A Portfolio Question (Tax Minimization) / Tax Efficient Investing Prospects

Over at Bogleheads we read a discussion:

A Portfolio Question (Tax Minimization)

by R Wins » Fri Jun 07, 2013 12:18 am

Hi, I am seeking to implement Dan Solin's supersmart portfolio by investing in the following funds amongst a taxable account with 146k and a tax sheltered account (Roth) with 65k. I would like to stay close to the allocations listed while also minimizing taxes:

Vanguard Large Cap Index Admiral Fund (VLCAX) 16%
Vanguard Value Index Admiral Fund (VVIAX) 16%
Vanguard Small Cap Value ETF (VBR) 16%
Vanguard REIT Index Admiral Fund (VGSLX) 8%
IShares MSCI EAFE Value ETF (EFV) 8%
IShares MSCI EAFE Small Cap ETF (SCZ) 8%
Vanguard Emerging Markets Stock Index Admiral Fund (VEMAX) 8%
IShares Barclays Short Treasury Bond ETF (SHV) 10%
SPDR Barclays Capital Short-Term International Treasury Bond ETF (BWZ) 10%

Any advice you could provide on how to split these funds between the taxable and tax sheltered account to minimize taxes would be helpful. Thanks!

R Wins

Posts: 2

Joined: 13 Jan 2013

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Re: A Portfolio Question (Tax Minimization)

by grabiner » Sat Jun 08, 2013 3:48 pm

Welcome to the forum!

Wiki article link: Principles of Tax-Efficient Fund Placement

This would be my estimated order of tax-efficiency, from most efficient (should be in taxable) to least efficent).

Temporarily tax-efficient (you'll need to switch these to tax-deferred if rates rise, but current yields are near zero):
IShares Barclays Short Treasury Bond ETF (SHV) 10%
SPDR Barclays Capital Short-Term International Treasury Bond ETF (BWZ) 10%

Tax-efficient:
IShares MSCI EAFE Small Cap ETF (SCZ) 8%
Vanguard Emerging Markets Stock Index Admiral Fund (VEMAX) 8%
Vanguard Large Cap Index Admiral Fund (VLCAX) 16%

Moderately tax-efficient:
Vanguard Small Cap Value ETF (VBR) 16%
IShares MSCI EAFE Value ETF (EFV) 8%
Vanguard Value Index Admiral Fund (VVIAX) 16%

Must be in IRA:
Vanguard REIT Index Admiral Fund (VGSLX) 8%

You might also consider VSS (Vanguard FTSE All-World Ex-US Small-Cap) instead of SCZ: it's less expensive, and it includes small-cap emerging markets, which Vanguard's emerging markets fund doesn't have.

 David Grabiner

grabiner

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Posts: 10253

Joined: 21 Feb 2007

Location: New Jersey

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Re: A Portfolio Question (Tax Minimization)

by R Wins » Sun Jun 09, 2013 12:17 am

Thank you! Your advice is invaluable and very helpful. Initially, I plan to invest 100% in stock funds and wait for interest rates to rise before investing in bonds since prices will likely fall. I will consider VSS instead of SCZ, especially since it has a lower expense ratio and covers small-cap emerging markets. I believe SCZ (small/blend) was recommended because it was more consistent with the Fama/French theory of small/value versus VSS which is small/growth.

I am new to this forum and can clearly see there is a wealth of experience and knowledge. I have a lot to learn...

Five budget items that target taxes / A roundup of proposals that would have significant consequences when planning for clients

Ed Slott for Investment News writes: Five proposals were included in this year's federal budget that directly relate to retirement accounts. Here is a rundown of each proposal, its main benefit and its drawback.

1) Mandatory five-year rule for non-spouse beneficiaries.

The proposal — Most beneficiaries of individual (and other) retirement accounts would be required to empty inherited retirement accounts by the end of the fifth year after the year of the IRA owner's death. This proposal is a potential game changer to many clients' estate plans. What makes this proposal scary is that it's not the first time it has been floated.

