Ken Himmler.com

Just what you need, right? One more time-consuming task to be taken care of between now and the end of the year. But taking a little time out from the holiday chores to make some strategic saving and investing decisions before December 31 can affect not only your long-term ability to meet your financial goals but also the amount of taxes you'll owe next April.

Look at the forest, not just the trees

The first step in your year-end investment planning process should be a review of your overall portfolio. That review can tell you whether you need to rebalance. If one type of investment has done well–for example, large-cap stocks–it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance. Your overall review should also help you decide whether that rebalancing should be done before or after Dec. 31 for tax reasons.    Also, make sure your asset allocation is still appropriate for your time horizon and goals. You might consider being a bit more aggressive if you're not meeting your financial targets, or more conservative if you're getting closer to retirement. If you want greater diversification, you might consider adding an asset class that tends to react to market conditions differently than your existing investments do. Or you might look into an investment that you have avoided in the past because of its high valuation if it's now selling at a more attractive price. Diversification and asset allocation don't guarantee a profit or insure against a possible loss, of course, but they're worth reviewing at least once a year.  

Know when to hold 'em

When contemplating a change in your portfolio, don't forget to consider how long you've owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, that rate could be as high as 35%, not including state taxes. Long-term capital gains on the sale of assets held for more than a year are taxed at lower rates: 15% for most investors.  (Long-term gains on collectibles are slightly different; those are taxed at 28%.)

Your holding period can also affect the treatment of qualified stock dividends, which are taxed at the more favorable long-term capital gains rates if you have held the stock at least 61 days. (Those days must occur within the 121-day period that starts 60 days before the stock's ex-dividend date; preferred stock must be held for 91 days within a 181-day window.) The lower rate also depends on when and whether your shares were hedged or optioned during those 61 days. Check with your tax professional to make sure you don't inadvertently incur unnecessary taxes by selling or buying at the wrong time.

Make lemonade from lemons

Now is the time to consider the tax consequences of any capital gains or losses you've experienced this year. Though tax considerations shouldn't be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.

If you have realized capital gains from selling securities at a profit (congratulations!) and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as "harvesting your losses."

Example: You sold stock in ABC company this year for $2,500 more than you paid when you bought it four years ago. You decide to sell the XYZ stock that you bought six years ago because it seems unlikely to regain the $20,000 you paid for it. You sell your XYZ shares at a $7,000 loss. You offset your $2,500 capital gain, offset $3,000 of ordinary income tax this year, and carry forward the remaining $1,500 to be applied in future tax years.

Time any trades appropriately

If you're selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a "wash sale," and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.

If you have unrealized losses that you want to capture but still believe in a specific investment, there are a couple of strategies you might think about. If you want to sell but don't want to be out of the market for even a short period, you could sell your position at a loss, then buy a similar exchange-traded fund (ETF) that invests in the same asset class or industry. Or you could double your holdings, then sell your original shares at a loss after 31 days. You'd end up with the same position, but would have captured the tax loss.

If you're buying a mutual fund in a taxable account, find out when it will distribute any dividends or capital gains. Consider delaying your purchase until after that date, which often is near year-end. If you buy just before the distribution, you'll owe taxes this year on that money, even if your own shares haven't appreciated. And if you plan to sell a fund anyway, you may minimize taxes by selling before the distribution date.

Know where to hold 'em

Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts. For example, it's generally not a good idea to hold tax-free investments, such as municipal bonds, in a tax-deferred account (e.g., a 401(k), IRA, or SEP). Doing so provides no additional tax advantage to compensate you for tax-free investments' typically lower returns. Similarly, if you have mutual funds that trade actively and therefore generate a lot of short-term capital gains, it may make sense to hold them in a tax-advantaged account to defer taxes on those gains, which can occur even if the fund itself has a loss. Finally, when deciding where to hold specific investments, keep in mind that distributions from a tax-deferred retirement plan don't qualify for the lower tax rate on capital gains and dividends.

