Expertly Riding the Waves of Volatility
We have prepared this piece to reiterate what we should all know, understand, and believe if we are going to own stocks in our portfolios. We look forward to continuing to educate you to help you stay well-informed and continue to watch our financial markets closely.
Why do we invest in stocks?
Quite simply, the reason we invest in stocks is because over the last 100 years they have illustrated again and again that if you invest for the long-term that you will, on average, receive about a 10% annual average return. This 10% return is about 40-50% higher than the return from bonds and about 50-60% higher than the returns from cash over that same 100 year period. Arguably, the excess returns over bonds and cash will be higher in the low interest rate environment we have become accustomed to for some time now.
Easing the burden of paying for education
The Tax Cuts and Jobs Act of 2017 will expand the use of 529 Plans to allow savers to accumulate money and pay for education on a tax-free basis. Before we discuss the changes let’s review the basics. A 529 Savings Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. You are not required to use the 529 in your domicile state and your plan, regardless of which state is the sponsor, can be used for any college in any state. Contributions to a 529 Plan are invested and grow tax deferred. If the funds are ultimately used for education, distributions come out federally tax-free. Contributions to the plan qualify for the $15,000 annual gift tax exclusion. The Plan has to have a named donor and a designated beneficiary. The donor of a Plan retains control indefinitely and only the donor can request withdrawals and can close the account at any time. However, if the funds are used for anything other than education, the earnings portion of the account is subject to income tax plus a 10% penalty. Most plans allow for lifetime contributions of $300,000 or more.
Learn how higher income earners can contribute to a Roth IRA
ROTH IRAS ARE A POWERFUL WAY TO SAVE FOR RETIREMENT
Contributions into a Roth IRA are not tax deductible. However, the earnings in the account accumulate tax deferred, and can be distributed completely tax free after age 59½, provided 5 years have elapsed since the tax year of your first Roth contribution. Many investors who might otherwise contribute to a Roth IRA find themselves constrained by the IRS income limits which restrict their ability to contribute to a Roth IRA based on their adjusted gross income (AGI).
Retirement Planning is by far one of the most important areas of financial planning and one that we allocate a good portion of our time and resources to address. We break retirement planning up into two distinct phases:
- Accumulation Phase
- Distribution Phase
The accumulation phase is simply the phase in which you are still working and gathering assets to fund the second phase, which is the distribution phase. Clients in the distribution phase are typically either retired or semi-retired and are supplementing their pre-retirement income with distributions from their portfolios. In the last newsletter we addressed the accumulation phase. This article is part two of our two-part series on retirement planning and will address the distribution phase.
As published in the Holiday 2015 Edition of NJ Lifestyle
More often than not, when we ask a potential client what they are currently paying in investment fees, we receive one of two answers:
- I don’t know.
- I don’t pay anything.
The first answer is understandable, as the transparency of investment fees leaves a lot to be desired, and the second answer is just wrong. Fees come in various forms; including commissions, portfolio management, operating expenses, and 12-b1 fees. Although you may not see the fee, it does not mean you are not paying it.
Taxation of Investment Income
Not all investment income is taxed the same. Thanks to Congress, the federal tax code regarding your investments is constantly changing, and keeping up with these changes is important to optimize the tax efficiency of your portfolio. Remember, it’s not what you make but what you keep that counts.
The main determinants of federal investment income tax rates are your annual income and the type of investment income earned: interest income, dividend, and capital gains. Investments such as savings accounts, certificates of deposit, money markets, annuities, and taxable bonds (as opposed to municipal bonds) produce taxable interest income. This income is considered ordinary income and is taxed at an individual’s ordinary income tax rate, which ranges from 0% to 39.6%.