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Our news articles are posted on a regular basis to give our clients relevant and timely information about matters pertaining to our financial services. Browse through our current and archived articles to learn more.

Category: Financial & Wealth

Wealth Management :: Why Do People Buy Annuities?

why_purchase_annuities

Annuities are insurance-based financial vehicles that can provide many benefits sought by retirement-minded investors. There are a number of reasons why people buy annuities. Deferral of taxes is a big benefit, and so is the ability to put large sums of money into an annuity — more than is allowed annually in a 401(k) plan or an IRA — all at once or over a period of time. Annuities offer flexible payout options that can help retirees meet their cash-flow needs. They also offer a death benefit; generally, if the contract owner or annuitant dies before the annuitization stage, the beneficiary will receive a death benefit at least equal to the net premiums paid. Annuities can help an estate avoid probate; beneficiaries receive the annuity proceeds without time delays and probate expenses. One of the most appealing benefits of an annuity is the option for a guaranteed lifetime income stream.
When you purchase an annuity contract, your annuity assets will accumulate tax deferred until you start taking withdrawals in retirement. Distributions of earnings are taxed as ordinary income. Withdrawals taken prior to age 59½ may be subject to a 10% federal income tax penalty.

 
Fixed annuities pay a fixed rate of return that can start right away (with an immediate fixed annuity) or can be postponed to a future date (with a deferred fixed annuity). Although the rate on a fixed annuity may be adjusted, it will never fall below a guaranteed minimum rate specified in the annuity contract. This guaranteed rate acts as a “floor” to help protect owners from periods of low interest rates. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.

 
Variable annuities offer fluctuating returns. The owner of a variable annuity allocates premiums among his or her choice of investment subaccounts, which can range from low risk to very high risk. The return on a variable annuity is based on the performance of the subaccounts that are selected. Any guarantees are contingent on the claims-paying ability of the issuing insurance company. The investment return and principal value of an investment option are not guaranteed. Variable annuity subaccounts fluctuate with changes in market conditions. When a variable annuity is surrendered, the principal may be worth more or less than the original amount invested.

 

Variable annuities are long-term investment vehicles designed for retirement purposes. They are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Of course, there are contract limitations, fees, and charges associated with annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Surrender charges may apply during the contract’s early years in the event that the contract owner surrenders the annuity. Variable annuities are not guaranteed by the FDIC or any other government agency; nor are they guaranteed or endorsed by any bank or savings association.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
This material was written and prepared by Emerald.
© 2014 Emerald Connect, LLC All rights reserved

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Financial & Wealth :: Save Now or Save Later?

save_now_or_save_later

 

Most people have good intentions about saving for retirement. But few know when they should start and how much they should save.

 

 

 

 

 

Sometimes it might seem that the expenses of today make it too difficult to start saving for tomorrow. It’s easy to think that you will begin to save for retirement when you reach a more comfortable income level, but the longer you put it off, the harder it will be to accumulate the amount you need.

 
The rewards of starting to save early for retirement far outweigh the cost of waiting. By contributing even small amounts each month, you may be able to amass a great deal over the long term. One helpful method is to allocate a specific dollar amount or percentage of your salary every month and to pay yourself as though saving for retirement were a required expense.

 

If you have trouble saving money on a regular basis,
you might try savings strategies that take money
directly from your paycheck on a pre-tax or after-tax basis,
such as employer-sponsored retirement plans
and other direct-payroll deductions.

 

Here’s a hypothetical example of the cost of waiting. Two friends, Chris and Leslie, want to start saving for retirement. Chris starts saving $275 a month right away and continues to do so for 10 years, after which he stops but lets his funds continue to accumulate. Leslie waits 10 years before starting to save, then starts saving the same amount on a monthly basis. Both their accounts earn a consistent 8% rate of return. After 20 years, each would have contributed a total of $33,000 for retirement. However, Leslie, the procrastinator, would have accumulated a total of $50,646, less than half of what Chris, the early starter, would have accumulated ($112,415).* This example makes a strong case for an early start so that you can take advantage of the power of compounding. Your contributions have the potential to earn interest, and so does your reinvested interest. This is a good example of letting your money work for you. If you have trouble saving money on a regular basis, you might try savings strategies that take money directly from your paycheck on a pre-tax or after-tax basis, such as employer-sponsored retirement plans and other direct-payroll deductions.