Be selective about selling shares

If you own a stock, fund, or ETF and decide to unload some shares, you may be able to maximize your tax advantage. For a mutual fund, the most common way to calculate cost basis is to use the average cost per share. However, you can also request that specific shares be sold–for example, those bought at a certain price. Which shares you choose depends on whether you want to book capital losses to offset gains, or keep gains to a minimum to reduce the tax bite. (This only applies to shares held in a taxable account.) Be aware that you must use the same method when you sell the rest of those shares.

Example: You have invested periodically in a stock for five years, paying a different price each time. You now want to sell some shares. To minimize the capital gains tax you'll pay on them, you could decide to sell the least profitable shares, perhaps those that were only slightly lower when purchased. Or if you wanted losses to offset capital gains, you could specify shares bought above the current price. 

A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s right for you.

• Don’t forget about the impact of inflation on your savings.  As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate.  Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
• Your asset allocation should balance your financial goals with your emotional needs.  If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.
• Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.

Each time one taxpayer transfers wealth to another, the transfer is potentially subject to federal transfer tax, in the form of gift or estate tax. The federal transfer tax system is designed to impose a tax on each and every generation (e.g., father to son, son to grandson, etc.).

The transfer tax system accounts for the fact that a transfer might “skip” a generation by passing from parent to grandchild, for example. This is accomplished by imposing an additional tax whenever transfers of wealth are made to persons who are more than one generation below the taxpayer (e.g., father to grandson). This additional tax is called the generation-skipping transfer tax (GSTT). GSTT is imposed at the highest estate tax rate in effect at the time of the transfer (45% in 2008).

Additionally, most of the individual states impose their own transfer taxes. Together, these taxes can take an enormous bite whenever wealth is being handed down, and eventually eat away a family’s fortune. This can be troublesome to individuals with substantial wealth who would prefer to have their legacies benefit their own family members. It’s from these circumstances that the dynasty trust evolved.

A dynasty trust is created to provide for future generations while minimizing overall transfer tax. With a dynasty trust, a taxpayer transfers assets to the trust. This transfer, from the taxpayer (the grantor) to the trust, is potentially subject to transfer tax (although the taxpayer may use his or her exemption amounts to shield the transfer from tax). The trust then provides for future generations for as long as it exists. Although the trust assets effectively move from generation to generation, there are no corresponding transfer tax consequences.

For more information on dynasty trusts and other trusts such as family foundation, you can go to http://kenhimmler.com.

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As I sat at my desk today and watched the crazy tumble of the Dow Jones it really reinforced the difference between accumulation and distribution. Everyday I meet with retirees or people about to retire and see the stress and the worry on their faces. Their worries are more founded lately because of this massive recession that we are in. In many of their cases I can understand why they are worried. Their entire future is dependent on the outcome of the stock market and they go up and down like a slinky. If you are twenty years old then you should by all means be invested in the stock market and probably 100% in. If you are in your sixties or in your seventies and you are dependent on at least 3% to 4% coming to you in a distribution and you are more than 40% in the stock market then you should be worried. Is this because I think the stock market wont come back – no, it is because I don’t think it will come back and grow for at least another two to three years. If you think I am crazy look at the business cycle. Just now the main street businesses are starting to go out of business. I know main stream financial media says that we are coming out of this recession but all the economic factors point the other way. Just yesterday Warren Buffett stated that this recession will last even longer than he originally anticipated. Lets look at the oil crisis. The oil supply has not kept up with the demand and therefore the sellers of oil have the market ability to increase prices and the world must pay it. If you think that this isn’t true just look at what is happening in Dubai. They expect to get over 1.7 trillion in profits over the next two years. They have at least 70% of the worlds tall cranes in one city – for building high rises. To add insult to injury now they are building another mall with another inside ski slope. This sudden increase in demand cannot be met in a short term. It will take a period of time for alternative fuel sources, alternative energy (solar), alternative transportation (hybrid and hydrogen cars) to not only be designed but produced. Once this happens then the oil produces don’t have as much power as they do now. What this means for people trying to plan their retirement income is that they may have a hard time living in today with inflation above 4%.  The real question is how can a person possibly feel comfortable with their retirement income when they don’t have a good asset allocation plan in place that includes a way to get an income from a fixed – no risk investment over the next two to four years. Let me know what are your thoughts and guesstimates of what will happen in the next few years in regards to the economy?

