MAKING CENTS: Investors need to consider tax ramifications

After factoring in federal income and capital gains taxes, the alternative minimum tax, and potential state and local taxes, your investments’ returns in any given year may be reduced by 40 percent or more.
 

Here are five ways to potentially lower your tax bill.

Tax-deferred accounts include employer-sponsored retirement accounts such as traditional

image source: ncpolicywatch.com 'Lowering Taxes'

401(k)s and 403(b) plans, individual retirement accounts (IRAs) and annuities. Investment earnings compound tax-deferred until withdrawal, typically in retirement.

Contributions to non-qualified annuities, Roth IRAs and Roth-style employer-sponsored savings plans, are not tax-deductible. Earnings that accumulate in Roth accounts can be withdrawn tax-free if you have had the account for at least five years and meet the requirements for a qualified distribution.

Withdrawals from these accounts prior to age 59½ may be subject to a 10 percent federal penalty.

Interest on U.S. government  issues is subject to federal taxes but is exempt from state taxes. Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in state may be free of state and local taxes as well.

Tax-managed or tax-efficient investment accounts are managed in ways that can help reduce their taxable distributions. Investment managers can potentially minimize portfolio turnover, invest in stocks that do not pay dividends and selectively sell stocks at a loss to counterbalance taxable gains elsewhere in the portfolio.

You may also be able to use losses within your investment portfolio to help offset realized gains. If your losses exceed your gains, you can offset up to $3,000 per year of the difference against ordinary income. Any remainder can be carried forward to offset capital gains or income in future years.

Maintain records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate how much you paid for the shares you own and choose the most preferential tax treatment for shares you sell. While federal laws now mandate that financial companies track and report your tax basis, there are still holdings in most portfolios that predate these laws, and you’ll need to do some digging.

This information is general in nature. Always consult a qualified tax adviser for information as to how taxes may affect your particular situation.

Originally posted on PatriotLedger.com 7/20/13

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

A Different, but Happy 4th

Guest Post
- by Tom Fletcher

The fourth of July has always been a special time for our family.  In addition to celebrating our great nation’s independence, we live in close proximity to the Esplanade Hatch Shell in Boston.  From our roof deck we can enjoy the music of the Boston Pops Orchestra as they perform their annual Independence Day concert, followed by some serious fireworks.   

image source: rentenna.com

In light of the Boston Marathon bombings in April and the two suspects apparent interest in targeting the July 4^th celebration, security was to say the least, very heavy.  Just on our street alone, using barricades the city closed it to automobile traffic on July 3^rd. A diagonally parked dump truck filled with sand blocked off one end of the street, while barricades closed the other.   Other nearby streets had big snowplows instead of large dump trucks. Throw in metal detectors, squad cars, dive teams, the National Guard, helicopters, and the occasional bomb squad, etc., it makes for a pretty expensive proposition.  I seriously can’t imagine what the city must have spent on the event.

Despite all the hoopla however, we really had a great 4^th.  As is our tradition, we proudly hung our 70 year old American flag a few days before the dump truck arrived.  The weather was hot but cloudless.  My son’s lemonade stand netted $70.  Children rode their bikes on the closed off streets. The grilled hamburgers and hot dogs never tasted better.  As the evening wore on and the music started, the area roof decks came alive with young and old eagerly anticipating the fireworks, which thankfully did not disappoint.  Can’t wait till next year!

Learn about Tom Fletcher 
 

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

MAKING CENTS: Stress test your forecast for retirement

With an eye toward summer vacation, this is a good time of year to think about how you would spend your time if every day was vacation.

For many, the goal of not working some day is still alive. Retiring isn’t what it used to be, however.

Today, retirees want a lifestyle that may be more active than their lifestyle while working, and that scares them. Most are keenly aware that the lifestyle costs when you are done working may be even higher than they were while you were working.

