TAXES AND YOUR PORTFOLIO: It s not what you earn, it s what you keep

Transcription

1 TAXES AND YOUR PORTFOLIO: It s not what you earn, it s what you keep

2 YOUR HOST John Sweeney Executive Vice President, Retirement & Investing Strategies, Fidelity Investments 2 JOIN THE

3 PRESENTERS Louis Satisky Regional Vice President, Fidelity Investments Howard Spielberg Regional Vice President, Fidelity Investments 3 JOIN #SomedayEvent

4 WEALTH PLANNING OVERVIEW Your Family Wealth planning is complex and unique to every family. We can guide you in considering questions and addressing concerns that help your family reach its wealth planning goals. Investment Strategy Investment Strategy Retirement Planning Income Protection Asset Protection Family Conversations Asset Allocation Savings Strategy Disability Estate Planning Education Tactical Allocation Asset Allocation Location Tax-Efficient Asset Location Investing Tax-Efficient Taxable Investing Savings Strategy Taxable Savings Strategy Income Strategy Personal (Taxable, IRA, Annuity) Workplace Investments Benefits and Social Security Premature Death Protection Outliving Income Wills Trusts Wealth Transfer Charitable Giving Living Expenses: Children and Parents Assisting Parents and Relatives Health Care/ Long-Term Care 4 Fidelity does not provide legal, tax, or estate planning advice. Please consult an appropriately licensed professional for advice on your specific situation. Primarily sourced from The New Advisor for Life, John Wiley & Sons, 2011, by Stephen D. Gresham with permission to reprint. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI FMR LLC. All rights reserved

5 OVERVIEW Topic overview: It is important to have a plan in place that addresses taxes. The fact is, taxes can have a significant impact on your investment returns at any stage of your investing life. We believe overlooking the potential impact of taxes is a common investor mistake. Goals: At Fidelity, we can help you develop an ongoing strategy a plan that seeks to defer, manage, and reduce taxes. What you ll learn: How taxes can affect your investments Strategies to help defer, manage and reduce taxes How Fidelity can help 5

6 POLL QUESTION #1 How would you describe your understanding of how taxes impact your investments? A. Very knowledgeable B. Somewhat knowledgeable C. Not very knowledgeable 6

7 YOUR RESPONSE How would you describe your understanding of how taxes impact your investments? 61.2% 15.5% 23.4% Very knowledgeable Somewhat knowledgeable Not very knowledgeable 7

8 TYPES OF TAXES Tax Types Impact* Long-Term Capital Gains Up to 23.8% (plus state and local taxes) Qualified Dividends Short-Term Capital Gains Interest and Non-Qualified Dividends Ordinary income tax rates are potentially subject to the Medicare surtax up to a total of 43.4% (plus state and local taxes) Alternative Minimum Tax (AMT) Potential to increase your effective marginal tax rate on long-term capital gains and qualified dividends Do you know what you pay in taxes on Q your investments? 8 *Tax rates as of January Includes 3.8% Medicare surtax, which applies to single filers with Modified Adjusted Gross Income (MAGI) above $200,000 and joint filers with MAGI above $250,000.

9 POLL QUESTION #2 Where do you think your tax rate will be in five years? A. Your tax rate will be higher B. Your tax rate will be lower C. Your tax rate will be unchanged 9

10 YOUR RESPONSE Where do you think your tax rate will be in five years? 40.7% 28.3% 31.0% Taxes will be higher Taxes will be lower Taxes will be unchanged 10

11 HISTORICAL TAX RATES Top U.S. Federal Tax Rates 100% Top income tax rate Top capital gains tax rate 80% Tax Rate 60% 40% 20% 0% Year Where do you think your tax rate is headed Q in the future? 11 Data represents the top federal marginal ordinary income tax rates and long-term capital gains tax rates, including the Medicare surcharge, as reported by U.S. Federal Individual Income Tax Rates History, The Tax Foundation, September 9, 2011, and Top Federal Income Tax Rates on Regular Income and Capital Gains since 1916, Citizens for Tax Justice, May 2004.

