AN INVESTOR S BEST FRIEND ASSET ALLOCATION in Software

Generator QR-Code in Software AN INVESTOR S BEST FRIEND ASSET ALLOCATION

stock, is inherited, the value at the time of the owner s death becomes the starting point For instance, you inherit 1000 shares of ScheringPlough stock The original cost basis for the stock is $20 per share However, when you inherit it, the cost of the stock is $57 per share You decide you will sell the stock at $60 per share, which you then do Your gain on the stock is $3 per share, not $40 per share because of the step-up in basis If you were to sell your holdings for a loss, you would be able to use that capital loss on your taxes to offset any capital gains you may have had, plus offsetting some of your ordinary income Up to $3000 of a capital loss may be used per year Any unused portion of the loss may be carried over to subsequent years Financial planning may help reduce your tax burden due to capital gains and you may be able to postpone or even avoid capital gains taxes through proper planning The limitations of holding directly owned assets are fewer than the advantages However, they should be considered just as seriously Each year that you receive taxable interest and/or dividends on an investment, they are taxable to you Likewise, any capital gains you receive are taxable This is generally found with mutual funds through fund turnover that occurs throughout the year At the end of each year, mutual fund companies are required to declare their dividends and capital gains, which are then passed on to the shareholders You, the shareholder, receive a 1099-DIV form from the company and you must declare it on your tax forms Also, capital gains may be triggered when your advisor rebalances your portfolio Any selling or exchanging of an asset for a gain will be taxable to you on your taxes Whether it s a long-term or short-term gain depends on how long you have held the asset

Tax-advantaged, or qualified, plans include qualified retirement plans (ie, 401(k)s), traditional IRAs, variable annuities, and variable life insurance policies and the like (See 6 on annunities) While each type of tax-advantaged investment has its own pluses and minuses, the following advantages and disadvantages apply to each

With qualified plans, all investment income, such as capital gains, dividends and taxable interest, is deferred until the owner takes distributions from the plan At that time, the money is taxed at ordinary income rates, regardless of how long the asset has been held by the owner Any dividends, taxable interest, or capital gains that would normally be currently taxable under directly owned investments isn t The distributions from these plans may be stretched out over many years, thus delaying the payment of taxes and allowing the tax-deferred feature of the investments to continue Any changes that are made within the tax-advantaged plan are done so tax free This means that any selling or exchanging of investments can be done without triggering any capital gains taxes, as long as it is done within the qualified plan The advantage here is that any asset that has appreciated in value may be sold or exchanged tax free, so as to fully realize the gain However, any assets that would be sold for a loss are better to be sold outside of the tax-advantaged plan (as a directly owned asset) in order to use the capital loss for tax purposes Unfortunately, there are some limitations to holding assets in these tax-advantaged plans For starters, there is no step-up in basis at death for these plans Second, although the gains in the assets may have been through capital gains, the capital gains tax rates don t apply when the money comes out Plus, participants must follow the guidelines of their particular plan when it is an employer-sponsored plan The employer is also allowed to make changes to the plan for the future There are also tax implications for these types of plans While deferring the gains on these plans is an advantage, pulling the money out and paying taxes on it at ordinary income rates may be viewed as a limitation (The exceptions to this are Roth IRAs and education IRAs, where the money comes out tax free) For many people, when they begin to draw from their tax-advantaged plans, they may be paying more in taxes than if they were pulling money out of their directly owned assets For example, you take a distribution of $20,000 from your traditional IRA You will pay taxes on this amount at ordinary income levels However, if you were to pull out $20,000 from your directly owned asset, and it was viewed as a gain, then you would be