The benefit — Requiring all non-spouse beneficiaries to withdraw inherited retirement account funds within five years would simplify the rules for both clients and advisers. The proposal would exempt certain beneficiaries, such as the disabled, and minor children.

The drawback — This proposal would lead to the death of the stretch IRA for most non-spouse beneficiaries. They would face more-severe tax consequences upon inheriting retirement accounts, and, as such, the values of these accounts as potential estate-planning vehicles would be diminished. It also would significantly reduce the value of Roth conversions, particularly for older clients using them as an estate-planning strategy.

2) Establish a “cap” on retirement savings, prohibiting additional contributions.

The proposal — New contributions to tax-favored retirement accounts, such as IRAs and 401(k)s, would be prohibited once clients exceeded an established “cap.” This cap would be determined by calculating the lump-sum payment that would be required to produce a joint and 100% survivor annuity of $205,000 beginning when clients reached 62. Currently, this formula produces a cap of $3.4 million. Accounts could still grow as a result of earnings, and the cap would be increased for inflation.

The benefit — Perhaps the only good news is that at $3.4 million, this provision would make an impact only on a very small percentage of retirement savers. But even here, if interest rates increased, then the cap could go much lower, since annuities paying $205,000 would cost less. This would affect many more retirees.

The drawback — Many clients would require significantly more annual income in retirement to maintain their desired standards of living, especially after factoring in taxes.

3) Create a 28% maximum benefit for retirement account contributions.

The proposal — The maximum tax reduction for making contributions to defined-contribution plans, such as IRAs and 401(k)s, would be limited to 28%. As a result, certain high-income taxpayers making contributions to retirement accounts would not receive a full tax deduction for amounts contributed or deferred.

The benefit — For some clients, the good news is that unless they were in a federal income tax bracket higher than 28%, this provision would not increase their tax liabilities.

The drawback — High-income clients no longer would be able to receive a true, full deduction for amounts contributed/deferred to a retirement account.

4) Eliminate RMDs for clients with $75,000 or less in retirement accounts.

The proposal — Clients with combined savings, across all retirement accounts, of $75,000 or less would be exempt from required minimum distributions.

The benefit — The proposal would decrease the compliance burden and increase simplicity for those individuals with smaller retirement account balances.

The drawback — None. This provision would eliminate RMDs for nearly 50% of IRA owners.

5) Allow non-spouse beneficiaries to make 60-day rollovers of inherited funds.

The proposal — Non-spouse beneficiaries would be allowed to move inherited retirement savings from one inherited retirement account to another via a 60-day rollover (in a manner similar to that in which they currently can move their own retirement savings).

The benefit — Unifying the rollover rules for retirement account owners and beneficiaries would greatly simplify this aspect of retirement accounts and reduce the number of irrevocable and costly mistakes that are made by beneficiaries under the current rules.

The drawback — No downside. Of course, if most beneficiaries would be required to empty the inherited account in five years (see the earlier proposal), this provision would be far less beneficial than it would be under current law.

Are you aware of how much your tax rates actually changed in 2013?

Arthur Bell writes:   We are all aware that taxes increased as a result of President Obama's American Taxpayer Relief Act ("Relief Act") enacted in January of this year. Yet, when talking to clients throughout this tax season, we realized that many clients do not fully appreciate how the tax increases actually impact them and their available cash flow. As a result, they may not have fully planned from a cash flow perspective to handle the increase. So, this email is a quick summary of the tax rate changes with some ideas on how to cope.

How did your tax rates change?

For illustrative purposes, the summary below applies to taxpayers with Adjusted Gross Income greater than $450,000 and earned income (i.e., wages and self-employment income) greater than $250,000. 

Type of   Income	2012 Rate	2013 Rate	Health Care Tax	Deduction  Phase-Out	Total Tax   Increase
Long Term  Capital Gains	15.00%	20.00%	3.80%	1.20%	10.00%
Short TermCapital Gains	35.00%	39.60%	3.80%	1.20%	9.60%
QualifiedDividends	15.00%	20.00%	3.80%	1.20%	10.00%
Interest and Non-Qualified Dividends	35.00%	39.60%	3.80%	1.20%	9.60%
Earned  Income	36.45%	41.05%	0.90%	1.20%	6.70%

How can you prepare for the impact of these tax increases?

