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Welcome to my blog!  If you are interested in retirement issues, you are welcome to come along with me as I "think out loud" about my recent retirement.  The most recent article that I have written appears at the top when you arrive at this site; previous articles are listed along the right margin; just click on the title of any article that may interest you.  I hope you will find some of them of interest.  You can also reach me through my web site: www.7oaksfinplng.com.
Sunday
Jun012014

Tax Diversification

Most know of the benefits of diversifying their investment dollars; i.e., spreading one’s investment dollars among different types of assets, but benefits can also be realized by diversifying how those assets will eventually be taxed.  Granted, most will have the largest portion of their retirement dollars in tax-deferred accounts like 401ks and IRAs, but tax diversification and being aware of which accounts are best for which types of assets can also prove beneficial if one has the opportunity to use other types of accounts. 

Our savings/investment accounts will eventually be taxed in one of three ways.  Let’s look at each one.

Some accounts will be taxed as regular income.  Traditional IRAs as well as 401ks and 403bs are “tax-deferred.”  This money was not taxed prior to it being deposited into these accounts; thus it will be taxed as regular income when it is withdrawn.  Although these accounts have grown tax free while we were working and contributing to them, the tax man was looking over our shoulders as we checked the balances, rubbing his hands in anticipation of the day we begin withdrawals.  We forego the benefits of having some of this money taxed as dividends or capital gains (which have traditionally been taxed at a lower rate) for the opportunity of allowing it to grow tax-free for years.  This same issue faces those who own deferred annuities as they can also turn capital gains and dividends into “ordinary income.”

ROTH accounts are really “special creatures.”  They come as IRAs, and more and more companies are offering 401ks as ROTHs.  The money that goes into these accounts is “after tax” money, and under current tax law that money, along with any earnings, can be withdrawn tax free once the owner is 59 ½, and the account has been open for at least 5 years.  The original investment in an IRA can be withdrawn any time with no penalty or tax, regardless of age.  A Roth account offers a wonderful savings opportunity, but not everyone will qualify for one.  Check the income rules for opening one and if you qualify, open one post haste if you can possibly afford to do so! 

Regular taxable accounts, like the brokerage account or mutual fund you may own outside of a tax-sheltered plan, also have tax advantages.  When you sell from these accounts you are allowed to exclude your basis (your original investment) from taxation since this money was previously taxed.  Also, any capital gain you may realize when you sell is presently taxed at a lower rate than ordinary income.  Likewise, the dividends you may have received have also been treated with a favorable tax rate.  There is much to recommend taxable accounts, and they are great accounts for individual, dividend paying stocks where you can realize the benefits of the lower tax rate on dividends and capital gains.

Traditional IRA’s and 401k’s are great retirement savings tools, and I would encourage most to max out their opportunities with these accounts.  These accounts are a good place, tax wise, to hold some of the bond allocation of your total portfolio.  However, if you qualify for ROTH accounts, you will certainly want to investigate that opportunity after ensuring that you defer enough to your 401k to get your employer match, if it is offered.  The advantages of a ROTH account are sizable, especially if you have years remaining before you will be withdrawing from the account.  They are an especially appropriate place for small cap stocks and funds that can be left to grow for years.  Imagine if you had bought 500 shares of Apple stock in a ROTH account 20 years ago at $7.20 per share.  You would now have an account worth nearly $300,000 available to you tax free in retirement! 

Each of the accounts I have mentioned have their unique tax characteristics and each offers some tax advantage.  Being aware of their differences and how certain asset classes better fit certain accounts can make a difference in your eventual post tax return.  But of much more importance is how well we relate to the idea of “deferred gratification,” and exactly how much we save in some account along the way.  And please remember, though far from the most important thing, still, money matters.

 

Fly/Drive Safely

1 June 2014

 

 

 

Sunday
Mar022014

A Penny Saved. . . . .

Benjamin Franklin was born in Boston on January 17, 1706, the tenth son of a soap maker.  For the next 84 years he lived one of the most remarkable and productive lives of any American ever.  Among his many achievements, he gained prominence as an author, an inventor, a political theorist, a scientist, a statesman, and a diplomat.  He was one of America’s first truly wealthy citizens, and he is well described as one of our country’s founding fathers.  Some have even referred to him as the “First American.”  Few in our history have played such a prominent role in the affairs of their day.  His intellect was boundless, and his interests were many and varied.  He shares his wit and intelligence with us today through his writings and the sayings and witty aphorisms he published in his “Poor Richard’s Almanac.”   I think just about everything we need to know to be financially successful today we can learn from a man who lived over two hundred years ago.  Consider some of Franklin’s sage advice with me, and I think you will agree.

He was a strong proponent of public education:  1) An investment in knowledge pays the best interest.  2) By failing to prepare, you are preparing to fail.

He understood that risk played a role in investing:  3) Nothing ventured, nothing gained. 4) Vessels large may venture more, but little boats should stay near shore.

He understood the role time plays in investing:  5) Time is money.  6) He who can have patience can have what he will.

He was a strong proponent of thrift and the importance of saving:  7) For age and want save while you may; no morning sun lasts a whole day.  8) Beware of little expenses; a small leak will sink a great ship. 

He understood the importance of personal responsibility and hard work: 9) Motivation is when your dreams put on work clothes.  10) There are two means to increase your wealth. Increase your means or decrease your wants.  The best is to do both at the same time.  11)  Diligence is the mother of good luck.

He understood the limitations of wealth and the limited role it plays in the life of the truly successful person.  12)  Money has never made man happy, nor will it; there is nothing in its nature to produce happiness.  The more of it one has, the more one wants.  13)  Great beauty, great strength, and great riches are really and truly of no great use; a right heart exceeds all.  14)  Don’t judge a man’s wealth or godliness by their Sunday appearance. 15)  Wealth is not his that has it, but his that enjoys it.  Success has ruined many a man.

Even in that chauvinistic age Ben recognized the role of a good woman:  16) A good wife and health is a man’s best wealth! 

Ben Franklin made these observations on the potential problems a democracy could face over two hundred years ago.  His warnings seem eerily loud, clear, and pertinent for us today. 17) When the people find that they can vote themselves money that will herald the end of the republic.  18)  The U. S. Constitution only guarantees the American people the right to pursue happiness.  You have to catch it yourself.

These are only a tiny sampling of Franklin’s financial wisdom, but with these few pearls you now know about all you need to know to be financially successful.  Franklin says that we should educate ourselves, be willing to take some risk, and have the patience to let time work its magic.  We should be willing to work hard; be industrious as he would say, and don’t expect others (or the government) to do for us what we can do for ourselves.  He cautioned us to keep money in perspective and recognize that it should not be an end unto itself, but simply a tool for doing good.  He warned us that money by itself will never make us happy, and we see the evidence of that all around us.

Benjamin Franklin is one of my favorite historical characters.  His genius was well recognized in his time, and he achieved fame, wealth, and the respect of his peers.  We are fortunate that he was there to share his wisdom as our country was being born.  We would do well to heed his words today as they are as relevant now as when he first spoke them.  I often caution my readers that though far from the most important thing, still, money matters.  I believe that Franklin had a similar thought in mind when he observed, “There are three faithful friends in our life: an old wife, an old dog, and ready money.”

 

Fly/Drive Safely

3 March, 2014