12 TAXES CAN SIGNIFICANTLY REDUCE RETURNS Impact of taxes on investment returns* from % Average Annual Return % 8.1% 5.7% 3.6% Stocks Stocks after taxes Bonds Bonds after taxes 12 *Past performance is no guarantee of future results. This chart is for illustrative purposes only and does not represent actual or future performance of any investment option. Returns include the reinvestment of dividends and other earnings. Stocks are represented by the Standard & Poor s 500 Index (S&P 500 Index). The S&P 500 Index is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of common stock prices of 500 widely held U.S. stocks. Bonds are represented by the 20-year U.S. government bond. Inflation is represented by the Consumer Price Index (CPI), which is a widely recognized measure of inflation, calculated by the U.S. government. Please note that indexes are unmanaged and are not illustrative of any particular investment. It is not possible to invest directly in an index. Morningstar Inc. All rights reserved. 3/1/2015. See Appendix A for more information.

13 CREATING A MORE EFFICIENT INVESTING STRATEGY DEFER PAYING TAXES WITH TAX-ADVANTAGED ACCOUNTS SUCH AS: 401(k)s 403(b)s IRAs Deferred annuities DEFER MANAGE THE TAXES YOU PAY BY EMPLOYING STRATEGIES INCLUDING: MANAGE Asset location Tax-loss harvesting Tax-efficient fund selection Managing mutual fund distributions Managing capital gains REDUCE REDUCE FUTURE TAXES WITH INVESTMENTS AND STRATEGIES INCLUDING: Roth IRAs Municipal bonds 529 college savings accounts Charitable giving 13

14 DEFER PAYING TAXES WITH TAX-ADVANTAGED ACCOUNTS

15 TAX-ADVANTAGED ACCOUNTS 2015 Annual Contribution Limits Minimum Required Distribution Rules Contribution Treatment Employer-Sponsored Plans [401(k)s, 403(b)s] $18,000 per year per employee If age 50 or above, $24,000 per year Mandatory withdrawals starting in the year you turn 70½ (except for Roth) Pre-tax IRAs (Traditional* and Roth ) $5,500 per year If age 50 or above, $6,500 per year Mandatory withdrawals starting in the year you turn 70½ (except for Roth) Pre-tax or After-tax Tax-Deferred Annuities No contribution limit Not subject to minimum required distribution rules for nonqualified assets After-tax Q employer-sponsored Are you taking full advantage of your plans? 15 *For a traditional IRA, full deductibility of a contribution is available to active participants whose 2015 Modified Adjusted Gross Income (MAGI) is $98,000 or less (joint) and $61,000 or less (single); partial deductibility for MAGI up to $118,000 (joint) and $71,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $183,000 for 2015; partial deductibility for MAGI up to $193,000. Roth IRA income requirements: For single filers: For 2015, single filers with Modified Adjusted Gross Income (MAGI) up to $116,000 are eligible to make a full contribution; a partial contribution can be made for MAGI of $116,000 $131,000. Married filing jointly: For 2015, MAGI up to $183,000 for a full contribution; partial contribution for MAGI of $183,000 $193,000. Issuing insurance companies reserve the right to limit contributions.

16 MANAGE THE TAXES ON YOUR INVESTMENTS

17 DO YOU WANT TO KEEP MORE OF WHAT YOU EARN? 17

18 REDUCING CAPITAL GAINS TAXES $10,000 Hypothetical Pre-tax Gain* An investor keeps 43.4% taxes paid $5,660 After-tax gain $4,340 Taxes $7,620 After-tax gain $2,380 Taxes An investor keeps 23.8% taxes paid Short term vs. 1 YEAR Long term 18 For this example, we assume the investor is subject to the top capital gains rate and is paying 43.4% on short-term gains and 23.8% on long-term gains. Tax savings will depend on an individual s actual capital gains and tax rate, and may be more or less than this example. This is a hypothetical example for illustrative purposes only and is not intended to represent the performance of any investment. *The taxes saved by waiting until a short-term investment gain (<1 year) becomes a long-term gain (>1 year) can be calculated as follows: (gain $) x (short-term rate long-term rate) = tax savings.

19 TAX-LOSS HARVESTING CAN MAKE A DIFFERENCE Which lot should I sell? TAX LOT 2 50 Shares at $75/Share 50 Shares at $50/Share TAX LOT 1 LOSS GAIN SELL at $60/Share JAN JAN TODAY For illustrative purposes only. 19 Generally, among asset classes, stocks are more volatile than bonds or short-term instruments and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Although the bond market is also volatile, lower-quality debt securities, including leveraged loans, generally offer higher yields compared with investment-grade securities, but also involve greater risk of default or price changes. Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice.

