Are State Refunds Taxable?

Each year, when you file your federal tax return, you have the option to deduct your state taxes to reduce your adjusted gross income.

This option is available if you decide to itemize your deductions on Schedule A.  On this form, you have the option to either deduct state sales taxes or state income taxes, but not both.

Here are three cases to consider:

Exact Payment
$500 was withheld for state income taxes
You owed $500 in state income taxes

In this case, when you do your federal income taxes, assuming you take the "state income taxes itemized deduction", you will deduct $500.  If you are in the 25% tax bracket, this will save you $125.

Over Payment
$700 was withheld for state income taxes
You owed $500 in state income taxes

In this case, when you do your federal income taxes, assuming you take the "state income taxes itemized deduction", you will deduct $700.  If you are in the 25% tax bracket, this will save you $175.

Next year, you will report your $200 state refund as income.  If you are in the 25% tax bracket, this will cost you $50.

In the end, this will save you $125 total.

Under Payment

$400 was withheld for state income taxes
You owed $500 in state income taxes

In this case, when you do your federal income taxes, assuming you take the "state income taxes itemized deduction", you will deduct $400.  If you are in the 25% tax bracket, this will save you $100.

Next year, if you add the $100 paid in state income taxes to the "state income taxes itemized deduction", you will save an additional $25.

In the end, this will save you $125 total.

See brrinc.org and blog.turbotax.intuit.com for more details.

Calculating Taxable Income when Surrendering a Whole Life Insurance Policy Before Death

In general, whole life insurance involves overpaying ten times the cost of term insurance and placing that extra money into a separate account.

The State of California categorizes Whole, Universal, Variable, Indexed and several others under the category of Whole Life Insurance (as opposed to Term Life Insurance).

In order to determine the gain within a Whole Life Insurance policy, you must first calculate the cost basis.  The cost basis in most cases is just the total amount of premiums paid on the policy (see finance.zacks.com for more information).  In rare cases, there may be distributions in which case the distributions will reduce the cost basis.

Next, you determine the surrender value.  A common misconception is that a life insurance policy is worth the account value.  However, a more accurate estimation of value is today's value, which is the surrender value.

Gain = Surrender Value - Premiums

Compare this to a typical gain for any investment, such as a home:

Gain = Sale Price - Cost Basis

The Gain will be taxed under the IRS code 7702.  This gain is reported as ordinary income.  This is unfortunate, because most policies result in a loss and a capital loss would have the option to be offset with a capital gain.

How Can Financial Institutions Be More Transparent?

Consider these questions when thinking about a particular investment portfolio. Is it possible that fund performance is not quite as important as we thought? How much are hidden fees and charges are affecting your bottom line? With all the information given by financial institutions, how can we really simplify our life and figure out how we are doing? How can we determine our financial velocity?

When in comes down to it, your fund performance, while important is not the most important. Your sales charges or management fees are also not that important. What is most important is your bottom line, which takes into account both performance and charges. In other words, rather than looking at income or expenses, lets look at profit. When you look at your account, you want to know what your personal rate of return is.

When looking at your personal rate of return it is critical to take into account the dates of your deposits and your current value. Luckily, when it comes to current value, the valuation of portfolios is fairly accurate due to the liquidity of stocks. This is not the same as car or home valuation. On the other hand, the time value of money should be taken into consideration.

If you deposit $500 during the year and your money at the end of the year is $1000, the day you deposit has a large impact on the personal rate of return. If you deposited the money near January 1st, your personal rate of return would be close to 100%. If you deposited your money around December 28th, your personal rate of return would be closer to 10000%!

With all this in mind, institutions like Charles Schwab and Fidelity have been including personal rate of return in their statements. I did an independent audit and found the following:

See the algorithm at sizustech.blogspot.com
This is what I found...

Case I

The following data represents deposits for the last quarter of 2013:

var currentNetWorth = createTransaction("12/31/2013", 4073.99);
var paymentArray = [];
paymentArray[0] = createTransaction("09/20/2013", 500.00);
paymentArray[1] = createTransaction("10/04/2013", 500.00);
paymentArray[2] = createTransaction("10/18/2013", 500.00);
paymentArray[3] = createTransaction("11/01/2013", 500.00);
paymentArray[4] = createTransaction("11/18/2013", 500.00);
paymentArray[5] = createTransaction("12/02/2013", 500.00);
paymentArray[6] = createTransaction("12/13/2013", 500.00);
paymentArray[7] = createTransaction("12/27/2013", 500.00);

The financial institution showed a 2013 rate of return as 3.6%. My calculation showed 13.60%.

