Our Full Financial Planning clients have the option to review their finances on their mobile devices using the Long Financial Planning mobile site from emoney .
The mobile site gives you a quick snapshot of your accounts, net worth, investments, spending, and budgets with the option to drill down on your transactions and to view documents in your vault. I’ve been using the mobile site for my own personal finances and in some ways I prefer it to the regular website. You can save the mobile site as an app on your phone and create a 4-digit code for access. Once you do this you can use the site just as you would use an app.
To see how to load the mobile site and save it as an app click below.
Here are some simple tips to create a more tax efficient portfolio:
Invest in Index Funds
Index funds generate lower short-term capital gains and higher long-term capital gains due to much less frequent buying and selling. Short-term gains are taxed every year as ordinary income. Long-term gains are taxed at lower capital gains rates, and most are only realized when you sell your shares.
The idea here is to place assets that produce higher income (e.g. bonds) in tax advantaged investments (IRA, 401k) that will allow you to not to have to pay taxes annually on the income.
Then putting assets that generally produce less income (e.g. stocks) in taxable accounts. You will have lower taxes each year, and when you sell your shares you will pay the lower long-term capital gains rate on your profits.
What about Roth IRAs and Roth 401k Accounts?
Since any gains in these accounts are tax free when withdrawn, it does make sense to put assets that will have the highest long-term growth in these accounts as well (e.g. stocks) as an exception to the rule above.
It will often not be possible to execute this perfectly with all of your income producing assets neatly tucked away in your Traditional IRA and your growth assets in your Roth IRA and taxable accounts.
Also please do not let the desire for tax efficiency overwhelm having the right asset allocation for your long-term needs. Tax efficiency is really a tactic not a strategy.
The recent debates over tax policy and the “fiscal cliff” have raised a pet peeve of mine. My peeve is when people, use the word “wealthy” interchangeably with “high income”. I do agree that there is a correlation between the two, but there are people with high incomes, with much lower wealth than people with significantly lower incomes.
I will draw a couple of examples based on a composite of my clients.
High Income/Lower Wealth
John and Mary Smith both age 42, work at high paying jobs and have a combined income of $400,000. They have two children, ages 6 and 2. They have high housing expenses, child care expenses, retirement savings, and college savings. They also spend money on home improvements, eating out and vacations. They have a net worth of $200,000 equal to a half a year of their income.
Lower Income/Higher Wealth
Doris and Boris Johnson, retired, are 67 and 65. They both collect pensions and Social Security which total $90,000 which provide enough income for them to live the lifestyle they wish. They spend time on volunteering, visiting friends and family, and some travel. They have lower housing costs than the Smiths, even though they have a second home, and do not have to worry about saving for retirement or college for their children. They have not spent any of their retirement nest egg of $1.8million, and plan to help their grandchildren with college expenses with some of it. Their total net worth is $2.3million or 25.5 times their annual income.
Factors that I have seen that are associated with a higher net worth besides income include.
Age, the older you are the more time your investments have had a chance to grow. In early retirement expenses may also be lower if you are in good health then they were if you were saving for retirement of college educations for children.
A strong ability to delay gratification. People who find it easy to delay gratification tend to spend a lot less. They spend less both on shorter-term expenses (vacations, eating out, ‘stuff’), and longer-term expenses (housing, cars). This is also manifested in a “pay yourself first” attitude when it comes to their income.
Think about their future often and though generally optimistic, know that financial reversals do occur and want to prepare for them.