What is it?

For the most part, annuities will impose various administrative charges and fees. At first, the expense may seem minimal. However, over time, the cumulative effect of the charges and fees can be substantial. These expenses typically arise when dealing with variable annuities. However, fixed annuity contracts may also assess fees in the form of surrender charges.

For more information on fees on variable and fixed annuities such as a guaranteed annuity or equity indexed annuity, you can go to http://kenhimmler.com

Fixed annuities

Fixed annuities usually do not impose express charges and fees (except for surrender charges). Because there are fewer fees involved with fixed annuities, it may seem that it is the cheaper alternative to the variable annuity. However, this may not always be the case, because a fixed annuity will usually contain implicit charges that are reflected in the interest rates in the underlying contract. These implicit charges arise when the insurance company sets the interest rate that it promises to pay at a lower rate than the rate it expects to earn on its investments (sometimes, the difference is called the spread). This spread allows the insurance company to make sure that it will recover its administrative costs.

Variable annuities

Annual maintenance charge

The annual maintenance charges for variable annuities may typically range from $0 to $100. These charges are usually deducted from the various investment accounts in which the annuity holder has placed his or her funds.

Example(s): Mr. Smith purchases a variable annuity from ABC Insurance Company. Mr. Smith has placed 20 percent of his funds in a money market fund and 80 percent of his funds in a growth fund. ABC has an annual maintenance charge of $50. Mr. Smith’s money market fund will be charged 20 percent or $10. Mr. Smith’s growth fund will be charged 80 percent, or $40.

Tip: Some contracts will waive this charge when the annuity’s value exceeds a certain amount (e.g., $25,000).

Investment management fees

Investment management fees pay for an investment management group that advises the insurance company on which investments to buy and sell. Investment management fees for variable annuities may range from .25 percent to .75 percent. While a variable annuity account can be charged a flat percentage rate, some variable annuity contracts will call for each type of fund to incur a different percentage cost.

Example(s): Mr. Smith purchases a variable annuity from ABC Insurance Company. Mr. Smith’s funds are within a money market fund and a growth fund. ABC charges an investment management fee of .35 percent for the money market fund and .60 percent for the growth fund.

Mortality and expense risk charge (M & E charge)

The mortality and expense risk charge (M & E charge) is imposed by insurance companies to protect against risk associated with the annuity contract (e.g., an annuitized contract paying out income longer than mortality tables projected the life expectancy of the annuitant). Generally, the M & E charge ranges between 1 percent and 1.5 percent of the value of the variable annuity account. The M & E charge is deducted proportionately from the variable accounts, similar to the annual maintenance charge (discussed previously).

Transfer fee

Some variable annuities will charge a fee for the transfer of funds between investment accounts. These charges can range anywhere between $0 and $15 per transfer. Some annuity contracts will allow a certain number of transfers per year without charge, assessing a charge for any transfers over the permitted number.

Surrender charge

Most annuity contracts will assess a charge for partial and full surrenders from the contract during a certain time period after the annuity is purchased (usually 5 to 10 years). This charge is often referred to as the surrender charge and can have a wide range that decreases over time. Depending on the annuity contract, the surrender charge percentage will be applied either to the full amount surrendered or the portion of the withdrawal that exceeds the earnings of the contract. Some annuity contracts allow some withdrawals without a surrender charge (e.g., 10 percent of the contract value or the contract earnings). The surrender charge is intended to prevent annuity owners from moving funds in and out of the annuity and allows the insurance company to recoup its losses if the contract does not remain in force for a lengthy time period.

