Today’s blog is a follow up to my blog covering 401K Rollover:
http://paulsgang.blogspot.com/2010/06/401k-rollover.html. Brief summary:
I decided to transfer my Sun 401K account to a Schwab IRA 401K rollover account with the following asset allocation:
• Cash (future investments) – 18%
• US stock market index – 58%
• International non US market index – 12%
• Emerging market index – 12%
I planned to use the following Exchange Traded Funds (ETFs) for my stock allocation:
• US stock market index - Vanguard Total Stock Market ETF (VTI)
• International non US market index – Vanguard FTSE All-World ex- U.S. ETF (VEU)
• Emerging market index - Vanguard’s MSCI Emerging Markets ETF (VWO)
As of today the only investment I’ve made is to start a 90 day Certificate of Deposit (CD) ladder for my cash allocation. I will buy a new 90 day CD every 30 days using 1/3 of my cash allocation. Every month I will have 1/3 of cash available for any new investment opportunity. There are two main advantages to laddering CDs or bonds:
• By staggering the maturity dates you are not locked into a CD or bond for a long duration.
• It provides investors with the ability to adjust cash flows according to their financial situation and/or investment opportunity.
As of today I have made no investment in the stock portion of my allocation. The following table shows the major US indexes, the ETFs I will use for my stock allocation and US $/Euro (June 14, 2010 was the first day I could have made investments in my account):
Date DJI S&P 500 VTI VEU VWO EUR/USD
06/14/2010 10,190.89 1,089.63 57.20 40.90 39.97 1.2301
07/16/2010 10,097.90 1,064.88 54.24 40.35 39.37 1.2931
Gain/loss -.9% -2.3% -5.2% -1.2% -1.5% +5.1%
All the ETFs for the stock allocation of my 401K rollover had a decrease of value from -.9 to -5.2%. The Vanguard Total Stock Market index (VTI) had the largest decline of -5.2%. The Vanguard International non US market index (VEU) had the smallest decline of -1.2%. The ETF VEU regional component is 44% Europe without the Euro gaining 5.1% versus the US dollar the decline for VEU would have been around -3%.
Starting this quarter (ending September 31st) I will start making investments in my stock allocation over the next three (3) quarters using the dollar cost averaging investment method unless there is a major stock pullback (in which case I may invest all at the same time). For example, I will invest 4% of emerging market stock allocation over the next three (3) quarters until it totals 12% (my emerging market allocation). The major advantage of dollar cost averaging is that it helps to reduce the market risk of your investment by buying investments over time.
I may make a modification to my Schwab 401K rollover portfolio to add 5% allocation (lowering the cash investment to 13%) to ‘real’ assets by using REITs when they are a good investment opportunity (I will write a future blog about when REITs are a good investment opportunity).
Please chime in with comments on when you think I should buy these ETFs or if I should consider a different allocation strategy. What do you think about adding ‘real’ assets (for example, trees, real asset, etc.) to 401K rollover portfolio?
© 2010 Paul Cusick
Paul
Friday, July 23, 2010
Saturday, July 17, 2010
REITS
This week’s blog is about Real Estate Investment Trust (REIT). I have never invested in a REIT; but it would be a good investment vehicle for dividends (which historically have been 4x the S&P 500 dividend returns), liquidity (vs. owning individual real estate), diversification and as an inflation hedge. As is the case of any equity investment the total return is comprised of share appreciation and dividend income return. For example, if the dividend return is 10% per year, in a little over 7 years you would have returned the purchase price of the stock (rule of 72). In portfolio theory the more diversified you are the lower your overall portfolio risk. Over the last 20 years REITs have had very strong diversification correlation to the Standard and Poor (S&P) 500 (please see the following for more information: http://www.reit.com/InstitutionalInvestors/Diversification.aspx). REITs can also be inflation hedges based on historic data; the dividend growth rate has exceeded the CPI index from 1992 to 2008. When you own individual real estate you have an unliquid investment. REITs makes the owning of real estate a liquid investment (especially publicly trade REITs).
In the US REITs are required by law to distribute 90% of their income to investors (they are like Canada trusts). A lot of REITs will pay out 100% of their income to investors. REITs are designed to provide structure for real estate similar to what mutual funds provide for stocks. A REIT cannot pass any tax losses through to its investors. REITs must adhere to a number of rules, for example, there must be more than 100 investors and no investor can own more than 5% of the REIT.
