Month: February 2018

In the day, grandparents might have given their grandchildren small cash gifts for birthdays and holidays.

But now, with the cost of education rising and concern over job opportunities for recent graduates, grandparents may wish to pass on major assets to their children and grandchildren.

If so, you may want to consider one of the following three strategies: give cash or stock, or make a 529 plan contribution.

First, you can just give cash. In 2018, under the IRS’s annual gift-tax exclusion, each person may give up to $15,000 per individual with no tax consequences. So you and your spouse could transfer $30,000 to each of your children and grandchildren.

Or you can give a gift of stock. Say you decide to give your grandchild $10,000 worth of stock that you purchased for $5,000 more than a year ago.

The transfer isn’t taxed, and the stock can continue to (hopefully) appreciate. But if your grandchild ever needs the cash, he or she will have to pay taxes on the capital gain – the difference between what you paid for the stock ($5,000) and its current value.

Is this a negative? Not necessarily. It’s likely that your grandchild will be in a lower tax bracket and have a lower capital gains tax than you would.

Finally, if your grandchild is saving for college, you could make a 529 plan contribution. This education savings plan helps families save funds for their children’s (increasingly expensive) college costs. You can contribute up to $15,000 per year to each child or grandchild’s 529 plan. However, the law allows you to “front load” five years’ worth of contributions at once, which means you can contribute up to $75,000 in 2018.

Therefore, you and your spouse together can contribute up to $150,000 to a grandchild’s 529 plan – a sea change from the old days.

Recent months have brought a number of personal finance changes, including a rise in interest rates that will affect some of the terms for borrowing money and accessing credit.

In December 2017, the U.S. Federal Reserve increased its key interest rate by 25 basis points, marking the fifth increase in the rate since December 2015. And more hikes are expected.

One of the best tips for handling rising interest rates is to move away from adjustable-interest-rate debt in the form of credit cards, home equity lines of credit, and mortgages.

Most credit cards, for example, have a rate directly tied to the federal funds rate, so the 25-basis-point increase will hurt those with credit-card debt. Those with this type of debt may want to consider transferring balances to a credit card with a low (or 0%) introductory rate, and work toward paying down the balance permanently.

You also may want to consider refinancing if you have an adjustable-rate mortgage. Adjustable mortgage rates may not rise as quickly as credit card rates, but fixed mortgage rates are still relatively low – around 4% – so it may make sense to switch.

Home equity lines of credit with adjustable rates often reset quickly to a higher rate, but they generally can be converted into a home equity loan with a fixed rate.

Situations differ, so discuss your personal financial circumstances and goals with your advisor before making these changes. He or she can offer you options for making the most of interest rate hikes.

Most retirees follow conventional wisdom when it comes to asset allocation, and try to balance their nest eggs between stocks and bonds. But how do you achieve the correct mix?

The old rule of thumb was to subtract your age from 100 to get the percentage of your portfolio you should keep in stocks. For example: If you are 40, you should keep 60% of your portfolio in stocks; if you are 60, you should keep 40% of your portfolio in stocks.

But with people living longer, many advisors now suggest using 110 or 120 minus your age to determine the percentage of stocks in your portfolio: if you are 60, you should keep 50% or 60% of your portfolio in stocks.

Allocating to bonds can be difficult in certain market environments. Today, thanks to a booming stock market, many investors have a higher percentage of equities in their portfolios than they originally intended. They know they should allocate more to bonds, but with equities performing well and interest rates on bonds at record lows, it’s a difficult choice to make.

Having bonds is important, however, to protect your portfolio in the event of an equity-market downturn. And there are many types of bonds to choose from, increasing the odds of finding the comfortable balance between return and safety. These include short-term, intermediate-term, and long-term bonds, as well as government, high-yield, global and municipal bonds.

Your advisor can help find the bond type and allocation that will work for your individual circumstances and goals.

Capital-loss deductions can take the sting out of investment losses and reduce your tax return – if you understand how to use them.

A capital loss occurs when a capital asset (such as an investment) drops in value and is subsequently sold.

To determine if you have a capital loss, you will need to determine your basis, which is what you paid for an asset plus any other costs you incurred to acquire it, including sales taxes and commissions.

If you sold it for less than its basis, you have a capital loss. If you sold it for more, you have a capital gain.

When you have a capital loss, you must first use it to reduce any capital gains you have. Any capital losses left over can be deducted from your income up to $3,000 per year.

If your losses exceed $3,000, you can carry them forward indefinitely. So, if you have $5,000 in capital losses in 2017, you can deduct $3,000 of those losses on your 2017 return and carry the remaining $2,000 forward to your 2018 return.

Capital Gains

If you have capital gains instead of capital losses, the situation changes. The way capital gains are taxed depends on whether it’s a long-term or a short-term gain.

If you hold the asset for more than one year, your capital gain or loss is long term. If you hold the asset for one year or less, it’s considered short term.

Short-term capital gains are taxed at the same rate as other income.

On the other hand, long-term capital gains are taxed at a much lower rate: 0% if you are in the 10% or 15% income-tax bracket; 15% if you are in the 25%, 28%, 33%, or 35% income-tax bracket; and 20% if you are in the 39.6% income-tax bracket.