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by Tim Maurer, Director of Advisor Development at the BAM Alliance, 11/27/2018
The giving season is underway, with the holidays and year-end bearing down on us. So how can we transform one of the more stressful, and sometimes guilt-ridden, elements of the season into something more life-giving?
Whether you’re giving to a family member, a friend or a cause, please consider the following four directives as a guide to happy giving:
1) Give out of impulsion, not compulsion. Compulsion to give can arise from the mountain of expectations, perceived or otherwise, heaped upon us at this time of year. (Those expectations are more often self-imposed, by the way.) Impulsion, on the other hand, comes from within. Give because you want to, not because you have to. And don’t give if you don’t want to.
2) Plan your giving. Just because you’re giving from impulsion doesn’t require that you wait for an epiphany to direct you. Sit down and decide who or what organizations are on this year’s list, and how much you plan to spend. This will help ensure that you are not going to suffer in 2017 for your over-zealous, underfunded generosity in 2016. Stick to your budget.
3) Give creatively. What you give someone and how you give it tells him or her more than the mere fact that you gave. You could give your Goth-inspired nephew a Visa gift card that he can spend on anything. Or, you could target his love of music with an iTunes gift card. Or, you could give him Jack White’s “Ultra LP” on vinyl—it plays from the inside out and has a locked groove on side A. And it also shows that you were paying attention enough to know that he has a record player and would probably like that kind of music. Creativity increases the value of your gift.
4) Give participatively. Yes, I know “participatively” isn’t a word, but perhaps it should be. I encourage you to actively participate in your giving, physically as well as fiscally. Especially when it comes to charitable giving. You can write a check, have a positive impact and feel good about it. But you can also get involved, personally interacting with those receiving your financial gifts. These acts of giving can be life-changing, for the giver and the recipient, and this isn’t simply anecdotal advice. Studies back it up, too: “[S]ocial connection helps turn generous behavior into positive feelings on the part of the donor.”
That ever-popular song says this is the most wonderful time of the year. And while it can be, it’s also one of the most stressful times for far too many. Reframing how we view and practice giving can help transform this central element of the holidays from a burden into a blessing.
A version of this commentary originally appeared December 5, 2014 on Forbes.com
By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by featured authors are their own and may not accurately reflect those of JDH Wealth Management or the BAM ALLIANCE®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. © 2018, The BAM ALLIANCE®
by Sue Stevens, Wealth Advisor, Buckingham Strategic Wealth
The advantages of a college education are numerous: potentially higher income levels over a lifetime, learning about subjects that can help in finding a job or meeting people that may help you throughout your life. But the costs can be intimidating. The most important step is just starting to save something. Once you’ve crossed that hurdle, you need to figure out where to put your savings. There are lots of college investment vehicles, so let’s take a closer look at what some of the most popular offer.
529 College Savings Plans
Perhaps the most commonly used type of college savings vehicle is the 529 College Savings Plan. These plans are typically sponsored by individual states or financial institutions. No matter which plan you invest in, your child can use that money to attend college anywhere in the country. You gift money to these plans and as long as your child uses the money for “qualified education purposes,” the earnings are tax-free. See the chart at the end of this article for what qualifies as an expense.
You can gift up to $15,000 (2018) per person each year. This is known as the “annual exclusion” amount for gift tax purposes. There is a special exception for 529 plans that allows you to contribute up to five times the annual exclusion, or up to $75,000 (2018) per child, in any one year. Just keep in mind that you’ve then used up the annual exclusion for that five year period.
If your child doesn’t use all the money in his or her 529 plan, you can transfer it to another “qualified beneficiary’s” plan. Qualified beneficiaries would include siblings, parents (or ancestors of either), nieces or nephews, aunts or uncles, first cousins, sons-in-law, daughters-in- law, fathers-in-law, mothers-in-law, brothers-in-law, sisters-in-law and spouses of any relatives previously listed.
Note: The ability to use 529 Savings Plan money for another beneficiary is a unique feature that is not available when you use college savings vehicles like UGMA/UTMA accounts. Those accounts are strictly for the named beneficiary.
Parents (or owners) maintain control of the assets in a 529 plan until distributed and the assets are factored into the financial aid formulas at a more advantageous rate.
There are, however, some disadvantages to 529 college savings plans:
- You are limited to changing investments twice a year.
