential drawbacks to keep in mind. Assets greater than $1 million in an IRA may be taken to satisfy your debts in certain personal bankruptcy scenarios. Assets in an employer-sponsored plan cannot be readily taken in many circumstances. Also, with a traditional IRA rollover, you must begin taking distributions by April 1 of the year after you reach 70½ whether or not you continue working, but employer-sponsored plans do not require distributions if you continue working past that age. (Roth IRAs do not require the owner to take distributions during his or her lifetime.)
Remember, the laws governing retirement assets and taxation are complex. In addition, there are many exceptions and limitations that may apply to your situation. Before making any decisions, consider talking to a financial advisor who has experience helping people structure retirement plans.
_____________________________________________________
1 Source: The Bureau of Labor Statistics, National Longitudinal Surveys, “Number of Jobs Held in a Lifetime,” June 2008.
2 Restrictions, limitations and fees may apply.
3 Provided all qualifying conditions are met. The rollover will be treated as a “conversion” with income taxes due up-front.
One flexible solution to simplify the task is to consolidate assets under a single account umbrella via a rollover IRA. Offered by many financial institutions, the rollover IRA can help you streamline your investments into a unified asset allocation plan.
Rollover IRAs Offer a Wide Range of Benefits (2)
As compared with employer-sponsored retirement accounts, a rollover IRA can provide a broader range of investment choices and greater flexibility for distribution planning. Consider the following benefits rollover IRAs offer over employer-sponsored plans:
• Simplified investment management. You can use a single rollover IRA to consolidate assets from more than one retirement plan. For example, if you still have money in several different retirement plans sponsored by several different employers, you can transfer all of those assets into one convenient rollover IRA.
• More freedom of choice, control. Using a rollover IRA to manage retirement assets after leaving a job or retiring is a strategy that’s available to everyone. And depending on the financial institution that provides the rollover IRA, you could have a wide array of investment choices at your disposal to help meet your unique financial goals. As the IRA account owner, you develop the precise mix of investments that best reflects your own personal risk tolerance, investment philosophy and financial goals.
• More flexible distribution provisions. While Internal Revenue Service distribution rules for IRAs generally require IRA account holders to wait until age 59½ to make penalty-free withdrawals, there are a variety of provisions to address special circumstances. These provisions are often broader and easier to exploit than employer plan hardship rules.
• Valuable estate planning features. IRAs are more useful in estate planning than employer-sponsored plans. IRA assets can generally be divided among multiple beneficiaries, each of whom can make use of planning structures such as the stretch IRA concept to maintain tax-advantaged investment management during their lifetimes. In addition, IRS rules now allow individuals to roll assets from a company-sponsored retirement account into a Roth IRA, further enhancing the estate planning aspects of an IRA rollover.(3) By comparison, beneficiary distributions from employer-sponsored plans are generally taken in lump sums as cash payments.
Efficient Rollovers Require Careful Planning
There are two ways to execute a Rollover IRA — directly or indirectly. It’s important you understand the difference between the two, because there could be some tax consequences and additional hurdles if you aren’t careful. With a direct rollover, the financial institution that runs your former employer’s retirement plan simply transfers the money straight into your new rollover IRA. There are no taxes, penalties or deadlines for you to worry about.
With an indirect rollover, you personally receive money from your old plan and assume responsibility for depositing that money into a rollover IRA. In this instance, you would receive a check representing the value of the assets in your former employer’s plan, minus a mandatory 20% federal tax withholding. You can avoid paying taxes and any penalties on an indirect rollover if you deposit the money into a new rollover account within 60 days. You’ll still have to pay the 20% withholding tax and potential penalties out of your own pocket, but the withholding tax will be credited when you file your regular income tax, and any excess amount will be refunded to you. If you owe more than 20%, you’ll need to come up with the additional payment when you file your tax return.
Potential Downsides of IRA Rollovers
While there are many advantages to consolidated IRA rollovers, there are some potential drawbacks to keep in mind. Assets greater than $1 million in an IRA may be taken to satisfy your debts in certain personal bankruptcy scenarios. Assets in an employer-sponsored plan cannot be readily taken in many circumstances. Also, with a traditional IRA rollover, you must begin taking distributions by April 1 of the year after you reach 70½ whether or not you continue working, but employer-sponsored plans do not require distributions if you continue working past that age. (Roth IRAs do not require the owner to take distributions during his or her lifetime.)
