6 ETF Investing Tips for Beginners / Tax Efficient Investing

John Nyaradi for Sector Selector writes: Various academic studies have indicated that asset allocation is more important than security selection, especially in times of greater volatility in the markets. However, according to Roger Ibbotson, writing about the importance of asset allocation in the March/April 2010 publication of the Financial Analyst Journal, about three-quarters of market gains or losses come from general (broad) market moves, rather than asset allocation or security selection. As a consequence, individual investors are turning more and more to index-based and/or sector-specific exchange traded funds (ETFs), rather than managed mutual funds or individual securities.

According to ETF Database, there are currently more than 1,400 exchange traded funds available, ranging from broad general market funds to highly specialized funds representing a single industry, country, commodity, or investment goal. You can pick ETFs which seek high dividends and/or interest payments, those focused solely on share appreciation, or those which seek both objectives. ETFs are available for bonds, commodities, real estate, or currencies. They are structured to move in concert with the index they track, exceed the index’s moves, or move in the opposite direction. The industry follows the advice popularized in the movie Field of Dreams: “If you build it, they will come.”  And they have – to the tune of more than one million shares per day on average.

What Is an Exchange Traded Fund?

Simply put, an ETF is an exchange-traded mutual fund. Rather than buying or selling a mutual fund through its sponsor/manager once per day at the close of business, ETF shares are bought and sold just like shares of stocks – at anytime during the trading day. You can also use the same trading strategies you would use with a share of stock, such as selling short, using stop-loss orders, and buying on margin.

ETFs are passively managed funds, meaning their portfolios reflect the price movements of a weighted average of a group of selected commodities, stocks, or bonds. Samples of various indexes include the S&P 500 (stocks of the largest companies on the NYSE), the Wilshire 5000 (virtually all publicly traded companies in the U.S.), or a specialty index such as the Morgan Stanley Biotech Index which consists of the top 36 American companies engaged in biotechnology. Index funds are managed or “weighted” to reflect the changing price relationships of the underlying stocks in the index, not to pick winners and losers among individual companies. As a consequence, management fees for the typical ETF are considerably less than the fees paid for a typical mutual fund (0.53% versus 1.42%).

Investing Tips

When investing in ETFs, it’s essential to research the market and ask yourself several strategic questions.

1. Determine Your Risk Tolerance

The most critical element in successful investing is knowing your risk tolerance. All people want maximum gains, but few have the stomach to accept the possible losses that accompany a swing-for-the-fences philosophy. Similarly, most people’s tolerance is directly proportional to the amount of funds they have at risk. A younger person, for example, just starting to build an asset base may seek high-reward, high-risk investments; a 60 year-old is more likely to want to preserve his or her hard-earned capital and seek a moderate, though surer return. You need to ask yourself, “Can I live with a 10% drop in the value of my portfolio? a 20% drop? 50%?” Your answers can help you identify the investments that best fit your psyche.

2. Develop an Investment Philosophy

Your investment philosophy should match your risk tolerance as well as your investment horizon. The safest way to become wealthy boils down to three rules:

• Let the Magic of Compounding Work For You. Invest $5,000 today at 5% and it’s going to grow to almost $17,000 in 25 years. Investing should not be a once in a lifetime event, but a habit developed slowly over time.
• Protect Your Assets. Suppose your investment drops 50% in the first year, then gains 80% over the next two years. Unfortunately, your portfolio is still going to be underwater with a 10% loss over the three years. Successful stock investors let their profits run and cut their losses short. Sell assets only when they fail to meet your earnings expectations; the market price fails to respond to increased earnings; or the price of the asset declines a pre-determined amount from the purchase price. Good-to-cancel stop-loss orders at pre-determined levels below the purchase price are an effective way to implement this strategy.
• Maximize Investment Returns Within Your Risk Tolerance. While it is impossible to accurately project the future (contrary to what some stock market gurus tell you), you can reduce your investment risk by understanding key performance measures regarding volatility and correlation of specific ETFs, such as beta and R-squared values.

3. Develop an ETF Investment Strategy

Investors in ETFs employ a variety of different strategies to achieve their investment goals. While no strategy is exclusive or permanently appropriate, determine which program best fits your needs today and put it in practice until experience indicates a change is needed. The five most popular strategies are as follows:

• Buy and Hold. Used most often by those investors with limited time or inclination to study their investments, this strategy is regularly buying a general market ETF indexed to a broad market index such as the S&P 500 or the Wilshire 5000.
• Portfolio Completion. The objective of this strategy is to ensure broad market diversification across sectors, asset classes, or foreign markets.
• Core/Satellite. This strategy consists of a core holding of a broad-based index complemented with actively managed smaller assets (individual stocks or sector ETFs). The core holding minimizes the risk of lagging the market, while the satellite holdings provide upside potential.
• Fixed Income. This strategy maximizes your investment in fixed income vehicles for higher income, diversification, and low cost.
• Sector Rotation. “It’s not a stock market, but a market of stocks.” At one time, this old adage may have been true. After all, buying the stock market as a whole was extremely difficult, if not impossible, before the appearance of ETFs. But today you can buy the stock market or a single sector of securities which has enabled the sector rotation strategy. At any given point, some individual stocks and industries are popular and their stocks rise just as others go out of favor and their values drop. Employing this strategy requires active oversight of your portfolio and the economy in general as you rotate from one sector to the next, ideally catching each as it comes into favor and selling when it becomes unpopular.

