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If you’ve received a tax refund this year, or if you expect to receive one next year, what is your plan for the money?

One option is buying a long-awaited luxury, but financially astute investors know there are alternatives that might be more beneficial in the long run. Below are details on three of them:

Invest the money in an Individual Retirement Account (IRA).

The earlier you invest, the more you benefit from compounding.

As a hypothetical example, let’s assume you invest $3,000 in an IRA each year for the next 10 years, and the IRA grows at 8 percent. If you make the contribution at the end of each year – in December – the account could grow to $44,589, according to Thomson Financial Company. But if you make the contribution earlier each year – say, in April – you’ll end up with $46,936.

That’s because, by making the contribution earlier, you’ll gain an additional nine months of tax-deferred compounding.

Give your child or grandchild a gift.

The Uniform Gift to Minors Act and Uniform Transfer to Minors Act allow individuals to create a custodial account for the benefit of a minor.

Let’s assume you’d like to help your 10-year-old granddaughter save for college, so you start investing $200 per month and continue doing so until she turns 18. Assuming a hypothetical average annual return of 8 percent, she will have $36,457 in her account when she reaches age 18.

Hire a financial advisor.

Everyone likes receiving a tax refund, but it isn’t necessarily a good thing. Getting a refund means you overpaid throughout the course of the tax year – a fact that essentially means you’re loaning money to the government, interest-free. A financial advisor can tell you how to better plan so you can have that money through the year.

The tax and legal information in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their legal or tax counsel for advice and information concerning their particular circumstances.

Investors who don’t recognize the big performance potential of small-cap stocks could be missing investment opportunities.

Small-cap stocks are those with a relatively small market capitalization, which is a measure of a company’s size. It’s calculated by multiplying the number of shares by the current market price.

Defining the small-cap universe has been challenging for the investment community. Several indices have been established to measure this market segment, including the Russell 2000 Index, the S&P Small-Cap 600 Index and the Wilshire Small-Cap Index.

When it comes to the average market capitalization, however, each index is different, so there’s no clear definition of just what range of market capitalizations a stock has to fall into to be a small-cap stock.

Although small-cap companies are clearly diverse, they do share some characteristics that may make them appealing to investors. They tend to be stocks of growing companies. Also, their size can allow them to react more quickly to changes in the economy than larger companies can.

These characteristics help explain why small-cap stocks have traditionally performed well as the economy is emerging from a downturn. Indeed, this tendency to perform well when other asset classes are not performing well is one of the best reasons to invest in small-cap stocks: They offer diversification.

Of course, small-cap stocks aren’t without risks. It can be harder to find buyers for these stocks, so it may take some time to sell your shares when the economy or markets perform poorly. Your advisor can explain more.

We’re all living longer, and this means many of us will require long-term care such as nursing-home care or in-home services. The costs of these services can be overwhelming, but you can prepare for these financial demands with careful planning.

What’s covered?

Although Medicare does cover long-term care to a certain extent, this coverage is limited. Generally, Medicare only pays for about three months of nursing-home care immediately following a hospitalization, and copays may apply.

Medicaid will cover some long-term care costs, but to be eligible you have to exhaust virtually all of your personal resources. This could create complications for your spouse, who may have fewer assets and/or less income to live on if you need to be cared for in a nursing home.

Do you need insurance?

Bypassing long-term care insurance might be the right choice if you have a lot of money (in which case you can afford to set aside enough money for years of care while still leaving enough to support a spouse), or if you don’t have much money at all (in which case you’re likely to qualify for Medicaid soon after entering a nursing home).

But if you fall somewhere between these two extremes, you may want to consider long-term care insurance.

Determining what kind of policy to buy can be a major challenge, because the cost varies dramatically depending on your age, the amount of coverage and the features included. Discuss it with your advisor, who will help you select the option that’s best for you.

If you’re unhappy with the amount of taxes you’ve been paying on your investments, you might want to start planning now so that next year you maximize the money going into your pockets and minimize that going into Uncle Sam’s.