We recommend that you:  

Whenever possible, determine your quarterly estimates using the safe-harbor method (based on your 2012 tax liabilities) to avoid underpayment penalties.

If paying in quarterly estimated tax payments based on actual 2013 earnings, be sure to account for the increased tax rates and health care tax.

Make sure you set aside additional cash for taxes to be paid in by April 15, 2014.

3 Ways You Can Cut Your Tax Bill in Retirement

Dan Caplinger for TheFool writes: With retirees suffering from low interest rates and rising expenses, the last thing they need is to pay more in taxes than absolutely necessary. Fortunately, by taking steps both during your career and after you retire, you can reduce your tax bill and keep more of your money to pay living expenses.

In the following video, Fool contributor Dan Caplinger discusses three ways to keep your taxes lower in retirement. Through judicious use of Roth IRAs, being smarter about using preferential tax rates on dividends, and taking care when you withdraw money from traditional tax-favored retirement accounts after you retire, you can avoid tax pitfalls and keep your overall taxes as low as possible. Dan discusses specifics of all of these strategies and notes some often-missed provisions that can help you cut your tax bill.

More Expert Advice from The Motley Fool

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Working Seniors Must Still Pay Tax / Q:I am 72, retired and went back to work. At what point do I not have Social Security tax deducted from my pay?

Tom Herman for the Wall St Journal writes an answer:   Your age isn't the issue here.  The Social Security Administration (www.ssa.gov) offers this response in question-and-answer form: "I'm receiving Social Security benefits. Do I still have to pay Social Security and Medicare taxes on my earnings if I continue to work?"

"Yes, you do. Whenever you work in a job covered by Social Security, your employer must deduct your Social Security and Medicare taxes from your salary and must pay the equal employer's share of the taxes. This is true, regardless of your age.

"If you are self-employed while getting benefits and the annual net profit from your business is more than $400 that, too, is covered by Social Security and Medicare taxes. You must report those earnings and pay the Social Security and Medicare taxes when you file your personal income-tax return."

Separately, a Florida reader asked about tax rates for 2013.

The employee tax rate for Social Security is 6.2%, up from 4.2% last year. The employer portion remains unchanged at 6.2%. Self-employed workers have to pay both portions (totaling 12.4%, up from 10.4% last year). The maximum amount of earnings subject to this tax is $113,700. See IRS Publication 15.

Don't forget about Medicare. The Medicare tax rate is 1.45% each for the employee and employer. Self-employed workers pay both portions. All wages are subject to the Medicare tax.

There is also an additional Medicare tax of 0.9% that began this year on earned income above a certain threshold. It applies to earned income exceeding $200,000 for most individuals and $250,000 for married couples filing jointly.

CFP, CLU Or ChFC - Which Is Best?

Investopedia writes: At some point in your financial career, you might encounter a client whose current situation is complicated, and during your meeting you might be stumped in determining the best solution. Clients with seemingly simple situations can often have complex issues related to life insurance, taxes or estate planning they may be unaware of.

In order to avoid these types of awkward situations, it is important to ensure that you have equipped yourself to recognize many situations and guide your clients through them correctly. By increasing your knowledge, your credibility and your income will benefit. In this article we'll examine three different designations that will allow you to gain the knowledge you need to handle almost any client's situation: the Certified Financial Planner® (CFP®), Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®).

CFP® - The Media's Choice
The CFP® mark is offered - and governed - by the Certified Financial Planner® Board of Standards in Washington, DC. The CFP® designation is perhaps the most widely recognized credential in the field today, due largely to the amount of exposure it has received from the media. This credential is generally the designation of choice for those who wish to offer fee-based financial planning, and traditionally has been more heavily pursued by those in the tax, legal or investment professions. Insurance agents that obtain this designation can use it to provide comprehensive financial plans for clients and show them how their various insurance needs fit into such plans.