There are 2 major types of REITs. The most common own and operate income producing real estate. Examples of equity REITs that own real estate are the following:
· Industrial and office space
· Retail (standalone and malls)
· Residential (i.e. apartment complexes)
· Lodging and resorts
· Health care
· Self storage
· Timber (or other ‘real’ assets)
The second type engages in real estate financing, for example, mortgages for industrial and office buildings.
REITs can be publicly and non-exchange traded and private trust. The following URL compares them: http://www.reit.com/AboutREITs/~/media/Portals/0/PDF/2009%20REITTypesNewCovers.ashx
. Public traded REITs work the same as stocks. You buy and sell shares just like any publicly traded company. Most of the publicly traded REITs are listed on the New York stock exchange. Just like other publicly traded companies, shareholders have no liability for debts of the REIT. The US market capitalization is over $250 billion and there are approximately 140 publicly traded REITs.
For US tax purposes REIT dividends are allocated to ordinary income, qualified dividends, capital gains and return of capital. This information is distributed to each shareholder by the IRS 1099-DIV form. If the REIT is in a non-taxable account (for example IRA, ROTH, 401K, etc.) you will pay no taxes. If it is in a taxable account the following are the tax consequences of REITs:
· Since the REITs in most cases do not pay corporate taxes (they need to distribute at least 90% of their income to shareholders) the majority of dividends will be taxed at your income tax bracket. For example, if your income tax bracket is 35% your dividend tax rate will be 35%.
If the REIT distributes qualified dividends the tax rate will be 15% for most taxpayers (it can be 10% for lower income earners). This may change in 2011 (see my previous blog).
· If the REIT distributes return of capital you will not pay taxes on the amount that was returned capital. The cost base of the REIT is reduced by the returned capital. For example, if you bought the stock for $25 and the returned capital is $1 per share the new cost base is $24.
· The REIT can also generate long term capital gain. For most taxpayers the tax rate is 15% (it can be 0% for lower income earners). This may change in 2011 (see the previous blog).
If you are interested in REITs’ historical 1099-DIV returns please check the following URL: http://reit.com/IndustryDataPerformance/Year-EndTaxReportingData/Historical1099Data1995-2008/
The following are examples of publicly traded REITs, by type and marketing capitalization that are included in the S&P 500:
· AIMCO (AIV) – Apartment investment and management company ($2.3 billion)
· Health Care REIT Inc. (HCN) – Buys and manages health care properties ($5.41 billion)
· Public Storage, Inc (PSA) – Involved in the acquisition, development, ownership, and operation of self-storage facilities in the United States and Europe ($31.37 billion)
· Ventas, Inc. (VTR) - Buys and manage health care related and senior housing properties ($7.54 billion)
In a future blog I will be writing about when you may want to buy publicly and non-publicly traded REITs and what REIT type and sector (i.e. retail, public storage, etc.).
Please chime in with comments about REITs, economic forecast for types of REITs (for office building, retail, medical, etc.), REITs to buy or short, etc.
© 2010 Paul Cusick
Paul
In the US REITs are required by law to distribute 90% of their income to investors (they are like Canada trusts). A lot of REITs will pay out 100% of their income to investors. REITs are designed to provide structure for real estate similar to what mutual funds provide for stocks. A REIT cannot pass any tax losses through to its investors. REITs must adhere to a number of rules, for example, there must be more than 100 investors and no investor can own more than 5% of the REIT.
There are 2 major types of REITs. The most common own and operate income producing real estate. Examples of equity REITs that own real estate are the following:
· Industrial and office space
· Retail (standalone and malls)
· Residential (i.e. apartment complexes)
· Lodging and resorts
· Health care
· Self storage
· Timber (or other ‘real’ assets)
The second type engages in real estate financing, for example, mortgages for industrial and office buildings.
REITs can be publicly and non-exchange traded and private trust. The following URL compares them: http://www.reit.com/AboutREITs/~/media/Portals/0/PDF/2009%20REITTypesNewCovers.ashx
. Public traded REITs work the same as stocks. You buy and sell shares just like any publicly traded company. Most of the publicly traded REITs are listed on the New York stock exchange. Just like other publicly traded companies, shareholders have no liability for debts of the REIT. The US market capitalization is over $250 billion and there are approximately 140 publicly traded REITs.
For US tax purposes REIT dividends are allocated to ordinary income, qualified dividends, capital gains and return of capital. This information is distributed to each shareholder by the IRS 1099-DIV form. If the REIT is in a non-taxable account (for example IRA, ROTH, 401K, etc.) you will pay no taxes. If it is in a taxable account the following are the tax consequences of REITs:
· Since the REITs in most cases do not pay corporate taxes (they need to distribute at least 90% of their income to shareholders) the majority of dividends will be taxed at your income tax bracket. For example, if your income tax bracket is 35% your dividend tax rate will be 35%.