Forecasting is the first step of assessing the consequences of working less and spending more. It starts with your cost of living as you know it today. Be careful to not underestimate this amount. Your ultimate “proof” of the number is to look at the total amount that leaves your checkbook every month. Count your ATM withdrawals in that amount you will call your total cost of living.

Next, add the wish-list items. Quantify the cost of your lifestyle while not working. To make this data a forecast, simply apply a net rate of return on assets and investments and choose an inflation rate to grow your cost of living. It’s fairly simple math, but here are some ways that many forecasts get thrown off track:

The first way is to make incorrect assumptions. Just like our federal government now imposes stress tests on banks, you ought to perform a stress test on your personal financial well-being. You should test your forecast the government does banks -- with a higher rate of return and a higher inflation rate. Do not wait for any of these possibilities to come true. It is best if you know in advance the consequences from your stress test activities, should those situations arise during your lifetime.

Add in a few of life’s predictable obstacles. Matters such as healthcare emergencies, loss of employment or a child needing assistance will throw off the most accurate forecast. For the healthcare part, stress test your forecast by factoring in the material cost of long-term care insurance and the consequences of an uninsured long-term illness. If the former looks OK, consider making the purchase. If not, consider alternative forms of protection including at-home family care.

Understand what you need from your assets. Many people are walking around with a collection of investments and following the markets as if their life depended on it. Some are taking more risk than is needed and some aren’t taking enough risk to generate the desired rate of return. Construct a portfolio that will attempt to find as little volatility as possible within the confines of your desired rate of return.

Don’t forget taxes. With rates higher than in past years, pay attention to the location of your assets and the timing of your buys and sells. A little extra attention to tax matters should be beneficial in today’s world.

 John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

MAKING CENTS: Beneficiary choices need to be reviewed

With certain assets, it doesn’t matter what your will says. Upon your passing, these assets will flow to whomever you elect as the beneficiary of each individual account. Beneficiary

image source: blog.nclife.com

elections are made for retirement accounts and insurance contracts.

Typically, these beneficiary elections are made when you establish the account. For certain retirement accounts, these elections may be old, and should be checked periodically to be certain that they still make sense given your dispositive desires for these assets.

The consequences of an improper beneficiary election may be a loss of protection for the asset, adverse income tax consequences or the asset flowing to the wrong person.

Regardless of what you thought you had, the recipient of this account is going to be determined by whatever the account custodian shows on their records as your beneficiary selection. Whether the custodian is wrong or right, their records will determine the flow of the asset.

We all know that financial institutions merge, sell, acquire and go out of business. Sometimes in these major corporate reorganizations, records are lost or destroyed. To determine with absolute certainty that your election is in fact what you want it to be, ask the custodian for written proof of what they are showing for your beneficiary elections. An actual copy of the form they have on file would be ideal. Simply calling and asking what their records show is not adequate – you need absolute confirmation of their records.

Sometimes, circumstances require a change to your prior elections. If you were young at the time of enrolling in your retirement plan, and had no spouse or children, you may have named your siblings or parents as the beneficiary of your IRA or 401K. Just because you may later marry does not automatically update the election. You would need to complete a new form naming your current beneficiary choice and file it with the custodian.

The opposite circumstance may pose an equally daunting problem. Should your marriage end through divorce, your retirement accounts will still flow to the former spouse unless you update the election. After the fact, there is little you can do about an incorrect or out of date beneficiary election.

If your primary beneficiary has predeceased you, the assets will automatically flow to the contingent beneficiary(s) chosen. Absent a contingent beneficiary being named, the asset will flow directly to your estate which would subject the asset to current income taxation as well as the drudgery of the probate process. Don’t ignore or overlook this important second layer of protection.

Sometimes an improper election can subject the asset to unnecessary risk. A named beneficiary who is disabled or insolvent at the time of your passing may subject the asset to their health care bills or other liabilities. Similarly, leaving substantial sums via a beneficiary election to a very young child may make those assets fully available to the child when reaching age 18. For most 18 year olds, knowing that this much money is waiting for them can spell disaster.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.