- Although the number and quality of investment choices within 529 plans has improved, you are limited to the options offered by your chosen plan.
- Pay attention to the costs of the Sometimes costs can be higher than you would find in alternative types of investments.
- Any assets not used for qualified education expenses will subject the earnings in the plan to income tax and a 10% You can avoid this by “rolling over” the plan to another qualified beneficiary.
- In some cases, especially with high net worth families, the annual gift tax exclusion may be better used in another way. For example, tuition can be paid directly to the school and not count toward the gift tax. If a Family Trust has been established, you may want to use your annual gift tax exclusion to fund the Family Trust.
But if the advantages outweigh the disadvantages for you, how do you choose among all the possible 529 College Savings plans available? The most important factors to consider are:
State Tax Advantages:
Many states offer tax deductions for residents investing in their state’s 529 plan. Some states also offer generous matches for first time enrollment in their plans. This may serve as an attractive incentive, but you can’t ignore other factors, such as fees and investment choices, especially when the tax advantage is relatively small.
Note: Since the Tax Cuts and Jobs Act of 2017, states are now scrambling to rewrite their own rules about what qualifies for a tax deduction. Withdrawing money for private K-12 qualified expenses may have unintended consequences like being required to repay prior state deductions or pay tax on investment gains. Every state is different, so you’ll need to do a little research to learn more. (Read http://time.com/money/5093099/529-plans-k12-expenses-tax-bill/.)
Investment Choice:
Having the “right” investment alternatives in the plan is critical. Especially in volatile markets, you need to have investment options that give you confidence. Many plans have added fixed income choices that should help do just that.
Fees and Expenses:
Not only do you pay a fee to the managers of the 529 plan, but you also pay a fee for the individual mutual funds the plan invests in. Both of these costs need to be accounted for when comparing the total expenses of various 529 plans. You do not want to make the mistake of choosing a plan with a low management fee, only to find out the individual funds in it have very high expense ratios or vice-versa.
The Tax Cuts and Jobs Act of 2017 expands how you can use 529 College Savings Plans assets. Now you can also take up to $10,000 a year to apply to private K-12 qualified education expenses. But this brings with it some additional considerations:
- How will that affect the state tax deduction you took when you made the contribution? Will you have to pay part of that back?
- Should you invest the money for K-12 differently because you have less time for the money to compound?
- If you take out money for K-12, will you derail the growth you were planning on to pay for college expenses?
- Will having the money available for K-12 change the financial aid calculations for what parents have to contribute for private school?
Alternative College Savings Vehicles
Not everyone will choose to use a 529 College Savings Plan, so let’s take a look at other savings alternatives:
UGMA/UTMA (Uniform Gifts to Minors Act/Uniform Transfers to Minors Act):
A UGMA/UTMA account is probably the most common type of investment account for a child other than a 529 plan. The appeal is that you can invest in anything–stocks, bonds, CDs, mutual funds–at just about any brokerage or bank. The money has to be used for the benefit of the child and can’t be used for normal parental obligations. At age 18 or 21, depending on state law, the money belongs to the child and can be used for any purpose. This type of account is a disadvantage for financial aid as it is counted as the child’s asset and is subject to a higher percentage in the financial aid formula.
Note: Investment income earned above $2,100 is subject to “kiddie tax” rules. With the new tax law, instead of being subject to parents’ rates, this income is now subject to potentially higher trust rates.
Coverdell Education Savings Account (ESA):
Coverdell accounts allow you to contribute $2,000 a year from all sources that can be used for elementary and secondary school expenses as well as qualified college costs. To be eligible to contribute, your income can’t be over $110,000 (single) or $220,000 (married filing joint). Beneficiaries must be under age 18 when the account is established. Any income earned on these assets is not taxed federally. They offer the ability to invest in just about anything–like a UGMA/UTMA. They are counted as a parent’s asset in the financial aid formula.
Traditional Brokerage Account:
Some parents choose to forgo the tax advantages of other types of college savings accounts so that they maintain control of the assets. For example, some parents will fund a 529 plan to cover the cost of four years of public college. To the extent the child wants to go to a more expensive school, parents pay that portion of the cost out of savings in their own names.