4. Don’t Invest in Leveraged ETFs

Leverage – using other people’s money – is often very attractive, doubling, even tripling the gains of an investment when it works for you. Unfortunately, the same upside potential also exists on the downside, generating the possibility of catastrophic losses. Leveraged ETFs use debt and complicated financial derivatives to achieve a leveraged daily return. As a consequence, leveraged ETFs are exposed to a constant leverage trap so that when the market moves down, the ETF is forced to sell shares and reduce its debt level in order to make the targeted leverage return. This locks in losses and reduces the ETF’s asset base, making it harder to recover gains in the next market upturn.

Investment professionals generally agree that, while leveraged ETFs can be useful in certain situations, they are intended to be held for less than a day and should be limited to large institutional investors. The long-term investor has no need to be in these products at all.

5. Understand the Weighting Mechanics of ETF Construction

While ETFs are investments intended to track a particular index, the percentage of each stock within the portfolio varies according to the weighting method elected by the creator of the ETF. Examples of weighting methodologies include the following:

• Market Capitalization. Stocks are proportioned in the portfolio based upon their total market value (all of the outstanding stock of a company times its share price). As a consequence, companies deemed most valued by the stock market represent a greater proportion of the fund than companies less valued. ETFs weighted by market capitalization tend to have less trading and consequently are considered tax-efficient. They generally have lower expenses as well. One criticism of a market cap strategy is that selection potentially favors past performance rather than future potential.
• Equal. The simplest strategy is that every stock position percentage-wise is equal. If you have 100 stocks, each occupies 1% of the portfolio. ETFs using these schemes have more trading, requiring frequent re-balancing and tax consequences as well as higher expenses. Smaller companies represent a greater percentage of total assets than in most other weighting schemes.
• Fundamental. ETFs using fundamental weighting rely upon factors such as net profits, sales, book values, dividends, or other tangible measures to determine the proper proportion of the stocks in the ETF, premising that such factors better represent the economic value of the company. The underlying investment assumption is that all companies ultimately reflect their real economic value in the long-term; if the assumption is correct, the ETF reaps benefits as the stocks change to reflect that value. This weighting shares similar disadvantages of the equal weighting scheme – low tax efficiency and high operating costs relative to a market cap-weighted index.
• Other Schemes. The proportion of the individual securities in an ETF can be based upon share price, dividends, market factors such as momentum or volatility, or other special strategies to make them unique or serve a particular investment objective. It is always important to read the description of the ETF to see how the portfolio is built.

6. Keep Studying

Your investment returns from within your comfortable risk zone are directly proportional to the effort you expend learning about ETFs, the stock market, and the economy in general. The environment is constantly evolving, creating new opportunities and causing once-safe investments to fail. There is a vast amount of information on the Internet about investing and investment vehicles that can be easily accessed for no cost. Read the business section of your local newspaper regularly, subscribe to national periodicals such as The Wall Street Journal, and visit websites like Morningstar and Zacks. The more you know, the faster your portfolio can grow.

Final Word

ETFs offer investors one of the most efficient, cost-effective, and convenient ways to participate in the growth of businesses in the U.S. and around the world. In fact, evidence indicates that the majority of returns in any given investment portfolio results more from long-term asset allocation than trying to pick and time the purchase of individual securities. ETFs are the perfect investment vehicle for a first-time or beginning investor – transparent and low-cost, with broad diversification and excellent liquidity – and should be a part of every investor’s portfolio.

Xero Review – Intuitive Accounting Software

Business2Community writes: Simple accounting errors can be costly to a small business owner, with late penalties and overdraft fees eating away at a company’s bottom line. Xero is an online accounting platform that aims to help businesses reduce those types of critical mistakes, making it easier for merchants to keep their financial houses in order.

In this Xero review, I will take a close look at the cloud-based service and test many of the platform’s most popular features. I will see how easy the system is to deploy, and compare the benefits of a web-based platform to those of a traditional desktop system. Based on my personal experience using Xero, I will offer my opinion as to whether this is an accounting system that small businesses should use.

About Xero

Entrepreneurs can’t make sound business decisions without reviewing accurate financial data, which is where Xero comes into play. The online accounting platform frees its users from the confines of traditional desktop-based systems, and gives businesses all the tools they need to stay up-to-date on all their latest transactions. Xero connects to a user’s banks, credit cards, and PayPal accounts. It automates as much of the accounting process as possible by importing credit card statements, reconciling bank transactions, sending invoices, and making scheduled payments on a company’s behalf.

