Financial and Tax Planning

To receive the full benefit of your investments, investment planning should be combined with tax, retirement, estate, and overall financial planning, as every investment impacts, and is impacted by, each of these areas of financial planning.  The following questions highlight several issues we consider when managing investments:

Are your investments tax-efficient? Different types of accounts (taxable, IRA\401(k), and Roth accounts) are subject to different tax treatment, while stocks and bonds are also subject to different tax treatment. Matching up the right account type with the right asset type can reduce taxes over the long term. This “asset location” strategy is often overlooked.

Are your investments generating unnecessary taxable capital gains distributions? Many mutual funds produce excessive short and long-term capital gains taxes that further harm your long-term returns. There is usually little reason to own mutual funds that produce excessive capital gains, when better choices are easily available.

Are opportunities for a Roth conversion being explored annually?  If one's marginal tax bracket in a particular year happens to be significantly lower than what the client's marginal tax rate will be in retirement, that may present an opportunity for a Roth conversion.  Roth accounts provide many benefits in retirement - no required minimum distributions, the ability to leave a tax-free account to a beneficiary, and the ability to make withdrawals from a retirement account that will not result in an increase in the amount of tax being paid on one's Social Security benefits, unlike IRA distributions.

Do you have enough saved for retirement, once your life expectancy (as well as the likelihood that you are underestimating your life expectancy) and that of your spouse is taken into account? If not, how much longer do you need to work, and how much more do you need to save?

Is your current stock-bond-cash investment allocation too risky, too conservative, or about right for your particular situation? Many investors have numerous investment accounts that are not coordinated into one “big picture”. As a result, they - and their advisor, if they have one - may not be aware of their overall investment allocation. Or the allocation may have been appropriate at one time, but may need to be adjusted at this time.

Should you roll your 401(k) or 403(b) plan to an IRA? The answer depends on several factors and also depends on whether you also own stock in your employer’s company.  One should look at the relative difference in fees between both types of accounts, whether the (somewhat) greater legal protections afforded 401(k) accounts are important, and also consider whether, if one is still working after age 70 1/2 and not a five percent owner of the company, not having to take a required minimum distribution from the 401(k) is or will be a key consideration.

If you are holding cash, are you getting the best return you can, consistent with safety? Too often, investors let cash sits in brokerage accounts, earning nothing for you but plenty for the broker, when higher paying –and safer – alternatives exist.  For example, many banks are still paying one-tenth of one percent annually in savings account interest, while 3-month T-bills are yielding close to five percent.  This difference can easily add up to thousands of dollars annually.

Should you pay off your current mortgage? This decision involves a number of factors.  Besides the psychological comfort of reducing debt, another factor may be that one is paying a higher, after-tax rate of interest on one's mortgage than what one is receiving from bonds that have a lower after-tax return than those mortgage payments.  A number of factors should be explored.

If retired, how should you be prioritizing withdrawals among your taxable, IRA and 401(k), and Roth accounts? Finding find the right balance between maximizing your long-term investment growth and minimizing your taxes should take a number of issues into account.  What is your marginal tax bracket in any particular year, relative to other years? How can you avoid the "tax torpedo" that causes more of your Social Security to become taxable? 

If still working, how should you prioritize contributions among your IRA\401(k), Roth, or taxable accounts? As with withdrawals from these accounts during retirement, your marginal tax rate, now and in the future, can be a helpful guideline.

Should you be locking in capital gains or losses on your investments, depending on your current and future marginal tax bracket? Sometimes, investors find themselves in temporarily low or zero marginal tax brackets.  This can present opportunities for long-term tax savings related to capital gains.

If you are over 59 1/2; and retired, should your IRA withdrawals be accelerated to avoid higher taxes later on in retirement? Sometimes, being in a temporarily lower marginal tax bracket can provide opportunities to pay less tax on IRA distributions by accelerating IRA withdrawals.

How should your current investment allocation take into account your present or future Social Security, pension, or other income streams? Given the bond\annuity-like nature of a pension or Social Security income stream, many investors fail to consider that their remaining portfolio allocation may need to be adjusted as a result.

If you are self-employed, should you be contributing to a SEP-IRA or to a solo 401(k)? Solo 401(k) accounts offer numerous advantages when compared to a SEP-IRA, inlcuding a catch-up contribution and higher overall contributions at lower income levels. 

Are you, or will you be, impacted by the 3.8% net investment income tax, and how can investment planning help mitigate the tax?  For higher income earners, being subject to the NIIT requires looking at options such as asset location strategies, or more tax-efficient types of investments.

Should you take a lump-sum distribution or annual payments from your pension plan?  In order to make the ideal choice, a number of factors should be considered with both options.

Do you currently own or are you considering purchasing annuities, and what are the pros and cons of doing so? Like all investments, annuities and other insurance products have pluses and minuses that should be objectively evaluated.  The lack of inflation-protection on most annuities is a major consideration that can reduce the real value of an annuity payment by 50% over 15 years.

Should you have a 529 savings plan for your children?  Many investors continue to use UTMA accounts for this purpose, without realizing the potential tax implications of doing so, as well as the negative impacts that an UTMA account cab have on the child's ability to qualify for financial aid.

If financially able to do so, should you be making Roth contributions to your working children’s retirement accounts? Making Roth contributions to a working child's Roth account may be one of the best financial planning decisions you can make for your child.

If you are considering gifting cash to one or more of your adult children, would gifting appreciated securities be a superior option?  Often, investors gift cash to their adult working children instead of exploring more tax-favored options.

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