Here are some tips:

• Make all capital gains long-term gains; the tax treatment of a capital gain depends on how long you’ve owned the asset before you sell it. Gains on the sale of assets held for longer than a year are treated as long-term gains and are taxed at a maximum rate of 20 percent.
• On the other hand, gains on the sale of assets you’ve held for a year or less are treated as short-term gains and are taxed at the rate you’re currently paying on regular income, which can be much higher.
• Select which lots to sell. You can reduce your capital gain by selling shares purchased at the highest price. To do this you must specify to your financial planner or investment company which shares are to be sold.
• Use capital losses to offset capital gains – both long-term and short-term capital losses can be used to offset capital gains on a dollar-for-dollar basis. The maximum capital loss you can deduct in a year is $3,000, but any losses that exceed $3,000 can be carried forward into future years until you have written them off completely.

Note that if you take a taxable loss on an investment and feel it has the potential to rebound, you can buy it back – but only after 30 days, due to the so-called wash-sale rule. If you buy it back within 30 days, you won’t be able to take the loss.

By minimizing your capital gains taxes, you can potentially save thousands of dollars – it’s well worth the effort.

This article is not intended to provide tax or legal advice and should not be relied upon as such. Any specific tax or legal questions concerning the matters described in this article should be discussed with your tax or legal adviser.

Municipal bonds and bond funds – both of which offer the potential for tax-free income – have long been popular among investors in higher tax brackets.

But are they an appropriate investment for you?

Municipal bonds are issued by state and local governments. They’re used to finance public projects and certain types of private projects.

Municipal bonds are tax exempt

Traditionally, investors have purchased municipal bonds because the interest on them is exempt from federal taxes and may also be exempt from state and local taxes.

For example, a resident of California likely won’t pay state or local taxes on a state of California bond.

The actual yield on a municipal bond may be lower than on a taxable investment. However, you want to consider the “tax equivalent yield,” which is the yield of a municipal bond after you’ve considered the fact that you aren’t taxed on the bond’s interest. You may find that its tax-equivalent yield is actually higher than the yield on a taxable investment.

Consider tax-equivalent yield

To determine this you’ll need to calculate a municipal bond’s tax-equivalent yield. First, obtain the yield of the municipal bond or bond fund you are considering. Then, determine your tax bracket. Finally, divide the yield of the municipal bond or bond fund by 100% minus your tax bracket.

For example, suppose you are in the 30% tax bracket. You currently own a corporate bond yielding 8%, and you want to know whether a municipal bond or bond fund yielding 6% is a better investment.

If you divide the yield of the municipal bond (6%) by 100% minus 30% (70%), you’ll get a tax-equivalent yield of 8.6%.

In this case, the tax-equivalent yield of the municipal bond or bond fund is more than the yield of the corporate bond, so the municipal bond might be a better investment for you.

To make a comfortable retirement possible, proper financial planning is crucial. You need to know your sources of income, the amount you can expect to receive from each source and whether those sources are likely to last throughout your retirement years.

Mistakes can prove disastrous to your financial future. So try to avoid the common ones noted below:

• Putting other financial goals first. You probably have several financial goals. You may, for example, be saving for a down payment on a second home. Don’t let other goals supersede your goal of a financially secure retirement.
• Underestimating your life expectancy. As life expectancy increases, you may need to plan and invest for a longer retirement.
• Incorrectly calculating retirement expenses. You may believe you’ll need a certain percentage of your preretirement income in your retirement. But should you plan based on a general percentage? It’s easy to underestimate.
• Ignoring inflation. Investors who are uncomfortable with market volatility and therefore decide to invest only in Treasury bills, insured fixed-rate CDs and savings accounts must accept the fact that inflation could potentially eat away at their investment return. That’s because inflation could be higher than the returns offered by these investment vehicles.
• Not taking full advantage of all available tax-deferred investing options. If you’ve already contributed the maximum to your company’s 401(k) plan, consider investing in another option such as an IRA.

Do you know your portfolio’s turnover rate?

When you use the term “portfolio turnover rate,” you’re usually referring to the trading activity that occurs in a mutual fund over the course of a year. A fund with a high turnover rate likely trades more frequently than one with a lower turnover rate. The Securities and Exchange Commission requires mutual funds to publish their portfolio turnover rate.

A lower turnover rate is a good indicator of a fund’s tax efficiency: When securities in a fund’s portfolio are frequently bought and sold by portfolio managers, the fund’s shareholders have to pay more taxes. Even if you do not sell or exchange your fund shares, you must pay taxes on distributions paid to shareholders by the fund itself.

You can expect to see some deviation in turnover according to the type of fund you’ve invested in.

For example, value-style equity funds – which often invest in out-of-favor stocks that are expected to come back into favor – usually have relatively low portfolio turnover rates; the strategy involves holding on to a stock until the market recognizes its value, which could be a long time.

