AN INVESTOR’S BEST FRIEND—ASSET ALLOCATION
stock, is inherited, the value at the time of the owner’s death becomes the starting point. For instance, you inherit 1000 shares of Schering- Plough stock. The original cost basis for the stock is $20 per share. However, when you inherit it, the cost of the stock is $57 per share. You decide you will sell the stock at $60 per share, which you then do. Your gain on the stock is $3 per share, not $40 per share because of the step-up in basis.
If you were to sell your holdings for a loss, you would be able to use that capital loss on your taxes to offset any capital gains you may have had, plus offsetting some of your ordinary income. Up to $3000 of a capital loss may be used per year. Any unused portion of the loss may be carried over to subsequent years. Financial planning may help reduce your tax burden due to capital gains and you may be able to postpone or even avoid capital gains taxes through proper planning.
The limitations of holding directly owned assets are fewer than the advantages. However, they should be considered just as seriously. Each year that you receive taxable interest and/or dividends on an investment, they are taxable to you. Likewise, any capital gains you receive are taxable. This is generally found with mutual funds through fund turnover that occurs throughout the year. At the end of each year, mutual fund companies are required to declare their divi- dends and capital gains, which are then passed on to the sharehold- ers. You, the shareholder, receive a 1099-DIV form from the company and you must declare it on your tax forms. Also, capital gains may be triggered when your advisor rebalances your portfolio. Any selling or exchanging of an asset for a gain will be taxable to you on your taxes. Whether it’s a long-term or short-term gain depends on how long you have held the asset.
TAX-ADVANTAGED PLANS—PROS AND CONS
Tax-advantaged, or qualified, plans include qualified retirement plans (i.e., 401(k)s), traditional IRAs, variable annuities, and vari- able life insurance policies and the like. (See Chapter 6 on annuni- ties.) While each type of tax-advantaged investment has its own pluses and minuses, the following advantages and disadvantages apply to each.