Money Matters

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On April 22, we observe Earth Day, an occasion that has inspired millions of people over the decades to take steps to clean up our world. Of course, your physical surroundings are important, but you also operate in other “ecosystems” – social, cultural and political. And you’ll need to consider your investment environment, too. How can you improve it?

Here are a few suggestions:

  • Avoid “toxic” investment strategies. The dangers of pollution helped drive the creation of Earth Day. As an investor, you also need to watch out for “toxins” – particularly in the form of unhealthy investment techniques. For example, chasing after “hot” stocks can burn you. In the first place, by the time you’ve heard of them, they may already be cooling off. Second, and probably more important, these hot stocks just may be wrong for the investment mix that’s appropriate for your needs. Another toxic investment strategy: trying to “time” the market by “buying low and selling high.” No one can really predict when market highs and lows will occur, and if you’re always jumping in and out of the investment world, you’ll likely waste time and effort – not to mention money. Instead of looking for today’s hottest stocks or guessing where the market is heading, try to create and follow a long-term investment strategy based on your goals, risk tolerance and time horizon.
  • Reduce waste.From an environmental standpoint, the less waste and garbage we produce, the better it is for our planet. As an investor, can you find “wasteful” elements in your portfolio? It’s possible that you own some investments that may be redundant – that is, they are virtually indistinguishable from others you may have. Also, some investments, due to their risk profile or performance, no longer may be suitable for your needs. In either case – redundancy or unsuitability – you might be better off selling the investments and using the proceeds to purchase others that can be more helpful.
  • Recycle wisely.Recycling is a major part of the environmental movement. At first, though, you might not think the concept of recycling could apply to investing. But consider this: If you own stocks or mutual funds, you may receive dividends, and, like many people, you may choose to automatically reinvest those dividends back into the stocks or funds. So, in a sense, you are indeed “recycling” your dividend payments to boost your ownership stakes – without expending additional resources. And, in fact, this can be quite an effective and efficient way to increase your wealth over time.
  • Plant some “trees.”Planting trees has always been a key activity among boosters of the environment – with the recognition that their efforts will take years, or even decades, to reach fruition. When you invest, you must sometimes start small. By purchasing a limited amount of an investment and nurturing it over the years by adding more shares, you may one day have achieved significant growth. (Keep in mind, though, that there are no guarantees – variable investments such as stocks can lose principal.)

By making these and other moves, you can create a healthy investment environment – one that can help you achieve your long-term goals.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS®

Financial Advisor from the STONY BROOK EDWARD JONES

Edward Jones. Member SIPC

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As you’ve probably heard, the government extended the federal income tax filing deadline for individual taxpayers from April 15 to May 17, due to the COVID-19 pandemic. But the extra month doesn’t just give you additional time to prepare your taxes – it also provides you with an extra chance to contribute to some tax-advantaged investments for the 2020 tax year.

First of all, you’ve got more time to fully fund your IRA – in fact, if you don’t already have one, you’ve got until the new tax deadline to open one for the 2020 tax year and then continue funding it for 2021 and beyond. For 2020 and 2021, the IRA contribution limit is $6,000, or $7,000 if you’re 50 or older.

If you have a traditional IRA, your investment dollars are typically tax deductible. So, for example, if you are in the 24% tax bracket, and you put in the full $6,000, your contribution for the 2020 tax year would only “cost” you $4,560, because you’d be able to deduct $1,440 from your taxable income. (Deductibility is gradually phased out at certain income levels.)

And your earnings grow tax-deferred until you start taking withdrawals, typically during retirement. With a Roth IRA, your contributions aren’t deductible, but earnings can grow tax free if you’ve had your account at least five years and don’t take withdrawals until you’re 59½ or older. Eligibility for a Roth IRA also phases out at higher income levels.