U.S. Savings Bonds:
There are limited advantages for college savings with U.S. Savings Bonds. To get the tax savings in 2017, your income must be less than $93,150 (single) or $147,250 (married filing joint), you must be over age 24 and the money must be used for tuition and fees. There is a $10,000 maximum annual purchase for electronic I-Bonds and EE-Bonds ($15,000 if you purchase a $5,000 paper I-Bond with your tax refund).
IRA:
Typically an IRA holds assets earmarked for retirement. But some people choose to use the money for college costs. You can avoid the 10% penalty if you use the money for college costs from a traditional IRA. You can withdraw contributions from a Roth IRA (but not earnings) without penalty. Overall, we would tend to recommend using these plans for retirement and not for college funding.
529 Prepaid Tuition Plan:
529 Savings Plans (as described previously) are not the only kind of 529 plan. There are also Prepaid Tuition Plans, although these plans have had a number of problems. Prepaid tuition plans were designed to lock in the future cost of tuition, but as state governments have hit their own financial difficulties, these plans may not be able to deliver on those promises. In general, we would not recommend investing in this type of plan.
2503c and Crummy Trusts:
High net worth investors may have additional factors to consider when thinking about funding college for their children. There are a couple types of trusts, 2503c and Crummy, where money can be put aside for future uses including college. One of the more important considerations in these situations is where the annual gift tax exclusion amount can best be used. There are legal costs associated with setting up these trusts, so they are not for everyone.
Once you’ve decided to start putting aside money for your children’s education and formulated a strategy to do so, choose the college savings tool that makes the most sense for your family and your unique financial circumstances. The costs associated with a college (or a private K-12) education can add up quickly, so be sure that the investment vehicle you select is the right one for you.
Download this table as a PDF »
The Bucket Brigade
Prior to the epic Wine Country fires in Northern California this past October, very few people, and I mean very few, even knew of anyone who lost their home to a fire, let alone lost a home themselves. Now with over 5,000 homes destroyed, just about everyone in the North Bay either lost a home or knows someone who did.
As the fires began to come under control, those of us who lost our homes turned our attention to the fine print of our homeowner’s insurance policies. Unfortunately, we were in for a shock: most of us were underinsured.
For those of you who did not lose a home, now is the time to scrutinize your homeowner coverage to see what types of coverage (or as I call them, “Buckets of Money”) you have. Odds are very high that you are underinsured unless you have been proactive with your insurance agent. Here is a quick rundown on the various “Buckets of Money” that can exist in your homeowner’s policy:
The Buckets
The Dwelling A Building Coverage Bucket
The Dwelling A Building Coverage Bucket is the maximum amount you will be paid on a total loss of the structure. Divide the coverage by your total square footage to get a coverage per square foot. For example, if you have a 2000 square foot (SF) home, and your Dwelling A coverage is $400,000, you have $200/SF of coverage. Then contact a builder to see if you can actually rebuild for that amount of coverage.
For those who had lived in their homes for a few decades but had not been in contact with their insurance agent about keeping the coverages current, we generally found ourselves woefully underinsured, often to the tune of hundreds of thousands of dollars.
The Replacement Coverage Bucket
The Replacement Coverage Bucket provides additional coverage over and above your Dwelling A coverage for either rebuilding your existing home or purchasing another home. Replacement coverage is generally based as a percentage of Dwelling A coverage. I have seen these figures range from 10% up to 100%, or higher. For example, if you have 50% replacement coverage, you would have another $200,000 of coverage to spend on rebuilding or replacing your home. This would bring you up to a total of $600,000 of coverage ($400,000 plus the extra $200,000) or $300/SF for a 2000 SF home.
Debris Removal Bucket
Someone needs to clean up your lot after your home has burnt down. This bucket of money will usually be a percentage of your Dwelling A coverage, like 5% to 10%.
The Building Code Upgrades Bucket
The Building Code Upgrades Bucket covers the cost of bringing the replacement home up to current building codes. In Sonoma County, our building code now requires sprinklers in new home construction. The cost of installing those sprinklers will be a building code upgrade.
The Personal Property (PP) Bucket
The Personal Property (PP) Bucket covers the replacement of your home contents. Imagine you were to pick up the home, turn it upside down and shake it. Everything that fell out would be considered PP. This is generally a percentage of your Dwelling A coverage.
