Objective information about financial planning, investments, and retirement plans

The Super Bowl and Your Investments

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Lombardi Trophy - Super Bowl XXXI

It’s Super Bowl time and once again my beloved Packers are not playing. They had a good season and beat the Giants and the top-seeded Cowboys in the playoffs. I attended the game against the Giants at football’s holy shrine, Lambeau Field, my first time attending a playoff game.

Every year the Super Bowl Indicator is resurrected as a forecasting tool for the stock market.

The indicator says that a win by a team from the old pre-merger NFL is bullish for the stock market, while a win by a team from the old AFL is a bad sign for the markets. Looking at this year’s game, New England is an original AFL team while Atlanta is an original NFL team.

How has the Super Bowl Indicator done?

According the Wall Street Journal, the seven-year win streak for this indicator was broken last year when Denver won and the market had an up year in 2016. The article said that the indicator has held true in 40 of the 50 Super Bowls that have been played.

Quoted in a Wall Street Journal article before last year’s game respected Wall Street analyst Robert Stoval said, “There is no intellectual backing for this sort of thing, except that it works.”

Some notable misses for the indicator include:

  • St. Louis (an old NFL team that was formerly and is now again currently the L.A. Rams) won in 2000 and the market dropped.
  • Baltimore (an old NFL team that was formerly the original Cleveland Browns) won in 2001 and the market dropped.
  • The New York Giants (an old NFL team) won in 2008 and the market tanked in what was the start of the recent financial crisis.
  • In 1970 the Kansas City Chiefs shocked the Minnesota Vikings and the Dow Jones Average ended the year up, by less than 5 percent.

Is this a valid investment strategy?

As far as your investments, I think you’ll agree that the outcome of the game should not dictate your strategy. Rather I suggest an investment strategy that incorporates some basic blocking and tackling:

  • financial plan should be the basis of your strategy. Any investment strategy that does not incorporate your goals, time horizon, and risk tolerance is flawed.
  • Take stock of where you are. What impact has the bull market of the past seven plus years had on your portfolio? Perhaps it’s time to rebalance and to rethink your ongoing asset allocation.
  • Costs matter.  Low cost index mutual funds and ETFs can be great core holdings. Solid, well-managed active funds can also contribute to a well-diversified portfolio. In all cases make sure you are in the lowest cost share classes available to you.

View all accounts as part of a total portfolio. This means IRAs, your 401(k), taxable accounts, mutual funds, individual stocks and bonds, etc. Each individual holding should serve a purpose in terms of your overall strategy.

The Super Bowl Indicator is another fun piece of Super Bowl hype. Your investment strategy should be guided by your goals, your time horizon for the money and your tolerance for risk, not the outcome of a football game.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Photo credit:  Flickr

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Stock Market Highs and Your Retirement

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As I write this the Dow Jones Industrial Average has surpassed the 20,000-milestone intraday today. This comes some seven months after a 610 point drop in the Dow in the wake of the Brexit, the vote taken in U.K. where they decided to leave the European Union.

Difference Between Stocks and Bonds

Over the past 16 + years we’ve seen two market peaks followed by pronounced market drops.  The S&P 500 peaked at 1,527 on May 24, 2000 and then dropped 49% until it bottomed out at 777 on October 9, 2002.  The Dot Com Bubble and the tragedy of September 11 both contributed.

The S&P 500 rose to a high of 1,565 on October 9, 2007 only to fall 57% to a low of 677 on March 9, 2009 in the wake of the Financial Crisis. Since then the market has rallied and we are approaching the eighth year of this bull market. As someone saving for retirement what should you do at this point?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over-allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to have one done. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is a great time to review it and see where you are relative to your goals.  Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still has a ways to run and might even be undervalued. Maybe they’re right. However don’t get carried away and let greed guide your decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Photo credit:  Phillip Taylor PT

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

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One of the best tax deductions for a small business owner is funding a retirement plan.  Beyond any tax deduction you are saving for your own retirement.  As a fellow small business person, I know how hard you work.  You deserve a comfortable retirement.  If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

