Articles tagged with: state taxes

Why DIY Investment Management Is Such a Risk

Paying attention to the wrong things becomes all too easy.

If you ever have the inkling to manage your investments on your own, that inkling is worth reconsidering. Do-it-yourself investment management can be a bad idea for the retail investor for myriad reasons.

Getting caught up in the moment. When you are watching your investments day to day, you can lose a sense of historical perspective – 2011 begins to seem like ancient history, let alone 2008. This is especially true in longstanding bull markets, in which investors are sometimes lulled into assuming that the big indexes will move in only one direction.

Historically speaking, things have been so abnormal for so long that many investors – especially younger investors – cannot personally recall a time when things were different. If you are under 30, it is very possible you have invested without ever seeing the Federal Reserve raise interest rates. The last rate hike happened before there was an iPhone, before there was an Uber or an Airbnb.

In addition to our country’s recent, exceptional monetary policy, we just saw a bull market go nearly four years without a correction. In fact, the recent correction disrupted what was shaping up as the most placid year in the history of the Dow Jones Industrial Average.1

Listening too closely to talking heads. The noise of Wall Street is never-ending, and can breed a kind of shortsightedness that may lead you to focus on the micro rather than the macro. As an example, the hot issue affecting a particular sector today may pale in comparison to the developments affecting it across the next ten years or the past ten years.

Looking only to make money in the market. Wall Street represents only avenue for potentially building your retirement savings or wealth. When you are caught up in the excitement of a rally, that truth may be obscured. You can build savings by spending less. You can receive “free money” from an employer willing to match your retirement plan contributions to some degree. You can grow a hobby into a business, or switch jobs or careers.

Saving too little. For a DIY investor, the art of investing equals making money in the markets, not necessarily saving the money you have made. Subscribing to that mentality may dissuade you from saving as much as you should for retirement and other goals.

Paying too little attention to taxes. A 10% return is less sweet if federal and state taxes claim 3% of it. This routinely occurs, however, because just as many DIY investors tend to play the market in one direction, they also have a tendency to skimp on playing defense. Tax management is an important factor in wealth retention.

Failing to pay attention to your emergency fund. On average, an unemployed person stays jobless in the U.S. for more than six months. According to research compiled by the Federal Reserve Bank of St. Louis, the mean duration for U.S. unemployment was 28.4 weeks at the end of August. Consider also that the current U-6 “total” unemployment rate shows more than 10% of the country working less than a 40-hour week or not at all. So you may need more than six months of cash reserves. Most people do not have anywhere near that, and some DIY investors give scant attention to their cash position.2,3

Overreacting to a bad year. Sometimes the bears appear. Sometimes stocks do not rise 10% annually. Fortunately, you have more than one year in which to plan for retirement (and other goals). Your long-run retirement saving and investing approach – aided by compounding – matters more than what the market does during a particular 12 months. Dramatically altering your investment strategy in reaction to present conditions can backfire.

Equating the economy with the market. They are not one and the same. In fact, there have been periods (think back to 2006-2007) when stocks hit historical peaks even when key indicators flashed recession signals. Moreover, some investments and market sectors can do well or show promise when the economy goes through a rough stretch.

Focusing more on money than on the overall quality of life. Managing investments – or the entirety of a very complex financial life – on your own takes time. More time than many people want to devote, more time than many people initially assume. That kind of time investment can subtract from your quality of life – another reason to turn to other resources for help and insight.

Mike Moffitt may be reached at phe# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

  

Citations.

1 – cnbc.com/2015/09/10/this-market-is-setting-a-wild-volatility-record.html [9/10/15]

2 – research.stlouisfed.org/fred2/series/UEMPMEAN [9/4/15]

3 – research.stlouisfed.org/fred2/series/U6RATE/ [9/4/15]

The U.S. Savings Bond Tax Trap

Open that safe deposit box.  See if your bond has matured.

Did you buy U.S. Savings Bonds decades ago? Or did your parents or grandparents purchase some for you? If so, take a look at them before April 15 rolls around. Your bonds may have matured. That means they are no longer earning interest, and it also means you need to cash them in.1

Check those maturity dates. Sometimes people hold U.S. Savings Bonds past the date of final maturity, often by accident. The old bonds are simply stashed away somewhere and forgotten.

While the Treasury will not penalize you for holding a U.S. Savings Bond past its date of maturity, the Internal Revenue Service will. Interest accumulated over the life of a U.S. Savings Bond must be reported on your 1040 form for the tax year in which you redeem the bond or it reaches final maturity. This must be done even if you (or the original bondholder) chose to have the interest on the bond accumulate tax-deferred until the final maturity date. Failure to report such interest may lead to a federal tax penalty.2

You are supposed to pay tax on a U.S. Savings Bond in one of two ways. Most bondholders choose to defer the tax until the bond matures. Once they redeem the bond, they report the interest through a 1099-INT form. Others choose to pay the tax annually prior to cashing the bond in, reporting the increase in the value of the bond as taxable interest each year.2,3

What if you find out you have held a U.S. Savings Bond for too long? You need to amend your federal tax return for the year in which the bond reached final maturity. You can file an amended return with the help of IRS Form 1040X. It may seem more logical and less arduous to report the forgotten, accumulated U.S. Savings Bond interest on your latest federal tax return, but the IRS does not want you to do that. The longer you leave the accumulated interest unreported, the greater the chance you will be cited for a tax penalty (or assessed a larger one than the one already in store for you).2