Tip: Some annuity contracts will provide that there will be no surrender charge if the annuity holder dies or becomes disabled.

Tip: Keep in mind that if you surrender your annuity when you are under the age of 59�, you may also be subject to the 10 percent penalty tax that applies to premature withdrawals.

Miscellaneous fees

Variable annuities might also levy charges for administrative expenses, such as record maintenance, accounting, and reporting. In addition, a variable annuity may charge extra for certain guarantees to be written into the annuity contract. Finally, several states levy a state premium tax on annuity premiums. The tax is generally a percentage of the gross premium paid and it is generally deducted prior to the computation of sales charges. Some insurance companies choose to add the cost of the tax into the price of the premium, rather than levy a direct tax.

Recently C.D. Ulrich CPA won a hard fought battle with the IRS. For years Ulrich really believed that the IRS was unfair to taxpayers (I really want to laugh right now but I am trying to be professional as I think the IRS has never been fair) when it came to the taxation of the stock they received from the demutualization of the insurance companies.

In the 90s many mutual insurance companies decided that they would go public and they went through the effort to sell their stock to the public. When they demutualized ( a mutual company is a company that is mutually owned by their policy holders) they not only sold stock to the public but the policy owners all got stock for owning policies.

You may have been one of the lucky (or so you thought) few that received notice that you were going to get a stock distribution from owning that policy until you also received a bill for taxes on the entire amount of stock distributed. As an example if you owned a policy with John Hancock and you received $100,000 in stock you would have been taxed on the entire $100,000.

Mr. Ulrich thought this was a rip off (like all the other financial planners out there) but he had the guts and staying power to fight the mighty IRS and he won.  His opinion was that if you are a mutual owner of a company you have paid for your policy which would constitute a cost basis for the stock. You are only getting an exchange for the premiums you paid. This means that if you take the first example of getting the $100,000 you would only pay tax if the $100,000 increased to $105,000. Then you would only pay tax on the increase of the $5,000.

Currently if you have ever received a distribution check from a company that has demutualized then you might be entitled to a refund. We are reviewing this for clients and people that contact us. The best way you can find out if you might be eligible for a refund is to send us an email to taxrefund@kenhimmler.com   Please let us know the company you received stock from, when and the amount. If we feel you might be eligible then we will contact you for more information. Please include your name and your mailing address and phone number in the email you send us.

What is a trust?

A trust is a legal entity that is created when you transfer property to a trustee for the benefit of a third person. The trustee manages the property for the beneficiary in accordance with the terms and the instructions in the trust document. In legal terms, the trustee has legal ownership of the property, while the beneficiary has beneficial ownership.

Creator of trust

The person who creates the trust is called the grantor, settlor, donor, or trustor. The grantor usually decides what assets will be transferred to the trust, who the beneficiaries will be, what the terms and conditions of the trust will be, and who will be the trustee. The grantor may also be a trustee and/or a beneficiary. Moreover, a beneficiary can be a trustee. The only arrangement that will not work is if the sole trustee is also the sole beneficiary (the legal and beneficial interests are said to merge and the trust is therefore disregarded as a legal entity).

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Major considerations

How much will you need in retirement?

When do you plan to retire? What kind of lifestyle do you desire? How much do you have right now that you can count on for your retirement? What about Social Security; do you know what kind of benefits you can expect? These are all factors you will need to consider when you determine how much you need. To understand how they tie together, see Determining Your Retirement Income Needs.

Know how much you have

Take an honest look at your present net worth. If you’re like most people, you’ve got a long way to go before you can afford to retire. Knowing how much you currently have earmarked for retirement will assist you in saving for your retirement. See Net Worth.

Implement a savings plan

Take an honest look at your current spending. Just as in planning for other financial goals, you need to implement a savings plan. Think about establishing a long-term systematic savings plan to put aside funds for retirement. If you haven’t already done so, consider the benefits of establishing and sticking to a spending plan.

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