SEP-IRA vs. Solo 401(k)

SEP-IRA Solo 401(k)
Who can contribute? Employer contributions only. Employer contributions and employee deferrals.
Employer contribution limits For 2016, up to 25% of the participant’s compensation or $53,000 whichever is less. The maximum for 2017 is $54,000 Contributions are deductible as a business expense and are not required every year. For 2016, employer plus employee combined contribution limit is a maximum of 25% of compensation up to $53,000 ($59,000 if the employee is age 50 or older).  For 2017 the maximums are $54,000 and $60,000, respectively. Employer contributions are deductible as a business expense and are not required every year.
Employee contribution limits A SEP-IRA only allows employer contributions. Employees can contribute to an IRA (Traditional, Roth, or Non-Deductible based upon their individual circumstances). $18,000 for 2016. An additional $6,000 for participants 50 and over. In no case can this exceed 100% of their compensation. The limits are unchanged for 2017.
Eligibility Typically, employees must be allowed to participate if they are over age 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years. No age or income restrictions. Business owners, partners and spouses working in the business. Common-law employees are not eligible.

Note the Solo 401(k) is also referred to as an Individual 401(k).

  • While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself.  I generally consider this a plan for the self-employed.
  • Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
  • The SEP-IRA contribution is calculated as a percentage of compensation.  If your compensation is variable the amount that you can contribute year-to year will vary as well. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
  • By contrast you can defer the lesser of $18,000 ($24,000 if 50 or over) or 100% of your income for 2016 and 2017 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
  • Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
  • Roth feature is available for a Solo 401(k) if allowed by your plan document. There is no Roth feature for a SEP-IRA.
  • Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
  • Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
  • Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process.  Whether you go this route or with some other option I urge to start saving for your retirement today 

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.    

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My Top 10 Most Read Posts of 2016

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I hope that 2016 was a good year for you and your families and that you’ve had a wonderful holiday season. For us it was great to have our three adult children home and to be able to spend time together as a family. We all ate way too much good food. Thankfully our newest family member Rex, a shelter dog we adopted in October, requires frequent walks. On a sad note, we had to say goodbye to Austin our 15-year-old Pekingese in August.

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Hopefully you find many of the posts here at The Chicago Financial Planner useful and informative as you chart your financial course. Whether you do your own financial planning and investing or you work with a financial advisor, my goal is to educate and provide some food for thought.

In the spirit of all the top 10 lists we see at this time of year, here are my top 10 most read posts during 2016:

Is a $100,000 a Year Retirement Doable?

Life Insurance as a Retirement Savings Vehicle – A Good Idea?

401(k) Fee Disclosure and the American Funds

4 Things To Do When The Stock Market Drops

4 Reasons to Accept Your Company’s Buyout Offer

4 Signs of a Lousy 401(k) Plan

My Thoughts on PBS Frontline The Retirement Gamble

YOU RECEIVED A PINK SLIP AND SEPARATION AGREEMENT – NOW WHAT?

Protecting Your Savings from the Cost of a Long-Term Care Illness

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

Full disclosure the last post listed was actually number 11, number 10 needs some updating and will be republished in the new year.

This past year saw me expand my freelance financial writing business. I wrote a number of pieces for various financial sites, several financial services firms and other financial advisors over the past year. I also had my first article published in Morningstar Magazine. I plan to continue growing this side of my business in 2017.

In addition to the above, I was a frequent contributor to these sites in 2016:

Investor Junkie

Investopedia

Go Banking Rates 

Thank you for your readership and support. Please let know what you think about any of the posts on the site (good or bad) and please let me know if there are topics that you would like to see covered in 2017.

I wish you and your families a happy, healthy and prosperous 2017.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Should You Accept a Pension Buyout Offer?

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Corporate pension buyout offers have been in the news in recent years with companies like Hartford Financial Services offering lump-sum payment options to vested former employees and with Boeing offering a choice of lump-sum or annuity payments to a similar group. Note these offers are not available to retirees who have already taken their pension benefit.

The answer to the question of whether you should accept a pension buyout offer versus taking your pension as a lifetime stream of monthly payment is that it depends upon your situation. Here are a few things to consider.

