Post by Zoinkers on Dec 4, 2007 19:02:51 GMT -5
Six Personal Finance Tips for the Holidays
Friday November 30, 11:56 am ET
By Christopher Davis
If there's any time of the year when it's easy to let your finances take a back seat to other priorities, it's the holidays. After all, you're busy shopping for presents, traveling, visiting family, and baking cookies (or at least eating them!). But ignoring money matters entirely at this time of year could bite back next year.
What should you be thinking about this holiday season? Here are a few tips to keep in mind.
Watch for year-end fund distributions.
Mutual funds are required by law to pass along any income and capital gains they've earned throughout the year. These distributions typically take place near year end, and they can cause a tax headache if you're not careful. (Dividend income and long-term capital gains are taxed at a 15% rate, while bond income and short-term capital gains are taxed at your highest marginal tax rate.) Let's say you buy Vanguard Explorer (NASDAQ:VEXPX - News) on December 1 for your taxable account. As a shareholder, Fidelity estimates you'll receive a $6.73 per share payout on Dec. 14. So what's the problem? Because you owned the fund on its pay date, you'll have to pay taxes on the distribution even though you weren't around to enjoy its gains.
The bottom line: If you plan on investing in a fund before the end of the year, make sure you do so after it pays its distribution. You'll find fund companies post the dates and amounts of their funds' expected distributions on their Web sites ahead of time. Fidelity's, for instance, is here, while Vanguard's is here. Expect the biggest distributions in areas that have enjoyed the biggest gains in recent years--domestic and foreign small caps, real estate, and emerging markets.
Ditch your losers.
In addition to avoiding ticking tax bombs, you can also help keep your tax bill down by selling some losers. There's a good chance you've sold some winners this year--it's shaping up to be a halfway decent year for the stock market--but you can offset those gains by "harvesting" losses elsewhere in your portfolio. Look through your portfolio to see if there's anything you're considering selling. If you sell at a net loss, you can use it to offset realized gains on other investments in your portfolio. The IRS allows individuals to write off up to $3,000 a year against their ordinary income, while unused losses can be carried forward indefinitely.
As a side note, make sure that if you decide to sell, you're doing so for the right reasons. For example, you might be tempted to ditch your large-growth fund because most have so-so five-year returns relative to smaller-cap value-oriented funds. But you could end up paying the price, given that growth stocks have surged so far this year. Then again, it also could be a good time to upgrade your investment. If your investment in a mediocre large-growth fund is under water, this could be a good time to take the loss and better position yourself for rebound by moving into one of the category's better options. Morningstar's list of Fund Analyst Picks is a good place to start.
Contribute to tax-advantaged accounts.
Another way to slim down your 2007 tax bill is to add more to your 401(k) account. The IRS allows individuals to put up to $15,500 per year in their 401(k) in 2007, and those over the age of 50 can add another $5,000. If you've put in less than that so far this year, you could consider boosting your contribution as the year closes. You could also give yourself a tax break by opening or adding to an individual retirement account, or an IRA. Although anyone, regardless of income, can open a traditional IRA (you can contribute up to $4,000 annually; $5,000 if you're over 50), individuals under certain income thresholds can actually deduct their IRA contributions from their income. Not everyone is eligible for a traditional deductible IRA--single filers earning more than $62,000 and joint filers earning more than $103,000 aren't eligible if they can also contribute to a company retirement plan. To learn more about how to choose the right IRA for you, click here. Another helpful tool to help navigate the IRA jungle is Morningstar's IRA calculator.
It's worth noting the alternative to the traditional IRA, the Roth IRA, is an attractive option from a tax perspective, particularly for higher-income savers. With the Roth, though, your contributions are aftertax, so they won't do much to reduce your tax bill this year. (Still, the account grows tax free, and withdrawals aren't taxed.)
Be generous.
The holidays celebrate the spirit of giving and generosity. Fortunately, the tax law rewards this spirit. Come tax time, you'll be able to deduct charitable contributions if you itemize--just remember to save receipts and canceled checks as proof. And if you're giving to loved ones, keep in mind that you can contribute up to $12,000 per year per recipient without triggering gift tax.