There are two components to the PP coverage: Actual cash value (ACV) and replacement cost value (RCV). ACV is the RCV less depreciation based on age and condition. RCV is the value the carrier will pay you once you finally buy the replacement item at the store. For example, assume you own a shirt you bought eight years ago. It or something comparable currently retails at $100. Further, assume the shirt depreciates or loses 5% value every year. After eight years, a total of 40% (5% x eight years) or $40 ($100 x 40%) has been lost to depreciation. The ACV would be $60 and the RCV would be $100.
The insurance carrier would pay you $60 now for the ACV, and then pay you the remaining $40 once you have bought a replacement shirt.
The Additional Living Expenses (ALEs) Bucket
The Additional Living Expenses (ALEs) Bucket pays temporary living expenses, such as rent, while you are displaced, waiting to either rebuild your home or buy a replacement home. Some policies have a term of how long ALEs will be paid out, such as 24 months.
There can be some unique coverages in one’s policy not discussed in this article. Insurance policies are not created equally. Every insurance carrier has different contractual terms, so it is important to read through the policy to understand what you are paying for.
The Bottom Line
The bottom line is this: To completely lose your home while underinsured can be a major game changer, and it can happen to anyone. Contact your insurance agent immediately to review your coverages, and use this article as a guide.
This survey originally appeared in the North Bay Business Journal, August 21, 2017.
1. When it comes to managing client portfolios, what are the three to five key economic signs you watch most?
Investors try to make their investment decisions based on something they read or saw in the newspaper, on TV or on the internet. That’s all noise. When investors start paying attention to “economic signs” such as the new U.S. President, tense relations with foreign powers, technology trends, hot stock tips, etc., mistakes are made. Do we live in volatile times? Of course. Investment worries and overconfidence are a constant. Both only harm your portfolio, long-term. We constantly remind investors: When you have the money, invest it. When you need the money, take it out. Worry less about the noise. Start focusing on the game plan. How much have you saved for retirement? Can you save more? Are you taking too much risk or not enough risk with your investments? Are you overspending each year? Instead of focusing on economic trends, these are the questions that will help people achieve their goals long term.
We advise to stay disciplined and diversified, keep costs low and save as much as you can. Ignore the noise. The world economy has always gone through periods of growth, downturns and uncertainty, and now isn’t any different. We continually help our clients focus on what matters.
2. What mistakes do you see individual investors making in the current financial climate?
We are seeing two extremes. On one side, overconfidence is promoting blind optimism. On the other side, outright pessimism is driving premature exit of the markets. Neither helps you in the long haul. Emotional decisions have no place in investing, yet emotional decisions are made all the time. To avoid emotion-driven investing, a written investment policy statement (IPS) should be in place. The IPS should be a roadmap of where the investor is headed, always there to reference. Too many investors skate to where the puck was, instead of skating to where puck is going. When one asset class has big gains at year-end, many investors see it as an opportunity to jump into that asset class. Unfortunately, good returns in one asset class at year-end don’t guarantee good returns for the following year. When investors make these reactionary decisions, they are, in essence, buying high and selling low. While everyone agrees that they want to buy low and sell high, emotional reactions often enter into the investing process without an investor recognizing it.
3. What trends are you anticipating will most impact investors over the next year?
The biggest change is within the retirement plan space. In the past, if advisors recommended a mutual fund that had a higher expense ratio, they could get paid more without disclosing this to their clients. While our firm has always taken on a fiduciary role to our clients, this has not always been the industry standard. The Department of Labor’s recent changes to retirement plan management, now require advisors to take on a fiduciary role to their clients. This is a great thing for investors and is something that should have been required decades ago. The new changes allow retirement plan participants to be more confident in fee transparency. They aren’t being encouraged to invest in one thing over the other to line their advisor’s pockets. If only all advisors would take on the fiduciary role to their individual clients and not just retirement plan clients. Hopefully this next step will be seen in the next few decades.
4. Is there anything you would like to add?
While hope springs eternal, the data overwhelmingly shows that individual investors make less than stellar decisions. Greed and fear take turns rearing their ugly heads, and investors end up buying high and selling low. The average investor barely keeps up with annual inflation. It is time for investors to learn how to become more successful long-term. A successful retirement isn’t built by focusing on market timing, trends, and other distractions. Keep spending down, put more money into 401(k) and IRA accounts, diversify, ignore the noise, and don’t lose focus on the end goal: providing for a secure retirement.
by Tim Maurer, Director of Personal Finance
I think we’ve been looking at Social Security retirement benefits all wrong. In the long-running debate about when to take Social Security — as early as age 62 or as late as age 70 — the focus has been on timing your claim to get the most money, in total, out of the social safety net.