What if you own a small business or, like many people this past year, struck out on your own and became self-employed? Business owners who file as sole proprietors also have until May 17 to contribute to, or open, a SEP IRA. (You might qualify for an extension until Oct. 15.) An SEP IRA is similar to a traditional IRA in that contributions are tax deductible and earnings grow tax deferred. For the 2020 tax year, you can contribute the lesser of 25% of your compensation or $57,000. However, special rules govern the maximum deductible contributions, so consult with your tax advisor before finalizing the amount you put in. Also, keep in mind that your estimated taxes for the first quarter of 2021 will still be due on the original April 15 date.

There’s one more area in which the new tax-filing deadline offers you an opportunity: “recontributions” to your retirement plans, such as your IRA and 401(k). In 2020, withdrawal rules were loosened for these accounts for individuals financially affected by the pandemic, and if you took money out, you could spread the taxes over three years. However, during that time, you can recontribute all or part of the withdrawals. And any money you do recontribute before the tax filing deadline of May 17 (or later, if you get an extension) can be excluded on your 2020 tax return, possibly reducing your taxes. So, your recontribution can provide you with more money in your retirement accounts and a tax break today.

One final point: If you’ve already filed your taxes but would still like to claim the extra tax benefits provided by IRA contributions or retirement plan recontributions, you may be able to file an amended return, so check with your tax advisor. In any case, look for ways to benefit from the tax-advantaged opportunities available to you.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS®

Financial Advisor from the STONY BROOK EDWARD JONES

Edward Jones. Member SIPC.

Photo from Pexels

The COVID-19 pandemic may end up changing our lives in some significant ways. To cite one example, it’s likely we’ll see a lot more people continue to work remotely, now that they’ve seen the effectiveness of tools such as videoconferencing. Education, too, may be forever changed in some ways. Perhaps just as important, though, is how many people may now think more about the future – including how they invest.

If you work with a financial professional, you may have connected with this individual over the past several months through a videoconferencing platform, rather than in person. Some people like this arrangement because it offers more scheduling flexibility and eliminates the time and effort of traveling to and from an appointment. Others, however, still prefer face-to-face contact and look forward to when such arrangements will again be practical and safe for everyone involved. But if you’re in the first group – that is, you prefer videoconferencing – you may now wish to use this communication method in the future, at least some of the time.

But beyond the physical aspects of your investing experience, you may now be looking at some changes in your investment strategy brought on, or at least suggested, by your reactions to the pandemic.

For example, many people – especially, but not exclusively, those whose employment was affected by the pandemic – found that they were coming up short in the area of liquidity. They didn’t have enough easily accessible savings to provide them with the cash they needed to meet their expenses until their employment situations stabilized. Consequently, some individuals were forced to dip into their long-term investments, such as their 401(k)s and IRAs. Generally speaking, this type of move is not ideal – these accounts are designed for retirement, so, the more you tap into them early, the less you’ll have available when you do retire. Furthermore, your withdrawals will likely be taxable, and, depending on your age, may also be subject to penalties.

If you were affected by this liquidity crunch, you can take steps now to avoid its recurrence. Your best move may be to build an emergency fund containing three to six months’ worth of living expenses, with the funds held in a separate, highly accessible account of cash or cash equivalents. Of course, given your regular expenses, it may take some time to build such an amount, but if you can commit yourself to putting away a certain amount of money each month, you will make progress. Even having a few hundred dollars in an emergency fund can help create more financial stability.

Apart from this new appreciation for short-term liquidity, though, the foundation for your overall financial future should remain essentially the same. In addition to building your emergency fund, you should still contribute what you can afford to your IRA, 401(k) and other retirement plans. If you have children you want to send to college, you might still explore college-funding vehicles such as a 529 plan. Higher education will still be expensive, even with an expansion in online learning programs.

Post-pandemic life may contain some differences, along with many similarities to life before. But it will always be a smart move to create a long-term financial strategy tailored to your individual needs, goals and risk tolerance.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS®

Financial Advisor from the STONY BROOK EDWARD JONES

Edward Jones. Member SIPC.