Case II

The following data represents deposits for the first and second third of 2014:

var currentNetWorth = createTransaction("8/15/2014", 12011.36);
var paymentArray = [];
paymentArray[0] = createTransaction("12/31/2013", 4073.99);
paymentArray[1] = createTransaction("1/13/2014", 450.00);
paymentArray[2] = createTransaction("1/27/2014", 450.00);
paymentArray[3] = createTransaction("2/10/2014", 450.00);
paymentArray[4] = createTransaction("2/20/2014", 450.00);
paymentArray[5] = createTransaction("2/28/2014", 376.82);
paymentArray[6] = createTransaction("3/07/2014", 450.00);
paymentArray[7] = createTransaction("3/21/2014", 450.00);
paymentArray[8] = createTransaction("4/04/2014", 450.00);
paymentArray[9] = createTransaction("4/17/2014", 456.08);
paymentArray[10] = createTransaction("5/02/2014", 456.75);
paymentArray[11] = createTransaction("5/16/2014", 456.75);
paymentArray[12] = createTransaction("5/30/2014", 456.75);
paymentArray[13] = createTransaction("6/13/2014", 456.75);
paymentArray[14] = createTransaction("6/27/2014", 456.75);
paymentArray[15] = createTransaction("7/11/2014", 456.75);
paymentArray[16] = createTransaction("7/25/2014", 456.75);
paymentArray[17] = createTransaction("8/08/2014", 456.75);

The financial institution showed a YTD rate of return as 3.2%. My calculation showed 6.19%.

Notice that to calculate YTD, you need to take into consideration the value of the portfolio at the end of the previous year.

Case III

The following data represents the combined deposits:

var currentNetWorth = createTransaction("8/15/2014", 12011.36);
var paymentArray = [];
paymentArray[0] = createTransaction("09/20/2013", 500.00);
paymentArray[1] = createTransaction("10/04/2013", 500.00);
paymentArray[2] = createTransaction("10/18/2013", 500.00);
paymentArray[3] = createTransaction("11/01/2013", 500.00);
paymentArray[4] = createTransaction("11/18/2013", 500.00);
paymentArray[5] = createTransaction("12/02/2013", 500.00);
paymentArray[6] = createTransaction("12/13/2013", 500.00);
paymentArray[7] = createTransaction("12/27/2013", 500.00);
paymentArray[8] = createTransaction("1/13/2014", 450.00);
paymentArray[9] = createTransaction("1/27/2014", 450.00);
paymentArray[10] = createTransaction("2/10/2014", 450.00);
paymentArray[11] = createTransaction("2/20/2014", 450.00);
paymentArray[12] = createTransaction("2/28/2014", 376.82);
paymentArray[13] = createTransaction("3/07/2014", 450.00);
paymentArray[14] = createTransaction("3/21/2014", 450.00);
paymentArray[15] = createTransaction("4/04/2014", 450.00);
paymentArray[16] = createTransaction("4/17/2014", 456.08);
paymentArray[17] = createTransaction("5/02/2014", 456.75);
paymentArray[18] = createTransaction("5/16/2014", 456.75);
paymentArray[19] = createTransaction("5/30/2014", 456.75);
paymentArray[20] = createTransaction("6/13/2014", 456.75);
paymentArray[21] = createTransaction("6/27/2014", 456.75);
paymentArray[22] = createTransaction("7/11/2014", 456.75);
paymentArray[23] = createTransaction("7/25/2014", 456.75);
paymentArray[24] = createTransaction("8/08/2014", 456.75);

The financial institution showed a lifetime rate of return as 6.2%. My calculation showed 6.96%.

As a sanity check, if the 2013 rate of return was 3.6% and the YTD rate of return was 3.2%, how could the lifetime rate of return be 6.2%?

Know your personal rate of return. This will help you weed through the fund performance charts, the sales charges, the hidden fees, reported returns, etc.

This post was reposted from http://finlit.biz/uncategorized/how-can-financial-institutions-be-more-transparent/, originally written on August 15th, 2014.

How Much is Cable Really Costing You?

Have you ever considered how much cable is really costing you?