This is a circular argument that will never be fully decided until the Social Security recipient in question dies. So let’s shift the focus from the question “How do we get the most out of Social Security?” to “How do we get Social Security when we need it most?”
Simply put, you’re more likely to run out of money at the end of retirement than at the beginning.
Behavioral science explains why we are all so prone to preferring money today over tomorrow. It’s called “hyperbolic discounting,” and behavioral economists plead that we meaningfully overvalue money now, unfairly discounting money later.
But the risk of making less money in your early retirement years is dwarfed in comparison to the risks of longevity and inflation in the latter stages of retirement. And the probability you will outlive your money meaningfully decreases if you wait to take Social Security.
Prove it!
Let me show you through an example that, while hypothetical, is no doubt close to reality for many.
We’ll consider three couples, the Earlies, the Fullers and the Laters. Each couple:
- Retires with $1 million in tax-deferred retirement savings.
- Has an identical 50 percent equity, 50 percent fixed-income portfolio.
- Has a pretax retirement income need of $90,000 per year.
- Will supplement their Social Security income with the retirement savings necessary to fulfill their income needs.
- Includes one household member who will receive the maximum in Social Security benefits and one who will receive 50 percent of the maximum.
The only difference is that the Earlies retire and begin taking Social Security retirement benefits at 62, the Fullers at 67 and the Laters at 70.
This hypothetical case study is designed to result in an academic probability that each couple will not run out of money, and applies more than 3,000 iterations of randomized historical market returns for the respective retirees’ portfolio allocations.
Then, we show the likelihood that each couple will have at least one dollar left in retirement savings at the end of four different time periods — 20, 25, 30 and 35 years into retirement.
Therefore, if you see a result of 47 percent in the 25-year column of the table below, it means the couple represented still had at least one dollar left in their retirement savings at the end of that period in nearly half of the thousands of iterations run. In other words, that couple had a 47 percent chance of not running out of money 25 years into retirement. Statistically, a probability of 85 percent or better is favorable.
The findings
What did we find? If you die early enough — within 20 years of your retirement date — you have a reasonably good chance to outlive your money regardless of when you take Social Security. The Earlies hit the golf course fully five years before the Fullers, but it’s not clear that they’ve suffered for it at the 20-year mark.
At 25 years, however, there’s a greater than 50 percent chance the Earlies have run out of money and now must ask their kids to pay their greens fees. At 30 years their probability of solvency has dropped to 30 percent, and at 35 years they’re likely relying on their reduced Social Security benefit for all of their income.
Why do the Earlies fail? Because in order to meet their income needs with a reduced Social Security benefit, they put too much pressure on their portfolio to pick up the tab. They were forced to take an effective withdrawal rate of 5.62 percent in their first year of retirement.
How do the Fullers look? Pretty good. Buoyed by a Full Retirement Age (FRA) Social Security benefit and beginning with a reasonable 4 percent effective rate of withdrawal from their portfolio, at 20 and 25 years into retirement, they’re in the 90 percent-plus range. But if they plan on seeing their faces on a Smucker’s jar, their probability of success declines to 67 percent when they’re 35 years into retirement.
As you’d guess, the Laters are solid. Because of their increased Social Security benefit, they require only a 3.26 percent portfolio withdrawal rate in year one. Statistically, they ride off into the sunset and should have the funds to test the boundaries of science in their pursuit of longevity.
If you suspect you’ll die early — and have lineal or medical justification for that belief — you might justify taking Social Security as early as you can (although a lesser-earning spouse could still benefit from your higher benefit when you’re gone). And please forgive the inherent insensitivity in this analysis, which presumes the Earlies, Fullers and Laters all have a choice in taking their benefits at various points in time. Many retirees don’t, and if you need to retire and take early Social Security for any number of valid reasons, of course you should do just that.
But if you hope to have a longer retirement — 30 or 35 years, especially — your chances of not outliving your retirement savings improve greatly if you delay Social Security. Waiting is like purchasing longevity and inflation insurance for what will hopefully be a long and prosperous retirement.
