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Does Your Risk Tolerance Need a Realignment?

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Investor information graph. Careful forex trader make money revenue, sell stock indicator with diagram profit information crypto analysis professional marketing vector illustration of investment graphMarket volatility. A change in your time horizon. Different goals. All these things can affect the amount of risk you feel comfortable taking with your investments. Your ability to tolerate risk influences the investment choices you make and may have a significant impact on your success in achieving your financial objectives. Periodically revisiting your risk tolerance is an important step in the portfolio review process.

A Moving Target

Your feelings about risk may change depending on what the markets are doing. During a prolonged period of market volatility, you may find your comfort level dropping, even if you previously thought you had a high tolerance for risk. If you’re a conservative investor, an extended market upswing may have the opposite effect, encouraging you to take on additional investment risk. In either case, basing investment decisions on market behavior instead of a well-thought-out investing strategy isn’t the best plan. Instead, take time to reassess your feelings about risk. If they’ve truly changed, adjust your strategy going forward to reflect the changes.

More Than a Feeling

How much money could you afford to lose if investment values dropped significantly? Your ability to accept risk also depends on your financial circumstances and your time horizon for tapping your assets. If investment losses would leave your finances in jeopardy and you have a relatively short time frame before you’ll need your money, your capacity for taking risk may be limited. Make sure you consider your risk capacity in your review.

A Realistic View

A long period of either strong or weak market performance may convince you that the current trend will continue indefinitely. Perceived risk is how much risk you think an investment holds. However, your perception of an investment’s risk might not match its actual risk. In that case, you could be taking more or less risk than you should to remain within your comfort zone and still reach your goals.

Your financial professional can help you reassess your risk tolerance along with the level of risk in your portfolio.

Tax Tips for Businesses

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Online tax filing concept, businessman filling tax form documents online vector illustrationAs a business owner, you should familiarize yourself with your federal, state, and local tax requirements. Understanding what your obligations are will assist you in filing returns and paying taxes accurately and on time. Whatever taxes you are required to pay, you have to be very aware that there are deadlines for remitting them and any delays on your part could result in penalties. Here are some tips that can help you avoid tax trouble with the IRS.

Employment Taxes

The IRS requires employers to withhold federal income tax and FICA (Social Security and Medicare) taxes from their employees’ wages. The IRS also wants you to remit these employment taxes, along with your company’s FICA contributions, to them in a timely manner. Failing to remit these taxes can lead to serious penalties for noncompliance. This is one issue you absolutely must stay on top of.

Remember, sole proprietors, general partners, and, usually, members of limited liability companies do not have Social Security and Medicare taxes withheld like employees do. Instead, they must pay self-employment taxes, which typically cover Social Security and Medicare.

Estimated Taxes

You must generally make quarterly estimated tax payments to cover self-employment taxes and income tax on income that is not subject to withholding. If you do not make required estimated payments on time, you may owe the IRS an underpayment penalty.

Misclassifying Workers

Employees and independent contractors are treated differently for income tax withholding and employment tax purposes. Generally, the more control you have over a worker’s tasks and hours of work, the more likely that individual is an employee. In the case of employees, you must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes. You are not required to withhold income or FICA taxes from an independent contractor. Independent contractors pay income taxes and self-employment taxes on their own. If the IRS determines that your business has misclassified employees as independent contractors, it could prove to be costly.

Keep Business and Personal Transactions Separate

Personal bank and credit card accounts should always be kept separate from business accounts. Doing so makes it easier to identify all appropriate business expenses at tax time. That, in turn, simplifies things when it comes to claiming business tax deductions.

Substantiating Business Expenses

Like every business, your company will incur various expenses that are simply the cost of doing business. Many of these business expenses will be deductible. You should have proof of purchase for those expenses that you intend to deduct. Proof can be a cancelled check (or a legible image of the check), or a credit card, debit card, or electronic funds transfer (EFT) statement that shows the payee, amount of purchase or transfer, and the date of the transaction.

It’s also important that you can provide an invoice or receipt that identifies the purchase. If it’s not clear what the business purpose for the purchase is, then you should attach a note of explanation or write directly on the invoice or receipt. This can be helpful if the deductibility of the purchase is ever questioned by the IRS. Deductions for business travel expenses have very specific substantiation requirements, so be sure you are familiar with them before claiming these expenses.

Determining what taxes your business is subject to and when those taxes must be remitted is complex. Unfortunately, errors can be costly to your business. A professional who specializes in small business tax and accounting matters can help your business put systems and procedures in place so that it can claim all the deductions it is entitled to and meet its tax obligations in a timely and accurate manner.