Xero integrates with many of the apps that businesses already use, importing and exporting data from CRM, inventory management, and invoicing applications like Vend, PayPal, Highrise, Salesforce, and Capsule CRM. Even private accountants and bookkeepers can take advantage of Xero, collaborating with clients in an online setting while still keeping security and compliance requirements in mind.

Main Functionality of Xero

Xero is a soup to nuts accounting system that allows teams of individuals to work together to manage business finances. By connecting their bank accounts to Xero, businesses can automatically import statements and categorize individual purchases. Meanwhile, cash coding allows users to seamlessly reconcile cash transactions with multiple tax rates.

Financial information from multiple institutions and business applications is combined on the Xero dashboard page, where users can find an overview of bank balances, invoices, bills, and expenses. Zooming in allows users to monitor specific accounts in real-time, and curated graphs show all the money coming in and going out of a business over the course of a day, a month, or even a year.

The deeper a business gets inside of Xero, the more useful the platform’s financial reporting tools become. Inventory management features can be used to import and export price lists, track sales, and expedite the invoicing process. Basic payroll needs — like printing payslips, making bulk payments, and creating detailed wage expense reports — can be met using Xero’s built-in system. Users with more advanced payroll needs can integrate Xero into top payroll systems like ADP and Monchilla.

Benefits of Using Xero

Business owners should be able to focus on growing their companies without worrying about basic accounting and payroll issues. Xero makes that possible, encouraging entrepreneurs to handle their own business finances without worrying about their accounting system. The web-application handles all of the most common financial issues that businesses face — including budgets, payroll, expense claims, and financial reporting — and integrates seamlessly with many business apps. This integration allows for the automatic importing and exporting of financial data on a business owner’s behalf.

Xero also offers a number of collaboration features that business owners can use to share the workload with their partners and employees. By relying on a cloud-based system, rather than a desktop software suite, users can log-in to their accounting system from anywhere — Xero works on Mac, Windows, iPhone, and Android devices — at any time, day or night.

When they use Xero, small business owners get all the financial reporting features that their larger competitors enjoy, with none of the headache or financial burden that comes with employing an in-house accountant or bookkeeper.

The Basics: What Does the Interface Look Like?

Follow the directions in Xero’s step-by-step setup guide to get started using the platform. Input basic information like your organization name, contact details, social media links, and financial details like your tax basis and ID number.

To begin reconciling your bank account information, you’ll need to start by connecting your account to the Xero system. Type in the name of your bank, the account name, account number, currency, and choose a unique code/number for the account.

Create a sales invoice from scratch by entering the necessary information. To streamline the process, you can set up your invoices to auto-populate with information as you type. For example, type in “Acm” and Xero will auto-populate the remainder of the line as “Acme Plumbing” if that’s a vendor you’ve worked with in the past.

Review your overall financial picture by clicking on the “Budget Manager” tab. You’ll find a month-by-month report showing income (interest, revenue, and sales), costs of goods sold, and gross profits, among other figures.

Support Information

Inside Xero’s Help Center, users can get detailed answers to hundreds of frequently asked queries. Support articles can be browsed by topic (like banking, sales tax, or expense claims), or searched by keyword. Xero also provides a number of tutorials and informational videos that guide new users through the process of getting their accounts set up and linked to outside apps and banking institutions. To get immediate answers to questions not found in Xero’s Help Center, visit the platform’s Business Community. Users in the Business Community are encouraged to ask questions and learn from the experiences of their peers.

Pricing Information

Xero offers three pricing plans for businesses, ranging from $19 per month to $39 per month. All plans come with a free trial, and require no setup fees, upgrade fees, or contracts. Businesses that use Xero can add an unlimited number of users to their accounts. Xero runs automatic backups for accounts at every pricing level.

The Bottom Line

If independent contractors and small business owners want to compete with larger businesses, they need the right tools. Xero’s design may look simple and sleek, but the system’s tools are hearty and robust. The system offers dozens of vertical small business solutions thanks to its integration with more than 200 popular apps. Businesses that use Xero can feel confident that their financial information is secure, and that important data sets are being backed up regularly in the cloud.

Ratings: ease of use 5/5, features 5/5, value 5/5 and ease of deployment 4/5

Video Intro to QuickBooks Online vs. QuckBooks Online Accountant - Key Differences (Click To View)

Michelle Long discusses the differences between QuickBooks Online & QuickBooks Online Accountant

June A Busy Month At IRS For Taxpayers and Tax Pros

Kelly Phillips Erb for Forbes writes:  We tend to think of summer as a slow time when it comes to taxes but it’s hardly a vacation for taxpayers and tax professionals. This summer, in particular, the Internal Revenue Service has a full calendar and June is no exception. Here are some notable dates to keep in mind:

• June 3. The IRS has announced tax relief for victims of the tornadoes in Moore, Oklahoma, and surrounding areas. Those businesses affected by the May 21 storms have until June 3 to make federal payroll and excise tax deposits normally due on or after May 18 and before June 3.
• June 14. The second planned closure for IRS due to furloughs will happen on June 14. All IRS offices, including all toll-free hotlines, the Taxpayer Advocate Service and the agency’s nearly 400 taxpayer assistance centers nationwide, will be closed on this day. No employees will report to work (they are furloughed without pay) so that means no answers to your phone calls or correspondences. No tax returns will be processed and no electronically filed returns will be accepted or acknowledged. No refund checks will be issued. You will also not be able to access the “Where’s My Refund?” tool and the Online Payment Agreement system. The furlough does not extend any due dates: tax-filing and tax payment deadlines will remain in place.
• June 17. Taxpayers who were out of the country on April 15 and therefore entitled to an automatic two month extension must file their federal income tax return by June 17. You qualify if, on April 15, you lived outside the United States and Puerto Rico and your main place of business or post of duty was outside the United States and Puerto Rico; or if you were in military or naval service on duty outside the United States and Puerto Rico. This extension gives you an extra 2 months to file and pay the tax, but interest will be charged from the original due date of the return on any unpaid tax. Remember that the extension is automatic (you didn’t have to file a form 4868 to claim it) but you must include a statement showing that you meet the requirements. If you need more time, you must file the federal form 4868.
• June 17. Estimated payments are due for most individuals and corporations.Taxpayers impacted by the Oklahoma storms who would have been subject to the June 17 deadline have until September 30, 2013, to file these returns and pay any taxes due.
• June 30. If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS. FBAR returns are due on June 30 of the year following the applicable calendar year and there are no extensions.

Normal deposit and reporting requirements still apply throughout the month. Enjoy your summer!

Is there a tuition reimbursement program that I can offer as an employee benefit that also offers my business a tax advantage?

Barry S. Kleiman for NorthJersey.com writes: There is a tuition reimbursement, or educational assistance, program that can help enhance a company's business and offset the financial burden of education for employees. While most are commonly associated with a graduate education, the program can apply to any form of instruction or training and can even apply to courses that are not necessarily part of a degree program.

One of the most important and generous benefits a company can offer its employees is tuition reimbursement. It is a contractual arrangement between employer and employee that outlines specific terms under which the employer may pay for the employee's education. The company can tailor the criteria of the program as it sees fit. For instance, the company may require that the employee repay the company upon resignation or termination within a certain time period after completion of the courses. The company also may stipulate approval of the specific courses to be reimbursed and require the employee to maintain a certain grade-point average to qualify for reimbursement.

Providing a reimbursement program benefits the company by increasing employees' skills and value and improving their ability to contribute to the growth of the company. It also serves as an incentive for hiring and retaining employees. There also is a tax benefit, in that employers can deduct the tuition reimbursement as a business expense.

Employees not only receive an economic benefit in the form of a tuition break — the reimbursement is not taxable as long as the employer establishes a qualified Educational Assistance Program (EAP). To qualify, the EAP must be a separate, written plan for the benefit of employees (spouses or dependents do not qualify). Notice of the availability and terms of the program must be provided to eligible employees and the plan cannot discriminate in favor of owners or highly compensated employees. The non-taxable portion of tuition reimbursement is limited to $5,250 per employee per year and can be used only toward tuition, fees and similar expenses, books, supplies and equipment. It cannot be used to pay for food, lodging, transportation or other items.

If more than $5,250 of educational assistance is provided to an employee, the excess is generally considered a fringe benefit that is taxable to the employee. However, if the tuition reimbursement can be treated as a working condition fringe benefit, the cost of educational assistance in excess of the $5,250 income exclusion cap may qualify for tax-free treatment. A working condition fringe benefit is assistance that an employer gives to employees expressly for the purpose of making them better able to do their jobs. In other words, a working condition fringe benefit is a benefit that, had the employees paid for it themselves, could be deducted as an employee business expense.

To learn more about the tax benefits of an Educational Assistance Program and how to implement one at your company, consult your tax adviser.

Help Maximizing Retirement Accounts

Ann Tergesen for the Wall St Journal writes:  Services that aim to help investors turn retirement savings into a steady income stream are coming to 401(k) plans and individual retirement accounts—and they may help retirees stick to a plan that will keep them from outliving their savings.

But anyone considering such services needs to understand how they generate a monthly paycheck and what the costs might be.

Currently, 28% of 401(k) plans feature at least one product or service designed to help participants convert their savings into retirement income, according to Aon Hewitt, a record keeper for 401(k) plans. The most popular option is a managed account that includes a retirement income service. With this, 401(k) participants hire professionals to advise them on how to invest their assets and withdraw a sustainable income.
With the oldest baby boomers turning 67 this year and defined-benefit pension plans falling by the wayside, there is "growing recognition that 401(k) plans need to do a better job of delivering income in retirement," says Alison Borland, vice president of retirement solutions and strategies at Aon Hewitt.