Remember, the laws governing retirement assets and taxation are complex. In addition, there are many exceptions and limitations that may apply to your situation. Before making any decisions, consider talking to a financial advisor who has experience helping people structure retirement plans.
_____________________________________________________
1 Source: The Bureau of Labor Statistics, National Longitudinal Surveys, “Number of Jobs Held in a Lifetime,” June 2008.
2 Restrictions, limitations and fees may apply.
3 Provided all qualifying conditions are met. The rollover will be treated as a “conversion” with income taxes due up-front.
Monday, August 23, 2010
Volatility on the Rise — Steps to Help You Cope
How quickly emotions can swing from euphoria to despair. Year-to-date through April 23 (the stock market’s recent peak), the S&P 500 was up 9.2%, the S&P MidCap 400 had gained 16.9% and the S&P SmallCap 600 was up 18.6%.1 But as if to remind us that some things are just too good to be true, the markets began to unravel as April came to a close.
May’s Downhill Slide
First came the May 6 “flash crash” a one-day event that resulted in a 9.6% intraday swing in a handful of U.S. stocks. In many ways, the events of May 6 also served as a harbinger of the bumpy ride that investors would experience in the weeks ahead. By May 31, although all three U.S. benchmark indices were higher for the year, large-cap stocks had fallen 10.5% from their April 23 high, while mid-cap and small-cap stocks had declined about 10% respectively.1,2 Indeed volatility is once again dominating the markets, but how long might it stay this time?
Once Burned, Twice Shy
For their part it seems that investors—recently burned by the swiftness of price declines in 2008—have adopted the approach of selling first and asking questions later. And it is that investor sentiment that is fueling market turbulence. Indeed the number of days that the S&P 500 has fallen by 2% or more in a single day has begun to escalate. In the past 12 months (ended May 31), the S&P 500 has fallen by 2% or more 13 times vs. an average of seven times per year since 1970.3
The question now on everyone’s mind is whether the volatility currently roiling the world’s financial markets will subside any time soon, and how it might affect the fragile, but tangible, recovery taking hold both here in the United States and around the globe.
While world equity markets have weathered past financial crises with only modest near-term price declines, today’s concerns seem to be deeper and more widespread: the European debt crisis and the declining euro; the crisis unfolding daily around the Gulf oil spill; and tensions brewing between North and South Korea.
However, while the current bout of market volatility is expected to be with us for some time, it is not expected to cause either the U.S. economy or the global economy to slip back into recession. Economists at Standard & Poor’s forecast real GDP growth of 3.3% for the United States and global GDP growth of 3.7% in 2010.4
Keeping It All in Perspective
Instead of reacting hastily to the market’s short-term swings, try to take a long-term view and keep the following strategies/perspectives in mind.
• Don’t panic - Don’t sell into a rapidly declining market and don’t buy into a rapidly rising market. You’ll just be following the herd and locking in losses. Panic selling also runs the risk of missing the market’s best-performing days. You never know when the market is going to shoot up, so staying invested and not giving in to panic can really make a difference.
• Review your goals, risk tolerance and investment mix - Does your portfolio’s asset allocation—your mix of stocks, bonds and cash equivalents—accurately reflect your needs? Have you adequately diversified by spreading your money among different investments to potentially reduce risk?
• Keep a long-term perspective - If you are a long-term investor, chances are you have experienced many steep climbs and a few steep drops, but overall you are making progress toward your investment goals. Be sure to ask yourself these key questions: What is your time horizon? How much can you afford to lose in the short term? Can you afford not to pursue growth to outpace inflation? How comfortable are you accepting short-term losses to eventually get long-term gains?
• Dollar cost averaging - If you are a long-term investor, dollar cost averaging can help reduce market-timing risk. By investing regular amounts at regular intervals, your cost per share will average out over time. If you believe that the market will rise over the long term, then the expensive shares you buy at the top of one cycle will be offset by the cheaper shares you buy when the market corrects.