Keeping It SIMPLE

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Simple IRA retirement plan in the hands of a man.A SIMPLE IRA is an option for small business owners who do not currently have a retirement plan in place but would like to have one. This particular type of retirement plan has several attractive features that deliver significant benefits to both employers and their employees.

What It Is

The Savings Incentive Match Plan for Employees (SIMPLE) is a retirement savings plan targeted at employers with 100 or fewer employees who earn $5,000 or more in compensation. With fewer reporting and administrative requirements than other retirement plans, the SIMPLE plan is designed to appeal to employers with limited resources and personnel to handle benefit administration and compliance issues.

With a SIMPLE IRA, employees may make tax-deferred contributions through payroll deduction to traditional individual retirement accounts set up under the plan. In 2023, the contribution limit is $15,500 ($19,000 if age 50 or over). All account earnings are tax deferred until the plan participant begins withdrawals. Withdrawals from a SIMPLE IRA are taxed at regular income tax rates.

Employers appreciate the fact that a SIMPLE IRA is relatively easy to set up and operate. An annual report is not required, although certain documents must be distributed to inform employees about the plan.

Employers are required to contribute to the plan, either by matching employee contributions up to 3% of pay or by contributing 2% of each eligible employee’s compensation. The matching percentage may be lowered in some years.

Plan Benefits

  • Employee contributions are tax deferred
  • Employer contributions to employees’ SIMPLE IRAs are tax deductible
  • Account earnings are tax deferred
  • No annual filing requirement or discrimination testing

Potential Drawbacks

  • Employer contributions are required
  • No Roth contributions are permitted
  • Full immediate vesting (employee has ownership of all SIMPLE IRA money)
  • No loans permitted

Your financial and tax professionals can help you assess your retirement plan options

Try a Trust

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Happy businesswoman using a digital tablet. Young leading businesswoman using a wireless tablet. Creative designer working in her agency. Designer standing in her office using an online appYou don’t have to be fabulously wealthy to benefit from a trust. For many people, a trust is a great financial planning tool.

What Is a Trust?

A trust is a legal arrangement between the person who sets up the trust and transfers property to it (the “grantor”) and the individual or institution that agrees to manage the trust assets (the “trustee”). The grantor specifies who is to benefit from the trust (the “beneficiaries”) both during his or her lifetime and at death, if applicable, names the trustee, and spells out in the legal document creating the trust how the trust assets are to be managed and distributed.

What Can a Trust Do?

Trusts can be used for many purposes, including:

  • Managing your assets if you become incapacitated. With a revocable living trust, you can stay in control of your assets while you’re able and avoid probate after your death. You can also arrange to have a successor trustee make investment decisions and handle other financial matters for your benefit if you’re no longer able to do so. This arrangement avoids the expense and complications of a court-ordered guardianship or conservatorship.
  • Reducing the size of your estate. With a grantor retained annuity trust (GRAT), you transfer assets with the potential for appreciation to an irrevocable trust for the benefit of a child, other family member, or noncharitable beneficiary and retain an annuity interest for a term of years. When the annuity ends, your child (or other beneficiary) will receive the remaining trust assets. If you outlive the trust term, the value of the assets won’t be included in your estate.
  • Donating to charity. If you set up a charitable remainder trust (CRT), you receive an income stream from the donated assets for life or a set number of years. Then, at your death or when the trust term ends, the charity you have chosen will get the trust assets. If you set up a charitable lead trust (CLT), the charity you choose receives income from the assets for a period of time that you specify. After that period ends, the assets flow to your family as “remainder beneficiaries.” Both CRTs and CLTs offer potential income tax and estate tax advantages.
  • Preserving wealth for future generations. With a dynasty trust, wealth is preserved and generated by cascading through multiple generations. Any income or appreciation generated by the trust assets may be exempt from estate and generation-skipping transfer taxes as long as it remains in the trust and if the laws governing such trusts are satisfied. Typically, your children and then your grandchildren would be the trust income beneficiaries. You also can determine under what conditions your beneficiaries can or cannot receive income from the trust.
  • Protecting assets from creditors. When you set up a trust, you can generally include “spendthrift” provisions that prevent your beneficiaries from assigning their interest in the trust to creditors. Putting assets in trust for your child instead of giving them to your child outright may be a good way to provide asset protection in case of a future divorce or major lawsuit.

Your financial and legal professionals can provide more information about the different types of trusts and how they may apply to your situation.

