While I realize the government is running such a deficit that it needs as many of my tax dollars as I can give it, I don’t agree this is best for me, so a lot of my financial planning has to do with tax efficiency.
This comes down to just a few things:
1) Use all the tax advantages I can. This means 403(b)s (in my case, anyway, since I work for a non-profit), Roth IRAs (I qualify), and flexible spending accounts. If I needed it and I could I’d also use a dependent care account. Anything to reduce the tax sting, which is substantial for someone like me with a marginal tax rate of about 30%. It also means claiming mortgage interest and student loan interest if you’re in those positions.
2) Invest in a tax efficient manner. This means not only to use the 403(b)s and Roth IRAs but to invest outside those accounts in ways that make sense for taxes. Index funds (or, actually, in my case, an index fund exchange traded fund) which spin off little to nothing in capital gains helps. Right now, dividend paying stocks or funds are fine in taxable accounts since they get a preferred rate, but that could change soon. Stocks which pay no dividends are even better in taxable accounts. And hold onto your stocks long enough to avoid short term capital gains.
3) Don’t overpay! Despite all the many, many friends of mine who brag about their tax returns, I don’t believe for a second getting a return is financially wise. In the exchange between yourself and the government regarding your income, someone owes someone, and I’d rather I owe them at the end of the year rather than they owe me. Why? Because someone’s giving the other an interest free loan, and I’d rather get the interest free loan and pay it back in the end than give the interest free loan and get the money back later–sometimes much later. This is why I was kicking myself so much over getting a refund recently because I overpaid on April 15.
These three things are the core of my tax strategy. Do you have any other ideas?
A few months back I borrowed money from myself to pay my tax bill for 2009. I did this by reducing (not eliminating!) my 403(b) contributions, increasing my tax withholding, and taking money out of a savings account I try to not touch.
A couple of months later, I’ve almost repaid the whole amount.
In celebration, I just increased my 403(b) contribution back to the previous amount so I can make sure I still do my maximum for 2010. In a week or so I’ll get my tax withholdings back down.
It feels nice to have repaid that to myself.
I haven’t run the numbers up until writing this post, but I think that our model portfolio did very nicely in April. So let’s see what those numbers look like now:
Starting this time with the fixed income portion of our porftolio, the Vanguard GNMA Fund (VFIIX) was up 0.654% for the month while paying that 3.44% yield; the Vanguard Total Bond Index Fund (VBMFX) was also up, 0.762% while paying 3.77% yield. These bond funds have done just beautifully for quite some time.
On the equity portion of our portfolio, the Vanguard Total Stock Market Index Fund (VTSMX), where we maintain our single largest position, was up 1.40% for the month, while also paying a 1.66% yield; finally, the Vanguard Total International Index Fund (VGTSX) was down for the month 3.43% for the month while paying a 2.39% yield.
Three of the four funds were up for the month and three of the four were up for the year to date through April. May’s been rocky but we’ll see how it goes.
As I’ve been discussing for awhile, I finally got my asset allocation done for 2010. It took me a long time to do this, partly due to the dynamic nature of the accounts (stocks trade every business day as we all know, and prices fluctuate possibly substantially) and also due to the number of accounts I have.
The majority of my invested money is in my 403(b) which is with Vanguard. I am fortunate that my employer has instituted the Vanguard Brokerage Option (VBO) which I’ve blogged about several times. Trading online in the account is simple and apparently just like a regular Vanguard brokerage account (I don’t have one so I can’t verify this). I exchanged some dollars in one fund for some dollars in another fund–simple. Finally, to get my asset allocation where I wanted, I had to add money from my 403(b) into my VBO and buy more of a fund I was already holding.
I could not figure out a way to do it online.
I called the next day and made the transfer and asked if it was possible to move money from my 403(b) to the VBO online and was told it wasn’t and there were no plans to do so as far as the representative knew; he explained there are so many restrictions on moving money this way for various 401(k) and equivalent plans they weren’t likely to make this part of the online service anytime soon.
In my view, that’s a serious flaw, but otherwise, I’m pretty thrilled with my Vanguard Brokerage Option.
It took me forever and a day but I finally got my asset allocation for 2010 done this past week. I called Vanguard on Tuesday.
Meaning that before the massive drop on Thursday, a five figure amount of money was moved out of the stock market, on its way to the Vanguard GNMA Fund (VFIIX).
All I was was lucky. I could have (actually ought to have) moved that money in February. It just didn’t happen until now.
So, not a genius. Knew nothing more than anyone else and probably a bit less than many. Just happened to luck out.
