For conservative investors who have a limited appetite for risk, yet still yearn for good growth opportunities, there may be an attractive option. Several major U.S. banks, including JP Morgan Chase, Barclays, and Goldman Sachs have entered the equity-linked note/CD space. Notes are essentially short-term bonds backed by the full faith and credit of the issuer. CDs are backed by the issuer and indirectly by the U.S. government through FDIC insurance.
While there exist a multitude of permutations of equity-linked notes and CDs, for those looking for conservative growth, there are some interesting alternatives. Several major banks are offering five-year notes that credit interest like uncapped index annuities.
Several banks are currently quoting 110 to 120 percent participation in the S&P 500 index with a 30 percent downside buffer. Although index annuities typically provide a 100 percent downside buffer, according to AXIO, over the last 9,700 days, only 23 days had a five-year trailing return that was less than 30 percent. Therefore, a 30 percent buffer is probably going to protect all note holders from any loss.
Additionally, the structured notes have attractive tax treatment. No income is accrued until the note matures, and when it does, the increased value of the notes are taxed as long-term capital gains. With greater than 100 percent participation in the S&P 500 and much less investment risk, these notes provide a pretty compelling opportunity even for aggressive investors.
For those looking for FDIC insurance, structured CDs offer complete safety of principal, albeit with less upside. However, structured CDs and notes could lose value if not held to maturity. Current issues are offering 100 percent participation in the S&P 500 on five-year CDs with gains capped out at about 40 percent with no downside risk. With the average five-year return of the S&P 500 at 57.91 percent, structured CDs could pay substantially more than traditional CDs. Unlike structured notes, CDs will create annual taxable income, which will be taxed as ordinary income unless they are held in an IRA.
If you are fortunate enough to own property or investments that have appreciated significantly, the federal, and perhaps your state, government is patiently waiting to tax your profits when you sell. Luckily there are a few ways to delay or avoid the tax debt when the appreciated asset is sold.
An owner of real estate can sell their real estate and use the proceeds to purchase another piece of real estate without paying taxes if the formalities of IRS code section 1031 are followed. The favorable tax treatment of a so-called 1031 exchange used to apply to artwork as well, however the new tax laws eliminated the application of the 1031 code section to artwork.
Investors who realize a capital gain from any source (stocks, real estate, art and privately held business interests) can continue to defer taxes on the realized gains by investing their gains in specially designated economically distressed areas that have been designated as opportunity zones under the Tax Cuts and Jobs Act of 2017.
Another option is the use of an installment sale. Prior to the sale, an entity that is created and controlled by the seller purchases the appreciated asset in exchange for an installment note at the intended sale price and that entity sells the asset to the ultimate purchaser. Then the seller takes periodic income from the entity and only realizes gains as income is received.
Finally, a charitable remainder trust can allow the owner of appreciated property to not only avoid paying capital gains tax but to also receive a current tax deduction. The sale proceeds can be managed in any way desired and the sellers can receive a steady income from the sale proceeds for a term of years or for life or joint lives. Any assets remaining in the trust at the death of the sellers will go to the charity of the sellers’ choice.
The hot word these days in the world of investing is “fiduciary.” In noun form, fiduciary is a person or organization that owes to another the duties of good faith and trust. An attorney owes these duties as well as the duty of confidentiality to their clients. Someone serving as a trustee owes similar duties to the trust creator. In the world of investing and financial planning, Registered Investment Advisors owe a fiduciary relationship to their clients, but brokers and insurance agents do not.
Research, by digital wealth manager Personal Capital, found nearly half of Americans falsely believe all advisers are legally required to always act in their clients’ best interests. The reality is that brokers and insurance agents are not required to act in their clients’ best interests. Many investment advisers are dually licensed as brokers as well. Often these dual licensed brokers will claim that they are a fiduciary yet earn commissions for selling investments to their clients.
Those that are dually licensed often switch hats without the client ever becoming aware the individual they hired as an adviser had suddenly strayed from the fiduciary standard to the suitability standard. It’s wise to ask your adviser, do you act as a fiduciary at all times or only under certain circumstances?
For instance, if your adviser gets a commission for selling certain investments through a broker dealer, they aren’t acting as a fiduciary for that transaction. That doesn’t mean that the advice to buy commission investments can’t be suitable, but the potential commissions could be a factor in the product being recommended and therefore, in that instance, you can’t necessarily rely solely on the adviser’s advice to make a decision because it may be biased.
At Singer Wealth Advisors we don’t accept commissions on investments. Whenever a financial investment product pays a commission to the adviser, we have that commission assigned to the client’s account. By doing this, we remain unbiased and avoid potential conflicts of interest.
When Congress passed the Tax Cuts and Jobs Act at the end of 2017, it created new lower tax brackets for U.S. taxpayers. However, the law included a sunset provision which automatically repeals the reduced tax rates in 2025. What additional tax legislation is likely in the future? It’s not a secret that the country is facing huge budget deficits. By 2020, 92 percent of every tax dollar is expected to be allocated for just these four items: Social Security, Medicare, Medicaid and interest on the national debt. So, what does this all mean? It means at some point Congress may be forced to raise taxes just to try to make the deficit more manageable. Even if Congress does nothing, tax rates are going to go up in 2026.
We had always been encouraged to max out retirement accounts and take retirement income while in a lower tax bracket. However, we now know this will no longer be the case as we will almost certainly be in a higher tax bracket either by 2026 or earlier if there is a change in the makeup of Congress and the executive branch.
If you have substantial savings in your IRA, you have received a tax deduction for your contributions; once you are older than 70½, you are required to start taking money out of your IRA and realizing the income from your account. Your RMDs may not only be taxed at a higher rate but they could make your Social Security benefits taxable and cause your Medicare premiums to increase. Fortunately, there are ways to mitigate this looming tax bite.
If you have an IRA, you should consider converting a significant portion to a Roth IRA over the next several years. By implementing smart tax planning today, it may be possible to substantially increase your after-tax retirement income even if tax rates rise sharply in the future.
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