Instead of cash, though, you might want to consider the gift that (hopefully) will keep on giving--a mutual fund. For some ideas on stocking-stuffer funds, click here.
Be wary of small thingytail party "hot tips."
'Tis the season for parties and small thingytail chatter. When the topic of conversation turns to investing, it's unlikely you'll hear anyone brag about their investments in sound, stable funds like T. Rowe Price Equity Income (NASDAQ:PRFDX - News) or Dodge & Cox Stock (NASDAQ:DODGX - News) (except, perhaps, at Morningstar's holiday party). Instead, they're more likely to talk about the big returns they've earned investing in the hottest asset classes. These days, that might mean investments focusing on China, India, or energy and other commodities. But tread carefully. What was hot yesterday might not be hot tomorrow. If you don't believe me, just ask the people who heard about "can't miss" Internet stocks at holiday parties in 1999 right before they went down in flames.
That's not to say emerging markets, commodities, or other strong-performing areas of the market don't belong in your portfolio. But as with any asset class that's had a big run, your near-term expectations should be modest. And you should consider whether an investment can add long-term value to your portfolio, not whether it will get you rich quick. That's not a recipe for bragging rights at a small thingytail party, but it'll pay off over time.
Don't go into debt.
Must-have holiday gifts like flat panel televisions and diamond rings don't come cheap. And many of us can't resist the temptation to whip out our charge cards to pay for it all. If you don't want to spend 2008 paying for gifts you bought in 2007, think carefully about how much you realistically can afford to spend. Create a budget and stick to it. (Of course, that's easier said than done.) You don't have to overspend to make the holidays special, however. Instead, try to be creative and focus on spending time with your loved ones. Those memories will last much longer and have more value over the long run than the new iPhone you buy this year.
Morningstar Premium Members get access to over 3,900 Stock and Fund Analyst Reports, Analyst Picks, and award-winning portfolio tools. Learn More.
biz.yahoo.com/ms/071130/214956.html?.v=2&.pf='retirement'
Friday November 30, 11:56 am ET
By Christopher Davis
If there's any time of the year when it's easy to let your finances take a back seat to other priorities, it's the holidays. After all, you're busy shopping for presents, traveling, visiting family, and baking cookies (or at least eating them!). But ignoring money matters entirely at this time of year could bite back next year.
What should you be thinking about this holiday season? Here are a few tips to keep in mind.
Watch for year-end fund distributions.
Mutual funds are required by law to pass along any income and capital gains they've earned throughout the year. These distributions typically take place near year end, and they can cause a tax headache if you're not careful. (Dividend income and long-term capital gains are taxed at a 15% rate, while bond income and short-term capital gains are taxed at your highest marginal tax rate.) Let's say you buy Vanguard Explorer (NASDAQ:VEXPX - News) on December 1 for your taxable account. As a shareholder, Fidelity estimates you'll receive a $6.73 per share payout on Dec. 14. So what's the problem? Because you owned the fund on its pay date, you'll have to pay taxes on the distribution even though you weren't around to enjoy its gains.
The bottom line: If you plan on investing in a fund before the end of the year, make sure you do so after it pays its distribution. You'll find fund companies post the dates and amounts of their funds' expected distributions on their Web sites ahead of time. Fidelity's, for instance, is here, while Vanguard's is here. Expect the biggest distributions in areas that have enjoyed the biggest gains in recent years--domestic and foreign small caps, real estate, and emerging markets.
Ditch your losers.
In addition to avoiding ticking tax bombs, you can also help keep your tax bill down by selling some losers. There's a good chance you've sold some winners this year--it's shaping up to be a halfway decent year for the stock market--but you can offset those gains by "harvesting" losses elsewhere in your portfolio. Look through your portfolio to see if there's anything you're considering selling. If you sell at a net loss, you can use it to offset realized gains on other investments in your portfolio. The IRS allows individuals to write off up to $3,000 a year against their ordinary income, while unused losses can be carried forward indefinitely.
