How the Federal Reserve Works

Tip: Checks. Due to the onslaught of electronic check collection, the Federal Reserve now processes paper checks at just one location nationwide, down from 45 locations in 2003.
Source: Board of Governors of the Federal Reserve System, 2016

Have you ever taken a close look at paper money? Each U.S. bill has the words “Federal Reserve Note” imprinted across the top.1

But many individuals may not know why the bill is issued by the Federal Reserve and what role the Federal Reserve plays in the economy. Here’s an inside look.

The Federal Reserve, often referred to as the Fed, is the country’s central bank. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.2 Prior to its creation, the U.S. economy was plagued by frequent episodes of panic, bank failures, and limited credit.

The Fed has four main roles in the U.S. economy.3

Economy Watch

In addition to its other duties, the Fed has been given three mandates with the economy: maintain maximum employment, maintain stable price levels, and maintain moderate long-term interest rates.4

Fast Fact: Unwieldy Patchwork. In the early 1800s, the U.S. had no central bank and no common currency. The monetary system ran through a patchwork of state-chartered banks with no federal regulation. By 1860, there were nearly 8,000 of these banks, each issuing its own banknotes.
Source: Federal Reserve Bank of San Francisco, 2015

It’s important to remember that “the Fed” cannot directly control employment, inflation, or long-term interest rates. Rather, it uses a number of tools at its disposal to influence the availability and cost of money and credit. This, in turn, influences the willingness of consumers and businesses to spend money on goods and services.

For example, if the Fed maneuvers short-term interest rates lower, borrowing money becomes less expensive and people may be motivated to spend. Consumer spending may stimulate economic growth, which may cause companies to produce more product and potentially increase employment. When short-term rates are low, the Fed closely monitors economic activity to watch for signs of rising prices.

On the other hand, if the Fed pushes short-term rates higher, borrowing money becomes more expensive and people may be less motivated to spend. This may, in turn, slow economic growth and cause companies to decrease employment. When short-term rates are high, the Fed must watch for signs of a decline in overall price levels.

Supervise and Regulate

The Fed establishes and enforces the regulations banks, savings and loans, and credit unions must follow. It works with other federal and state agencies to ensure these financial institutions are financially sound and consumers are receiving fair and equitable treatment. When an organization is found to have problems, the Fed uses its authority to have the organization correct the problems.

Financial System

The Fed maintains the stability of the financial system by providing payment services. In times of financial strain, the Fed is authorized to step in as a lender of last resort, providing liquidity to an individual bank or the entire banking system. For example, the Fed may step in and offer to buy the government bonds owned by a particular bank. By so doing, the Fed provides the bank with money that it can use for its own purposes.

Banker for Banks, U.S. Government

The Fed provides financial services to banks and other depository institutions and to the U.S. government. For banks, savings and loans, and credit unions, it maintains accounts and provides various payment services, including collecting checks, electronically transferring funds, distributing new money, and receiving and destroying old, worn-out money. For the federal government, the Fed pays Treasury checks; processes electronic payments; and issues, transfers, and redeems U.S. government securities.

Each day, the Fed is behind the scenes supporting the economy and providing services to the U.S. financial system. And while the Fed’s duties are many and varied, its focus is to maintain confidence in banking institutions.

A De-Centralized Central Bank

The Federal Reserve System consists of 12 independent banks that operate under the supervision of a federally appointed Board of Governors in Washington, D.C. Each of these banks works within a specific district, as shown.

Source: Federal Reserve Board of Governors, 2015

1. U.S. Bureau of Engraving and Printing, 2015
2, 4. Federal Reserve Bank of San Francisco, 2015
3. Board of Governors of the Federal Reserve System, 2015

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

A Primer on Dividends

Tip: Dividend Dates. There are four important dates for dividends:
Declaration Date: The company announces when it will pay a dividend and how much the dividend will be worth.
Ex-Dividend Date: Shareholders of record before this date are entitled to receive the next dividend payment.
Record Date: On this date, the list of stockholders is finalized.
Payable Date: On this date, the taxable dividend is paid to shareholders.

When interest rates reach historic lows, some investors in search of income-generating investments turn to dividend-yielding stocks.

Dividends are taxable payments made by a company to its shareholders. When a company makes a profit, that money can be put to two uses—it can be reinvested in the business or it can be paid out to the company’s shareholders in the form of a dividend. Some dividends are paid quarterly and others are paid monthly.

Dividend Ratios

Investors track dividend-yielding stocks by examining a pair of ratios.

Dividend per share measures how much cash an investor is scheduled to receive for each share of dividend-yielding stock. It is calculated by adding up the total dividends paid out over a year (not including special dividends) and dividing by the number of shares of stock that are outstanding.

Dividend yield measures how much cash an investor is scheduled to receive for each dollar invested in a dividend-yielding stock. It is calculated by dividing the dividends per share by the share price.