The CFP® curriculum contains five core courses that cover the following planning topics:

• Investment planning
• Insurance planning
• Estate planning
• Tax planning
• Retirement planning
• Education planning
• Ethics and the financial planning process

There are approximately 106 conceptual topics related to financial planning that are covered in this material. Once all coursework has been successfully completed, students must pass a rigorous, comprehensive 10-hour board exam. Once the candidates have passed the exam, they must pass a background check and pay an entrance fee before receiving their certifications. 

Chartered Life Underwriter® - The Oldest Designation
The CLU® is widely considered to be the most respected insurance designation in the industry. This designation was created in 1927 by the American College in Bryn Mawr, Pa. The CLU®; has traditionally been pursued by agents who wish to specialize in life insurance for business or estate-planning purposes.

The current course curriculum for the CLU® includes five required courses plus three elective courses. The required courses include the following:

• Fundamentals of Insurance Planning
• Life Insurance Law
• Individual Life Insurance
• Fundamentals of Estate Planning
• Planning for Business Owners and Professionals

The three elective courses can be chosen from such subjects as the following:

• Financial Planning: Process and Environment
• Individual Health Insurance
• Income Taxation
• Group Benefits
• Planning for Retirement Needs
• Investments
• Estate Planning Applications

Chartered Financial Consultant - Advanced Financial Planning
The Chartered Financial Consultant® (ChFC^®) credential was introduced in 1982 as an alternative to the CFP® mark. This designation has the same core curriculum as the CFP® designation, plus two or three additional elective courses that focus on various areas of personal financial planning. The biggest difference is that it does not require candidates to pass a comprehensive board exam, as with the CFP®.

Due to the number of courses that overlap both the ChFC® and CFP®, the ChFC® and CLU marks are often taken by individuals seeking in-depth knowledge of both financial planning and insurance, but who wish to avoid a lengthy board exam.

Which Is Best? The answer to this question lies in your preferred area of focus. If you would like to focus more exclusively on life insurance, then the CLU® designation will provide the most complete curriculum for you. If you would rather focus on 
comprehensive financial planning, then one of the other two credentials will be a better fit.

It should be noted that none of these designations are considered to be inherently superior to the others. The CFP® designation requires less coursework but forces its students to learn the material in a way that allows them to proactively apply it in the board exam. The CLU® and ChFC® credentials require more coursework but have no comprehensive exam. The following chart can help you understand the differences and similarities between the three designations.

--	CLU®	CFP®	ChFC®
Comprehensive Board Exam	No	Yes	No
Number of courses required	8	5	8
Focus of Study	Life Insurance, both personal and business	Comprehensive financial planning	Comprehensive financial planning

The Bottom Line
Agents and brokers that decide to earn one of these designations will soon discover that some of the same coursework is required regardless of which designation is chosen. Those who desire to obtain only one of these credentials will need to personally evaluate the courses that are required for each and their relevance to their specific areas of practice.

Original story - CFP, CLU Or ChFC - Which Is Best?

 

Cloud Accounting for Small Business / Keeping your books at an offsite server may make your accounting function more efficient and cheaper.

LL Brougham writes: What Is Cloud Accounting?

Cloud accounting represents a shift from the traditional “software-in-a-box” installed on your desktop or laptop that can be updated only by accessing that specific machine. Instead, cloud accounting is sold as “software-as-a-service”; the application is web-based and generally accessible at any time from any location because your data and the application itself reside on the remote server.

Cloud accounting offers myriad features, including accounting, invoicing, payroll and expense tracking. Several service providers now offer online accounting solutions tailored to the unique needs of individual businesses. In general, cloud products are easy to use and usually inexpensive or even free.