Managed-account providers have introduced an array of retirement-income services in recent weeks. Financial Engines FNGN -1.84% of Sunnyvale, Calif., and San Diego-based GuidedChoice now offer income-planning and investment management services—previously available only in 401(k) plans—to those who open IRAs at a handful of specific companies.
Morningstar MORN -0.13% recently introduced its own income-planning service, Retirement Manager With Income Secure, to 401(k) participants who use its managed accounts.
Each company takes a different approach to creating a retirement income stream.
Take a 65-year-old man with $250,000 in assets in a 401(k) and IRAs. Assuming he needs all $250,000 to cover essential expenses in retirement, Financial Engines would put 80%—or $200,000—in a portfolio of bond funds, with the remaining $50,000 in stock funds. Over time, it would move the $50,000 into bonds as well.

Assuming the stock market delivers average annual returns of 5.5% above the one-year Treasury bond rate, he will be able to withdraw $9,375 the first year and then increase that amount by 2.5% to 3% in each subsequent year. If all goes according to plan, enough money will remain at age 84 to finance a fixed immediate annuity that locks in a comparable income for life. 

GuidedChoice and Morningstar, in contrast, recommend a mix of stocks, bonds, cash and any annuities available in a client's 401(k) plan, tailored to the individual's financial situation. GuidedChoice also provides a strategy to maximize Social Security, a service Financial Engines plans to add later this year.

Financial Engines and GuidedChoice both can provide regular paychecks from the 401(k) and IRA assets they manage. All three companies advise clients on how much they should draw from each of their accounts annually and aim to minimize taxes. 

All this service comes at a cost. Financial Engines and Morningstar offer free income-planning advice to clients with managed accounts, who typically pay from 0.15% to 0.7% of assets a year, in addition to the fees of the mutual funds they invest in. GuidedChoice charges up to 0.25% of assets for a managed account, plus $250 a year for an income plan.

How corporate executives can navigate the 2013 tax minefield

Geoffrey Zimmerman for Smart Business Insight & Strategy writes:    There’s a popular metaphor referred to as “the boiled frog.” Simply put, it says if you drop a frog in boiling water it will quickly try to escape. But if you place a frog in tepid water that’s slowly heated to a boil, the frog will “unresistingly allow itself to be boiled to death.”

With the 2013 tax changes, this metaphor may apply to taxpayers, married and filing jointly, with wages of taxable income of $223,000 to $450,000, says Geoffrey M. Zimmerman, CFP®, Senior Client Advisor at Mosaic Financial Partners, Inc. These households could see their federal marginal tax rate go from 28 to 45.5 percent.

“Executives in this income range may soon find that they are in hot water with the heat on as the marginal tax rates ramp up fairly quickly,” Zimmerman says.
Smart Business spoke with Zimmerman about key tax changes as well as possible planning and investment strategies.

Why are $223,000 to $450,000 income earners unaware of the danger?

The increases come from moving up tax brackets, new Medicare taxes of 0.9 percent on payroll and 3.8 percent on unearned income, and the phase-out of itemized deductions. People earning more than $450,000 have a good idea of what’s coming, but others aren’t as prepared for 1 to 2 percent increases that can add up. For example, if each spouse earns less than $200,000, their employers aren’t required to withhold additional taxes from their paychecks for the 0.9 percent increase in Medicare. But, if their combined income pushes them over the $250,000 threshold in household wages, they may be surprised by an unexpected tax bill.
Additionally, if you live in a state like California where state income taxes have gone up, combined federal and state income tax rates can exceed 50 percent, with capital gains rates reaching 33 percent or more.

What should these taxpayers be doing?

First and foremost, don’t let the tax tail wag the dog. Tax strategies that look great in a silo may actually be detrimental to the big picture. If your strategy puts you in a concentrated position or triggers undue risk, then a sudden bad market movement can be worse than paying the taxes.
This is an opportunity for people to update their financial plan and review how the tax changes affect their goals. Make sure your advisers are talking with one another and coordinating their work and advice.

How can some key planning strategies mitigate these increases?

Look for opportunities related to the timing of cash flows. If you have a big income year where up to 80 percent of your itemized deductions might be lost, defer some itemized deductions to the following year where the income might be lower. In a low income year, look at doing IRA to Roth conversions, realizing capital gains and/or accelerating income.
Take the initiative to engage in tax loss harvesting in taxable accounts, which means you sell a security, harvest the loss and then use that loss to offset a gain in either the current year or carry forward for use in future years. This can be attractive, particularly for investing styles that offer similar but not identical alternatives. One example might be to sell an S&P 500-index fund and reinvesting with a Russell 1000-index exchange traded fund to capture the loss while remaining invested.

Review the use of asset location strategies to improve tax efficiency. Strategically place securities that produce ordinary income or that generally don’t receive favorable tax treatment into a tax-deferred account, while putting tax-efficient investments that generate long-term capital gains or qualified dividends in taxable accounts.