 

Regardless of the method you choose, it’s extremely important to start saving now, rather than later. Even small amounts can help you greatly in the future. You could also try to increase your contribution level by 1% or more each year as your salary grows. Distributions from tax-deferred retirement plans, such as 401(k) plans and traditional IRAs, are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if withdrawn prior to age 59½.

 

 

*This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent the performance of any specific investment. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return involve a higher degree of investment risk. Taxes, inflation, and fees were not considered. Actual results will vary.

 

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.This material was written and prepared by Emerald.
© 2013 Emerald Connect, LLC All rights reserved

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Accounting & Tax :: How to Use the Internal Revenue Service Rules and Regulations to Achieve Estate Tax Savings


The use of trusts known as Intentionally Defective Grantor Trusts (IDGT) may provide the opportunity for estate tax savings by using the IRS rules and regulations in your favor. In this instance, the term defective does not mean that it does not work or it is substandard like a defective toy or defective product. This type of trust is specifically drafted to be an irrevocable trust for gift and estate purposes. The carefully-drafted document includes certain selected provisions under the Internal Revenue Service Code 671 to 677 that cause the trust to be a grantor type trust income tax purpose. For example, a provision to allow the substitution of property by the grantor can cause the trust to be considered a grantor type trust. A gift to this type of trust is considered completed and reportable for gift tax purposes. The provision or the intentional defect results in income earned from the gift being taxable to the grantor.

 

“…With proper consultation with a skilled estate
and trust attorney and coordination with your tax professional you may want to consider the use of Intentionally Defective Grantor Trust to achieve tax savings and
maximize the transfer of property to your heirs.”

 

At first glance this may not be considered a great bargain to the donor. However, if the donor’s intention is to reduce the taxable estate over a period of years, the requirement to pay the income tax on the earnings of the grantor trust reduces the donor’s estate. Revenue Ruling 2004-64 further reinforced the benefit by stating the grantor’s payment of the income taxes that was not distributed to the grantor is not a taxable gift. Also, the current trust income tax rate thresholds are substantially lower resulting in higher taxes on accumulated trust income. For taxable years beginning in 2013, a trust’s highest tax rate on ordinary income is 39.6% when exceeding $11,950 of taxable income. During 2013, a single taxpayer reaches the 39.6% rate on the excess of $400,000 taxable income. Avoiding the compressed brackets result in tax savings.

 

If the value of the property contributed to the IDGT trust is below the available applicable lifetime exclusion amount there is no gift tax due. The lifetime gift tax exclusion for 2013 is $5,250,000.
Another opportunity to achieve estate tax savings is when the grantor can sell appreciating property to the IDGT. Under IRS Revenue Ruling 85-13, the sale is considered a nonevent and is not recognized for income tax purposes. The interest earned and interest paid is disregarded for income tax purposes. Capital Gain is not recognized and the trust takes the grantor’s basis in the assets. By coupling the sale with a promissory note the seller can fix the value of the property at the time of the sale. The remaining value of the promissory note at the time of death is includible in the grantor’s estate. The benefit is that the property sold the IDGT is allowed to continue to appreciate outside of the grantor’s taxable estate and the value to the estate is in effect frozen at the time of the sale.
When using the IDGT, there are many technical issues in drafting and complying with the law. Due care is required to make sure you are within the guidelines of IRS rules and regulations. Also, not all property is ideal for this type of trust. Closely held business interests that generate cash flow are the favored property for this type of transaction. Whereas, marketable securities contributed to the trust may not achieve the desired result.
The fans of the estate tax are not fond of this estate planning technique and routinely plot to restrict or to eliminate their use. But in the meantime, with proper consultation with a skilled estate and trust attorney and coordination with your tax professional you may want to consider the use of Intentionally Defective Grantor Trust to achieve tax savings and maximize the transfer of property to your heirs.

 

Contact G.R. Ried Wealth Management Services to discuss estate planning strategies.

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Financial & Wealth :: What Is a Required Minimum Distribution?

