Wealth Management Blog

Posts published in July 2012

Don’t Put Midyear Moves On Hold

By JJ Burns

July 9, 2012

Tax planning isn’t just for the end of the year. This is especially true in 2012, a year in which a national election could affect tax policies, and when several key tax breaks are slated to expire. What should you do in this situation? Here are five midyear tax-planning moves that may improve your financial picture:

1. Harvest tax losses.

If you’ve realized capital gains from securities sales this year, you can use any capital losses before the close of the year to offset those gains, plus up to $3,000 of ordinary income. If now is a favorable time from an investment perspective to sell certain securities, don’t wait until year-end to take action.

2. Realize capital gains.

Conversely, any capital gains you recognize now can help you take advantage of earlier losses, making your profits effectively tax-free up to the amount of your losses. Furthermore, the maximum tax rate on long-term capital gain (for securities held longer than a year) in 2012 is only 15% (0% for lower-income investors). The top rate is set to jump to 20% (10% for lower-income investors) in 2013, barring legislative changes.

3. Invest in dividend-paying stocks.

Like the current break on long-term capital gains, a favorable tax provision for “qualified dividends” (paid out by most domestic corporations) is scheduled to expire at the end of the year. Currently, the maximum tax rate for dividend profits also is only 15% (0% for lower-income investors). Beginning in 2013, however, dividends will be taxed at ordinary rates that could reach as high as 39.6% (up from the current top tax rate of 35%). If you invest in stocks now that will pay dividends at year-end, you could reap tax benefits.

4. Dodge the “wash sale” rule.

Under this rule, you can’t deduct a loss from the sale of securities if you acquire “substantially identical” securities within 30 days of the sale transaction. To avoid tax problems, wait at least 31 days before you buy back the same or similar securities. Alternatively, you could “double up,” acquiring the new securities now and waiting at least 31 days before selling the original shares.

5. Contribute to your retirement plan.

It’s easy for employees to contribute to a 401(k) plan during the year through regular payroll deductions. If you’re self-employed, you might set up a comparable plan, such as a Savings Incentive Match Plan for Employees (SIMPLE) or a Simplified Employee Pension (SEP). Caution: Although you have until the 2012 tax-return due date (plus extensions), to get a SEP started, the deadline for setting up a SIMPLE for 2012 is October 1.

Of course, tax laws are ever evolving and you might have to make wholesale changes in your game plan after the election. We’ll keep you up to date on new developments.

Should You Consolidate Your IRAs?

By JJ Burns

July 9, 2012

Everyone’s financial situation is different, but people at various stages of life often share similar concerns. Here’s a question from a client we encountered under such circumstances:

“I am in my 60s and recently retired from my full-time job. Over the years, I’ve opened several traditional IRAs and a Roth IRA. Also, I have a ‘rollover IRA’ with funds from a 401(k) at a previous job. Should I consolidate all of these IRAs into one for tax purposes, or should I just leave things the way they are?”

While there is no real tax benefit one way or the other, there is a trap to watch out for if you do consolidate. Combining the assets of your traditional IRAs into a single IRA could provide a few advantages, however.

For starters, it may be more flexible and cost-efficient to have just one IRA, as well as relieving you of considerable clutter if you’re still receiving paper statements from all of your IRA custodians. Also, if one IRA has provided better investment returns than the other or offers other advantages, it might make sense to shift more funds to the IRA with those advantages. (Of course, past performance is no guarantee of future results.) And you may find it easier to coordinate your plans for retirement, and focus on your main objectives, with a consolidated IRA.

Moreover, consolidating accounts might help you avoid a complication that can arise when you start taking “required minimum distributions” (RMDs) from your traditional IRAs. The law mandates that you begin taking RMDs no later than Apri1 1 of the year following the year in which you turn age 70½. These withdrawals from your account, the amount of which is based on life expectancy tables, must continue annually for the rest of your life. If you have several IRAs, you’ll have to choose the source of your annual RMD. It can come from one or multiple IRAs. But no matter how you arrange the distribution, the IRS treats it for tax purposes as coming from all of your IRAs on a “pro-rata” basis.

