3 ways to prepare for the next Tax Season


April 15th has come and gone. And for all but the most die-hard procrastinators, myself included, “tax season” is over. But it’s never too early to prepare for the next round coming up.

What are some ways to minimize our taxes on investments?

1. Hire a knowledgeable CPA or tax preparer

(See my other blog for more info on hiring professionals.) Hiring a crafty tax expert is priceless. They can more than make up their fees by maximizing your deductions and creating a good tax strategy for your situation.

2. Invest in municipal bonds and funds

These are local government bonds that usually pay tax-exempt interest.They are very secure bonds with very low default rates, making them the second safest bond type after Treasury bonds.

I use one muni bond fund that pays over 6% yearly and is exempt from federal taxes. It has nearly 1,100 different local government bonds, pays monthly income and is liquid.

Here’s a link to a website created by a non-profit that explains all things bonds, including municipals.

3. Answer the tough question: “Will my retirement income be the same or higher in retirement?”

The answer to this question will either steer you towards or away from Roth IRAs and Roth 401k’s. My usual advice is that if you think you’ll make less income in retirement then a Roth may not be the greatest idea.

By using a Roth you give up a possible tax deduction today and may end up pulling money out while you’re in a very low bracket. If you’re in a low bracket during retirement, then you haven’t really saved much by taking a tax-free withdrawal. And you’ve paid taxes today on all contributions.

On the other hand, if you’ll have a higher tax bracket during retirement, then a Roth can be smart. You’ll take distributions at a potentially higher tax-free rate.

The flip-side to this argument is that tax rates could be much higher in the future. True. But who really knows what future tax rates will be? It’s more likely that we can estimate our income during retirement than guess what politicians will do in the future. So be vigilant in this decision of Roth’s versus regular retirement accounts.

4. Use annuities only when all other options are exhausted

Normally, I’m not a big fan of annuities for most investors. Why? They’re regularly abused by unscrupulous agents trying to get titanic commissions. And the end result is usually similar to The Titanic.

But for the right person they can be a good tool. Who’s “the right person”?

Someone who:

  • has maxed out all other retirement options
  • has high income (then the tax deferral is more valuable)
  • has higher net worth (which helps liquidity) &
  • is a business owner (not 100% essential but they have less pension options)

Hopefully these ideas help you out this time next year.


“Wow,” was All I Could Muster For a Shocked Response


The other day I picked up a copy of the Wall Street Journal. There was an article about The Great Depression by Morgan Housel. He mentioned a big hedge fund manager thinking that today’s economy is like the 1930s.

The two times are hugely different!

“Let me count the ways”:

1. Today’s economy: Up over 2% versus down 45% then

2. Today’s economy: 89% private and 11% government vs. about three percent federal government spending in The Great Depression (government spending = more diverse economy and on-going stimulus)(also, this doesn’t include current government payouts like Social Security, Medicare, etc. and their impact in the economy)

3. Today’s economy: internet, smart phones, apps, technology, biotechnology, alternative energies vs. none of that (in other words, we have a much-stronger, more-diverse economy)

4. Today’s unemployment: 5.5% vs. 25%

5. Today’s stock market: near historic highs vs. Dow Jones down 89% (and the current market is at an historically average price, when looking at forward 12-month earnings)

6. Today’s banking: FDIC insurance covering $250,000 per account vs. no bank insurance

7. Today’s brokerage: SIPC insurance covering $500,000 per account vs. no brokerage insurance during the 1930s

8. Today’s brokerage: margin limits of $1 equity to $1 debt vs. $1 equity and up to $9 debt! (this made the stock bubble and crash of the 1930s significantly worse and is even blamed for starting the depression)

9. Today’s retirement: Social Security income vs. none

10. Today’s retirement: Medicare coverage vs. none

(Both of these programs create an on-going stimulus from government dollars and a more-stable economy)

11. Today’s liquidity: corporate and personal cash of over $4.148 trillion vs. ??? (I really don’t know how much cash was around back then. I’m pretty sure that it was less than trillions, even adjusted for inflation)

12. Today’s Federal Reserve: experienced and aware of volatility caused by rate moves vs. inexperienced and short-sighted in The Great Depression

This list could be longer but you get the idea.

What was the hedge fund guru, Ray Dalio’s point? That the Federal Reserve is ready to raise rates and this could cause a market panic and drop. So have a lot of cash.

I agree with the “have cash” idea but that’s pretty well covered with over $4 trillion in cash.

Mr. Dalio’s other point was that the Fed Reserve was going to raise rates (like in the 1930s). That’s absolutely true. Rates are at zero. Most likely, there’s only one way to go with them…up. See my post for my predictions for 2015, including rate moves.

So worry not, dear investors, we will have stock market volatility. Probably a correction. Maybe even a moderate bear market. But we may also have a near-repeat of the record gains started in the late 1980s and running all the way through the 1990s.

You don’t want to miss a “super bull market.” Have cash but own a lot of equity….

How NOT to Get Ripped Off


According to Thomas Stanley, author of The Millionaire Next Door, most millionaires take the advice of a CPA, attorney or other financial adviser. It makes sense. We’re too busy with our career or business to become an armchair expert in these subjects. So we farm it out. Or, at least, the millionaires do.

When you seek investment advice it’s very important to understand who you’re talking to. I recently had someone ask me if I was a CFP (Certified Financial Planner). And that’s a very good question. It showed that this investor was seeking qualified advice, not just a sales pitch. I applaud and appreciate that.

And no, I’m not a CFP. But I have the same fiduciary and ethical standards as a CFP because I’m a licensed financial advisor.

I know, I know. All of this is super-boring but its super-important. This small detail could mean the difference between you keeping your money or getting ripped off….If you’re taking advice from a product salesperson are your best interests top priority? Or is making a sales commission top priority?

In answer to that, let’s look at the definition of fiduciary duty: “A fiduciary duty is a legal duty to act solely in another party’s interests.” That’s from the Cornell Law School website (here’s the link: fiduciary duty).

A fiduciary financial advisor is obligated to act in your best interest. If there’s a choice between something that will benefit the advisor or the client, they must choose the client interest over their own.

So how do you make sure you don’t get ripped off? Choose a fiduciary financial advisor.