Tips on Tax Planning

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Monthly cost or budget, expense to pay bill, mortgage or debt, plan for savings or investment, money management or credit card payment, smart woman plan her monthly budget with calendar and piggybank.You may not think about taxes often, but they can prove to be a large expense. That’s why it’s important to make the most of any opportunities you may have to lower your tax liability. Here’s a look at some of the factors you may want to consider in your planning.

Standard Deduction or Itemizing

The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don’t automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.

Home/Work Tax Breaks

If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won’t be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.

Moving Expenses

Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.

Health Savings Accounts (HSAs)

HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Family Related Tax Credits

The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don’t qualify for the child credit. Credits include one for each child under age 18 at the end of the tax year and another for each qualifying dependent who isn’t a qualifying child. The latter category includes an older dependent child or a dependent elderly parent.

The adoption credit and the income exclusion for employer adoption assistance are still in place. You’ll want to check into the details if you are adopting a child.

Section 529 Plans*

These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses — including elementary and secondary school tuition of up to $10,000 per year per student — are free of federal income taxes.

A special break allows you to front-load five years’ worth of gift tax annual exclusions and make up to a $85,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $170,000. (These limits may be inflation adjusted.)

Other Education Tax Breaks

As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.

In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.

Keep in mind that there are income limits for these tax breaks.

Investments

To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:

  • Selling securities with unrealized losses before year end to offset realized capital gains.
  • Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.
  • Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you’re married filing separately), but you can carry forward excess losses to subsequent tax years.

You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% “net investment income tax,” or NIIT.

Retirement

While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.

Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.

Roth alternatives — available in some employers’ 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own — provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer’s Roth plan than to a Roth IRA.

As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.

Your Plan Account Statement Can Reveal Valuable Information

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The days are best spent with youIt’s smart to make a point of reviewing your retirement plan account statement in detail at least once a year. You’ll want to ensure that the information in your statement is accurate and assess whether you should make any changes in your contribution level or investments going forward.

Ensure Personal Details Are Correct

To start your review, check the following for accuracy:

  • Personal information (e.g., name, address, phone, etc.)
  • Hire date (since it can affect vesting)
  • Contribution amounts (yours and your employer’s, if applicable)
  • Investment instructions
  • Beneficiary designation

Review Your Investments’ Performance

Any large change — up or down — in one investment market can impact your portfolio’s overall asset allocation.* Consider rebalancing** your portfolio at least once a year so that the percentages you have invested in stocks, bonds, and cash alternatives remain in line with your desired asset allocation.

As a retirement plan investor, your investment goals are typically long term. As such, you may decide to allocate a greater percentage of your portfolio to stock funds*** since a longer investing horizon gives your portfolio more time to recover from any short-term declines in the stock market. However, if there have been changes in your financial situation — for example, you have experienced a job loss, or you have had to deal with large, unexpected expenses — you may have less tolerance for investment risk than before. If that’s the case, you may choose to lower your exposure to higher risk investments in your portfolio.

One of the best ways to measure your portfolio’s performance is to compare your investments to benchmarks. Benchmarking helps put performance in perspective. For example, it can be disturbing when a fund you own has a negative return. However, it doesn’t seem so bad if the fund’s comparable index dropped by a similar percentage.

Likewise, if the overall market fell 10% while your fund only fell by 5%, you would understand that your fund did well in the circumstances. However, if your fund earned returns of 5% during a period when its benchmark rose by 15%, then you may want to examine whether continuing to hold that fund makes sense.

Portfolio Turnover Rate

The term portfolio turnover rate refers to the percentage of a mutual fund’s holdings that changes over a given period of time. Certain types of stock funds may have high turnover rates because they pursue aggressive or growth strategies. Other types — value funds, for example — may have lower turnover rates.

It can be a red flag if a fund’s portfolio turnover rate is much higher than that of other funds in the same style category and the fund consistently underperforms similar funds and its benchmark. Portfolio turnover rate is just one of the many factors investors should review when assessing funds in their portfolios.

Management Fees

Mutual funds charge management fees to help cover the expenses of operating the fund. Typically, management fees are used to compensate the investment managers who select and monitor the fund’s investments. Deciding whether to continue owning a mutual fund based on how much it charges in annual management fees is a subjective judgement. If the management fees are higher than those of other comparable funds and the fund’s performance demonstrates no appreciable difference, then it might be worth looking deeper into the issue.

Work With a Professional

Reviewing your retirement plan account statement can help identify strengths as well as deficiencies in your retirement planning and allow you to respond accordingly. Your financial professional can also be a valuable partner in ensuring that you are on the right track to a financially solid retirement.