Municipal bonds/bond funds in taxable accounts now may be more attractive, and you also can review opportunities to take advantage of ‘above the bar’ deductions, such as contributions to qualified plans like your pension, 401(k), etc. For senior executives, contribution to nonqualified deferred compensation arrangements may be more attractive, particularly if a transition, such as retirement, is on the horizon.

With the help of good advisers who understand these moving parts and how they fit together, executives can use these strategies and others to make better decisions to move toward the things that are really important to them.

Making High-Deductible Health Savings Accounts Work

DONALD JAY KORN, FOR INVESTOR'S BUSINESS DAILY writes:    Health savings accounts are tax-efficient tools that can help with retirement planning. Like 401(k) accounts and Roth IRAs, investment income inside an HSA is not taxed.

And HSAs offer some tax advantages that other plans don't. For one, contributions to HSAs are tax-deductible. That's not the case with Roth IRAs.

Also, HSA withdrawals can be tax-free. Withdrawals from traditional 401(k)s aren't.
The average retired couple will need about $220,000 to cover health costs, says a Fidelity study.

To benefit from all HSA tax breaks, money must be spent on qualified health care. "Given the high projected costs of health care in retirement, the vast majority of retirees should have plenty of eligible costs to cover," said William Applegate, a Fidelity vice president.
In 2012, the number of HSAs rose almost 22% to 8.2 million, reported Devenir, a consulting firm.

To have an HSA, you need a qualified high-deductible health insurance plan. Such HD plans can come through your job or be purchased on your own.

Qualifying plans have an annual deductible not less than $1,250 for individual coverage in 2013. For family coverage, the minimum deductible is $2,500. Annual out-of-pocket expenses can't top $6,250, or $12,500 for families. Those limits apply to deductibles and co-payments but not to premiums.

Once your own and any company contributions are in an HSA, you can withdraw funds tax-free for eligible expenses. Generally, that means costs that qualify as itemized medical or dental deductions.

So HSA owners can use their HSA to cover costs now, or they can let their money grow to cover health bills when they're in retirement.

Create A Strategy
One strategy is to put your first retirement dollars into your 401(k) if your employer offers a match. Contribute enough to get the maximum match.  Dollars above that amount can go to an HSA, before making an unmatched 401(k) contribution.
 
Suppose a hypothetical Ed Hill wants to put away $15,000 for retirement this year. Hill, age 56, has family coverage in the company health plan and an HSA.

In his 401(k), his employer offers a 100% 401(k) match, up to 6% of pay.
If Hill's salary is $100,000, 6% is $6,000. So Hill's first $6,000 goes to the 401(k), to get a $6,000 match. That's a 100% immediate return, with no investment risk.
Then Hill kicks in $7,450 to his HSA this year. That's the $6,450 max for family contributions plus the $1,000 age-55-plus catch-up.

Deducting Losses Due to Disasters

Tom Herman for the Wall St Journal writes:   Q: How do the tax rules work on deducting personal losses due to storms and other natural disasters?
—N.H., Brooklyn, N.Y.

A: Our reader is asking about the rules for what tax experts refer to as "casualty and theft losses." If you're a storm victim, don't be surprised if you wind up being able to deduct little or none of your losses, thanks mainly to two high hurdles in the law.
First, you have to reduce each casualty or theft loss by $100.
After that, you can deduct your losses only to the extent they exceed 10% of your adjusted gross income. That's the hurdle that trips up many victims.
If you collect insurance proceeds or other types of reimbursements (such as an employer's emergency disaster fund), you have to subtract those when calculating your loss. "You do not have a casualty or theft loss to the extent you are reimbursed," the Internal Revenue Service says in Publication 547 (available at www.irs.gov).
Despite all this, don't give up hope. Generally, you have to deduct casualty losses only for the year in which they actually happened. But there is a big exception to this rule that might help some victims of recent disasters—such as the extraordinary tornadoes and storms that ripped through Oklahoma or severe storms in Illinois.
If you have a casualty loss in a place designated as a federal disaster area, you can deduct your losses on your federal income-tax return for the year the loss occurred—or on your return for the prior year.
Most taxpayers already filed their returns for 2012. But they can take advantage of this provision by filing an "amended" return. Use IRS Form 1040X.
For a list of federal disaster areas, go to the website of the Federal Emergency Management Agency, or FEMA.

Tax Planning for High Income Taxpayers AICPA Conference – 5 Takeaways

Diane Gilabert for Gilaberttax writes: I recently attended the 2013 AICPA Conference: Tax Planning for High Income Individuals in Las Vegas.  I hear you snickering. How could any serious learning take place in Las Vegas? Surrounded by the luscious surroundings at the Bellagio no less?

A tax geek to my core, I did not attend one show or put even one quarter in a slot machine. I skipped no classes.

While some of the sessions were better than others, the overall quality of the speakers’ presentations and materials was outstanding. Much fodder for future blog posts!