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Sadly, identity theft happens throughout the year – but some identity thieves are particularly active during tax-filing season. How can you protect yourself?

One of the most important moves you can make is to be suspicious of requests by people or entities claiming to be from the Internal Revenue Service. You may receive phone calls, texts and emails, but these types of communication are often just “phishing” scams with one goal in mind: to capture your personal information. These phishers can be quite clever, sending emails that appear to contain the IRS logo or making calls that may even seem to be coming from the IRS. Don’t open any links or attachments to the emails and don’t answer the calls – and don’t be alarmed if the caller leaves a vaguely threatening voicemail, either asking for personal information, such as your Social Security number, or informing you of some debts you supposedly owe to the IRS that must be taken care of “immediately.”

In reality, the IRS will not initiate contact with you by phone, email, text message or social media to request personal or financial information, or to inquire about issues pertaining to your tax returns. Instead, the agency will first send you a letter. And if you’re unsure of the legitimacy of such a letter, contact the IRS directly at 800-829-1040.

Of course, not all scam artists are fake IRS representatives – some will pass themselves off as tax preparers. Fortunately, most tax preparers are honest, but it’s not too hard to find the dishonest ones who might ask you to sign a blank return, promise you a big refund before looking at your records or try to charge a fee based on the percentage of your return. Legitimate tax preparers will make no grand promises and will explain their fees upfront. Before hiring someone to do your taxes, find out their qualifications. The IRS provides some valuable tips for choosing a reputable tax preparer, but you can also ask your friends and relatives for referrals.

Another tax scam to watch out for is the fraudulent tax return – that is, someone filing a return in your name. To do so, a scammer would need your name, birthdate and Social Security number. If you’re already providing two of these pieces of information – your name and birthdate on social media, and you also include your birthplace – you could be making it easier for scam artists to somehow get the third. It’s a good idea to check your privacy settings and limit what you’re sharing publicly. You might also want to use a nickname and omit your last name, birthday and birthplace.

To learn more about tax scams, visit the IRS website (irs.gov) and search for the “Taxpayer Guide to Identity Theft.” This document describes some signs of identity theft and provides tips for what to do if you are victimized.

It’s unfortunate that identity theft exists, but by taking the proper precautions, you can help insulate yourself from this threat, even when tax season is over.

Michael Christodoulou, ChFC®, AAMS®CRPC®, CRPS®

Financial Advisor from the STONY BROOK EDWARD JONES

Edward Jones. Member SIPC.

Photo from Pixabay

We’re now well into what’s known as “Tax Season.” If your income in 2020 was affected by the COVID-19 pandemic, your tax return will reflect it. However, if your earnings were fairly normal last year, you might look at your tax situation and wonder how you could improve it in 2022. One area to look at may be your investment-related taxes.

To help control these taxes, consider these moves:

  • Take full advantage of tax-deferred investments. As an investor, one of the best moves you can make is to consider contributing as much as you can afford to your tax-deferred accounts – your traditional IRA and 401(k) or similar employer-sponsored plan – every year. If you
  • Look for tax-free opportunities. Interest from municipal bonds typically is exempt from federal income tax, and, in some cases, from state and local income tax, too. (Some municipal bonds, however, may be subject to the alternative minimum tax.) And if you qualify to contribute to a Roth IRA – eligibility is generally based on income – your earnings can be withdrawn tax-free, provided you’ve had your account for at least five years, and you don’t start taking withdrawals until you’re at least 59-1/2. Your employer may also offer a Roth 401(k), which can provide tax-free withdrawals. Keep in mind, though, that you contribute after-tax dollars to a Roth IRA and 401(k), unlike a traditional IRA and 401(k), in which your contributions are made with pre-tax dollars.
  • Be a “buy and hold” investor. Your 401(k) and IRA are designed to be long-term investments, and you may face disincentives in the form of taxes and penalties if you tap into them before you reach 59 ½.  So, just by investing in these retirement accounts, you are essentially pursuing a “buy and hold” strategy. But you can follow this same strategy for investments held outside your IRA and 401(k). You can own some investments – stocks in particular – for decades without paying taxes on gains. And when you do sell them, you’ll only be taxed at the long-term capital gains rate, which may well be less than your ordinary income tax rate. But if you’re frequently buying and selling investments you’ve held for one year or less, you could rack up some pretty big tax bills, because you’ll likely be taxed at your ordinary income tax rate.
  • Be prepared for unexpected taxes. Mutual fund managers are generally free to make whatever trades they choose. And when they do sell some investments, they can incur capital gains, which may be passed along to you. If this is a concern, you might look for funds that do less trading and bill themselves as tax efficient.