I love dividends. In fact, one of the things I look for when I buy a stock is whether or not it pays a dividend and how much it is in comparison to the stock price (it’s not the only thing, of course, but I like to see a nice dividend). There’s been even more to like about dividends in the last few years since qualified dividends have gotten a better tax rate than ordinary income on the federal level.
Unfortunately, that special treatment is due to expire in 2011. With record deficits going on in Washington it’s quite possible that it won’t be extended and dividend tax rates might be back to regular income levels.
If that’s the case, while I will still own dividend paying stocks, I will restrict them to my tax sheltered accounts (Roth IRA, regular IRA, and 401(k)/403(b), etc.).
I agree taxes are needed, but I won’t pay more than I have to.
As those of you who have followed this blog for awhile know, I have a model portfolio made up of four funds, two stock and two bond, that I track regularly. This is actually essentialy the portfolio I have in my 403(b) as well.
Any portfolio where asset allocation is a consideration–that would be every investment portfolio–needs periodic adjustment. For me, that adjustment happens yearly. Quite frankly, if the adjustments are very minor I often leave the portfolio alone, just because it’s often more trouble than it’s worth. That’s not the case this year.
If making adjustments to your portfolio, please consider fees (commissions from sales, for instance) and taxes (which is not an issue here since these funds are all contained within a 403(b)).
Also, consider what your overall asset mixes are. For instance, last year I decided on a more aggressive than usual 75% stock/25% bond allocation; this year I’m going back to my usual 70% stock/30% bond mix. Of the stock allocation, 47.5% is a domestic stock index and 22.5% is an international stock index; with bonds, 15% will be a total bond index and the other 15% will be a GNMA fund.
To match those up with the funds I discuss in the model portfolio posts, the domestic stock fund is the Vanguard Total Stock Market Index (VTSMX), the international stock fund is the Vanguard Total International Stock Index (VGTSMX), the domestic bond index fund is the Vanguard Total Bond Market Index (VBMFX), and the GNMA fund is the Vanguard GNMA Fund (VFIIX).
Turns out that I will need to take a bit off both my domestic and international stock funds and put them mostly into VFIIX but a little into VBMFX. I will work on that today!
The 401(k) match, where an employer matched up to a certain contribution by an employer into their retirement account, largely disappeared last year in the midst of the economic crisis.
Now, according to CNNMoney.com, the 401(k) match is back.
While a whole bunch of companies discontinued or at least cut back on their 401(k) matches last year, 80% of the ones who eliminated their matches are saying they’re going to restore them this year.
That’s a huge help for folks saving for retirement and a positive sign that an economic recovery is underway.
As usual I’ve been giving monthly updates of the performance of our model portfolio, consisting of four different Vanguard funds, the same ones I said I’m definitely not selling. You know these by heart already, so let’s see how they did for the year rather than just the month:
The Vanguard Total Stock Market Index (VTSMX) finished the year up 22.22%. Remember that this fund also yields 1.88% at current and makes up the largest portion of our portfolio. The Vanguard Total International Stock Market Index Fund (VGTSX) did an even better 30.87% and right now pays a dividend yield of 2.24%. As you can see, the stock portion of our portfolio did fabulously.
In the fixed income portion of our portfolio, the Vanguard Total Bond Market Index (VBMFX), was up 1.57% while putting out a very nice 4.04% yield. Similarly, the Vanguard GNMA Fund (VFIIX) was up, but a marginal 0.662% while paying a current yield of 3.99%.
Overall, every single one of these funds was up, and it was a great year for investing (remember, early this year the markets looked like they were on the brink of collapse)! Let’s see how things go in 2010.
I’ve been very happy with the way our model portfolio has performed this year, and I believe that December was just as much of a winner as the year had been to date. Let’s take a look at the numbers and see how things went.
The Vanguard Total Stock Market Index Fund (VTSMX) was again up, less than a percent, but up, 0.92%; in addition remember this fund pays a dividend yield of 1.88%. The Vanguard Total International Stock Index Fund (VGTSX) was actually down, 3.61%, but remember, the fund yields a decent 2.24%. On the fixed income side of the equation, the Vanguard GNMA Fund (VFIIX) was also down, 2.21%, while yielding 3.99%, and the Vanguard Total Bond Market Index (VBMFX) was down as well, 1.71%, with a yield of 4.04%.
Despite the fact that three of the four funds in the portfolio were down for the month, overall the portfolio was up, a combination of the fact that VTSMX was the largest holding in it and all of the dividend yields that the various funds paid.
While it wasn’t a spectacular month for our portfolio, it was a positive one, and I’ll take those any days over the alternative!