A required minimum distribution (RMD) is the annual amount that must be withdrawn from a traditional IRA or a qualified retirement plan (such as a 401(k), 403(b), and self-employed plans) after the account owner reaches the age of 70½. The last date allowed for the first withdrawal is April 1 following the year in which the owner reaches age 70½. Some employer plans may allow still-employed account owners to delay distributions until they stop working, even if they are older than 70½. RMDs are designed to ensure that owners of tax-deferred retirement accounts do not defer taxes on their retirement accounts indefinitely.

You are allowed to begin taking penalty-free distributions from tax-deferred retirement accounts after age 59½, but you must begin taking them after reaching age 70½. If you delay your first distribution to April 1 following the year in which you turn 70½, you must take another distribution for that year. Annual RMDs must be taken each subsequent year no later than December 31.

 

The RMD amount depends on your age, the value of the account(s), and your life expectancy. You can use the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table, in certain circumstances) to determine your life expectancy. To calculate your RMD, divide the value of your account balance at the end of the previous year by the number of years you’re expected to live, based on the numbers in the IRS table. You must calculate RMDs for each account that you own. If you do not take RMDs, then you may be subject to a 50% federal income tax penalty on the amount that should have been withdrawn.

 

Remember that distributions from tax-deferred retirement plans are subject to ordinary income tax. Waiting until the April 1 deadline in the year after reaching age 70½ is a one-time option and requires that you take two RMDs in the same tax year. If these distributions are large, this method could push you into a higher tax bracket. It may be wise to plan ahead for RMDs to determine the best time to begin taking them.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

 

This material was written and prepared by Emerald.
© 2013 Emerald Connect, Inc. All rights reserved.
 

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Financial & Wealth :: What is Diversification?

diversificationVirtually every investment has some type of risk associated with it. The stock market rises and falls. An increase in interest rates can cause a decline in the bond market. No matter what you decide to invest in, risk is something you must consider.

 

The main philosophy behind diversification
is really quite simple:

“Don’t put all your eggs in one basket.” 

 

One key to successful investing is managing risk while maintaining the potential for adequate returns on your investments. One of the most effective ways to help manage your investment risk is to diversify. Diversification is an investment strategy aimed at managing risk by spreading your money across a variety of investments such as stocks, bonds, real estate, and cash alternatives; but diversification does not guarantee against loss.

 

The main philosophy behind diversification is really quite simple: “Don’t put all your eggs in one basket.” Spreading the risk among a number of different investment categories, as well as over several different industries, can help offset a loss in any one investment.

 

Likewise, the power of diversification may help smooth your returns over time. As one investment increases, it may offset the decreases in another. This may allow your portfolio to ride out market fluctuations, providing a more steady performance under various economic conditions. By potentially reducing the impact of market ups and downs, diversification could go far in enhancing your comfort level with investing.

 

Diversification is one of the main reasons why mutual funds may be so attractive for both experienced and novice investors. Many non-institutional investors have a limited investment budget and may find it challenging to construct a portfolio that is sufficiently diversified.

 

For a modest initial investment,
you can purchase shares in
a diversified portfolio of securities.
You have “built-in” diversification.

 

For a modest initial investment, you can purchase shares in a diversified portfolio of securities. You have “built-in” diversification. Depending on the objectives of the fund, it may contain a variety of stocks, bonds, and cash vehicles, or a combination of them.

 

Whether you are investing in mutual funds or are putting together your own combination of stocks, bonds, and other investment vehicles, it is a good idea to keep in mind the importance of diversifying. The value of stocks, bonds, and mutual funds fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost.

 

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

 

 

This material was written and prepared by Emerald.
© 2013 Emerald Connect, Inc. All rights reserved.

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Accounting & Tax :: Year-end planning: reducing exposure to the new 3.8% surtax on unearned income – Part I

Year-end tax planning for 2013 includes a new and unwelcome complication: the 3.8% surtax on unearned income. This two-part article takes a look at year-end moves that can be used to reduce or eliminate the impact of this surtax. Part I, in this article, highlights the new code regarding the surtax and overall year-end strategies for coping with it, and includes specific strategies for taxpayers with interests in passive activities.