1, 3, 4Source: Standard & Poor’s, The Outlook, May 26, 2010. The S&P 500 is a capitalization-weighted index that measures the performance of 500 large-cap U.S. stocks with capitalizations of more than $3.5 billion, chosen for market size, liquidity and sector; the S&P MidCap 400 is a capitalization-weighted index that measures the performance of 400 midcap U.S. stocks with market capitalizations between $850 million and $3.8 billion, chosen for market size, liquidity and sector; the S&P SmallCap 600 is a capitalization-weighted index that measures the performance of 600 small-cap U.S. stocks with market capitalizations between $250 million and $1.2 billion, chosen for market size, liquidity and sector. Indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
2Source: Standard & Poor’s Financial Communications. For the period indicated. Past performance is no guarantee of future results.
Consult your financial advisor or me if you have any questions.
May’s Downhill Slide
First came the May 6 “flash crash” a one-day event that resulted in a 9.6% intraday swing in a handful of U.S. stocks. In many ways, the events of May 6 also served as a harbinger of the bumpy ride that investors would experience in the weeks ahead. By May 31, although all three U.S. benchmark indices were higher for the year, large-cap stocks had fallen 10.5% from their April 23 high, while mid-cap and small-cap stocks had declined about 10% respectively.1,2 Indeed volatility is once again dominating the markets, but how long might it stay this time?
Once Burned, Twice Shy
For their part it seems that investors—recently burned by the swiftness of price declines in 2008—have adopted the approach of selling first and asking questions later. And it is that investor sentiment that is fueling market turbulence. Indeed the number of days that the S&P 500 has fallen by 2% or more in a single day has begun to escalate. In the past 12 months (ended May 31), the S&P 500 has fallen by 2% or more 13 times vs. an average of seven times per year since 1970.3
The question now on everyone’s mind is whether the volatility currently roiling the world’s financial markets will subside any time soon, and how it might affect the fragile, but tangible, recovery taking hold both here in the United States and around the globe.
While world equity markets have weathered past financial crises with only modest near-term price declines, today’s concerns seem to be deeper and more widespread: the European debt crisis and the declining euro; the crisis unfolding daily around the Gulf oil spill; and tensions brewing between North and South Korea.
However, while the current bout of market volatility is expected to be with us for some time, it is not expected to cause either the U.S. economy or the global economy to slip back into recession. Economists at Standard & Poor’s forecast real GDP growth of 3.3% for the United States and global GDP growth of 3.7% in 2010.4
Keeping It All in Perspective
Instead of reacting hastily to the market’s short-term swings, try to take a long-term view and keep the following strategies/perspectives in mind.
• Don’t panic - Don’t sell into a rapidly declining market and don’t buy into a rapidly rising market. You’ll just be following the herd and locking in losses. Panic selling also runs the risk of missing the market’s best-performing days. You never know when the market is going to shoot up, so staying invested and not giving in to panic can really make a difference.
• Review your goals, risk tolerance and investment mix - Does your portfolio’s asset allocation—your mix of stocks, bonds and cash equivalents—accurately reflect your needs? Have you adequately diversified by spreading your money among different investments to potentially reduce risk?
• Keep a long-term perspective - If you are a long-term investor, chances are you have experienced many steep climbs and a few steep drops, but overall you are making progress toward your investment goals. Be sure to ask yourself these key questions: What is your time horizon? How much can you afford to lose in the short term? Can you afford not to pursue growth to outpace inflation? How comfortable are you accepting short-term losses to eventually get long-term gains?
• Dollar cost averaging - If you are a long-term investor, dollar cost averaging can help reduce market-timing risk. By investing regular amounts at regular intervals, your cost per share will average out over time. If you believe that the market will rise over the long term, then the expensive shares you buy at the top of one cycle will be offset by the cheaper shares you buy when the market corrects.
1, 3, 4Source: Standard & Poor’s, The Outlook, May 26, 2010. The S&P 500 is a capitalization-weighted index that measures the performance of 500 large-cap U.S. stocks with capitalizations of more than $3.5 billion, chosen for market size, liquidity and sector; the S&P MidCap 400 is a capitalization-weighted index that measures the performance of 400 midcap U.S. stocks with market capitalizations between $850 million and $3.8 billion, chosen for market size, liquidity and sector; the S&P SmallCap 600 is a capitalization-weighted index that measures the performance of 600 small-cap U.S. stocks with market capitalizations between $250 million and $1.2 billion, chosen for market size, liquidity and sector. Indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
2Source: Standard & Poor’s Financial Communications. For the period indicated. Past performance is no guarantee of future results.
Consult your financial advisor or me if you have any questions.