This commentary originally appeared January 1 on CNBC.com
By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by featured authors are their own and may not accurately reflect those of JDH Wealth Management. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2017, JDH Wealth Management, LLC
In some alternate universe, there may be markets where nobody ever experiences any loss and every investment just keeps growing. In our world, we know better. While markets are expected to climb over time, periodic downturns happen. When they do, they can leave you feeling left out in the cold. That’s why it pays to look for opportunities to leverage inclement markets through year-round tax-loss harvesting.
Tax-Loss Harvesting: An Overview
The concept of tax-loss harvesting is relatively simple. I’ll go into more detail in a moment, but the general goal is two-fold:
1. Realize a loss for tax purposes. When appropriate, sell assets at a loss and use the losses to offset taxable gains on other investments.
2. Keep assets in the market according to your investment plan. Buy a similar holding (one that’s not “substantially identical”) until you can reinvest those assets as originally intended without running afoul of the IRS’ “wash sale rule.”
In other words, tax-loss harvesting is not about abandoning your carefully crafted asset allocation by panic-selling a losing holding. It’s about achieving an available tax break while sticking to your disciplined investment strategy throughout.
What Is the Wash Sale Rule?
There are often several mutual funds and ETFs that make good substitutes for one another from a practical perspective. But when tax-loss harvesting, you cannot claim a deductible loss on a sale if you (or your spouse, for joint filers) sell a security at a loss and then buy the same security or a “substantially identical” one within 30 calendar days before or after the transaction. If you violate either of these conditions, the IRS’ wash sale rule will typically disallow the loss for current income tax purposes. Thus, it’s important to use caution in choosing “similar” funds.
A Tax-Loss Harvesting Illustration
It might help to see an illustration. Assume you purchase a fund for $10,000. Two months later, it’s trading at $7,000. You decide to harvest the short-term, $3,000 loss (short-term because the fund was held less than a year). With a 35 percent ordinary federal income tax rate, this can result in a $1,050 tax savings.
At the same time, you take the $7,000 from the sale and invest it in a similar holding. After 31 days, you can reinvest it back where it came from. As long as the market eventually recovers and the fund returns to the level at which you originally bought it, you’ve effectively lost nothing while gaining a $1,050 tax break.
There Is No “Tax-Loss Harvesting Season”
Maybe it’s because tax-loss harvesting is associated with tax planning, but many investors (and even some advisors) treat it as a strictly year-end task.
This is a mistake. Losses can occur any time of the year, and vanish by year-end. On the one hand that’s good, because it means your investments are no worse for the wear (if you remained invested). But if you skip the opportunity to also tax-loss harvest when the (hopefully) temporary losses occur, you miss the chance to lower your tax bill while you’re at it.
How It Works (and How It Doesn’t)
Now that you understand the basics, let’s cover some of the finer points. In a December 2015 MarketWatch article, Robert Powell shares BAM ALLIANCE Director of Investment Strategy Kevin Grogan’s advice: “Most investors should do tax-loss harvesting as long as the loss is large enough.”
But what is “large enough”? As I’ll explain in a moment, tax-loss harvesting opportunities are best considered on a case-by-case basis, but in the aforementioned article, Grogan offers some general starting points: For stocks, start with at least a $5,000 or 5 percent loss and for bonds start with at least a $5,000 or 2 percent loss.
There are additional factors to help you decide when a loss seems ripe for harvesting.
Transaction costs: Clearly, it won’t make sense to harvest a tax loss if the trading costs are going to erase the benefits. For example, say your tax break would be $100. You’re better off staying put if it’s going to cost you $80 to complete the trades involved (selling the holding, reinvesting in a similar one, and then ultimately repurchasing the initial investment).
Asset location: You cannot harvest losses from holdings that are in tax-sheltered accounts (such as IRAs or retirement plans). Because realized gains in these accounts are not taxable to begin with, they cannot be offset with any losses.
Market uncertainty: There can be times when the market is so extraordinarily volatile that you are better off just remaining seated. Remember, your goal for tax-loss harvesting is to sell at a loss AND invest in a temporary replacement holding that is similar (but not “substantially identical”). You then typically want to swap back to your original holding after 31 days. This ensures your portfolio remains true to your greater wealth plans.
When it’s time to complete a swap, it works best when the price of your replacement holding is the same or lower than the price you paid for it. Why is that so? Taxes. When you sell the replacement holding, if it’s gone up in value, you’ll incur short-term taxable gains, which could cost you more than the loss harvesting will save you.