 

Overview

For tax years beginning after Dec. 31, 2012, certain unearned income of individuals, trusts, and estates is subject to a surtax on “unearned income” (i.e., it’s payable on top of any other tax payable on that income). The surtax, also called the “unearned income Medicare contribution tax” or the “net investment income tax” (NIIT), for individuals is 3.8% of the lesser of:

 

(1) net investment income (NII), or

(2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

 

MAGI is adjusted gross income (AGI) plus any amount excluded as foreign earned (net of the deductions and exclusions disallowed with respect to the foreign earned income).

 

For an estate or trust, the surtax is 3.8% of the lesser of (1) undistributed NII or the excess of adjusted gross income (AGI) over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

 

For 3.8% surtax purposes, NII is investment income less deductions properly allocable to such income. Examples of properly allocable deductions include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in NII.

 

Investment income is:

 

… gross income from interest, dividends, annuities, royalties, and rents, unless derived in the ordinary course of a trade or business to which the 3.8% surtax doesn’t apply,

… other gross income derived from a trade or business to which the 3.8% surtax contribution tax does apply, and

… net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the Medicare contribution tax doesn’t apply.

 

The 3.8% surtax applies to a trade or business only if it is a passive activity of the taxpayer or a trade or business of trading in financial instruments or commodities. Investment income doesn’t include amounts subject to self-employment tax), distributions from tax-favored retirement plans (e.g., qualified employer plans and IRAs), or tax-exempt income (e.g. earned on state or local obligations).

 

The surtax doesn’t apply to trades or businesses conducted by a sole proprietor, partnership, or S corporation (but income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax).

Gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as NII only to the extent of the net gain or loss that the transferor would take into account if the entity had sold all its property for fair market value immediately before the disposition.

The tax does not apply to: nonresident aliens (special rules apply to nonresident aliens married to U.S. citizens or residents); trusts all the unexpired interests in which are devoted to charitable purposes; trusts exempt from tax under; or charitable remainder trusts exempt from tax under. (Also exempt are trusts treated as “grantor trusts” and trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).

Specific Year-End Moves to Reduce Exposure to Surtax

Reexamine passive investment holdings. The 3.8% surtax applies to income from a passive investment activity, but not from income generated by an activity in which the taxpayer is a material participant. One subject a “passive” investor should explore with a tax adviser knowledgeable in the passive activity loss (PAL) area is whether it would be possible (and worthwhile) to increase participation in the activity before year-end so as to qualify as a material participant in the activity.

 

In general,  a taxpayer establishes material participation by satisfying any one of seven tests, including: participation in the activity for more than 500 hours during the tax year; and participation in the activity for more than 100 hours during the tax year, where the individual’s participation in the activity for the tax year isn’t less than the participation in the activity of any other individual (including individuals who aren’t owners of interests in the activity) for the year. Special rules apply to real estate professionals.

 

Becoming a material participant in an income-generating passive activity wouldn’t make sense if the taxpayer also owns another passive investment that generates losses that currently offset income from the profitable passive activity.

 

Taxpayers that own interests in a number of passive activities also should reexamine the way they group their activities. A taxpayer may treat one or more trade or business activities or rental activities as a single activity (i.e., group them together) if based on all the relevant facts and circumstances the activities are an appropriate economic unit for measuring gain or loss for PAL purposes. A number of special “grouping” rules apply. For example, a rental activity can’t be grouped with a trade or business activity unless the activities being grouped together are an appropriate economic unit and a number of additional tests are met. And real property rentals and personal property rentals (other than personal property rentals provided in connection with the real property, or vice versa) can’t be grouped together.

 

Once the taxpayer has grouped activities, he can’t regroup them in later years, but if a material change occurs that makes the original grouping clearly inappropriate, he must regroup the activities.

 

Proposed reliance regs issued late last year provide a regrouping “fresh start” allowing qualifying taxpayers to regroup their activities for any tax year that begins during 2013 This would apply to the taxpayer without regard to the effect of regrouping (i.e., they have NII and the applicable income threshold is met). A taxpayer may only regroup activities once, and any regrouping will apply to the tax year for which the regrouping is done and all later years. (Reg. § 1.469-11(b)(3)(iv)) The regrouping must comply with the disclosure requirements.