Let’s say you have four IRAs with a combined value of $500,000, and this year you withdraw $20,000 from one of them. The applicable percentage is 4% ($20,000 divided by $500,000), so it’s calculated as if you had withdrawn 4% of the balance in each IRA. Consolidating your IRAs would eliminate any confusion.

Finally, be aware that you can’t commingle the funds in traditional and Roth IRAs. This is the trap we alluded to earlier. Because Roths have an edge over traditional IRAs—qualified Roth distributions are tax-free and you don’t have to take lifetime mandatory distributions—you wouldn’t want to put them together anyway. Should you consolidate all of your Roth IRAs? Many of the same considerations that apply to combining traditional IRAs also are applicable to Roths.

Where There’s a Living Will, There’s a Way

By JJ Burns

July 9, 2012

Will your family members know how to handle a life-threatening illness or injury involving a loved one? A “living will” can point them in the right direction.

Simply put, a living will is a legal document that establishes guidelines for prolonging or ending medical treatment. It’s important to have a living will created for yourself, and for relatives such as your spouse and parents, to inform health-care providers in case of a medical emergency or terminal illness.

A living will indicates the types of medical treatments you want or do not want applied in the event you suffer a terminal illness or fall into a permanent vegetative state. The living will doesn’t become effective unless you’re incapacitated. Typically, a physician must certify that you have a terminal illness or that you’re permanently unconscious.

To cover situations in which someone is incapacitated and can’t speak, yet the condition isn’t so dire that the living will becomes effective, you can execute a health-care power of attorney or health care proxy.

The requirements for living wills vary from state to state. Have an attorney who is experienced in these matters prepare the living will based on applicable laws. The best approach is to coordinate your living will with your regular will, any trusts or powers of attorney you may have, and other estate-planning documents.

Do You Understand Investments?

By JJ Burns

July 2, 2012

People who find themselves owning complex investment vehicles often leave the driving to the professionals. And that’s perfectly acceptable, but even “passengers” should have a basic understanding of how a particular investment works—especially when it’s your hard-earned money on the line.

Consider a retiree who’s looking into purchasing an annuity. Is it an investment product, an insurance product, or both? Will the annuity continue to pay income to heirs if the owner dies? Is the principal protected in case of a severe economic downturn? Surprisingly, many investors—including owners of annuities—are stumped by these basic questions.

Other commonly used terms often befuddle investors. Do you know the difference between an “annual effective yield” and an “average annual yield”? How about an “annual percentage yield”? It’s important to distinguish among different types of yield so you can make valid comparisons of investments.

Do you consider yourself an investment expert? Here are a few simple questions—with the answers below—to see how you measure up.

1. An insurance company generally begins payments under an annuity when:

  1. The accumulation phase begins.
  2. The accumulation phase ends.
  3. The annuity owner dies.
  4. The annuity owner retires.

2. Payments under a variable annuity are based on:

  1. Fluctuations in the current interest rate.
  2. Fluctuations in the current inflation rate.
  3. Performance of underlying stocks. 
  4. Performance of the Standard & Poor’s (S&P) 500 index.

3. An annual effective yield is described best as:

  1. The annual return before interest is compounded.
  2. The annual return after interest is compounded.
  3. The annual return before inflation.
  4. The annual return after inflation.

4. The average annual yield often is used to:

  1. Compare the past performance of mutual funds.
  2. Distinguish Treasury bills from Treasury notes.
  3. Factor in the tax-free element of municipal bonds.
  4. Account for a guaranteed minimum-income benefit.

5. When you buy Treasury bills at auction, the rate is:

  1. Based on the current interest rate for loans. 
  2. Based on the S&P 500. 
  3. Equal to par.
  4. Discounted from face value.

6. A “private activity bond” is best described as:

  1. A corporate bond eligible for capital-gain treatment.
  2. A corporate bond exempt from income tax. 
  3. A municipal bond that is completely taxable. 
  4. A municipal bond that can trigger alternative minimum tax (AMT) problems.      

7. An exchange-traded fund (ETF):

  1. Trades like stocks.
  2. Trades like mutual funds.
  3. Involves trades between major stock exchanges.
  4. Involves trades between different currencies. 

Answers: 1-b; 2-c; 3-b; 4-a; 5-d; 6-d; 7-a