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.
More Ways a Buy-Sell Agreement Will Help Buy Out a Partner
Suppose that Steve decides that after years of hard work and dedication, he wants to retire so that he can travel the world while he’s still fit. Leonard plans to stay at the sandwich shop and actively continue to run the business.
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?
Last week, we started digging a little deeper into the classes of mutual fund shares, trying to decipher the details that differentiate them from one another. To recap, we discussed mutual fund “A” shares, which have lower recurring fees (such as 12b-1s), but require an upfront cost, around 5% of the total investment. Now we’ll move onto mutual fund “B” shares.
Last week, we took an introductory look at mutual funds, but there’s a lot more to learn than just the basics. We briefly discussed the fees associated with some mutual funds, which are often called “sales loads.” Now that we’ve familiarized you with the overview, let’s delve a bit further into mutual fund share classes.
You have many options when it comes to how you choose to invest your money. Having to make a choice from an array of options is often incredibly difficult—just think about when you’re handed a 10-page dinner menu! I wind up stuck at the table forever trying to decide. But making decisions about your money are always important ones, and you need to have a good understanding of all of your options.
We’ve already discussed how the New York estate tax exemption has changed from last year to this year, but we haven’t talked about why it’s changed. The new legislation regarding estate taxes was passed in an attempt to keep wealthy New Yorkers from leaving the state upon retiring, but whether that’s actually working is debatable.
Last week we started looking into retirement plans such as 401ks and IRAs, and the different strategies that people use to manage their finances as they enter into retirement. Sometimes you don’t have to pay taxes on the money you invest into retirement plans, like IRAs, so one strategy is to hold off on withdrawing from your account until you’re in the lowest possible tax bracket. People who follow this practice will wait until their taxable income decreases substantially enough that they enter into a lower tax bracket than they were in when they were working, so that they have to pay less on the money they withdraw from their retirement accounts.