Before the memories fade, here are my 5 takeaways:

1. No Comprehensive Tax Reform Likely in 2013

We’ve all heard that Dave Camp (House Ways and Means Committee Chair) and Max Baucus (Senate Finance Committee Chair) – that’s them in the photo above – are committed to passing tax reform. Check out this joint Wall Street Journal op ed. Max Baucus even announced his retirement to lend urgency to the quest. But the reality is the likelihood for passing comprehensive tax reform in 2013 is grim.

To learn about what’s being proposed (and what should be), check out my recent series of posts on tax reform for small business:

Tax Reform for Businesses: What’s Being Proposed and What Should Be

Tax Reform for Businesses: Proposed Changes to Tax Accounting Methods

Tax Reform for Businesses: Proposed Changes to Section 179 Expensing

Tax Reform for Businesses: Proposed Changes to Start-up Expendtures

Tax Reform for Businesses: 5 Suggestions for Tax Simplification

2. Tax Planning Will Be Tough Due to Expiring Tax Provisions (Again)

Remember how impossible it was to do tax planning last fall when so many tax provisions were expiring? Well it’s happening again, and the speakers in the know at the Conference see another last minute deal on the horizon. Another fall of uncertainty for us and our clients.

Some examples of expiring tax provisions December 31, 2103: 50% bonus depreciation, expanded §179 limits, 15 year depreciation for qualified leasehold improvement, retail, and restaurant property, and the R&D tax credit.

3. “Permanent” is a Myth

The recently enacted lower estate and gift tax rates and exemption amounts were supposedly made permanent by the Tax Reform Act of 2012 signed January 3, 2013. So much for that. The Obama Administration’s budget proposal would hike rates again and roll back the estate and gift tax exemption to pre-2010 levels.

4. Inflation is the Enemy of Taxpayers (Again)

Remember how not indexing the AMT exemption resulted in more and more middle income taxpayers caught in its net every year? The constant flurry of last minute patches required to “fix” it? Well apparently Congress has a short memory: the new 3.8% tax on net investment income has thresholds not indexed for inflation.

Not sure how the new §1411 works? Check out this blog post to get up to speed fast.

5. Tax Rates are Not Going Down for High Income Taxpayers

Do you have clients hoping the recent tax increases will be repealed? In the words of my fellow New Jerseyians, fuggetaboutit! If anything, further increases on the “wealthy” are likely in the form of the “Buffet rule” and the Obama Administration’s pledge not to raise taxes on individuals making less than $200,000 and families making less than $250,000.

What’s the message for tax practitioners? Don’t fear, we will still have jobs! Tax planning will be paramount. One thing all the speakers agreed on is that whatever tax legislation is passed, there will be “winners and losers”. It’s up to us to make sure our clients aren’t blindsided by the changes.

Have you attended CPE recently? Share your key tax planning takeaways in the comments below.

PlanGuru Review – Simplify Your Accounting Practices

http://www.business2community.com writes: By itself, budgeting can be overwhelming task for small businesses. After all, this is where the rubber hits the road. Expensive on-premise software further complicates the task. Fortunately, a solution is on hand.

In this PlanGuru review we will see how this budgeting and forecasting software simplifies and automates any forward looking financial analysis. We will look at its interface, features, and see how it can be of use to you.

Planning a Budgeting Software

A thirteen-year-old product, PlanGuru was initially built to help CPAs model financial projections for their clients. “The time and inaccuracy of creating formulas in spreadsheets led PlanGuru’s founders to develop an accurate and flexible solution,” says Tripp Graham, Director of Marketing at the company. Subsequently, the company has improved it’s usability for other customers, including entrepreneurs, small businesses, nonprofits, and large corporations.

The design starting point for the solution was Excel’s complicated setup. “Developing and maintaining multiple spreadsheets in Excel is painfully time-consuming and can be error prone,” says Graham. So, the solution’s developers aimed for simplicity, integration, and automation. With PlanGuru, you can import your chart of accounts then choose from 20 inbuilt forecasting methods to project your budgets over a ten-year period.

This also frees up time for financial professionals to focus on the more important parts of their business. “Because PlanGuru alleviates the painful aspects of budgeting (such as correcting faulty Excel sheets), these professionals can now spend more time drawing insights from their projections,” says Graham.

According to him, future plans for the solution include more robust analytics and reporting features. “While the core PlanGuru application is a solving tool, PlanGuru analytics will allow users to draw deeper insight into the forecasted financial statements they have created in the application,” he says.

Working With PlanGuru

In its simplest form, PlanGuru is an integrated set of financial statements and associated analyses. The statements (and analyses) are enclosed in a format that is similar to an Excel Workbook. The statements help you budget and forecast analysis. You can budget for up to ten years in advance. However, granular planning is only available at the quarterly and monthly level.

As I mentioned earlier, the solution automates several associated components of budgeting and forecasting. For example, the statement of cash flows is updated automatically, once you update budget and income statements. Similarly, the solution offers you a choice of 20 different forecasting methods (with multiple sub-options).