As a side note, make sure that if you decide to sell, you're doing so for the right reasons. For example, you might be tempted to ditch your large-growth fund because most have so-so five-year returns relative to smaller-cap value-oriented funds. But you could end up paying the price, given that growth stocks have surged so far this year. Then again, it also could be a good time to upgrade your investment. If your investment in a mediocre large-growth fund is under water, this could be a good time to take the loss and better position yourself for rebound by moving into one of the category's better options. Morningstar's list of Fund Analyst Picks is a good place to start.
Contribute to tax-advantaged accounts.
Another way to slim down your 2007 tax bill is to add more to your 401(k) account. The IRS allows individuals to put up to $15,500 per year in their 401(k) in 2007, and those over the age of 50 can add another $5,000. If you've put in less than that so far this year, you could consider boosting your contribution as the year closes. You could also give yourself a tax break by opening or adding to an individual retirement account, or an IRA. Although anyone, regardless of income, can open a traditional IRA (you can contribute up to $4,000 annually; $5,000 if you're over 50), individuals under certain income thresholds can actually deduct their IRA contributions from their income. Not everyone is eligible for a traditional deductible IRA--single filers earning more than $62,000 and joint filers earning more than $103,000 aren't eligible if they can also contribute to a company retirement plan. To learn more about how to choose the right IRA for you, click here. Another helpful tool to help navigate the IRA jungle is Morningstar's IRA calculator.
It's worth noting the alternative to the traditional IRA, the Roth IRA, is an attractive option from a tax perspective, particularly for higher-income savers. With the Roth, though, your contributions are aftertax, so they won't do much to reduce your tax bill this year. (Still, the account grows tax free, and withdrawals aren't taxed.)
Be generous.
The holidays celebrate the spirit of giving and generosity. Fortunately, the tax law rewards this spirit. Come tax time, you'll be able to deduct charitable contributions if you itemize--just remember to save receipts and canceled checks as proof. And if you're giving to loved ones, keep in mind that you can contribute up to $12,000 per year per recipient without triggering gift tax.
Instead of cash, though, you might want to consider the gift that (hopefully) will keep on giving--a mutual fund. For some ideas on stocking-stuffer funds, click here.
Be wary of small thingytail party "hot tips."
'Tis the season for parties and small thingytail chatter. When the topic of conversation turns to investing, it's unlikely you'll hear anyone brag about their investments in sound, stable funds like T. Rowe Price Equity Income (NASDAQ:PRFDX - News) or Dodge & Cox Stock (NASDAQ:DODGX - News) (except, perhaps, at Morningstar's holiday party). Instead, they're more likely to talk about the big returns they've earned investing in the hottest asset classes. These days, that might mean investments focusing on China, India, or energy and other commodities. But tread carefully. What was hot yesterday might not be hot tomorrow. If you don't believe me, just ask the people who heard about "can't miss" Internet stocks at holiday parties in 1999 right before they went down in flames.
That's not to say emerging markets, commodities, or other strong-performing areas of the market don't belong in your portfolio. But as with any asset class that's had a big run, your near-term expectations should be modest. And you should consider whether an investment can add long-term value to your portfolio, not whether it will get you rich quick. That's not a recipe for bragging rights at a small thingytail party, but it'll pay off over time.
Don't go into debt.
Must-have holiday gifts like flat panel televisions and diamond rings don't come cheap. And many of us can't resist the temptation to whip out our charge cards to pay for it all. If you don't want to spend 2008 paying for gifts you bought in 2007, think carefully about how much you realistically can afford to spend. Create a budget and stick to it. (Of course, that's easier said than done.) You don't have to overspend to make the holidays special, however. Instead, try to be creative and focus on spending time with your loved ones. Those memories will last much longer and have more value over the long run than the new iPhone you buy this year.
Morningstar Premium Members get access to over 3,900 Stock and Fund Analyst Reports, Analyst Picks, and award-winning portfolio tools. Learn More.
biz.yahoo.com/ms/071130/214956.html?.v=2&.pf='retirement'