For Start-ups—Investing in a tax conscious manner.
Annie Hung-Scanga • April 1, 2021
For Small Business Owners
Ian and Sam, twin brothers, started their business after their employment was terminated as employees, but retained as “contractors”. The brothers are optimistic and rightfully so. After one year in business, they have some cash saved up. What shall they do with the money on hand?
Starting out is exciting! You get to put your vision into action. You have done your research and consulted with your CPA, setting up a suitable business entity and you are ready to rock and roll.
As a financial advisor, I would be delighted to assist you with tax saving strategies when it comes to investments and retirement savings accounts / programs.
But without knowing whether my clients are married or single, or even divorced with a child support obligation; whether they want to use the savings in a few years for business expansion or save for retirement. Would it be in my clients’ best interests to ask what is the best strategy for making their savings grow? Would I be living up to my professional standard to advise my clients without knowing more of their background and plans for their business and personal life?
One response might be “make as much money as possible regardless”. Respectfully, I beg to differ. We must look at the “after tax” rate of returns. In addition, how could we compare the “results”, if we do not know the number of years we are investing over?
Further, some investments enjoy tax deferred growth (like retirement accounts) while others don’t (like regular checking accounts).
The most logical way for me to conduct “business” is to sit down with you and to understand your life goals (in addition to your business pursuit), to get a sense of your risk tolerance (are you able to sleep through the night when the market is down 20% for example), and time frames for each goal. Then we could come up with a personalized plan with strategies you are comfortable with. Finally, we will select which stocks, mutual funds, etc. to invest in after all the “pre-requisite” items discussed above are met.
Where do “tax saving” opportunities come in?
- Tax loss harvesting is usually best executed in the last quarter: we will review each investment holding and sell those who are in the red. This way, you will have a “capital loss” to offset your income while filing your income tax returns the following year
- While selecting mutual funds to invest in, some fund do stipulate that “tax manage” or “tax efficient” is one of their investment objectives, then those are the funds that we could focus on and consider to invest in.
- Donate highly appreciated investments to the charity of your choosing. When you donate the investments, the donated amounts are determined by the market value of the donated investments and as a result, you need not sell them, pay taxes on the capital gain, and use the sales proceeds for the donation.
- These are common and general ideas. Personalized recommendations will have to be based on your goals, plans, investment time horizon, perception and tolerance of investment risks, etc. to make proper recommendations.
- Also, even if your new business venture is not ready to set up a company sponsored retirement plan for all, I would still help you set up an Individual Retirement Account (IRA) to bring down the taxable income on your personal income tax return and at the same time build up tax deferred growth for your retirement goal.
- Even though the strategy and program discussed above might not seem material since the IRA contribution limit usually is not high compared to other types of retirement plans such as 401k accounts. Nonetheless, if you give it time for the compounding effect, it will surprise you when your reach retirement age. Let’s do a quick calculation, if you invest $6,000 in 2020 and earn an average return of 10% annually for 20 years, the balance in 2040 will be around $40,365.
- Building up wealth takes time. The secret is: be in the market, invest consistently, review and adjust periodically; patience and discipline do pay off statistically speaking (although there is no guarantee).
- I am here to help – an initial free consultation is offered to all new clients. You could ask your questions and we could both decide whether we are able to work successfully together. For your convenience, here is a link to access my appointment calendar, https://square.site/book/9AXE057BXPYYG/annie-hung-scanga.
Should you manage your finances all by yourself, or engage a professional’s service Scenario 1: Lauren retired from her hospital position after 3 decades of service. She is the bread winner of the household. She has about less than a half million of retirement money saved up to last her and her husband the rest of their lives. Conservative in nature, she wants some “safe investments”. Scenario 2: Michael and Mary always lost money on anything they invested in – real estate and the stock market just to name a couple. Both contribute to their retirement plans at work and those performances were good. However, Michael is considering rolling over his 401K account to a financial advisor, since the advisors at his company kept on leaving the firm and he knows little about his current advisor who is assigned to his account. Scenario 3: Dr. Chen has always invested his own money. He has a total of 8 IRA, pension and retirement accounts. He needs to take his RMD and is in search of a firm to consolidate all of his retirement accounts. Scenario 4: Travis has not worked with a financial advisor in 2 decades. He is a corporate executive and is financially savvy. He has a company 401k and a brokerage account. Should you work with a financial advisor to help you manage your money? By manage, should you grant the advisor discretionary authority to trade on your behalf whenever he/she see fits. (I don’t accept discretionary accounts, nor do I plan to, ever.) This is two one million-dollar questions. Statistics show that people who engage a financial advisor’s services have higher rate of returns than if the investor managed the investments alone. (1) Drilling down into the factors that contribute to the higher returns, it comes down to the behavior coaching that helps the investors have higher overall lifetime returns. We all know we should invest when the stock prices are lower and divest when the prices are higher. However, when almost all the media is shouting “end of the world” and this time the crisis is different. All the people around you are dumping their stocks, scared, and packed up ready to leave the country (okay, the leaving part is just a joke). You probably couldn’t help but sell some of your holdings while it is probably the better time to scoop up some bargain investments instead. When you have all the time in the world, would you rather pick stocks/mutual funds instead of watching your daughter’s recital? When you have down time at work or prefer not to climb the corporate ladder; sure, by all means, manage your finances yourself. After all, you are smart and have time, why pay a financial advisor fees to manage your investment performance? Are you absolutely sure that this is the best use of your time? Could you maintain your cool to buy low and sell high? Are you certain that your intelligence and emotion bestowed on your own finances outweigh the objectivity and experiences of a competent financial advisor? What if you are unable to manage your finances? Are you the only one in the family who knows where everything is? When you travel, would you prefer to get on an airplane to reach your destination quickly or drive your car? If you could afford to buy an airline ticket, you probably could use the time better for anything but driving. If you are In need of heart surgery, would you rather hire a general practitioner or an experienced surgeon, perhaps the Chief of Cardiology, to perform the lifesaving surgery for you? Life is too short. Is spending time with your family more important than managing your investments or financial plan? Speaking of financial plan – it is kind of a “given”, a base for you to form a strategy and select appropriate investment vehicles; and if you don’t have one and don’t think you need one, then I am not the right advisor for you after all. Otherwise, I would be delighted to help. p.s. With regards to preparing a personalize financial plan, please see my other article, “The Way”. Disclosure: Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including loss of principal. (1) Morning Analysts 11-05-17, Think Advisor 12/12/19
The new season is a great reason to make and keep resolutions. Whether it’s eating right or cleaning out the garage, here are some tips for making and keeping resolutions.