If the REIT distributes qualified dividends the tax rate will be 15% for most taxpayers (it can be 10% for lower income earners). This may change in 2011 (see my previous blog).
· If the REIT distributes return of capital you will not pay taxes on the amount that was returned capital. The cost base of the REIT is reduced by the returned capital. For example, if you bought the stock for $25 and the returned capital is $1 per share the new cost base is $24.
· The REIT can also generate long term capital gain. For most taxpayers the tax rate is 15% (it can be 0% for lower income earners). This may change in 2011 (see the previous blog).
If you are interested in REITs’ historical 1099-DIV returns please check the following URL: http://reit.com/IndustryDataPerformance/Year-EndTaxReportingData/Historical1099Data1995-2008/
The following are examples of publicly traded REITs, by type and marketing capitalization that are included in the S&P 500:
· AIMCO (AIV) – Apartment investment and management company ($2.3 billion)
· Health Care REIT Inc. (HCN) – Buys and manages health care properties ($5.41 billion)
· Public Storage, Inc (PSA) – Involved in the acquisition, development, ownership, and operation of self-storage facilities in the United States and Europe ($31.37 billion)
· Ventas, Inc. (VTR) - Buys and manage health care related and senior housing properties ($7.54 billion)
In a future blog I will be writing about when you may want to buy publicly and non-publicly traded REITs and what REIT type and sector (i.e. retail, public storage, etc.).
Please chime in with comments about REITs, economic forecast for types of REITs (for office building, retail, medical, etc.), REITs to buy or short, etc.
© 2010 Paul Cusick
Paul
Tuesday, July 6, 2010
Investment US Tax Changes for 2011
Disclaimer: I am not a Certified Public Accountant (CPA), tax advisor or tax lawyer. Please talk with your CPA, tax advisor, or tax lawyer before making any investment decisions that may have tax consequences for your investments. One of my investment rules is know the tax consequences of any investment that you plan to make before you make it and make it tax efficient, whether under current tax laws or forecasted future tax changes. Taxes and/or government fees will be increasing over the next 5 years to help pay for the federal, state and local government deficits and future government entitlement programs (for example, health care).
Former president Bush’s tax cuts will expire at the end of 2010 and revert to the previous tax code for long-term capital gains, qualified dividends, revival of the estate tax and adding back the top marginal bracket of 39.6% at the beginning of 2011. As of today Congress has not addressed the expiration of these tax cuts. The following are my predictions for 2011:
Long-term capital gains tax (on assets held longer than one year): Currently 0% for taxpayers in the 10% and 15% tax brackets as of 2008 and 15% for everybody else, it is scheduled to return to the pre-BTC (Bush’s tax cuts) rates of 10% for 15% and below brackets and 20% for everybody else. I predict congress will not take action on the tax bracket above 15%, effectively making the long term capital gains tax 20%; they may take action to set the tax rate at 5% for the 15% and under tax bracket.
Qualified dividends: In 2011 qualifying dividends will go back to their pre-BTC rate i.e. ordinary income based on your highest tax bracket. Bush’s tax cut of 2003 changed the qualified dividends tax rate from ordinary income (your highest income tax bracket) to the same as capital gains (15% for most people). Your tax rate could be high as 39.6% if you are a high income earner. Congress could change it to be the same as long-term capital gains – 20% for most taxpayers – but I think it’s more likely they will not take action and it will return to your ordinary income rate of your highest tax bracket.
Top income tax bracket: Bush tax cuts eliminated the top income tax bracket of 39.6% and created a new 10% bracket for low income earners. If Congress does not take action, the top income tax bracket in 2011 will be 39.6% and the 10% bracket will be eliminated. I predict Congress will let the top bracket tax rate go to 39.6% and will take action to keep the 10% tax bracket.
Revival of the estate tax: In 2010 there is no limit on the size of your estate that is not subject to federal estate taxes unless Congress takes action this year and sets a limit on the estate size that is tax exempt. Starting in 2011, unless Congress takes action, the federal estate will go back to the pre-BTC exemption of $1,000,000 with a maximum tax rate of 50%. This is one of the tax increases that Congress may act on and set the exemption at $3,000,000.