Advantages of an Online Service

Cloud accounting offers several time-saving advantages over device-bound systems:

• ·         Integration with financial accounts: Some programs save you the pain of exporting and importing spreadsheets by offering the ability to import transactional data from your bank automatically.
• ·         Online invoicing: Many offerings allow you to create invoices quickly and easily, then send them electronically via email to your clients. Clients can then pay your invoice online. The invoice is automatically marked as paid once the payment is processed.
• ·         Expense tracking: In addition to the traditional method of manually entering line items to a budget or expense account, some providers allow you to capture and file receipts or bills by simply taking a picture from your smartphone or mobile device. The picture is read and the data entered automatically into a pre-defined category within your account.
• ·         Cross platform: Since this is a web-based service, you can use a Mac, PC, Linux, or a combination of multiple platforms.
• ·         Mobile friendly: Many cloud accounting platforms offer mobile apps that provide access to key features from your smartphone or tablet, such as submitting a receipt directly following a business lunch, or quickly creating an invoice while you’re on the go. For example, you could snap a photo of the receipt from your business lunch and send it directly to your accounting department. No more piles of unprocessed paper receipts in your drawer!
• ·         Collaboration: Some programs offer the ability to collaborate on financials with multiple employees and even to share your books with an off-premises accountant or bookkeeper.
• ·         Security: We all know that we should back up our data regularly, but most of us don’t. If your desktop crashed or your laptop got stolen and you had not backed up your data, it would all be lost. Cloud accounting companies use rigorous back-up practices to ensure your data is protected against possible deletion or corruption.

Cloud accounting can save you time and money.

Lower Your Costs

Switching to cloud accounting can save you time and money. For example, using electronic invoices may help you to get paid faster, particularly if payments are made online.

The pricing model of cloud accounting is subscription-based. Depending on the provider and the services you require, the monthly cost ranges from under $20 to about $40. Some providers offer different tiers based on the number of clients, number of transactions, number of staff that requires access, and other product-specific features. Technical support is included with the subscription rather than treated as an add-on.

Some providers offer a free tier as a trial or for very small businesses. However, at least one company, Wave Accounting, offers service for free, while supporting itself with advertising revenues and by charging fees for processing electronic invoice payments and payroll transactions.

By comparison, some of the leading software-in-a-box options start at under $100, but can cost nearly $600 for a more comprehensive edition with a 12-month payroll service subscription. Gaining access to new features may require you to purchase an upgrade or new edition. Cloud accounting, on the other hand, automatically adds new features as they become available.

Other Considerations

Every rose, after all, still has its thorns. So, before you get rid of your current desktop-based software, some potential drawbacks to cloud accounting should be considered.

With the application and your data located remotely (and, therefore, not within your control), there’s always the possibility that something could disrupt access to your service. That “something” could be anything from a server issue at your cloud accounting provider, to your local Internet connection going down, to a power outage across town. Unfortunately, these things can happen.

Another consideration to make before committing to a cloud accounting option is where your data will actually be stored. With some of the current options available, your data could be stored on servers outside Canada. If so, your data may be subject to the laws of the country in which it is stored. If this affects your business, check with the provider in advance.

What about My Accountant?

Some critics have commented that cloud accounting may eliminate the need for accountants. This is highly unlikely. Most owner-managers will find that cloud accounting is no replacement for a thinking human to oversee their financial decisions.

In fact, cloud accounting may make keeping in touch with an accountant even easier. With online collaboration, instant uploading of bills, receipts and invoices, and the ability to designate or authorize a “user” to access your account data, you may find that your regular visits to your accountant become a breezy experience!

Most cloud accounting services also offer a “network” feature to encourage accountants and bookkeepers to register with them. The service provides incentives that include a listing on the service provider’s website to help attract prospective clients. This feature gives you an easily accessible network of accountants who are already familiar with the format and organization of your type of financial data. Assistance is available by simply logging on and clicking a few links.

Final Words

While cloud accounting may be a relatively new kid on the block when it comes to accounting software, there are some compelling advantages:

1. 1.      many offerings are designed to be easy to use (one was even created by and for “people who hate accounting”);
2. 2.      online integration with bank accounts and the ability to manage financials on the go could potentially be big time savers; and
3. 3.      remote storage of data means easy accessibility anytime, anywhere, and protection against potential data loss.

So, is cloud accounting right for your small business? It might be worth looking into.