Why rollover your retirement accounts? Scenario 1: James retired from the company where he had worked for the last 3 decades. He probably will move out of the state and no longer be in close contact with his company. What should he do with his 401k account? Scenario 2: Laura left her company due to downsizing. Before she lands another corporate position, she wonders whether she ought to rollover her pension and 401k account with her prior employer considering the pension is invested only in company stock and earned less than 1%. The most common reasons to rollover are: Better and direct control More investment options Personal service and advice Once you have left your job, it’s probably more difficult to keep in touch with your ex-employer when you wish to change investments or re-designate your beneficiaries with your 401k account or pension plans. A company’s 401K plan usually offers 10-12 mutual funds, sometimes with company stock as the only choice. Although there usually is a designated 401k representative and toll-free help desk, that person probably don’t know you on a personal level. Please be sure to speak to your financial professional to carefully consider differences between your company retirement account and investment in an IRA. If you decided to go forward with moving your accounts you would have conducted a search and interviewed some potential advisors and found an experienced and trustworthy one that you feel comfortable to work with, then a rollover may be right for you. (1) If I am the advisor, I would have an initial meeting with you – taking about 15 minutes to explain my process and planning philosophy. Then it is up to you to ask me any questions, share concerns and decide when to leave the meeting. If you and I decide to work together, I will prepare a comprehensive customized financial plan for you and your family and use the plan to propose strategies and suggest investment portfolios. We have numerous investment options to help fit your plan. Most importantly, you will have yours truly to call upon for advice—what to do and what not to do. I will know you and your family’s finances intimately and you don’t have to be put on hold for 10 minutes and be transferred to 1 or more representatives to ask your questions. One of the most important benefits of our relationship is that you have someone to talk to in difficult times because at some point the market will decline and you may wish to cash out. History has shown this to be the wrong move. It may be time to sell some stocks so that you can buy some bargains or maybe just wait. A calming conversation could give you a new perspective. You can never turn the clock back. Make time to meet some advisors. Make time to rollover and plan better for your retirement (for your hard-earned money and life)! I am here to help. (1) Factors to consider when rolling over a retirement account include, but are not limited to, changes to availability of funds and withdrawals, fund expenses, and fees, etc. IMPORTANT DISCLOSURES Registered Principal, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA / SIPC . Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and ATO Capital are not affiliated. Neither Cambridge nor ATO offers tax advice.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
A financial plan personalized for you may help you achieve your financial goals. This is how I look at a financial plan: take all you have saved and invested at today’s dollar and growth based on the return you are currently getting to project the total accumulated balance. This “ending” balance should sustain you through your lifetime including retirement. Let’s look at a couple of real-life examples. Example 1: A 45-year old couple, Josh and Ann, saved $500,000 in their retirement accounts and plan to both retire at age 65. Their current rate of returns on average is 8% per year. Their annual spending is $150,000. Their combined annual income is $200,000. Example 2: A 65-year old couple, Mike and Lauren, also saved $500,000 in their retirement accounts and just retired in 2020. Their current rate of returns on average is 5% per year. Their annual spending is $100,000. The combined annual social security income is $60,000. Let’s see if they make no changes and follow their plans, whether their income could sustain them through their lifetime. Our goal is to ensure both couples can live the lives they want to have, (by their definition) through the projected life expectancy of age 100. We can’t tell. How would anyone know with certainty that they will, or will not run out of money? Pray and hope is not the answer. To make sure they won’t run out of money, could I possibly help them get better returns and accumulate more? Could I possibly help them invest in less risky investments and achieve the same level of returns? To ensure their funds will be adequate, could I possibly re-align the investments to help get better returns? Or should they look for other sources of income? Spend less? Delay retirement age? Get part-time jobs in retirement? Stay with their adult children? The earlier you start to plan the better is your chance to accomplish your goal(s). More money could have been made and you have lost time. True, things don’t always turn out as we plan but failing to plan is planning to fail. It is your life, your money, your decision. As a financial advisor, I want to spend my time wisely helping families take their finances seriously. From a professional perspective, doing a financial plan is a given, a benchmark for us to keep track of the progress, and the only way for me to help my clients, to work side by side meaningfully and productively. If you were building a house, wouldn’t you hire an architect to draw the blueprints to see what the house will look like? And how could you budget the money needed and still pick out the materials you prefer? Don’t you think your retirement is more important than your house? How could you decide whether your Body Mass Index (BMI) is good if you don’t have your height and weight measured? How could your primary physician assess your wellness if she/ he doesn’t have your age, blood test, etc.? To have a personalized financial plan completed before I construct a portfolio for clients is a prerequisite for me to take on a new client. If we are to work together for you and your loved ones’ finances, we are going to do it “your way” – based on your unique financial plan. When you are ready, I am here to assist you and your family. p.s. I am dedicating this article to Mr. Nick Murray whose experience and knowledge has helped me realize the passion in me to be a financial advisor and the right way of building my practice.
