After tax day, we are rewarded with the fun task of deciding what to do with our income tax refund. Before buying anything this year, consider some of our smart strategies for investing your tax refund for retirement.
Are you in the business of buying and selling real estate? Tired of paying out your gains at tax time? Let us introduce you to the 1031 exchange!
Usually, when you sell a business or investment property and have a gain, you have to pay a tax on that gain at the time of the sale. With a 1031 exchange there is an exception that allows you to postpone paying taxes on that gain if you reinvest gains into a similar property in a like-kind exchange.
To help you save at tax time and reinvest your gains we will explain key aspects of a 1031 exchange, who qualifies for a 1031 exchange and what a like-kind exchange involves.
Don’t allow your tax refund check to burn a hole in your pocket. Instead, let your money grow. If you receive money back from the government this year, try one or more of our five ways to invest a tax return for your future.
We started talking about passive investing last week, when we introduced an example of a woman investing in an index fund that tracked the S&P 500. This type of passive investing, in which you invest in a fund that tracks the indexes of bonds, small company stocks, foreign stocks, and other asset classes, is quickly becoming one of the most popular forms of investment.
Investors can employ two different strategies when choosing how to invest their money: passive or active. Despite the fact that active investing has historically been most popular, there’s recently been a shift that’s put passive investing way above active in measures of popularity. To illustrate, look at figures from 2013: passive equity funds exceeded $60 billion in net investments, while active funds only had $3.4 billion.
It’s no surprise that wealthy people have an interest in sustaining their wealth through future generations. However, what is surprising is how few of them are confident in their ability to do so. In a recent study published by Merrill Lynch’s Private Banking and Investment Group, a third of the participants indicated that their biggest financial concern is their uncertainty about wealth sustainability.
As it turns out, their fears aren’t unfounded—in fact, two out of three times, a family’s wealth doesn’t outlive the generation immediately following the one that created it. What’s even more frightening, is that assets wind up completely spent before the end of the third generation ninety percent of the time. This is such a common occurrence that there’s even a phrase for it: “Shirtsleeves to shirtsleeves,” when a family finds themselves in the same financial position that they started.
A recent survey published by Merrill Lynch’s Private Banking and Investment Group uncovered alarming statistics with regard to the universal goal of sustainability. “The Meaning of Sustaining Wealth” was a survey that included 171 participants, meant to gain insight into the desire to sustain wealth and the plans through which individuals intended to do so.
The wealthiest participants of the study had assets valued over $10 million, 63% of whom viewed sustainability from a multigenerational perspective. By that we mean that those individuals intended for their wealth to last for several generations. Participants who were age 55 or younger didn’t appear to have asset sustainability timelines that were quite as long; 58% of them aimed to support themselves and their children through their lifetime.
There are several strategies to consider when planning your investments, many of which are dependent on the length of your investment term. Oftentimes, investors will opt for the lowest possible investment risk because they’re afraid of downturns in the market, but not taking a risk could be more detrimental in the long run. If you never take risks, you’re preventing your portfolio from ever seeing any significant growth, meaning that your money isn’t working as hard as it could be for you.
One type of investment that is virtually risk-free is buying into US Treasury bills (T-Bills). These are short-term arrangements wherein the individual buys in at a discounted rate, so that there’s a positive yield when the bill reaches maturity. T-Bills are generally issued with either one-month, three-month, six-month, or one-year maturity terms. Unlike other types of investments, T-Bills do not accrue interest over the investment term, which is why you buy in at a rate that’s less than its full value—your return is thus guaranteed upon the maturity of your T-Bills.
A subsidiary of Morningstar, Ibbotson Associates, recently studied what the returns on a $1 investment in 1925 would be today. They found that if someone had invested $1 in T-Bills in 1925, and continued reinvesting the return income, it would have grown to more than $20 by the end of 2013. With regard to inflation, $1 in 1925 is about $13 today, so that means the hypothetical investment would have stayed ahead of inflation. However, these figures fail to consider transaction costs or income taxes, in which case the investment could have actually fallen below the inflation rate.
With the numbers for a long term investment in T-Bills in mind, looking to other investment options prove to yield significantly higher returns. Intermediate-term Treasury Bonds, with five year maturities, are not completely risk-free, but they’re definitely lower risk than most alternatives. Under the same assumptions as the T-Bills model, that same $1 would have grown to $93 at the end of 2013 if invested in Treasury Bonds. Throughout the years, there were a few losses in the market, with the steepest calendar year loss measuring at -2.3% in 2009.
On the other hand, had you invested that very same dollar in large company US stocks in 1925, by 2013 you’d have more than $4,600 in growth! The 88 year time-period certainly saw its share of ups and downs—with a serious decline of 37% on 2008—but the overall return would have been well-worth sticking through the rough times.
While many investors find it much too difficult to keep investing when times are bleak, the longer you have for your money to work for you, the better your odds at higher returns when investing in risky stocks. After all, the term “high risk, high reward” doesn’t exist for nothing!
If you have questions about the investment risks that are best suited for you, call the tax professionals at DeFreitas and Minsky LLP at (516) 746-6322!
When you’re are looking for ways to invest your money, it’s important to explore all of the options that are available to you. Traditionally, most people default to investing in stocks and bonds, but those aren’t the only means by which you can invest.
But exactly what is a Hedge Fund? Simply put, it’s an investment partnership that is coordinated and managed by an individual (hedge fund manager). Hedge Funds are sometimes classed as Limited Liability Companies or Limited Partnerships in order to legally protect the investors involved in the fund. If the company goes bankrupt, creditors could potentially go after the investors for even more money than they’re put into the fund, but with these protective measures in place, they’re safe.
We’ve spent the last few weeks taking a fairly in-depth look at mutual fund share classes. From our initial definition of mutual funds, to our explanations of mutual fund A-Class and B-Class shares, we’re finally coming to a close with C-Class Mutual Fund Shares. So what kind of charges can you expect with these mutual fund shares?