Another note about reporting interest: if a U.S. Savings Bond has matured and you have failed to redeem it, you will not find a Form 1099-INT for it in your records. Only redemption will bring that 1099-INT your way. (The accumulated interest for the bond should have been reported to the IRS regardless.) After you cash in that old bond, you will thereafter receive a 1099-INT. It will record that the interest on the bond was earned in the year of the bond’s final maturity.2

Plan ahead & keep track. U.S. Savings Bonds were issued on paper for decades and were often purchased on behalf of children and grandchildren. They are issued electronically now and receive little recognition, yet they can still prove quite useful to a retiree looking to improve cash flow. When you cash in a bond, or even multiple bonds, the “cash infusion” may help you put off withdrawing assets from another retirement account. While the interest on U.S. Savings Bonds is taxed by the IRS, it is exempt from state and local taxes.4

You want to keep track of the maturity dates, the yields and the interest rates on your bonds, as that will help you to figure out what bond to redeem when. A decades-old U.S. Savings Bond may cash out at anywhere from three to nine times its face value at full maturity.4

A useful search tool. Do you own a Series E U.S. Savings Bond? You might want to check on its maturity date at savingsbonds.gov/indiv/tools/tools_treasuryhunt.htm, which provides records of Series E bonds issued since 1974.5

Mike Moffitt may be reached at ph# 641-782-5577 or  email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – treasurydirect.gov/indiv/research/securities/res_securities_stoppedearninginterest.htm [3/2/15]

2 – budgeting.thenest.com/penalty-savings-bond-past-final-maturity-31113.html [3/18/15]

3 – irs.gov/publications/p550/ch01.html#en_US_2014_publink10009895 [2014]

4 – usatoday.com/story/money/columnist/tompor/2014/01/26/did-you-cash-those-savings-bonds-you-got-as-a-kid/4824631/ [1/26/14]

5 – treasurydirect.gov/indiv/tools/tools_treasuryhunt.htm [9/19/14]

 

Section 105 Plans

Medical reimbursement plans to benefit the smallest businesses.

Some businesses start small and stay small, by design. You may own such a business. Perhaps things begin and end with you, or maybe you employ one other person – your spouse. If this is the case, you should know about Section 105 plans.

Being self-employed, you already know that you can deduct 100% of your healthcare premiums from your federal and state taxes. The tax savings needn’t stop there. A properly structured Section 105 plan may let you deduct 100% of your family’s out-of-pocket medical expenses from federal, state and FICA/Medicare taxes.1,2

That’s right – all of them. TASC, a major provider of microbusiness employee benefits administration services, estimates that a Section 105 plan saves a family an average of $5,000 in taxes a year.2

How does this work? Section 105 of the Internal Revenue Code permits a self-employed person to set up a health reimbursement arrangement (HRA) for tax-free repayment of major qualified medical expenses not covered under a health plan. Alternately, that self-employed individual may hire a salaried employee (read: his/her spouse) and offer that employee an HRA.1,3

If the latter choice is made, the benefits offered will not only cover the employee, but also his/her spouse and dependents. So if the new hire is the business owner’s spouse, what results is effectively a family healthcare expense account.1

Most solopreneurs need to hire someone to get this perk. Can you set up a Section 105 plan without hiring an employee? Yes, if your business is a C-corp, an S-corp, or an LLC that files its federal tax return as a corporation. In a corporate structure, the corporation is defined as the employer and the business owner is defined as a salaried employee.1,3

Otherwise, hiring an employee is a precondition to implementing a Section 105 plan. You don’t necessarily have to hire your spouse – the new hire could be your son or daughter, a more distant relative, or even someone to whom you aren’t related.1

Did the Affordable Care Act restrict the implementation of these plans? Not for microbusinesses. When the IRS issued Notice 2013-54 as a follow-up to the Affordable Care Act, most businesses lost the chance to offer a discrete medical reimbursement plan. One-employee HRAs are still allowed under Section 105 using group or individual insurance coverage.2

Look at all you can potentially deduct. A properly designed Section 105 plan allows eligible employee(s) and their family/families to deduct all health and dental insurance premiums, all life and disability insurance premiums, all premiums for qualified long term care coverage, all Medicare Part A and Medigap premiums, all out-of-pocket medical, dental, and vision care expenses, psychiatric care, orthodontics … anything stipulated as a qualified medical expense in Section 213 of the Internal Revenue Code. Section 105 plans can even be structured so that if an employee doesn’t max out his/her yearly deduction, the unused portion can be carried over to subsequent years.1 

To keep up the plan, keep the paper trail going. A business owner and a financial or tax professional should collaborate to put a Section 105 plan into play. The IRS does look closely at these plans to check that the other spouse is legitimately employed – salaried, working a set schedule of hours, and hired per a written agreement. In addition, appropriate tax forms must be filed with the IRS, including Form 940 if the employee is unrelated to the business owner.1

If you want to lessen your tax liability and create an expense account to meet unanticipated medical costs, consider doing what other microbusiness owners have done: set up a Section 105 plan.

Mike Moffitt may be reached at 1-800-827-5577or email mikem@cfgiowa.com

website  cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC.  Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor.  Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tasconline.com/products/agriplan/section-105-plan-2/ [4/15/14]

2 – theihcc.com/en/communities/hsa_hra_fsa_admin_finance/hras-are-still-a-viable-tax-savings-device-for-sma_hsnc3u8t.html [3/10/14]

3 – smallbusiness.chron.com/can-business-owners-reimburse-themselves-taxfree-health-insurance-38718.html [4/15/14]