Index funds – which track a particular index such as the S&P 500 – tend to have limited portfolio turnover because the stocks that make up their indices change infrequently.

Check out your portfolio’s turnover rate. You may be surprised what it reveals.

The legal and tax information contained in this article is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax advisor for advice and information concerning your particular circumstances.

Some people believe they risk losing some or all of their money by investing. But did you know that not investing could be even riskier?

Let’s say a 35-year-old has decided to invest for her retirement and is putting $750 a month (a total of $9,000 a year) in a tax-deferred account such as a 401(k).

She’s convinced the bull market will halt suddenly, so she’s invested her money in a low-risk investment vehicle earning 6% a year.

Flash forward 25 years. This investor is about to retire and has accumulated roughly $523,000. Will it last another 20 years or so?

Perhaps not. After 25 years, $523,000 is equivalent to $244,000 (assuming 3% annual inflation). And when you take out what is owed in taxes, the total dwindles even more. It may not be enough to live on for 20 years.

The moral of the story: Don’t let all your savings sit in a checking or savings account because you fear risk.

To build a diversified portfolio, you should consider investing in individual stocks and bonds as well as cash or in mutual funds that hold these asset classes.

Of course, investing more aggressively isn’t an appropriate strategy for all investors. Returns are not guaranteed. But it is an option to consider.

Also, remember, diversification doesn’t end at having a mix of stocks, bonds and cash. There are many types of equity investments: growth, value, large-cap, small-cap, international, domestic.

There are also many types of bond investments, from municipal to high yield. And at any given time, one type tends to outperform the others. So be sure to consider all your options.

One option you may not want to consider is letting your money languish because you are afraid of risk. Your financial advisor can help you compare options to get the most from your hard-earned savings.

Everywhere you turn these days, it seems as if someone is telling you that now is the best time to invest in gold.

Should you consider it?

Historically, gold has been considered a “safe haven” in times of economic, financial and geopolitical instability. This is certainly the case today, given the debt crisis in Europe and unstable political environments in other parts of the world.

Inflation and currency devaluation are good reasons to invest in gold, because it holds its value. And there is potential for those conditions to develop today.

Gold’s greatest advantage is that it performs differently from other assets, which is why many recommend gold stocks as a way to diversify a portfolio of stocks, bonds and real estate. This helps protect against inflation, debt default and bad investment climates.

That said, no investment is a sure thing, and gold is no exception. That’s because its price can fluctuate widely. For example, it declined from more than $800 per ounce in the 1980s to $250 in the 1990s. Since then, it’s been on a tear, and in October of 2012, exceeded $1,700 per ounce.

If you’re interested in investing in gold, you can do so in a number of ways, from buying gold itself to buying stocks of gold-mining and gold-producing companies. The latter is simpler, as it allows you to obtain the potential advantages of rising gold prices without physically taking possession of gold. But buying gold stocks can require some research. Discuss it with a financial professional.

Living in retirement isn’t always life at the beach; it requires an understanding of key financial issues and careful planning, as well as a close, positive relationship with your financial advisor.

For a stress-free retirement, here are three of the most common mistakes that people make, along with suggested strategies for avoiding them.

Mistake #1–Spending too much too early

• Periodically re-evaluate your budget to ensure it’s still realistic.
• Determine how much you need to put aside to sustain your budget throughout your retirement.
• If your savings don’t match up, gradually pay down debt and increase annual savings.

Mistake #2–Not knowing the consequences of taking distributions

• Don’t withdraw funds without knowing the rules governing withdrawals.
• Decide whether you can put off taking distributions until you reach age 70½, so your money can continue to grow tax-deferred.
• Plan your distribution payouts according to your life expectancy. Withdraw as much as you need for living expenses while keeping the bulk of your assets working for you.
• Withdraw first from savings and taxable investment accounts; only then turn to tax-advantaged accounts.
  • When you do tap tax-advantaged accounts, know the consequences.
• Consider opening a Roth IRA. You can also roll over amounts in a Traditional IRA to a Roth IRA, if certain conditions are satisfied.

Mistake #3–Not knowing how and when to grow your assets

• If you need your assets to grow over 10 years or more, consider putting the majority in stocks.
• If you require current income, consider investing the majority of your assets in bonds.
• If you seek stability of principal and don’t need to grow your assets, consider putting the majority of your portfolio in cash equivalents.