Are they sweetening the deal? 

Perhaps the lump-sum is a bit larger, and in the case of the Boeing offer the annuity payments were a bit better as well. Or perhaps there normally wouldn’t be a lump-sum option available from the pension plan so this in and of itself is an incentive.

Remember the incentive for the companies offering these deals is to get rid of these future pension liabilities. The potential cost savings and impact on their future profitability is huge. 

Can you manage the lump-sum? 

The decision to take your pension as a lump-sum vs. a stream of payments is always a tough decision. A key question to ask yourself is whether you are equipped to manage a lump-sum payment. Ideally you would be rolling this lump-sum into an IRA account and investing it for your retirement. Are you comfortable managing this money?  If not are you working with a trusted financial advisor who can help you?

There has been much written about financial advisors who troll large organizations (both governmental and corporate) looking for large numbers of folks with lump-sums to rollover. In some cases, these advisors have moved this rollover money into investments that are wholly inappropriate for these investors. As always be smart with your money and with your trust.  Be informed and ask lots of questions.

Do you have concerns about the company’s financial health? 

Do you have doubts about the future solvency of the organization offering the pension? This pertains to both a public entity (can you say Detroit?) and to for-profit organizations like Hartford Financial and Boeing. In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC. If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.

While I am not familiar with the financial state of either Hartford Financial or Boeing I’m guessing their financial health is not a major issue. If you receive a buyout offer you might consider taking it if you have concerns that your current or former employer may run into financial difficulties down the road.

Who guarantees the annuity payments? 

If the buyout offer includes an option to receive annuity payments make sure that you understand who is guaranteeing these payments. Generally, if a company is making this type of offer they are looking to reduce their future pension liability and they will transfer your pension obligation to an insurance company. They will be the one’s making the annuity payments and ultimately guaranteeing these payments.

This is not necessarily a bad thing but you need to understand that your current or former employer is not behind these payments nor is the PBCG. Typically, if an insurance company defaults on its obligations your recourse is via the appropriate state insurance department. The rules as to how much of an annuity payment is covered will vary.

The impact of inflation

An additional consideration in evaluating a buy-out option that includes annuity payments of this type is the fact that most of these annuities will not include cost of living increases. This means that the buying power of these payments will decrease over time due to inflation. 

What other retirement resources do you have? 

If you will be eligible for Social Security and/or have other pension plans it quite possibly will make sense to take a buyout offer that includes a lump-sum. Review all of your retirement accounts and those of your spouse if you are married.  This includes 401(k) plans, 403(b) accounts, IRAs, etc. This is a good time to take stock of your retirement readiness and perhaps even to do a financial plan if don’t have a current one in place.

The Bottom Line

I’m generally a fan of pension buyout offers, especially if there is a lump-sum option. As with any financial decision it is wise to look at your entire retirement and financial situation and to have a plan in place to manage this money.  Where an annuity is also available you need to understand who will be behind the annuity and to analyze whether this is a good deal for you. Be prepared to deal with an offer if you receive one.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Annuities: The Wonder Drug for Your Retirement?

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Annuities: The Wonder Drug for Your Retirement?

Annuities are often touted as the “cure” for all that ails your retirement.  Baby Boomers and retirees are the prime target market for the annuity sales types. You’ve undoubtedly heard many of these pitches in person or as advertisements. The pitches frequently pander to the fears that many investors still feel after the last stock market decline. After all, what’s not to like about guaranteed income?

What is an annuity?

I’ll let the Securities and Exchange Commission (SEC) explain this in a quote from their website:

“An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

There are generally three types of annuities — fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In an indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.

In a variable annuity, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.

Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC. You can learn more about variable annuities by reading our publication, Variable Annuities: What You Should Know.”

What’s good about annuities?

In an uncertain world, an annuity can offer a degree of certainty to retirees in terms of receiving a fixed stream of payments over their lifetime or some other specified period of time. Once you annuitize there’s no guesswork about how much you will be receiving, assuming that the insurance company behind the product stays healthy.