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Accounting & Tax :: A Possible Threat to Municipal Bond Interest Tax Exemption

Municipal bonds have long been an appealing investment option for high net worth individuals. This has been the case, not only because they provide relatively safe and stable income for investors due to their much lower levels of defaults versus corporate bonds, but also because of their tax-exempt status.

 

As the federal government’s budget deficit has increased, both parties have been seeking ways to reduce spending and the municipal bond tax exemption is often an item lawmakers target. The 2010 Simpson-Bowles Deficit Reduction Commission recommended to President Obama that the tax code be changed to eliminate the municipal bond tax exemption. In addition, the Obama Administration has recently proposed to tax a portion of tax-exempt interest by capping the tax rate at 28% for high-income earners. The 28% cap would likely apply to bonds that have been already purchased by investors.

 

Many financial experts believe that any substantial change in municipal bond tax exemptions would decrease demand for municipal bonds and make financing for state and local government more expensive. Removing or limiting the tax exemption would make tax-exempt bonds less attractive compared to other investment options. States and localities would have to raise interest rates to make their bonds more attractive to investor. According to analysis performed by the Securities Industry and Financial Markets Association (or SIFMA), it is estimated that it would have cost state and local governments an additional $173 billion of interest on infrastructure investments if the municipal bond tax exemption limit was implemented from 2003-2012. These additional costs would have resulted in higher taxes or user fees.

 

Individual investors own about 75% of the nearly $3.7 trillion municipal bond market. A cap or elimination of the tax-exempt status of municipal bond interest would significantly affect high net worth individuals’ investments. And at the same time, higher bond costs would impact state and local governments and other municipal issuers’ budgets, and directly affect taxpayers in the form of higher taxes and user fees.

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All Legal Same-Sex Marriages Will Be Recognized for Federal Tax Purposes

One of the last impediments to joint tax reporting for same-sex married couples was removed with the recent ruling by the U.S. Treasury Department and the Internal Revenue Service. The federal government now recognizes same-sex marriages for federal tax purposes, regardless of the taxpayers’ state of residence, so long as the marriage was valid where performed (U.S. States or foreign countries where same-sex marriage is legal).

 

The implications of this ruling are significant for both estate and tax planning. Legally married same-sex couples are now able to consider their tax and estate planning needs without concern for differentiated treatment under federal tax law.

This ruling is for tax purposes only. It does not address the definition of marriage by other federal agencies, such as Social Security, which looks to whether the couple’s marriage is recognized by their state of residence. It also does not address whether the IRS will implement any expedited procedures for filing amended tax returns for same-sex married couples. The IRS has indicated there will be additional guidance in the next month.

 

The following is the press release from the U.S. Department of the Treasury:

 

August 29, 2013

WASHINGTON – The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

 

The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

 

“Today’s ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve,” said Secretary Jacob J. Lew. “This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”

 

Under the ruling, same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

 

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

 

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

 

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some taxpayers may have special circumstances (such as signing an agreement with the IRS to keep the statute of limitations open) that permit them to file refund claims for tax years 2009 and earlier.

 

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

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Financial & Wealth :: Is There Such a Thing as a Tax-Free Investment?

The simple answer to this question is “yes.” There are two main types: (1) municipal bonds and municipal bond mutual funds and (2) tax-free money market funds.

 

tax_free_investments

Municipal bonds are issued by state and local governments in order to finance capital expenditures; typically, municipal bond funds invest in municipal bonds. Municipal bonds are generally free of federal tax because the interest from bonds issued by a state, municipality, or other local entity is exempt from federal taxation. As an added benefit, most states will allow a state tax exemption if the owner of the bond resides in the state of issue. However, if you purchase a bond outside your area of residency, it may be subject to both state and local taxes. If you buy shares of a municipal bond fund that invests in bonds issued by other states, you will have to pay income tax. In addition, while some municipal bonds that are in the fund may not be subject to ordinary income tax, they may be subject to federal, state, or local alternative minimum tax. If you sell a tax-exempt bond fund at a profit, there are capital gains taxes to consider. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance. Municipal bonds come in a variety of forms and should be selected by strict criteria based predominantly on the state’s or municipality’s ability to service the debt. It’s important to remember that the principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

 

Tax-free money market funds invest in short-term notes of state and local governments and can provide a high amount of liquidity. Money market funds can be invested in a wide range of securities, so it is important to analyze your options carefully before investing.


Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money market funds attempt to preserve the value of your investment at $1.00 p
er share, it is possible to lose money by investing in such a fund.

 

If you decide to invest in either type of tax-exempt security, consider the different options carefully. You can purchase individual bonds, which come in denominations of $1,000. Or you might consider investing in a municipal bond mutual fund, a portfolio of bonds in which you can invest for as little as $500. Municipal bonds can also be purchased through a unit investment trust, a closed-end portfolio of bonds with minimums of $1,000. Often tax-exempt securities are the most favorable for those in higher tax brackets, so it’s important to determine whether buying them would be an advantageous move for you. To decide whether municipal bonds or money market funds would be an asset to your portfolio, calculate the taxable equivalent yield, which enables you to compare the expected yield of the tax-exempt investment with its taxable equivalent.

 

For instance, if you are in the 28% federal income tax bracket and invest in a municipal bond yielding 5%, this is equivalent to investing in a taxable investment yielding 6.94%. If you are in the 35% tax bracket and invest in the same bond, it would be the equivalent of investing in a taxable investment yielding 7.69%. Also be aware that tax-exempt income is included in the formula for determining taxes on Social Security benefits. In some instances, it may be necessary to limit your tax-exempt income by shifting to other tax-advantaged investment areas. If they’re in line with your investment objectives, tax-exempt securities can be an excellent means of reducing taxable income. Check your options with your tax advisor.

 

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald.
© 2013 Emerald Connect, Inc. All rights reserved.

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Financial & Wealth :: Growth Stocks vs. Value Stocks

Investors are often confused about the differences between growth stocks and value stocks. The main way in which they differ is not in how they are bought and sold, nor is it how much ownership they represent in a company. Rather, the difference lies mainly in the way in which they are perceived by the market and, ultimately, the investor.
growth_stocks

Growth stocks are associated with high-quality, successful companies whose earnings are expected to continue growing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. The P/E ratio is the market value per share divided by the current year’s earnings per share. For example, if the stock is currently trading at $52 per share and its earnings over the last 12 months have been $2 per share, then its P/E ratio is 26. The price-to-book ratio is the share price divided by the book value per share. The open market often places a high value on growth stocks; therefore, growth stock investors also may see these stocks as having great worth and may be willing to pay more to own shares.

Investors who purchase growth stocks receive returns from future capital appreciation (the difference between the amount paid for a stock and its current value), rather than dividends. Although dividends are sometimes paid to shareholders of growth stocks, it has historically been more common for growth companies to reinvest retained earnings in capital projects. Recently, however, because of tax-law changes lowering the tax rate on corporate dividends (through 2012), even growth companies have been offering dividends.

At times, growth stocks may be seen as expensive and overvalued, which is why some investors may prefer value stocks, which are considered undervalued by the market. Value stocks are those that tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). Value stocks generally have good fundamentals, but they may have fallen out of favor in the market and are considered bargain priced compared with their competitors. They may have prices that are below the stocks’ historic levels or may be associated with new companies that aren’t recognized by investors. It’s possible that these companies have been affected by some problem that raises some concerns about their long-term prospects.

Value stocks generally have low current price-to-earnings ratios and low price-to-book ratios. Investors buy these stocks in the hope that they will increase in value when the broader market recognizes their full potential, which should result in rising share prices. Thus, they hope that if they buy these stocks at bargain prices and they eventually increase in value, they potentially could make more money than if they had invested in higher-priced stocks that increased modestly in value.

Growth and value are styles of investing in stocks. Neither approach is guaranteed to provide appreciation in stock market value; both carry investment risk. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments seeking to achieve higher rates of return also involve a greater degree of risk.

Growth and value investments tend to run in cycles. Understanding the differences between them may help you decide which may be appropriate to help you pursue your specific goals. Regardless of which type of investor you are, there may be a place for both growth and value stocks in your portfolio. This strategy may help you manage risk and potentially enhance your returns over time.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

 

This material was written and prepared by Emerald.
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