Faith Based Investing

Are you going to purchase stocks in 2011?

If your answer to that question is “yes’, there’s an important IRS rule change you should know about.

If you buy a stock in 2011, your broker must report the gain or loss when you sell it. In fact, this will be true for the following investment classes as of the following dates:

·               Individual stocks you buy after January 1, 2011

·               Mutual fund shares you buy after January 1, 2012

·               Bonds, options & other securities you buy after January 1, 2013

Prior to 2011, reporting the gain or loss triggered by the sale of an investment was your responsibility – but the IRS wasn’t satisfied with that.

It’s all about the cost basis. To properly tax your investment when it is sold, the IRS has to know what you initially paid for it. In financial jargon, this acquisition price is known as the cost basis.

It isn’t always easy to figure the cost basis – factors like splits, mergers, reinvestment of dividends and inherited or gifted investments can make things hazy. The IRS simply doesn’t want to rely on your math anymore – federal government studies estimate that the agency loses up to $25 billion in tax revenue each year because of cost basis errors.

Your broker will send Form 1099-B to the IRS. Each sale of a stock bought in 2011 will generate a 1099-B. You will get a copy; the IRS will get a copy. On that 1099-B form, the gain or loss will be characterized as long-term or short-term.

Accounting method is critical!

The key here is to make sure your broker uses the accounting method you prefer as they report gains or losses. Most brokerages report individual securities using the FIFO method, as that is the IRS default method.3 FIFO is an acronym for “first in, first out” – that is, the shares bought first are the shares sold first.

With the FIFO method, you end up selling your cheapest shares first. In a down market, that’s okay – but in a rising market, many investors favor the specific ID method, in which they identify specific shares they want to sell. Using this method enables you to sell your highest-cost shares first, which can be tax-wise.

More details worth noting. According to the Wall Street Journal, the new reporting rules will also apply to REITs, foreign stocks and foreign ETFs classified as stock in 2011. In 2012, the reporting rules will apply to most ETFs and DRIPs in addition to mutual funds. In 2013, the reporting requirements may also apply to derivatives and partnerships.

Remember, this does not apply to shares & investments bought before 2011. You will still have to personally track the cost basis of these investments and report the realized gains and losses to the IRS.

By the way, these new IRS reporting rules do not apply to tax-sheltered investment accounts such as 529 plans and IRAs.

Yesterday we examined five of the top ten retirement blunders.  Now let’s look at the remaining five.  If you have any questions on any of these blunders or would like me to take a look at your personal situation, email me at jay at jayperoni.com.   READ PART 1

6.  PLACING TOO MUCH STOCK IN YOUR COMPANY

THE BLUNDER: Owning too much of your own company’s stock, which could jeopardize your retirement funds. With the fall of companies like Enron and WorldCom, many employees lost some or all of their retirement income. Could this happen to you?

THE SOLUTION: It’s not possible to predict the future, and that’s why a diversified portfolio is generally a wise move for the cautious investor. If you have too much invested in your own company, then essentially your retirement income could rely on the performance of one stock. That’s high-risk investing. If you’d rather not assume so much risk, consider speaking to a professional who can assist you in diversifying your investments.

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Congress should vote to extend them … but what if it doesn’t?

As 2010 draws to a close, Congress will likely act to extend the Bush-era tax cuts into 2011 or beyond. However, this is the same Congress that has done nothing about the estate tax for a year. So let’s play “what if” for a moment. What if we witness an “epic fail” on Capitol Hill and the EGTRRA and JGTRRA cuts disappear?

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Respect for the humble CD?

When the stock market turns volatile, people take a second look at fixed-rate investments, including certificates of deposit. In a bull market, the CD may seem like just about the most unattractive investment choice out there. But during downturns, those who own CDs can be thankful for their cautiousness.

A classic interim investment?

Often, people choose to put money in a CD when they are “between investments” – that is, as they move a portion of their assets out of the market or a market sector for the short-term. While leaving the stock market altogether is a laughable and ill-advised idea for the serious, committed investor, most CDs are FDIC-insured and thereby offer safety of principal (up to $100,000) along with a guaranteed rate of return.

A CD is certainly a commitment: you can’t pull the money out of one until the end of the specified term. (If you need to withdraw your money, you’ll almost always pay an early withdrawal penalty.) You also want to find a CD that offers returns sizable enough to keep ahead of inflation and taxes. With interest rates still near historic lows, it may be tough to find attractive rates.

The tradeoff of a CD is easily expressed. We all want CDs with higher rates of return, but this usually means CDs with longer periods until maturity. The longer the wait, the longer the investor goes without access to those funds, and the greater the potential opportunity cost of not assigning those assets to an investment that might perform better.

What About Index-linked CDs?

Some CDs offer you the chance to earn stock-market like returns. As the term implies, index-linked CDs are linked to the performance of a particular stock index. Often, they will match 90-100% of the return generated by an index, and some offer guaranteed minimum returns regardless of how the linked index performs over the term of the CD.

Should you move money into a CD?

For the short-term, given this challenging market, it is an option to consider for a portion of your money. Far too many retirees put their full nest egg in CDs which is often a very costly mistake in the long run. Before you make a move to a CD, be sure to speak to a qualified financial advisor about your financial direction – for today, and for the long term.

Plan ahead!

The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2011? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.

1. Think about adjusting or timing your income and tax deductions. If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2010 until 2011, this decision may bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.

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