Watch out for high and/or hidden fees 

The biggest beef about annuities are the fees, which are often hidden or least difficult to find. Many annuity products carry fees that are pretty darn high, others are much more reasonable. In general, the lack of transparency regarding the fees associated with most annuity contracts is appalling.

There are typically several layers of fees in an annuity:

Fees connected with the underlying investments In a variable annuity there are fees connected with the underlying sub-account (accounts that resemble mutual funds) similar to the expense ratio of a mutual fund. In a fixed annuity the underlying fees are typically the difference between the net interest rate you will receive vs. the gross interest rate earned.  In the case of an indexed annuity product the fees are just plain murky.

Mortality and expense charges are fees charged by the insurance company to cover their costs for guaranteeing a stream of income to you. While I get this and understand it, the wide variance in these and other fees across the universe of annuity contracts and the insurance companies that provide them makes me shake my head.

Surrender charges are fees that are designed to keep you from withdrawing your funds for a period of time.  From my point of view these charges are heinous whether in an annuity, a mutual fund, or anyplace else. If you are considering an annuity and the product has a surrender charge, avoid it. I’m not advocating withdrawing money early from an annuity, but surrender charges also restrict you from exchanging a high cost annuity into one with a lower fee structure. Essentially these fees serve to ensure that the agent or rep who sold you the high fee annuity (and the insurance company) continue to benefit by placing handcuffs on you in terms of sticking with the policy.

Who’s really guaranteeing your annuity? 

When you purchase an annuity, your stream of payments is guaranteed by the “full faith and credit” of the underlying insurance company.  This differs from a pension that is annuitized and backed by the PBGC, a governmental entity, up to certain limits.

Outside of the most notable failure, Executive Life in the early 1990s, there have not been a high number of insurance company failures. In the case of Executive Life, 1,000s of annuity recipients were impacted in the form of greatly reduced annuity payments which in many cases permanently impacted the quality of their retirement.

Insurance companies are regulated at the state level; state insurance departments are generally the backstop in the event of an insurance company failure. In most cases you will receive some portion of the payment amount that you expected, but there is often a delay in receiving these payments.

The point is not to scare anyone from buying an annuity but rather to remind you to perform your own due diligence on the underlying insurance company.

Annuities and the DOL fiduciary rules

The Department of Labor’s fiduciary rules that will govern which financial products financial advisors use for clients in their retirement accounts do not prohibit the use of annuities, but the new rules do require much more disclosure and justification when they are used. The final draft of the rules also cover indexed annuities which is different from drafts of the rules prior to the final version.

Should you buy an annuity? 

Annuities are not a bad product as long as you understand what they can and cannot do for you. Like anything else you need to shop for the right annuity. For example, an insurance agent or registered rep is not going to show you a product from someone like Vanguard that has ultra-low fees and no surrender charges because they receive no commissions.

An annuity can offer diversification in your retirement income stream. Perhaps you have investments in taxable and tax-deferred accounts from which you will withdraw money to fund your retirement. Adding Social Security to the mix provides a government-funded stream of payments. A commercial annuity can also be of value as part of your retirement income stream, again as long as you shop for the appropriate product.

Annuities are generally sold rather than bought by Baby Boomers and others. Be a smart consumer and understand what you are buying, why a particular annuity product (and the insurance company) are right for you, and the benefits that you expect to receive from the annuity. Properly used, an annuity can be a valuable component of your retirement planning efforts. Be sure to read ALL of the fine print and understand ALL of the expenses, terms, conditions and restrictions before writing a check.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Photo credit:  Flickr

The Election and Your Financial Plan

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The improbable happened last night, we now have President-Elect Donald Trump.

The financial news media is buzzing about the election results and the potential impact on your pocketbook. There has been much speculation about taxes, healthcare and certainly which stocks and stock sectors might benefit from the Trump victory and the Republic majority in both houses of Congress.

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What should you do financially in the wake of the election? 

Nothing!