Well this example can be applied to any monthly expense. Consider this from the blog posting at sizusfinlit.blogspot.com.

"Some families are very happy because they earn over $200,000 with a combined income. However, this is no match for a simple cable bill, which is paid $120 per month for the entire life of most people. Using the average age newborns live to, which is 80, this becomes $115,200 of payments over one's life. If I factor in compound interest, paying $1440 annually at a 5% interest rate, this becomes $1,468,498. Wow, looks like the $200,000 just went out the window when you decided to own cable throughout your entire life, costing $1,468,498!"

This post was reposted from http://finlit.biz/estate-planning/how-much-is-cable-really-costing-you/, originally written on August 9th, 2014.

Residual Income, The Dream Killer or The Dream Creator?

Today, I want to discuss a fundamental concept called residual income. A related concept is passive residual income.

Have you ever asked why and how society funnels money, eventually leaving 15% of families poor, 80% as middle class and 5% of the population as wealthy? Have you ever wondered why the rich get richer? Or why is it that by age 65, 90% of the population is working or dependent, 5% is wealthy and the other 5% deceased?

What is inflation? Well, inflation is used so that the money people stuff under their mattress eventually becomes useless. It is a 3% funnel back into society.

What are taxes? Taxes are a chunk of income used to return a portion of what people earn to pay for government expenses. It is another 35% residual income for society.

What is a credit card? Well, it a 3% service charge funneling your money to credit card companies with each swipe.

What is a mortgage? A mortgage is a 30 year contract to remove the residual income from rent. By the way, financially speaking, the ability to have control over possibly reducing rent may be more valuable than having the mortgage.

What is a grocery store? It is a residual expense to keep you fed, despite the fact that you might be able to handle your own food production.

Now, if that weren't enough, companies became smart and started adding to the list of expenses that you need each month. You have mortgages, rent, electricity, water, gas, telephone, cable, internet, newspaper/magazine/gaming/online subscriptions, property taxes, fitness memberships, health insurance, home insurance, whole life insurance, and car insurance/registration/gasoline.

Some families are very happy because they earn over $200,000 with a combined income. However, this is no match for a simple cable bill, which is paid $120 per month for the entire life of most people. Using the average age newborns live to, which is 80, this becomes $115,200 of payments over one's life. If I factor in compound interest, paying $1440 annually at a 5% interest rate, this becomes $1,468,498. Wow, looks like the $200,000 just went out the window when you decided to own cable throughout your entire life, costing $1,468,498!

The wealthy know that high salaries mean very little. Just look at the lottery winners and athletes that have gone broke after 5 years (there are other reasons of course and this may be a whole blog in itself). It is those who eventually have more residual income flowing in than out that win over the long run. Wealthy people probably didn't purchase cable until they had enough passive income to cover it.

Now, if you have gotten a chance to create a solid passive residual income stream, how would you feel knowing that legislation existed to ensure its stability?

What is really interesting is if we look at how each of the previous decades has brought an additional product or service to market which introduced an additional passive income stream for a new company.

Another interesting concept is looking at what it would take to accumulate $50,000 of passive residual income rather than looking at what it would take to accumulate 1 million dollars which might indirectly be used to bring $50,000 of passive residual income.

Dedicated to Adam Ward.

This post was reposted from http://sizuservices.blogspot.com/2012/12/residual-income-dream-killer-or-dream.html, originally written on December 26th, 2012.

Should You Pull Equity From Your Home for Investment Purposes?

I wanted to share the personal story of a woman I spoke with this month. While I will keep her identity private, I think others can benefit from hearing this story. It is important because it is through our experiences and the experiences of others that we learn. This is where we discover that theory sounds good and great, but application rarely matches theory.

This woman was convinced to take 350,000 equity out of her house, putting 175,000 into two life insurance policies that were supposed to provide growth and tax free retirement.

She ended up taking an interest only mortgage which switched after ten years to normal amortization. She ended up losing a big chunk from the life insurance policy, which didn't quite return what was implied by the hypothetical. Now, she doesn't even consider it as an asset. On top of that, now that the regular amortization hit, she is having trouble affording the payments.

Her mortgage is far from paid off and she is considering moving from the area, being only two or three years away from retirement.

Moral of the story. Only take money out from your home for an active business venture. This does not include home improvements or passive investing. It only includes jump starting a life long dream where you are actively involved in decisions and the direction of the business.