While taxes are one factor to consider when you invest, they should probably not be the driving force. You need to build a diversified portfolio that’s appropriate for your risk tolerance and time horizon. Not all the investments you select, and the moves you make with them, will necessarily be the most tax efficient, but by working with your financial and tax professionals, you can make choices that can help you move toward your long-term goals.

This article was written by Edward Jones for use by Michael Christodoulou, ChFC®,AAMS®,CRPC®,CRPS® of the Stony Brook Edward Jones.

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During the COVID-19 pandemic, many of us have been forced to work from home. But once we’ve moved past the virus, many workers may continue working from home. More than one-third of companies with employees who started working from home now think that remote work will stay more common post-pandemic, according to a Harvard Business School study. This shift to at-home work can affect people’s lives in many ways – and it may end up providing workers with some long-term financial advantages.

If you’re one of those who will continue working remotely, either full time or at least a few days a week, how might you benefit? Here are a few possibilities:

  • Reduced transportation costs – Over time, you can spend a lot of money commuting to and from work. The average commuter spends $2,000 to $5,000 per year on transportation costs, including gas, car maintenance, public transportation and other expenses, depending on where they live, according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. If you are going to work primarily from home, you should be able to greatly reduce these costs.
  • Potentially lower car insurance premiums – Your auto insurance premiums are partially based on how many miles you drive each year. So, if you were to significantly reduce these miles by working from home, you might qualify for lower rates.
  • Lower expenditures on lunches – If you typically eat lunch in restaurants or get takeout while at work, you could easily be spending $50 or more per week – even more if you regularly get coffee drinks to go. By these figures, you could end up spending around $3,000 a year. Think how much you could reduce this bill by eating lunch at home during your remote workday.
  • Lower clothing costs – Despite the rise in “casual dress” days, plenty of workers still need to maintain appropriate office attire. By working from home, you can “dress down,” reducing your clothing costs and dry-cleaning bills.

As you can see, it may be possible for you to save quite a bit of money by working from home. How can you use your savings to help meet your long-term financial goals, such as achieving a comfortable retirement?

For one thing, you could boost your investments. Let’s suppose that you can save $2,500 each year by working remotely. If you were to invest this amount in a tax-deferred account, such as an IRA or your 401(k) or similar employer-sponsored plan and earned a hypothetical 6% annual return for 20 years, you’d accumulate more than $97,000 – and if you kept going for an additional 10 years, you’d have nearly $210,000. You’d eventually pay taxes on the amount you withdrew from these accounts (and withdrawals prior to age 59½ may be subject to a 10% IRS penalty), but you’d still end up pretty far ahead of where you’d be otherwise.)

You also might use part of your savings generated by remote work to help build an emergency fund containing a few months’ worth of living expenses. Without this fund, you might be forced to dip into your retirement accounts to pay for something like a major home repair.

Becoming an at-home worker will no doubt require some adjustments on your part – but, in strictly financial terms, it could lead to some positive results.

This article was written by Edward Jones for use by Michael Christodoulou, ChFC®,AAMS®,CRPC®,CRPS® of the Stony Brook Edward Jones.

Edward Jones, Member SIPC