Archives for September 2016

Trimming Taxes into Retirement

Retirement is the time for many things. You are free to explore your passions, travel, spend more time with family. It is also time to reevaluate your financial situations. By cutting your tax bill, you essentially end up with more money to spend on yourself during retirement.

When you retire, you stop collecting paychecks. This means you are living on other funds you have spent your life saving. There is a good chance that this change in income will put you in a lower tax bracket then what you were in when you were working. Being in a lower tax bracket means lower taxes. This can be a nice benefit to retirement.

While this is something that can happen naturally, there are other ways to actively save on your taxes into your retirement. So let’s look at somethings you can do to reduce your taxes.

Switch to a Roth

Many people have a 401(k) or a traditional IRA. A Roth can help reduce your taxable income since no federal taxes are due on Roth withdrawals. This is not the case for the other tax-deferred accounts, but the conversion to a Roth can take several years to accomplish.

When converting to a Roth stretch it out over several years, and only convert enough so it will not put you into a higher tax bracket. If you are under 65 and buying subsidized health insurance, a conversion is less attractive because converting will increase your income and decrease your subsidy.

Get a Leg Up

Since the bulk of your savings is in a tax-deferred account, a Roth conversion might not make since for you since you will need funds outside your 401(k) or traditional IRA to pay taxes on the conversion. Instead of converting, you might take distributions from you 401(k) or IRA while still in your sixties. You might save money by starting the withdrawals earlier and in a lower tax bracket as long as you are over the age of 59 ½ to avoid the 10% penalty you are subjected to in most cases.

Sell Some Stock

If you are in the 15% federal tax bracket or lower, then you do not owe capital gains taxes on the sale of securities held form more than a year. If you are in the higher tax bracket, then you owe at least 15% on the sale of any securities. So dropping to a lower tax bracket may give you the chance to sell off some stocks, especially if they have gone up in value and no longer fit your portfolio.

Remember circumstances change and so do the rules governing taxes, so revisit these strategies often and reevaluate you finances to ensure you are still saving money and it fits your current lifestyle.


Risk and Return

Millions of people invest in in diverse portfolios, but do they understand the difference of risk and return. Many want better portfolio performance with less risk, but is it possible? Yes, it is, but it also depends on how we measure risk and return.

Of the two, return is the easily measured. We calculate the average annualized return over multiyear/rolling time periods. You can see the growth and it is represented by a growth of $10,000 over various timeframes.

If we look at a diversified seven-asset portfolio consisting of US stock, small-cap US stock, non-US stock, real estate, commodities, US bonds and cash all held in equal 14.29% allocations, then the client can expect a 46-year average annualized return of 9.78% if they rebalance as needed. This is safe and the client can reap the rewards in retirement, but what are the other options.

There is the large-cap US stock (the S&P 500) investment. In the same 46-year period where the portfolio consisted of mainly large-cap US stocks, the return investment was higher than the broadly diverse model that included almost 30% fixed income.

While the returns over the long run are significant, many clients have a short term mind set. They expect to make millions in just a few short years, but when comparing an all-stock model to a diversified model the gap shrinks considerably making the diversified model more appealing.

Now what about risk? Risk is a bit trickier to measure. It is complicated and messy. The traditional method is to calculate the standard deviation of return of investment. For many clients is does not mean anything. Some may know that a higher deviation is preferred, but beyond that it means nothing. They only way to make the number useful is by comparison.


Closing the Loophole on Family Limited Partnership

In the past few decades, estate planners have found ways to reduce the amount of taxes paid when transferring marketable assets into trusts. The estate planners have used entities such as family limited partnerships (FLP) or family limited liability companies (FLLC). The marketable assets are held within the FLP or FLLC and then transferred to trusts for the taxpayer’s children. This in essence discounts the marketability of the gifts by 25% to 40%.

Since the IRS is not getting what they deem their fair share, this strategy has been labeled as abusive. With no effective legislation to control the use of the FLP and FLLC, the Treasury has proposed regulations aimed at curbing these transfers. While the IRS has recently conceded that there should be some discount applicable to the transfer of the family entity, they argue over the size of the discount.

These regulations have been expected over the last few years, and are getting closer to being finalized, many advisors are recommending that the transfers of those that may be affected by the change get done early before the rules become final.

While the IRS hopes the new regulations will disallow the discounts on value for FLPs and similar entities from being controlled by a single family or members of a single family with a small number of outsiders added for the purpose of avoiding Section 2704, the taxpayers that this will effect are hoping that is will not be retroactive.

The Treasury has allowed a generous window to provide the opportunities for families to use the entities until the end of the year. There is a 90-day comment period with comments due by November 2, 2016 and a hearing scheduled for December 1, 2016. The final regulations will not take effect until the end of December giving advisors time to set up an FLP or FLLC and get the benefits of the discounts like they would today. The window is closing and now is the time to take advantage of the opportunity.


Increasing Productivity

Everyone is busy. Some of us seem busier than others, but there may be a way to help increase your productivity. Everyday there is more “to-dos” thrown our way that we have to manage while still getting to everything else. So how do you manage everything there is to do in only the short 24 hours we are given. The answer is not more hours, but using those hours more effectively. This does not require you to work more hours or give up family time, it just requires you to find small ways to increase your productivity in the hours you already work.

Tip 1: It is okay to say “no”

I know in the world where “yes” is king, it is hard to utter the two letters that make people gasp in horror, but it is a word that needs to be uttered more often. Don’t be afraid to say “no” in a
yes” world.

So how do you say “no” when someone asks you to do something. First, evaluate the situation or task. Ask yourself, “Am I the right person,” “Can someone else do this task instead,” “Do the task even need to be done?” Many of us are people pleasers and “no” is a hard thing to say, but it has to be done. Even when “no” is not feasible to say (everyone has bosses who ask us to do the impossible), know your goals for both your business and personal life, and use “no” when it I most valuable to you.

Tip 2: Stay Organized

Life is complicated and messy. Juggling all the commitments take either more than two arms to keep the balls in the air or a very sophisticated reminder system. This is where a good calendar system comes into play. Outlook, Google Calendar, etc. are calendars that will sync to computers, phones, and tablets. Schedule everything that is important, including doctor appointments, personal obligations, etc. You may even need to schedule work time before a deadline to make sure you have enough time to commit to the task.

Set up reminders. Many calendars allow you to set us recurring reminders to events that need to be set weekly, monthly, semi-yearly, yearly, etc. This can be helpful for birthdays, anniversaries, doctor appointments, or anything you need a reminder for. Many of the calendars also have color coding for the reminders. This will help you organize the tasks in to categories, and even critical events.

Tip 3: Take Breaks

There are times during the day when you are less productive than other. In those times, take a break, breathe, and regroup. When you are rested and refreshed you are more productive and can think clearly. Find the time when your productivity slips and use that time to watch a silly movie, take a nap, spend time with your family, or just take a brain break. It will boost your productivity and all your brain to recharge. Who knows you may even come up with a few more things you need to do.