If you are considering whether or not your business venture qualifies for taking equity out of your home, consider Jim Collin's book from Good to Great, where he states that your purpose is the intersection of your passion, potential and profit.

This post was reposted from http://finlit.biz/estate-planning/should-you-pull-equity-from-your-home-for-investment-purposes/, originally written on August 9th, 2014.

Can You Build a Downpayment for a House in 5 Years?

Suppose you decided to rent for a while and you sold your house receiving a large lump sum. Suppose you also wanted to build you savings for a while to purchase another house down the road in, say 5 years. How much could you expect to save or grow your money?

For the short term, you want to protect your money as well as grow it. If you put down $100,000 and contributed $120 monthly for 5 years, you would use the following formula to calculate your growth.

P*(1+r)^y + sum_{n=0}^{y*12-1} M*(1+r)^(y-n/12)

where P is the original amount, r is the rate, y is the number of years and M is the monthly contribution.

You can use Javascript to calculate the growth: see sizustech.blogspot.com for code.

Based on this formula, the orginal amount of $100,000 would grow to $127,628 and the monthly contributions of $120 would add $8,170 which yields a total of $135,798.

Which sounds better, losing value at a rate of 3.5% due to inflation or investing wisely, shooting for a 5% return?

This post was reposted from http://finlit.biz/estate-planning/can-you-build-a-downpayment-for-a-house-in-5-years/, originally written on July 30th, 2014.

Five Reasons to Start Saving Before Paying Off Your Debt

Pop quiz: If someone has gotten themselves into $20,000 worth of debt over a 3 year period and all of the sudden receive an $30,000 inheritance, should they pay off their debt?

Answer: No. If they do, they will be back into $20,000 worth of debt in just a few years. It was the habits that got them into debt in the first place. They should focus on paying back their debt by saving from their income. Working their way out of debt will give them the discipline and habits to stay out of debt long term.

In general, it is counter intuitive to think that one should start to save before getting out of debt. After all, if you are saving with an interest rate of 9% and have debts with an interest rate of 15%, aren't you falling behind?

Perhaps, but people make decisions based on emotion and then justify their actions using logic. Here are the five reasons you should start saving while paying off debt:

1. Many people tell themselves they will start saving once they have paid off all their debts. In the end, they never pay off their debts and they never start saving. If you have reasons why you can't save money today, in your current situation, what makes you think you won't have plenty of excuses of why you can't save in the future?
2. If you aren't saving money for emergencies, the emergencies that come up will leave you in a bind. Any progress towards debt you made will be undone. You may even end up using high interest rate credit cards to pay for an emergency which will cause you to fall further behind.
3. Saving is a habit. If you don't start to develop the life long habit today, even if you happen to be one of the few who do become debt free, you will not have developed the habits necessary to continue to increase your net worth.
4. Debt is like weight. Most people have a certain level that they are comfortable with, even if it is unhealthy. While some people try to diet, years later, they find themselves at the same weight level. This is true with debt as well. Imagine saving only after you have hit your weight goal! Don't wait to start saving until after you have hit your debt goal.
5. Saving is one of the building blocks in your financial house. If you don't put the foundation in place, you will not be able to build on it later. Dave Ramsey's debt stacking strategy (see www.daveramsey.com) can be extended to continue the snowball into savings. If the building blocks are not set in place, however, months of savings will be found spent before they reach a savings account.

Thank you so much for visiting the site and taking an interest in your own personal finances. This means a lot to us. Please do browse the site and leave comments or questions.

This post was reposted from http://finlit.biz/debt/five-reasons-to-start-saving-before-paying-off-your-debt/, originally written on June 3rd, 2014.

How to Calculate Interest Rate with Deposits and Withdrawls

People tend to do many different things when it comes to investing. Some people will set a certain amount aside and once they have "arrived", they will let that money sit in a savings account. This is likened to buying some tools and just letting them rust in the shed.

Other people, will accumulate a nice savings and then invest it, hoping that this investment will produce good fortune. This is likened to purchasing a small plant that was nurtured since it was a baby seed, then taking that plant and searching for a location to plant it into the ground, then sitting back crossing your fingers and hoping it will grow.

Finally, other people, will steadily grow their savings, never "arriving" but out of sheer habit, setting aside a specified percentage of their income and continuing to invest over time. This is likened to planting an orchard. It is not surprising that the orchard planters are the successful ones, and rare at that.