The two tax changes that will have the greatest effect on investors will be the increase in long-term capital gains and qualified dividends tax rates. The dividend tax rate will more than double for taxpayers having income over $141,000 and married filing jointly (it will go from 15% to 31%). I always try to have all my interest and dividend paying and non tax efficient taxable investments in my non-taxable accounts (for example, IRAs and 401 accounts). This is the reason why I have not invested in mutual funds in my taxable accounts for the last five years; Exchange Traded Funds (ETFs) are much more tax efficient than mutual funds (if you are interested please read my blog - BRIC ETFs and ETFs vs. Mutual Funds). This will become more important starting in 2011 unless Congress acts to decrease long-term capital gains and qualified dividends tax rates. This strategy will also help high income earners and investors that will be in the 39.6% bracket – they will not have to pay almost 40% in taxes on their interest and dividends returns to the federal government.
With all of the House of Representatives and 1/3 of senators up for reelection in November 2010, a lot could change in 2011 for investment tax rates. My strategy is always to have interest- and dividend-paying and non tax efficient investments in my non-taxable accounts. Also, any investments for which there is a high degree of difficulty determining the tax liability, i.e. trading stocks, future contracts, exotic ETFs, etc., are invested in my non-taxable accounts.
Please chime in with your comments on 2011 tax rates, tax efficient investments, or anything else.
© 2010
Paul Cusick
Former president Bush’s tax cuts will expire at the end of 2010 and revert to the previous tax code for long-term capital gains, qualified dividends, revival of the estate tax and adding back the top marginal bracket of 39.6% at the beginning of 2011. As of today Congress has not addressed the expiration of these tax cuts. The following are my predictions for 2011:
Long-term capital gains tax (on assets held longer than one year): Currently 0% for taxpayers in the 10% and 15% tax brackets as of 2008 and 15% for everybody else, it is scheduled to return to the pre-BTC (Bush’s tax cuts) rates of 10% for 15% and below brackets and 20% for everybody else. I predict congress will not take action on the tax bracket above 15%, effectively making the long term capital gains tax 20%; they may take action to set the tax rate at 5% for the 15% and under tax bracket.
Qualified dividends: In 2011 qualifying dividends will go back to their pre-BTC rate i.e. ordinary income based on your highest tax bracket. Bush’s tax cut of 2003 changed the qualified dividends tax rate from ordinary income (your highest income tax bracket) to the same as capital gains (15% for most people). Your tax rate could be high as 39.6% if you are a high income earner. Congress could change it to be the same as long-term capital gains – 20% for most taxpayers – but I think it’s more likely they will not take action and it will return to your ordinary income rate of your highest tax bracket.
Top income tax bracket: Bush tax cuts eliminated the top income tax bracket of 39.6% and created a new 10% bracket for low income earners. If Congress does not take action, the top income tax bracket in 2011 will be 39.6% and the 10% bracket will be eliminated. I predict Congress will let the top bracket tax rate go to 39.6% and will take action to keep the 10% tax bracket.
Revival of the estate tax: In 2010 there is no limit on the size of your estate that is not subject to federal estate taxes unless Congress takes action this year and sets a limit on the estate size that is tax exempt. Starting in 2011, unless Congress takes action, the federal estate will go back to the pre-BTC exemption of $1,000,000 with a maximum tax rate of 50%. This is one of the tax increases that Congress may act on and set the exemption at $3,000,000.
The two tax changes that will have the greatest effect on investors will be the increase in long-term capital gains and qualified dividends tax rates. The dividend tax rate will more than double for taxpayers having income over $141,000 and married filing jointly (it will go from 15% to 31%). I always try to have all my interest and dividend paying and non tax efficient taxable investments in my non-taxable accounts (for example, IRAs and 401 accounts). This is the reason why I have not invested in mutual funds in my taxable accounts for the last five years; Exchange Traded Funds (ETFs) are much more tax efficient than mutual funds (if you are interested please read my blog - BRIC ETFs and ETFs vs. Mutual Funds). This will become more important starting in 2011 unless Congress acts to decrease long-term capital gains and qualified dividends tax rates. This strategy will also help high income earners and investors that will be in the 39.6% bracket – they will not have to pay almost 40% in taxes on their interest and dividends returns to the federal government.
With all of the House of Representatives and 1/3 of senators up for reelection in November 2010, a lot could change in 2011 for investment tax rates. My strategy is always to have interest- and dividend-paying and non tax efficient investments in my non-taxable accounts. Also, any investments for which there is a high degree of difficulty determining the tax liability, i.e. trading stocks, future contracts, exotic ETFs, etc., are invested in my non-taxable accounts.
Please chime in with your comments on 2011 tax rates, tax efficient investments, or anything else.
© 2010
Paul Cusick
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