Category Archives: Investing

Tax Tips to Aid in Retiring Early

Tax Planning

Wouldn’t it be nice to check out of the workforce early and not have to worry about having enough for retirement? While good financial planning can help you get there, leveraging the tax code as part of your retirement plan is also a good idea. Here are some tax tips that could help you reach your early retirement goal.

  1. Maximize tax advantaged retirement accounts. Retirement accounts like Traditional IRAs and 401(k)s allow qualified taxpayers to save pre-tax money, invest the funds, and not pay taxes until the funds are withdrawn during retirement years. The IRS still receives their tax on your income and earnings, but they delay receiving the funds until you withdraw them in the future. In other words, the IRS allows you to invest their potential tax receipts along with your money and will take their share of your investment earnings at a later date.
  2. Leverage the “catch-up” provisions within retirement accounts. Most retirement accounts allow older taxpayers to invest even more money in these retirement savings accounts. The key retirement fund limits for 2012 are noted here:
    Retirement Plan 2012 Maximum
    Age 50+
    Total Maximum
    401(k), 403(b), 457
    Traditional/Roth IRAs
  3. Consider Tax Free Retirement Choices. Roth IRAs and Roth 401(k)s are an interesting alternative to other qualified retirement plans. Within Roth accounts you invest money in your plan with “after-tax” dollars, but any earnings are tax-free as long as you follow the withdrawal rules. While this lowers your potential initial investment, you have created a source of funds that can earn money without being taxed in the future. If you expect tax rates to go up during your retirement years, perhaps a Roth IRA should be included in your retirement portfolio.
  4. Roth Rollovers. You may also roll money from most qualified retirement accounts into Roth retirement accounts. When you do this, you must pay the tax on the funds rolled over, but the rollover makes any future earnings within this account tax-free as long as you follow the distribution rules. In the past, you were unable to do this type of rollover if your income exceeded $100,000.
  5. Consider Health Savings Accounts and their “catch-up” provisions. Health Savings Accounts allow you to set aside money to pay for qualified health expenses in pre-tax dollars. To be eligible to set up this type of savings account, you must be in a qualified high deductible, medical insurance plan. The good news is that unused funds can be invested and carried forward to future years. These funds can then be used to augment your retirement plan.
  6. Consider state taxes. Part of your retirement plan should be understanding where you wish to live. It is important to note that states are not created equal on this front. Many states have no state income taxes, while others like Hawaii, are in excess of 10%. And you must project where your chosen state might be in the future. In Minnesota, for instance, recent proposals would make that state’s taxes among the top taxed states in the nation. Many states are also trying to take the position that you must pay them state taxes on all retirement plan withdrawals from money earned while you lived in their state, even though you moved ten years ago! This problem will not go away as long as governments continue spending programs in excess of tax collections.
  7. Consider additional deductions and benefits. There are also a number of other benefits that should be considered as you reach retirement age. These include:
    • the additional standard deduction when you reach 65
    • the credit for elderly/disabled
    • the timing of when to commence social security benefits
    • the impact of Medicare and Medicaid plans
    • the potential taxability of retirement benefits including social security and pension plan income

Tax Prep Deerfield Beach


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Investing on Margin Increases Risk and Potential Rewards

Investment Page

CPA Deerfield Beach

Although stocks have been volatile lately, they have been attractive longterm investments. The broad U.S. stock market has returned approximately 10% a year for the past 25, 30, 35, and 50 years—and that’s still true after the bear markets of 2000–2002 and 2008–2009. If you have a long time horizon and can tolerate periodic slides, you probably should hold some of your portfolio in stocks or stock funds. Investors who can tolerate stock market risks may be able to enhance returns by investing on margin, or borrowing from their broker to buy securities using their own holdings to secure the loan. Assuming that stocks continue to rise, long term, margin investing can increase your exposure and your overall gains. You shouldn’t overlook the risks of margin investing, but you also should realize that tax advantages may push your investment results toward the plus side.

Double play

When you invest on margin, you borrow money to buy securities. Once you set up a margin account with your brokerage firm, the firm will lend you money, secured by your holdings there. Base interest rates on margin loans might be in the 6%–7% rangenow, but you can pay more or less if you have a small or large account with the firm. Interactive Brokers is notably cheap. Here is a cheaper firm

$0 – $49,999 2.00% + 1.75% (3.75%)
$50,000 – $99,999 2.00% + 1.00% (3.00%)
$100,000 – $249,999 2.00% + 0.50% (2.50%)
$250,000 – $499,999 2.00% (2.00%)
$500,000 – $999,999 2.00% – 0.50% (1.50%)
$1,000,000 + 2.00% – 0.75% (1.25%)

Typically, the maximum margin allowed on stocks is 50%. By borrowing, say, $50,000 on margin, you can buy as much as $100,000 worth of stocks. Then you’ll stand to gain or lose twice as much as you would if you had not invested on margin.

Where do the tax benefits come in? The interest you pay on a margin  loan may be tax deductible (see the Trusted Advice column “Deducting
investment interest” for more information).

Example: Say you get a margin loan at a 6.5% interest rate, and your effective tax rate (federal, state, local) is 35%. With a 35% tax deduction,
your net borrowing cost is 4.225%: 65% of 6.5%. If your after-tax investment returns from the assets bought on margin top 4.225%, you’ll benefit from using the margin loan. Based on long-term stock market results, investing on margin can be a reasonable strategy for those who can
tolerate the risk.Moreover, the tax savings from deducting margin interest come right away. For many stock market investors, substantial taxes are deferred for many years, until they sell the shares, and favorable long term capital gains rates may apply. Although the numbers may seem favorable, don’t downplay the risks involved with investing on margin. If your investments lose value, you may get a margin call—a demand for more cash or securities in your brokerage account. If you don’t provide the cash or securities that your broker requires, the firm can sell securities from your account and use the proceeds for loan repayment.
One way to reduce this risk is to use less margin—20% or 30%, perhaps, instead of 50%. You’ll own less stock, but you’ll also have less chance of
receiving a margin call.

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