Because highly volatile assets often incur large gains or losses over very short periods, tax-loss harvesting should be carefully executed if the market is highly unstable. For example, some advisors employed tax-loss harvesting where appropriate following the passage of the June 2016 Brexit referendum. Depending on your individual holdings and your ability to focus on careful execution, it might or might not have made sense for you to do the same.
Why Are Short-Term Losses More Valuable?
In our earlier illustration, we mentioned harvesting a short-term loss. Why would that matter? Again: taxes. Short-term losses are first deducted against short-term gains that are otherwise taxed at higher ordinary income tax rates. Long-term losses are first deducted against long-term gains that are otherwise taxed at lower capital gains rates. Thus, short-term losses are considered more valuable to your tax management efforts, especially if you are in a higher tax bracket.
The Takeaway
Given that periodic market losses are inevitable and inherent to investing, I’d recommend making the most of them when they occur. So consider employing year-round tax-loss harvesting as part of your overall wealth strategy – while also ensuring that the tax-loss harvesting “tail” doesn’t inappropriately wag the portfolio management “dog.”
By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2016, The BAM ALLIANCE
As a “Chicagoan to the core,” we’re sure he had a wonderful day yesterday, the day the Cubs won the World Series.
By Carl Richards
Some of us really like the status quo. Even when we have a better alternative, many of us are content to keep on doing what we’re doing.
I think about this every time my wife and I swap cars. Depending on who is running what errands that day, we’ll switch between our big car and our little car.
Every time we change, my wife has this habit. It’s a very good habit, but it’s the exact opposite of what I do. Before she backs out of the garage, she adjusts everything. The seat slides closer and the mirrors get moved. She even fiddles with the height of the seatbelt. Only then does she head down the road.
I, on the other hand, just get into the car and slide back the seat (because I wouldn’t fit otherwise). But everything else I leave alone. Things are great — until I try to look in any of the mirrors. Because the mirrors are still where my wife left them, I can only see out of them if I slouch down and move back and forth. Read more
Tim was recently featured on The BAM Alliance website with an article he wrote about how we view the markets. The article – What Does Your Glass Look Like? – reminds readers that we shouldn’t listen only to the bad news the media sells investors. There is plenty of good news, too. And if you want to keep your sanity, it will do you good to have a positive outlook. Read more
Frank W. Abagnale is one of the world’s most respected authorities on forgery, embezzlement and secure documents. For over 40 years he has worked with, advised and consulted with hundreds of financial institutions, corporations and government agencies around the world.
Mr. Abagnale’s rare blend of knowledge and expertise began more than 45 years ago when he was known as one of the world’s most famous confidence men. This was depicted most graphically in his best-selling book, Catch Me If You Can, a film of which was also made, directed by Steven Spielberg with Leonardo DiCaprio and Tom Hanks. A Broadway musical of the same title was also created and in April 2011 opened on Broadway and won a Tony Award.
While at the most recent BAM ALLIANCE National Conference, JDH Wealth Management had the opportunity to hear Frank speak. He shared his amazing life story as well as a few tips on combating fraud…
SHRED EVERYTHING: Anything that has personal information should be shredded. Use a micro-cut shredder for sensitive documents. It takes only about an hour to reassemble documents from regular shredders. Documents from cross shredders can be put back together in about 10 hours. But documents from micro-shredders are virtually impossible to put back together.
DON’T PLUG IN AN UNKNOWN FLASH DRIVE: If you find a flash drive hanging around and you don’t know where it came from, don’t plug it into a computer. Abagnale gives speeches to companies all the time, and he likes to drop flash drives in the parking lot with a label that says, “Confidential.” Someone always plugs it in. The flash drive could have a virus in it that enables someone to steal information and commit fraud.
BE CAREFUL WHAT YOU SHARE ON FACEBOOK: If a hacker gets onto your Facebook profile, they can get a lot of information. Make it a little more difficult by not giving them your birthday, where you live, and other sensitive information.
USE A CREDIT MONITORING SERVICE: Sign up for a credit monitoring service that tracks all three credit bureaus and notifies you in real time.
At JDH, security of our clients’ information is a high priority. We do many things to ensure that your information is safe with us. We also help educate our clients on things that they can be doing to protect themselves at home.