The PlanGuru setup is fairly easy and involves constructing (or, uploading) tables to create a chart of accounts. PlanGuru already has several account groupings under which you can enter line items. However, if you are unsure about groupings, you can simply add expenses by line items. Automation is, again, an overriding theme in maintaining and forecasting your line items: the system automatically calculates budget ratios and makes rolling forecasts for you.

The Basics: What Does The Interface Look Like?

The interface is fairly similar to Microsoft Excel. Although it is not Excel based, it adopts a similar cell- and grid-based approach. The design was a conscious choice, according to Graham. “Our users were more comfortable viewing their budgeted/forecasted numbers in a spreadsheet-like format,” he says.

Pros & Cons

Perhaps, the tool’s greatest benefit lies in its ability to automate and simplify complex budgeting and forecasting practices. That it does this without the help of messy and unwieldy excel sheets is fantastic. PlanGuru also provides comprehensive analysis for your line items. For example, modeling techniques enable you to accrue expenses or declare dividends in multiple formats.

Finally, there is an added side benefit to the tool. For someone who does not understand financial statements, I thought the solution did a neat job of simplifying accounting for me. This can be an especially important benefit for entrepreneurs. For example, they can create custom accounting line items to track their expenses and balance books. “The one role nobody wants to play is auditor of their own spreadsheet models,” says Graham. He says PlanGuru helps businesses starting out by automating this task and preparing them for a number of contingencies.

One area where PlanGuru could improve is in its interface. The solution’s interface, which is similar to Excel, helps business transition quickly and easily to PlanGuru. However, it does not mark a significant improvement over the Excel interface. I think a SaaS paradigm offers great scope for users to interact with software in new and innovating formats. Improving the interface (by reducing the number of cells, adding color, or automating more financial transactions) will help simplify PlanGuru further.

Pricing

PlanGuru has interesting pricing models that encompass multiple formats. Thus, the PlanGuru Cloud Hosting plan enables you to purchase a license and host it in a private cloud. The Lease PlanGuru in the “cloud plan” enables you to lease a PlanGuru license in the cloud on a per-month basis. Both plans enable you to access the application from anywhere. Finally, you can also purchase a traditional PlanGuru on-premise desktop or network license, if security is your biggest concern.

The Bottom Line

Yes. With a diverse array of features and its ability to simplify complex budgets and forecasts, which can be customized to fit a wide variety of businesses, PlanGuru is a winner all the way.

Ratings: ease of use 4/5, features 5/5, value 5/5 and ease of deployment 4/5 

How 3 Different Types Of Investment Income Are Taxed (Introduction for Beginners)

Miranda Marquit for istockanalyst writes: As you probably know, our tax system is far from straightforward. Not only are there a number of different deductions and credits to take into accounts, and various tax brackets to consider, but even your income falls into different categories.

You can't even rely on a division between "regular" income that you receive at a traditional job and investment income received as a result of your careful division of resources. As you fill out your tax return, you will find that even your investment income is divided into different categories and taxed differently.

Interest Income

When you invest in cash products, like high yield savings accounts and CDs, or in bonds (municipal bonds aren't taxed at a federal level, though), you are likely to earn interest. The interest you earn is taxed in a fairly straightforward manner: It's added to your regular income and taxed at your marginal rate.

In most cases, your interest income is taxed in the year that you receive it, even if it is reinvested and you never actually hold the money in your hands. Some CDs automatically reinvest your interest earnings back into the CD, and if this is the case, you will receive a 1099-INT describing how much you have earned that year.

There are some cases in which bond interest and CD interest isn't paid out until the investment matures. In these cases, you are responsible to pay taxes on the interest you receive at the end of the term, when you receive the interest.

Capital Gains

A capital gain is the increase that you see when you sell an asset for more than you bought it for. So, if you spend $1,000 on an asset, and a few years later you sell it for $2,500, you have a capital gain of $1,500. This is the amount that you are taxed on.

The good news about capital gains, though, is that they are taxed at a preferred rate – if you have held the asset long enough. There are two types of capital gains income:

1. Long term: If you have held the asset for more than a year (so you need to hold the asset for at least a year and a day), you receive a preferred tax rate. You pay 0% on the income if you fall into the 10% or 15% tax brackets. If you fall into the marginal tax brackets ranging from 25% to 35%, you will pay a capital gains tax of 15%. Those who fall into the highest tax bracket (39.6%) pay a capital gains tax of 20%. In any case, you pay less on long term capital gains than you would normally pay on income.
2. Short term: For capital assets held for a year or less, you pay at your marginal tax rate.

Your tax planning requires you to consider the impact of how long you hold your assets before selling.

Dividend Income

Your dividend income is taxed at a preferred rate as well. As long as your dividend income is "qualified," your dividend income is taxed at the long term capital gains rate – at least for now. Dividend income is subject to the possibility of reverting to being taxed as regular income in the year it is earned.

Pay attention to the type of investment income you have, and plan your investment and tax strategy accordingly.