Personal Finance column: ‘Location, location, location’ also applies to your assets
We are blessed to live in one of the most beautiful locals on earth, and we benefit from the growth in our real estate holdings over time. What does location have to do with your investment portfolio? The location of your assets has bearing on what ultimately stays in your wallet, for your use down the road.
It is not what you make but what you keep that matters in long-term investing. How do you create a portfolio that holds up to the eroding forces of a multitude of taxation components? Tax time is upon us, and while there are limited opportunities to alter your 2015 return, you can start taking a proactive stance for 2016.
This year, there are seven taxation levels for ordinary income, and three levels of taxation on long-term gains and qualified dividends. There is potential Medicare Surtax on net investment income. There are phase outs on itemized deductions and personal exemptions which impact disposable income. With a dual tax system, there are two tax calculations — regular and Alternative Minimum Tax — you pay the higher of the two.
Take a look at your tax return to determine if the investment neighborhood you are located in is putting you at risk for tax erosion.
Because you can’t grow or compound a lost tax dollar, you need to keep as much working for you as possible. Do you have dividend income? Is it ordinary or qualified? Tax-inefficient mutual funds can generate short-term capital gains which are classified as ordinary dividends. There is a meaningful difference in the tax rate on ordinary (up to 43.4 percent) versus qualified (23.8 percent) dividends.
If you are over 70, you can use your Required Minimum Distribution on your IRA to fulfill your charitable intentions and avoid the amount from being included in your AGI, which may help avoid the Medicare Surtax.
Look at what capital gains are coming in and take advantage of strategic tax-loss harvesting opportunities throughout the year. The 2015 average capital gain distribution even with disappointing returns, was 9.7 percent, according to Morningstar and Russel investment calculations. You got taxed even though your portfolio didn’t do well.
Can you make a deductible IRA, or a ROTH IRA, or a non-deductible IRA contribution? Are you maxing out your employer sponsored plan for any matching contributions? If you are hitting 50 this year — you can get up to $24,000 into your 401K 403B or 457 plan. Focusing on your personal plan? You can get up to $6,500 into traditional IRA. What is the best fit for you?
Location is very important, but your foundation is paramount. Why do you live in the Roaring Fork Valley? Why do you have an investment portfolio? It has to be deeper than the dollar. If the only reason you live here is to make more money, you are missing the beauty of what this place has to offer. If the only reason you are in the market is to make more of it — you are missing the beauty of creating an intentional life well-lived. Let’s reconnect with the important stuff. Clarify your values and what true wealth means to you. The what and the why are the materials that bring structural integrity to your foundation. A solid foundation and suitable location will reap both intrinsic and monetary rewards whether it is real estate or investments.
Danielle Howard is a Certified Financial Planner practitioner. Her office, Wealth By Design LLC, is in Basalt. Visit her at http://www.wealthbydesign4u.com. Advisory Services offered through Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Cambridge and WBD are not affiliated.
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