If you are an orchard planter, how do you calculate your interest rate. You will need to know the deposits/withdrawls made along with the dates. In addition, you will need to know the current net worth and current date.

• On 04/02/2013, a man spent $300 purchasing stock.
• On 05/03/2013, a man spent $300 purchasing stock.
• On 09/03/2013, a man spent $300 purchasing stock.
• On 10/01/2013, a man spent $300 purchasing stock.
• On 11/01/2013, a man spent $300 purchasing stock.
• On 12/01/2013, a man spent $300 purchasing stock.
• On 01/02/2014, a man spent $250 purchasing stock.
• On 02/04/2014, a man spent $250 purchasing stock.
• On 03/04/2014, a man spent $250 purchasing stock.
• On 04/02/2014, a man spent $300 purchasing stock.
• On 05/02/2014, a man spent $300 purchasing stock.
• Today, 05/30/2014, the man's stock is worth 3170.14.

When it comes to listing deposits, you should include money used before sales charges as positive numbers. When it comes to listing withdrawls, you should include money withdrawn after sales charges as negative numbers. You should also include money used to pay taxes as a negative number. This will give your own personal interest rate (and profit) as opposed to the investment's reported interest rate.

To calculate the interest rate, r, you must solve the equation:

P1(1+r)^Y1 + P2(1+r)^Y2 + ... + PN(1+r)^YN = PF

From our example above, P1 is the $300 and Y1 is the number of years between 04/02/2013 and 05/30/2014. PF is 3170.14. This can be solved using a binary algorithm. See sizustech.blogspot.com for a Java example.

Solving this equation gives an interest rate of 1.17%.

This post was reposted from http://finlit.biz/retirement-2/how-to-calculate-interest-rate-with-deposits-and-withdrawls/, originally written on May 30th, 2014.

Employee Stock Options, The Need to Knows

Employee stock options can be quite complicated. Stock options are not as valuable as actual stock. For example, if you receive 10 shares of stock worth $50 per share, this is essentially worth $500. On the other hand, if you receive 10 stock options with the option to purchase at $40 per share, if the stock is worth $50 per share, this is essentially worth $100 since 10*($50-$40)=$100.

According to www.investopedia.com, when your stock options vest, if you decide to exercise the options to obtain shares, you will pay taxes on the value (ie $100 in the example above) as if you received $100 cash (ie ordinary income).

When you go to sell the stock, you will also pay taxes on the gain. This can either be taxed as ordinary income (typically around 25% for most people) or if held longer than a year, taxed as a capital gain (typically 15%). In the example above, if the stock was held for 3 years and the price jumped to $70 per share, you would pay capital gains taxes on $200 since 10*($70-$50)=$200.

In general, if you hold more than 10% of your portfolio in a few particular stocks, you are already exposing yourself to high investment risk. In the case of stock options, when you exercise the options, you will also have to pay taxes in the same year, exposing you to the risk of not having the money to pay the appropriate taxes. You may want to consider this when deciding whether to pay ordinary income taxes or try to hold out to pay capital gains taxes.

This post was reposted from http://finlit.biz/retirement-2/employee-stock-options-the-need-to-knows/, originally written on May 29th, 2014.

Dave Ramsey's Approach to the Emergency Fund

An emergency fund represents 3 to 6 months of monthly expenses put into a special account (not checking or savings) for the purposes of an emergency.

Some people hesitate to start an emergency fund because they may be in debt or they may be in a bind financially. Art Williams once said, "All you can do is all you can do, but all you can do is just enough."

No matter where you are in life, do what you can do. If you can only contribute $5, contribute $5. If you put $100 aside, put $100. Whatever you do, do it consistently and you will see your savings grow.

When a person lives paycheck to paycheck and an emergency arises, they are forced to borrow from their credit cards and pay high interest and fees. This is all too common and probably the reasoning behind Dave Ramsey's argument for building your emergency fund while simultaneously paying off debt.

See what Dave Ramsey has to say about the emergency fund:


This post was reposted from http://finlit.biz/estate-planning/dave-ramseys-approach-to-the-emergency-fund/, originally written on May 20th, 2014.

Solo K, Simple, Sep IRAs, The Need to Knows

At www.obliviousinvestor.com, you can read about these 3 types of accounts. Here are some extra notes. Please consult a tax advisor before making any decisions about which account to use.

