Four Tips for Tax Smart Investing

At times, you may be able to use losses in your investment portfolio to help offset
 realized gains.

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 (AMT), 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. Here are four tips to help you become a more tax-savvy investor.

Tip #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 and traditional individual retirement accounts (IRAs). In some cases, contributions to these accounts may be made on a pre-tax 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 Roth IRAs and Roth 401(k) savings plans are not deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you are over age 59 1/2, have held the account for at least five years, and meet the requirements for a qualified distribution.

Tip #2: Manage Investments for Tax Efficiency

Tax-managed investment accounts are managed in ways that can help reduce their taxable distributions. Your investment professional 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.

Tip #3: 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.

Tip #4: 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 your tax professional.

The information in this article is not intended to be tax advice and should not be treated as such. You should consult with your tax advisor to discuss your personal situation before making any decisions.

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

March 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Ronald J. VanSurksum CFP® , a local member of FPA.

Five Reasons to Make an IRA Part of Your Planning Strategy

IRAs typically give investors access to a wider range of investment options than workplace-sponsored plans, such as a 401(k).

There could be an important tool already in your portfolio that can help you save more for retirement. It's your IRA.

Nearly 50 million American households own an IRA, but it is often an overlooked component of most investors' financial planning strategies. In fact, over the past two years, only 15% of households that were eligible to contribute to an IRA did so.¹

Have you forgotten your IRA? If you don't have one, should it be part of your overall investment plan? Here are some compelling reasons why this vehicle can help you plan for your future.

1. Tax deferral: Traditional IRAs allow your investment earnings to grow tax-deferred until withdrawn, typically at retirement. For 2011, the maximum contribution is $5,000, but for those aged 50 and over, the limit is $6,000. The limits are the same for a Roth IRA, but to be eligible to fully contribute, an investor must have a 2011 modified adjusted gross income of less than $107,000 for singles and $169,000 for married couples filing jointly. Singles earning up to $122,000 and couples earning up to $179,000 are eligible for partial contributions.
2. Deductibility: If you are a single taxpayer who doesn't participate in an employer-sponsored plan and you earn less than $56,000 in 2011, you can deduct your contributions to a traditional IRA off your income taxes. Couples earning under $90,000 are also eligible for a full deduction. Partial deduction limits also apply, up to $66,000 for singles and $110,000 for couples. Note that Roth IRA contributions are not deductible.
3. Investment flexibility: IRAs typically give investors access to a wider range of investment options than workplace-sponsored plans, such as a 401(k). Depending on the financial institution you use to open your account, you can invest in a broad array of mutual funds, ETFs, individual stocks and bonds, CDs, annuities, even commodities and real estate.
4. Convertibility: Traditional IRA holders can convert to a Roth IRA to enjoy some of the additional benefits listed below. But before you decide make a switch, be sure to investigate the tax consequences of such a move.
5. Portability: If you have assets in an employer-sponsored plan and you leave your job, you can easily roll over those assets into an IRA. Rolling over your assets can make sense, particularly if you change jobs frequently and don't want to devote too much time to coordinating and tracking your accounts.

Additional Benefits of Roth IRAs

• Qualified tax-free withdrawals: Since Roth IRAs are funded with after-tax dollars, your withdrawals are tax free, as long as you have held the account for at least five years and are over age 59 1/2.
• No RMDs: Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs) once the accountholder reaches age 70 1/2.

Contact your financial professional to discuss a strategy for your IRA or to see if investing in an IRA makes sense for you.

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¹Source: Investment Company Institute, The Role of IRAs in U.S. Households' Saving for Retirement, December 2010 (http://www.ici.org/pdf/fm-v19n8.pdf).

© 2011 McGraw-Hill Financial Communications. All rights reserved.

March 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Ronald J VanSurksum, CFP® , a local member of FPA.

Tax Planning for 2010 Down to the Wire

As a changing power base in Washington wrangles over tax policy in the waning days of Congress’ lame duck session, millions of families and investors are reluctantly awaiting the return of the estate tax and presumably much more stringent rules on gifting.

Already it’s been a strange year for taxes. At this writing, the estate tax remained repealed in 2010, meaning that individuals dying during 2010 will be free to pass down their estates to heirs without any estate tax at all. However, as of Jan. 1, 2011, that picture will change drastically without any form of Congressional action – the estate tax will roar back with a vengeance with a low $1 million exemption per individual, down from $3.5 million in 2009, and a 55 percent top rate, up from 45 percent.

Also, the generation-skipping transfer (GST) tax – which also was repealed in 2010 – is also expected to return in 2011. It will carry a similar $1 million exemption in 2011, down from $3.5 million in 2009. While not as well known as the estate tax, the GST was written to prevent wealthy families from gifting assets to grandchildren as a strategy to cut their tax liability. In short, without any significant changes in tax policy, starting in 2011, individuals might see such gifts become subject to double taxation – the GST or either the estate or gift tax.

While there may be solutions even at this late date, the best choice is to seek out trained advice from both qualified tax, legal and financial planners, preferably in tandem. For wealthy taxpayers with a few years to go until retirement – or even until grandchildren arrive – it’s also not a bad time to be thinking about your individual estate plans and how you’ll manage assets as you get older.

In the meantime, consider the following strategies on gifting:

Start with the basics: Grandparents – and parents, for that matter – can avoid the gift tax by giving up to $13,000 per recipient per year to each child or grandchild. Above that amount, remember that the gift tax stands at 35 percent in 2010 but is scheduled to rise to 55 percent in 2011.

You can go farther: You can gift an additional $1 million all at once or over an extended period on top of each $13,000 gift by borrowing from the amount you’ll be able to shelter from the estate tax.

Opt to pay medical or tuition bills: If you pay a family member’s school or hospital directly, you may give an unlimited amount. It’s also important to know that you can do that on behalf of anyone, not just family members. 

Don’t forget charity: Charitable giving is not something that’s done only in someone’s will. You can donate assets to a charitable gift fund or community foundation where your investment grows tax-free and you can designate charities you plan to give to before and after you die.

And keep in mind some general last-minute tax planning advice:

Max out your retirement contributions: For 401(k)s, you have until Dec. 31 to make your 2010 contributions. The limit per employee is $16,500 with an extra $5,500 allowed to taxpayers 50 and older. IRAs have later deadlines.

Empty your flexible savings accounts: Flex accounts must be emptied out by yearend (or by the end of your company’s standard grace period) or the money must be forfeited. Double-check the many items that qualify, because that list will get smaller last year – no over-the-counter medicines can qualify for Flex spending without a prescription.

Take advantage of energy credits: The Residential Energy Property Credit expires Dec. 31. Taxpayers spending for qualified improvements ranging from roofs to insulation and water heaters can qualify for a credit up to $1,500.

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December 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Ronald J VanSurksum, CFP , a local member of FPA.