Real Life Resources

Your Investments: Keep Ahead Of The Game

The financial picture has changed in the past few years. By staying on top of the situation, you and your investments won’t get left behind.

Interest: A Better Way

Look at your situation in a holistic way to make sure your investment interest is working for you in today’s financial environment.

  1. Consider interest income in light of the cost of your debt: mortgages, credit cards, auto and student loans. Keep in mind that taxable interest income creates a tax liability.
  2. Today’s puny yields aren’t much of an incentive to hold high-quality bonds or CDs. Think about cashing them in to pay off your 5% mortgage loan instead. But don’t forget to build an adequate cash reserve and consider your future liquidity needs, too.

Paying Dividends

Not all dividend income is created equal.  To get the most bang for your dividend bucks, make sure you keep your assets in the right places.

  1. Qualified dividends are untaxed or taxed at 15%, depending on your income. That’s a good thing.
  2. But dividends such as distributions from REITs are taxed as ordinary income, and it’s costing you. Consider: with a 30% tax rate and a 6% annual return, 32.5% will go to the taxman over five years; a 10% return over 20 years time will cost you a whopping 50%.
  3. Consider moving the dividend-generating securities to a tax-deferred account.

Keep Capital Gains

Uncle Sam will want his cut of your profits, but there’s no reason to be overly generous with him.

  1. Relatively complex strategies like tax-loss harvesting — selling stocks at a loss to offset taxable gains — are worth investigating with your financial advisor.
  2. The other side of the coin is selling winning stocks to create gains in a year when you can offset them with capital losses.
    1. There’s no rule against buying back winners as there is for stocks sold at a loss.
    2. With falling interest rates, it’s not unusual to hold bonds with capital gains. You can also sell them to offset a loss and then invest the proceeds in other bonds.

Gifts that Benefit You, Too

Charitable contributions can be a boon to a worthy cause and to your wallet, too. Some options:

  1. Instead of writing a check to your favorite organization, consider giving winning stocks in your account directly to the charity. You can bypass the capital gains tax on the appreciated amount of the stock while taking a deduction for the full price of the shares.
    For example, if you sold securities that increased in value from $20,000 to $25,000 you would have to hand over the tax on $5,000 (20% capital gains tax) to the IRS. But by contributing the shares instead of the proceeds of the stock sale, both you and your charity get the gain without the pain: the charity gets $25,000 (instead of the $20,000 after tax) and you’d get the 25K deduction too.
  2. Seniors can use a similar strategy to lower their adjusted gross income and thus avoid higher Medicare premiums and social security taxes.If you’re over 70 ½  and required to take required minimum distributions from your Traditional IRA, for 2013 you can lower your RMDs (or contribute up to $100,000) by gifting charitable contributions directly from your IRA.

Take advantage of what’s permitted in the tax code and other financial strategies. Whether you’re going into the office or retired and enjoying the fruit of your labor, your money should be working for you every day.

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Gerstein Fisher
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