20 ACTIVELY MANAGE LOSSES YEAR-ROUND S&P 500 Index annual total returns and max intra-year declines: % Positive S&P 500 Index Negative S&P 500 Index Max Intra-Year Decline S&P 500 Index Total Return 30% 10% -10% -30% -6% -19% -27% -19% -50% -48% -70% What is your approach to Q harvesting losses? 20 Past performance is no guarantee of future results. It is not possible to invest directly in an index. Returns are based on index price appreciation and dividends. Intra-year declines refer to the largest index drop from a peak to a trough during the year. For illustrative purposes only. Data as of 12/31/2014. Sources: Standard & Poor s, Bloomberg.

21 TAKING CONTROL Beyond your control The FUND SELLS a holding for a capital gain or receives dividends or interest. Current taxes are owed on the fund s taxable distributions received by shareholders. Within your control INVESTOR SELLS shares of a fund for a capital gain/loss or to rebalance. Current taxes are owed on realized capital gains. What strategies are you using to control Q your tax impact? 21

22 MATCH THE RIGHT ACCOUNT WITH THE RIGHT INVESTMENT Consider for Taxable Accounts MORE TAX EFFICIENT Consider for Tax-Deferred Accounts LESS TAX EFFICIENT High Tax Efficiency Medium Tax Efficiency Lower Tax Efficiency Equity Index Funds (other than REITs) Equity Index ETFs (other than REITs) Equity Income Funds 1 Equity Income ETFs 1 Tax-Managed Equity Funds Equity Separately Managed Accounts Bond Funds with Large U.S. Treasuries Allocations 2 Typical Actively Managed Equity Funds High-Turnover Equity Funds Mortgage Bond Funds Corporate Bond Funds Leveraged Loan / Floating Rate Bond Funds U.S. High Yield Bond Funds Emerging Market Bond Funds REIT Funds Have you matched your investments and Q your accounts effectively? 22 The relative tax efficiency of these investments are generalizations and are not universally accurate. Each investment should be considered individually for the benefits of being held in a taxable or tax-deferred account. 1 Equity Income Funds typically distribute most of their income in the form of Qualified Dividends, which for many taxpayers are taxed relatively lightly, allowing most Equity Income Funds and ETFs to be considered High Tax Efficiency investments when compared with other investment options that generate taxable income. However, for higher income taxpayers, Qualified Dividends may be subject to both a higher tax rate and also the Medicare surtax on investment income, which may make them less efficient for those investors. 2 Applies to investors who are subject to high rates of state/local tax on investment income; for other investors, these bond funds should be considered Lower Tax Efficiency.

23 VALUE OF TAX-SENSITIVE INVESTMENT MANAGEMENT Hypothetical cumulative value of tax-sensitive investment management growth strategy* $2.2 $2.0 A potential increase of $256,039 from tax-sensitive investment management $2.09M $1.84M Portfolio Value ($M) $1.8 $1.6 $1.4 $1.2 $ $ Hypothetical Account Value with Tax-Sensitive Investment Management Hypothetical Account Value without Tax-Sensitive Investment Management For illustrative purposes only. *Based on strategy composites. (See Appendix B for information on the composites.) These results are hypothetical and do not represent actual value added to client accounts. Returns for individual clients will vary. Performance shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, and you may lose money.

24 HELP REDUCE TAXES NOW OR IN THE FUTURE

25 HELP REDUCE TAXES NOW OR IN THE FUTURE Roth Accounts Roth IRA Conversion Municipal Bonds Self-Directed or Managed 529 College Savings Accounts Charitable Giving What strategies are you employing to Q reduce current and future taxes? 25

26 ROTH ACCOUNTS OR ROTH IRA CONVERSION You might want to consider a ROTH conversion if you: Expect higher taxes in the future Have a long investment time frame Can afford to pay taxes on the conversion from taxable accounts Want greater flexibility managing withdrawals Plan to pass most of your retirement assets to your beneficiaries Have IRA assets consisting entirely of nondeductible contributions Expect to have lower taxable income than usual this year Expect additional investment income in future years Have retirement accounts you expect to increase in the future 26

27 KEY CONSIDERATIONS When would you prefer to pay taxes? How can you diversify your tax risk? How would you prefer to manage your investments? When do you need to access your money? 27

28 HOW FIDELITY CAN HELP 1. Meet with a Fidelity Investment Professional. 2. Understand how taxes impact your investments. 3. Choose investment accounts and strategies to help meet your goals: Defer 401(k)s 403(b)s IRAs Deferred annuities Manage Asset location Tax-loss harvesting Tax-efficient fund selection Managing mutual fund distributions Managing capital gains Roth IRAs Reduce Municipal bonds 529 college savings accounts Charitable giving 4. Set up regular check-ins. 5. Learn more at Fidelity.com/TEI. 28