Monday, July 19, 2010
Five Tax-Smart Ideas for Managing Your Portfolio
Savvy investors have long realized that what their investments earn after taxes is what really counts. After factoring in federal income and capital gains taxes, the alternative minimum tax and potential state and local taxes, your investment returns in any given year may be reduced by 40% or more. Luckily, there are tools and tactics to help you manage taxes and your investments.
#1: Invest in Tax-Deferred and Tax-Free Accounts
Tax-deferred investments include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans, traditional individual retirement accounts (IRAs) and annuities. In some cases, contributions to these accounts may be made on a pretax basis or may be tax deductible. More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to nonqualified annuities, Roth IRAs and Roth 401(k) savings plans are not deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you have held the account for at least five years and meet the requirements for a qualified distribution. Unless certain criteria is met, Roth IRA owners must be 59 ½ or older and have held the IRA for 5 years before tax-free withdrawals are permitted.
#2: Consider Investing in Municipal Bonds
Municipal bonds, or “munis” as they are frequently called, are bonds issued by state or local municipalities to fund public works projects such as new roads, stadiums, bridges or hospitals. A municipal bond can also be issued by legal entities such as a housing authority or a port authority. For this reason, municipals can be an excellent way to invest in the growth and development of your community.
In addition, because the interest earned on municipal bonds is exempt from federal income taxes and may be exempt from state and local taxes (if they are purchased by residents of the issuing municipality), munis have the potential to deliver higher returns on an after-tax basis than similar taxable corporate or government bonds. What this means is that although the interest paid on municipal bonds is typically a lower percentage than is paid on taxable bonds, because it is tax free, it is, in effect, not as low as it appears. A simple calculation known as the “taxable-equivalent yield” can be used when considering an investment in a municipal bond.
For instance, if your income tax rate is 35%, a municipal bond paying 5% interest is actually a better investment than a taxable bond paying interest at 7.7%. Thus, for investors in a high tax bracket, the benefits of using municipal bonds in a fixed-income portfolio can be significant. Municipal bonds are subject to availability and change in price. Subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
#3: Manage Investments for Tax Efficiency
Tax-managed investment accounts are managed in ways that can help reduce their taxable distributions. Your investment manager can employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.
#4: Put Losses to Work
At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years.
#5: Keep Good Records
Keep records of purchases, sales, distributions and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the most preferential tax treatment for shares you sell.
Keeping an eye on how taxes can affect your investments is one of the easiest ways to help enhance your returns over time. For more information about the tax aspects of investing, consult a qualified tax advisor.
______________________________________________
Thanks for taking a look at this guys!
#1: Invest in Tax-Deferred and Tax-Free Accounts
Tax-deferred investments include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans, traditional individual retirement accounts (IRAs) and annuities. In some cases, contributions to these accounts may be made on a pretax basis or may be tax deductible. More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to nonqualified annuities, Roth IRAs and Roth 401(k) savings plans are not deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you have held the account for at least five years and meet the requirements for a qualified distribution. Unless certain criteria is met, Roth IRA owners must be 59 ½ or older and have held the IRA for 5 years before tax-free withdrawals are permitted.
#2: Consider Investing in Municipal Bonds
Municipal bonds, or “munis” as they are frequently called, are bonds issued by state or local municipalities to fund public works projects such as new roads, stadiums, bridges or hospitals. A municipal bond can also be issued by legal entities such as a housing authority or a port authority. For this reason, municipals can be an excellent way to invest in the growth and development of your community.
In addition, because the interest earned on municipal bonds is exempt from federal income taxes and may be exempt from state and local taxes (if they are purchased by residents of the issuing municipality), munis have the potential to deliver higher returns on an after-tax basis than similar taxable corporate or government bonds. What this means is that although the interest paid on municipal bonds is typically a lower percentage than is paid on taxable bonds, because it is tax free, it is, in effect, not as low as it appears. A simple calculation known as the “taxable-equivalent yield” can be used when considering an investment in a municipal bond.
For instance, if your income tax rate is 35%, a municipal bond paying 5% interest is actually a better investment than a taxable bond paying interest at 7.7%. Thus, for investors in a high tax bracket, the benefits of using municipal bonds in a fixed-income portfolio can be significant. Municipal bonds are subject to availability and change in price. Subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
#3: Manage Investments for Tax Efficiency
Tax-managed investment accounts are managed in ways that can help reduce their taxable distributions. Your investment manager can employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.