SEP

SEP accounts require employers to contribute the same percentage to all employees based on their salary, according to www.irs.gov. This plan is useful as a profit sharing mechanism.

For a SEP account, your tax deductible contribution must satisfy the following two equations:

C1 < .25*(P - .5*T - C1)
C1 < 51,000

where C1 represents the employer contribution, P represents the profit (revenue - expenses) and T represents the self employment tax. According to www.obliviousinvestor.com, self employment tax includes 12.4% for Social Security tax and 2.9% for the Medicare tax, which is 15.3% in total. Therefore, T=.153*P. Simplifying the equations, we get:

C1 < .1847*P
C1 < 51,000

So, roughly speaking, for a SEP, the business owner's tax deductible contribution must be less than 18% of your profit (and is capped at $51,000).

SIMPLE

SIMPLE plans can include businesses with up to 100 employees. Unlike the SEP, which has a 10% penalty for early withdrawl (like a Traditional IRA) before age 59 1/2, the SIMPLE has an early withdraw penalty of 25%. According to www.irs.gov, normal simple plans are used to match employer contributions or share profit so they will have either:

A) a match elective contribution with the employer matching up to 3% of the employee's salary
B) a profit sharing non-elective contribution with the employer gifting employees 2% of the employee's salary

The following equations regulate the employer and employee contributions:

C1 < .03*(P - .5*T - C1)
C2 < (P - .5*T - C1)
C2 < 12,000

where C1 represents the employer contribution, P represents the profit, T represents the self employment tax and C2 represents the employee contribution. To create a guideline, we will assume the maximum employer contribution is made for C1, although if it isn't the employee contribution C2 could be larger. So for the second equation, we will use an estimate from the first equation: (P-.5*T-.027705*P) < (P - .5*T - C1). This simplifies the equations to:

C1 < .027705*P
C2 < .895795*P
C2 < 12,000

So, roughly speaking, for a SIMPLE, the business owner's tax deductible contribution must be less than about 92.35% of your profit (and is capped at about $12,000 plus 2.75% of your profit).

SOLO K

SOLO K (aka Individual 401K) plans are typically for businesses without any employees. There are also exceptions made for when the only other employees that would qualify to make contributions are the owner's spouse. See mysolo401k.blogspot.com for guidelines.

These equations regulate the contributions for the account:

C1 < .25*(P - .5*T - C1)
C1 < 51,000
C2 < (P - .5*T - C1)
C2 < 17,500

where C1 represents the employer contribution, P represents the profit, T represents the self employment tax and C2 represents the employee contribution. For the second equation, we will again use an estimate from the first equation: (P-.5*T-.1847*P) < (P - .5*T - C1).

C1 < .1847*P
C1 < 51,000
C2 < .7388*P
C2 < 17,500

So, roughly speaking, for a SOLO K, the business owner's tax deductible contribution must be less than 92.35% of your profit (and is capped at about $68,500). In addition, the employee contribution can be after tax, using the ROTH provision of a SOLO K (capped at about $17,500).

This post was reposted from http://finlit.biz/business/solo-k-simple-sep-iras-the-need-to-knows/, originally written on May 2nd, 2014.

Index Funds versus Individual Stocks

Here are some miscellaneous tips on index funds and individual stocks.

The reason for the passive index fund is that it has multiple stocks to spread the risk. This is called diversification. Like in a garden, multiple seeds, spread out into different companies. Index means a specific group of selected companies which are used to represent the market they are in. Passive means that there are low maintenance fees. The average investor pays about 3.75% in fees per year.

Its a good idea to look at mathematical ways to purchase stocks at a cheaper price. This includes dollar cost averaging and rebalancing.

There are two 10% rules, that may apply, one for index funds and the other for individual stocks. Never invest more than 10% in individual stocks. If you do, it is very much a gamble. Ten percent, here, refers should include all of your assets, not just your stock portfolio.

When the index fund rises or falls 10%, look into rebalancing. This means, if the target allocation is $20,000, and the price jumps 10% to $22,000, sell $2,000 to take the profit. However, keep an eye out for fees required during a sale. With large amounts invested, companies should allow you to make free trades, to minimize these fees.

This post was reposted from http://finlit.biz/retirement-2/index-funds-versus-individual-stocks/, originally written on April 30th, 2014.