There is a lot of speculation and uncertainty. Those of you who read this blog or follow me on social media know that I advocate the use of a financial plan as the basis of most financial decisions. Reacting to the election or any other major event usually is not a good idea. For example, many investors who panicked and sold off investments during the market drop of 2008-09 are generally behind those investors who stuck with their investment plan, at least based upon my experience.

In all likelihood there will be changes in the coming months politically and economically. Some of these changes might create the need to adjust strategies for some investors and retirement savers down the road.

For now my suggestion is to monitor the news and to stick with your financial plan. As always your financial plan should be reviewed on a periodic basis and adjusted when appropriate.

My advice is to plan and not react.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

5 Tips to Manage Taxable Mutual Fund Distributions

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With the end of the year in sight it’s time for year-end mutual fund distributions. If you hold mutual funds in taxable accounts, these distributions will be taxable to you.

taxable mutual fund distributions

Even with the weakness in the stock market to start the year, the Bexit vote in United Kingdom and recent pre-election weakness many mutual funds have gains embedded from a seven-year plus bull market.

Short of selling the funds, which may or may not a good idea, here are 5 tips to manage taxable mutual fund distributions.

Don’t buy the distribution 

During November and December mutual fund companies will publish information about fund distributions on their websites. If you are looking to add to a position or start a new mutual fund position in a taxable account it is important that you know the dates of these distributions and take the anticipated distribution into account. You don’t want to buy a fund shortly before a significant distribution and then owe taxes on the distribution only having owned the fund for a short time.

Even if you reinvest distributions on mutual funds held in a taxable account the distributions are still taxable in the year received. These distributions can be added to your cost basis in fund which can take a bit of the sting out of this.

Consider tax-loss harvesting to offset capital gains distributions 

As you go through your taxable accounts near the end of the year consider selling holdings with a loss to offset some of the capital gains distributions from your funds.

Just as with gains and losses generated from the sale of investments, long-term capital gains are matched against long-term capital losses and likewise with short-term capital gains and losses.

Tax-loss harvesting or any tax strategy should only be used if it makes sense from an investment point of view.

Index funds are not a cure-all for taxable mutual fund distributions

Index funds tracking standard broad-market indexes are generally pretty tax-efficient. That doesn’t mean that this will be the case each and every year. Further index funds and ETFs tracking small and mid-cap indexes may need to make more transactions in order to track their respective indexes.

As smart beta products become more popular they will likely be less tax-efficient than more common market-cap weighted index products. Smart beta funds will likely need to buy and sell more frequently in order to rebalance to the their underlying benchmark than more standard index products, potentially resulting in larger capital gains distributions.

Don’t let the tax tail wag the investment dog 

While it is aggravating to receive large taxable mutual fund distributions, it is rarely a good idea to sell an investment holding solely for tax reasons.

Mutual fund distributions are one of three types:

  • Dividends
  • Short-term capital gains
  • Long-term capital gains

All three have different tax implications.

Ordinary dividends and short-term capital gains are taxed at your highest marginal ordinary income tax rate. Long-term capital gains are taxed at preferential rates ranging from 15% to 20% with higher income tax payers subject to the 3.8% Medicare tax. Qualified dividends are taxed at these same rates as well.

That said it is important to pay attention to the tax efficiency of the mutual funds that you are using in your taxable accounts. 

Consider distributions when looking to rebalance 

Year-end is a good time to look at rebalancing your entire portfolio, both taxable and tax-deferred accounts.  As you look to rebalance your portfolio consider reducing positions in taxable mutual fund holdings that continually throw off large distributions. If the fund is a good holding look for ways to own it in a tax-deferred account if possible.

The decision with regard to the taxable portion of your portfolio always involves taxes to one extent or another. If you were looking to reduce your position in the fund anyway it can make sense to sell it prior to the record date for this year’s capital gains distribution. If selling the fund would result in a capital gain, offsetting the gain against a realized loss on another holding could be a good strategy.

The Bottom Line

With the gains in the stock market over the past few years many investors may find themselves the recipient of large distributions this year in spite of weakness in the markets over the course of the past year. When possible consider tax-efficiency when buying mutual funds in a taxable account.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Photo credit: Pixobay