#4: Put Losses to Work
At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years.
#5: Keep Good Records
Keep records of purchases, sales, distributions and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the most preferential tax treatment for shares you sell.
Keeping an eye on how taxes can affect your investments is one of the easiest ways to help enhance your returns over time. For more information about the tax aspects of investing, consult a qualified tax advisor.
______________________________________________
Thanks for taking a look at this guys!
Friday, June 18, 2010
Everything You Ever Wanted to Know About Retirement Income
After years of saving and investing, you can finally see your retirement on the horizon. But before kicking back you still have some important planning to do. For instance, it’s important to figure out how much retirement income you need. To do that, you’ll need to consider your housing costs, the length of your retirement, whether you have earned income, your retirement lifestyle, health care and insurance costs and the rate of inflation. You’ll also need to identify all of your potential retirement income sources and review your asset allocation. Remember, decisions made now could make the difference between your money outlasting you—or vice versa.
The following frequently asked questions about retirement income should help you begin the final stages of retirement planning on the right foot.
When should I begin thinking about tapping my retirement assets and how should I go about doing so?
The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid to late 50s. A series of meetings with a financial consultant may help you make important decisions such as how your portfolio should be invested, when you can afford to retire and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier, or enjoying a longer working life, you may need to alter your planning threshold accordingly.
How much annual income am I likely to need?
While studies indicate that many people are likely to need between 60% and 80% of their final working year’s income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today’s retirees.
How much can I afford to withdraw from my assets for annual living expenses?
As you age, your financial affairs won’t remain static: changes in inflation, investment returns, your desired lifestyle and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with a qualified financial consultant and review your personal situation.
When planning portfolio withdrawals, is there a preferred strategy for which accounts to tap first?
You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.
If you maintain a traditional IRA or a 401(k), 403(b) or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70½. The amount of the annual distribution is determined by your life expectancy and, potentially, the life expectancy of a beneficiary. RMDs don’t apply to Roth IRAs.
Are there other ways of getting income from investments besides liquidating assets?
One such strategy is bond laddering, which utilizes fixed income investments. A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can potentially be redeemed at par value each year. As a portfolio management strategy, bond laddering may help you maintain a relatively consistent stream of income while limiting your exposure to risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and changes in price.
When crafting a retirement portfolio, you need to make sure it generates enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation. Dividing your portfolio among stocks, bonds and cash investments may provide adequate exposure to some growth potential while trying to protect against market setbacks.
This article is not intended to provide specific investment or tax advice for any individual. Consult your financial advisor, your tax advisor or me if you have any questions.
The following frequently asked questions about retirement income should help you begin the final stages of retirement planning on the right foot.
When should I begin thinking about tapping my retirement assets and how should I go about doing so?
The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid to late 50s. A series of meetings with a financial consultant may help you make important decisions such as how your portfolio should be invested, when you can afford to retire and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier, or enjoying a longer working life, you may need to alter your planning threshold accordingly.
How much annual income am I likely to need?
While studies indicate that many people are likely to need between 60% and 80% of their final working year’s income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today’s retirees.
How much can I afford to withdraw from my assets for annual living expenses?
As you age, your financial affairs won’t remain static: changes in inflation, investment returns, your desired lifestyle and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with a qualified financial consultant and review your personal situation.
When planning portfolio withdrawals, is there a preferred strategy for which accounts to tap first?
You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.
If you maintain a traditional IRA or a 401(k), 403(b) or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70½. The amount of the annual distribution is determined by your life expectancy and, potentially, the life expectancy of a beneficiary. RMDs don’t apply to Roth IRAs.
Are there other ways of getting income from investments besides liquidating assets?
One such strategy is bond laddering, which utilizes fixed income investments. A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can potentially be redeemed at par value each year. As a portfolio management strategy, bond laddering may help you maintain a relatively consistent stream of income while limiting your exposure to risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and changes in price.
When crafting a retirement portfolio, you need to make sure it generates enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation. Dividing your portfolio among stocks, bonds and cash investments may provide adequate exposure to some growth potential while trying to protect against market setbacks.
This article is not intended to provide specific investment or tax advice for any individual. Consult your financial advisor, your tax advisor or me if you have any questions.
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