What is inflation risk?

The question we will ask today is whether or not holding $100,000 in your checking or savings account is risky.

Do you remember what it cost to purchase an ice cream cone when you were a kid? For me, it has almost quadrupled in price. Isn't that amazing? Let's take a look at how this type of thing happens, this thing called inflation risk.

Well, in 2007, the monetary base for the United States was about 1 trillion dollars and this monetary base has quadrupled to 4 trillion today. According to www.huffingtonpost.com, "the monetary base (currency, coin and bank reserves) rose from $800 billion in August 2008 to $1.9 trillion in November 1, 2010 (2.3 times larger)." As of Dec 2013, according to www.bloomberg.com, "Chairman Ben S. Bernanke has raised assets from $2.82 trillion before the third round of quantitative easing began in September 2012 and quadrupled them since 2008 to attack unemployment after the 2008-2009 recession."

While different economists have different explanations, my belief is that our dollar will soon be worth one quarter of what it is worth today. According to history, inflation rate in the US has been 3.22% since 1913, according to inflationdata.com.

So, keeping your money in your checking account will lose roughly 3.22% per year.

This post was reposted from http://finlit.biz/retirement-2/what-is-inflation-risk/, originally written on March 30th, 2014.

Restricted Stock Units, the "Need to Knows"

Companies like to offer Restricted Stock Units, to encourage their employees to stay with the company. Typically, each year, a certain percentage of this stock will vest.

For example, suppose your company offers you $10,000 of restricted stock units which vest at 20% annually. Then, 1 year after your start date, you will be given $2,000 worth of stock. Since you have not yet paid taxes on this money, in most cases, the company will withhold some of this stock for tax purposes. So the company might withhold $500 worth of stock and give you $1,500 worth of stock.

Effectively, this is the same as if company withheld $500 for federal tax purposes, paid you $1,500 and you immediately purchase $1,500 worth of stock.

As such, at the end of the year, you will report $2,000 of ordinary income and have to pay taxes, of which the $500 withheld will be credited when you do your taxes. You have the option to sell the stock within the year, which would result in a short term capital gain or loss or you can sell the stock after a year, which would result in a long term capital gain or loss.

In general, losses can be used to offset income (at a rate of $1,500/$3,000 per year for single/married people, for which the remaining loss is carried over to the next year), short term capital gains are taxed as regular income and long term capital gains are taxed at 15% (which is typically lower). See www.irs.gov for more information.

This post was reposted from http://finlit.biz/business/restricted-stock-units-the-need-to-knows/, originally written on January 28th, 2014.

ESPP, What are the "Need to Knows"

Many companies offer ESPPs (Employee Stock Purchase Plans), in which money is deducted from your paycheck on a regular basis, in order to purchase discounted shares. In this article, we will discuss the "need to knows", to give you a quick overview of the benefits and terminology.

ESPP plans, often have an Offering Date (the first day of the Offering Period) and a Purchase Date (the last day of the Purchase Period). For example, you might have the following:

• Offering Date of May 1st, 2010
• Offering Period from May 1st, 2010 to April 30th, 2012 (2 years)
• Purchase Period from November 1st, 2011 to April 30th, 2012 (6 months)
• Purchase Date of April 30th, 2012

The dates and periods typically align with tax periods and the only purpose for the Offering Period, is to help calculate the discounted price for the employee. On the other hand, the Purchase Period is important, because this is the period for which the employer will withhold funds from the employee.

As an example, suppose your company, withdrawls $1,000 over six months (Purchase Period), of after-tax money from your paychecks. After six months (on the Purchase Date), if you are given stock at a 15% discounted price, you would be given $1,150 worth of stock.

Effectively, this is the same as if you purchased $1,000 worth of stock (on the Purchase Date) and the next day, it went up to $1,150. As such, this does not effect amounts that can be invested in tax-qualified retirement accounts. Also, as mentioned in money.cnn.com, you might sell immediately, including the $150 as ordinary income or you might sell after a year, including the $150 as a long term captial gain. Going the second route might be beneficial because capital gains taxes are typically lower.

To summarize, if you get a discount of 15% and are in the 20% tax bracket, effectively, the money you saved in the plan grew at 12%.

This post was reposted from http://finlit.biz/business/espp-what-are-the-need-to-knows/, originally written on January 28th, 2014.