29 LEARN MORE AT FIDELITY.COM/TEI For illustrative purposes only. 29

30 QUESTIONS AND ANSWERS 30 JOIN #SomedayEvent

31 IMPORTANT INFORMATION: APPENDIX A Taxes Can Significantly Reduce Returns data, Morningstar, Inc., Federal income tax is calculated using the historical marginal and capital gains tax rates for a single taxpayer earning $110,000 in 2010 dollars every year. This annual income is adjusted using the Consumer Price Index in order to obtain the corresponding income level for each year. Income is taxed at the appropriate federal income tax rate as it occurs. When realized, capital gains are calculated assuming the appropriate capital gains rates. The holding period for capital gains tax calculation is assumed to be five years for stocks, while government bonds are held until replaced in the index. No state income taxes are included. Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Generally, among asset classes stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate. Although bonds generally present less short-term risk and volatility than stocks, bonds do entail interest rate risk (as interest rates rise, bond prices usually fall, and vice versa), issuer credit risk, and the risk of default, or the risk that an issuer will be unable to make income or principal payments. The effect of interest rate changes is usually more pronounced for longer-term securities. Additionally, bonds and short-term investments entail greater inflation risk, or the risk that the return of an investment will not keep up with increases in the prices of goods and services, than stocks. 31

32 IMPORTANT INFORMATION: APPENDIX B 32

33 IMPORTANT INFORMATION: APPENDIX B (CONTINUED) Performance shown represents past performance, which is no guarantee of future results. Investment return and principal value of investments will fluctuate over time. A client s underlying investments may differ from those of the composite portfolio. Returns for individual clients may differ significantly from the composite returns and may be negative. Current performance may be higher or lower than returns shown. Composite and after-tax benchmark returns are asset weighted because both are based on individual client accounts. Pre-tax benchmarks are not asset weighted, because they are based on market indexes. Returns include changes in share price and reinvestment of dividends and capital gains. The index performance includes the reinvestment of dividends and interest income. An investment cannot be made in an index. Securities indexes are not subject to fees and expenses typically associated with managed accounts or investment funds. The underlying funds in each composite portfolio may not hold all the component securities included in, or in the same proportion as represented in, its corresponding customized benchmark. Only Fidelity Personalized Portfolios that are all stock or include national and state-specific municipal bond funds are included. Availability of state-specific funds depends on client s state of residence. Fidelity Personalized Portfolios ( FPP ) launched July 2010; performance before such date reflects only Fidelity Private Portfolio Service ( PPS ) accounts. See endnote 11 for more information on how these returns and benchmarks are calculated. The results in Appendix B represent average annual composite returns (net of fees) for FPP client accounts managed by Strategic Advisers that use an all-stock strategy or a strategy with municipal bond funds. N on-fee-paying accounts may be included in composites. This may increase the overall composite performance with respect to the net-of-fees performance. The pre-tax benchmarks consist of market indexes. The after-tax benchmarks consist of mutual funds, because an investable asset with known tax characteristics is needed to calculate after-tax benchmark returns for comparison. Composite portfolio excess returns are the difference between composite portfolio returns and their applicable composite portfolio benchmark returns. Both the pre-tax and after-tax composite portfolio benchmark returns are blended from either representative market indexes (for pretax benchmarks) or representative mutual funds (for after-tax benchmarks) in weightings based on the long-term asset allocation of each strategy. The benchmark returns are calculated monthly based on the long-term asset allocation of the strategies at that time so the benchmarks reflect historical changes to the asset allocation of each strategy. The benchmark long-term allocation weightings may vary slightly from individual client accounts due to individual account investments and activity. The tables on the next page detail the current composition of the benchmarks for each of the investment strategies that are all stock or with a municipal bond fund component mentioned in this webinar. 11 Based on strategy composites. (See Appendix C for information on the composites.) These results and slide 22 are hypothetical and do not represent actual value added to client accounts. Returns for individual clients will vary. Performance shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, and you may lose money. 33

34 IMPORTANT INFORMATION: APPENDIX C 34

35 IMPORTANT INFORMATION Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Past performance is no guarantee of future results. Diversification and asset allocation do not ensure a profit or guarantee against a loss. In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. The municipal market can be affected by adverse tax, legislative, or political changes, and by the financial condition of the issuers of municipal securities. Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal, tax, or estate planning advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. 35 Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI FMR LLC. All rights reserved