Other Dividend Considerations

Investing in dividend-paying stocks can create a stream of taxable income. But the fact that a company is paying dividends is only one factor to consider when choosing a stock investment.

Dividends can be stopped, increased, or decreased at any time. Unlike interest from a corporate bond, which is normally a set amount determined and approved by a company’s board of directors. If a company is experiencing financial difficulties, its board may reduce or eliminate its dividend for a period of time. If a company is outperforming expectations, it may boost its dividend or pay shareholders a special one-time payout.

When considering a dividend-yielding stock, focus first on the company’s cash position. Companies with a strong cash position may be able to pay their scheduled dividend without interruption. Many mature, profitable companies are in a position to offer regular dividends to shareholders as a way to attract investors to the stock.

Dividend income is currently taxed at a maximum rate of 20%.

Be cautious when considering investments that pay a high dividend. While past history cannot predict future performance, companies with established histories of consistent dividend payment may be more likely to continue that performance in the future.

In a period of low interest rates, investors who want income may want to consider all their options. Dividend-yielding stocks can generate taxable income but, like most investments, they should be carefully reviewed before you commit any dollars.

Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

The information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Dividends Can Make a Difference

This chart shows the role dividends have played in stock market performance during the past 35 years ended December 31, 2015. Past performance does not guarantee future results.

Thomson Reuters, 2016. The S&P 500 Composite Index and S&P 500 Composite Index (Total Return) are unmanaged indices that are generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Asset Allocation

If you live in or have visited a big city, you’ve probably run into street vendors—people who sell everything from hot dogs to umbrellas in carts—on the streets and sidewalks. Many of these entrepreneurs sell completely unrelated products, such as coffee and ice cream.

At first glance, this approach seems a bit odd, but it turns out to be quite clever. When the weather is cold, it’s easier to sell hot cups of coffee. When the weather is hot, it’s easier to sell ice cream. By selling both, vendors reduce the risk of losing money on any given day.

Asset Allocation

Fast Fact: Importance of Allocation. A landmark study found that asset allocation accounted for 91.5% of portfolio returns. Only 8.5% of portfolio returns could be attributed to the selection of specific securities.
Source: Brinson, Singer, and Beebower, “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May/June 1991.

Asset allocation applies this same concept to managing investment risk. Under this approach, investors divide their money among different asset classes, such as stocks, bonds, and cash alternatives, like money market accounts. These asset classes have different risk profiles and potential returns.1

The idea behind asset allocation is to offset any losses in one class with gains in another, and thus reduce the overall risk of the portfolio. It’s important to remember that asset allocation is an approach to help manage investment risk. It does not guarantee against investment loss.2

Determining the Most Appropriate Mix

The most appropriate asset allocation will depend on an individual’s situation. Among other considerations, it may be determined by two broad factors.

  1. Time. Investors with longer time frames may be comfortable with investments that offer higher potential returns but also carry higher risk. A longer time frame may allow individuals to ride out the market’s ups and downs. An investor with a shorter time frame may need to consider market volatility when evaluating various investment choices.
  2. Risk tolerance. An investor with high risk tolerance may be more willing to accept greater market volatility in the pursuit of potential returns. An investor with a low risk tolerance may be willing to forego some potential return in favor of investments that attempt to limit price swings.

Asset allocation is a critical building block when creating a portfolio. Having a strong knowledge of the concept may help as you consider which investments may be appropriate for your long-term strategy.

Asset Classes

Here’s a quick look at how the three main asset classes have performed during the past 20 years.

Chart Source: Thomson Reuters, 2015. For the period January 1, 1995 to December 31, 2014.

Stocks are represented by the S&P 500 Composite Index (total return), an unmanaged index that is generally considered representative of the U.S. stock market. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

Bonds are represented by the Citigroup Corporate Bond Composite Index, an unmanaged index that is generally considered representative of the U.S. bond market. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity investors will receive the interest payments due plus their original principal, barring default by the issuer.

Cash is represented by the Citigroup 3-Month Treasury-Bill Index, an unmanaged index that is generally considered representative of short-term cash alternatives. U.S. Treasury bills are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury bill prior to maturity, it could be worth more or less that the original price paid.

Investments seeking to achieve higher potential returns also involve a higher degree of risk. Past performance does not guarantee future results. Actual results will vary.

  1. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity investors will receive the interest payments due plus their original principal, barring default by the issuer. Money market funds seek to preserve the value of your investment at $1.00 a share. Money held in money market funds is not insured or guaranteed by the FDIC or any other government agency. It’s possible to lose money by investing in a money market fund. Mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
  2. Investments seeking to achieve higher potential returns also involve a higher degree of risk. Past performance does not guarantee future results. Actual results will vary.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Required Reading: The Economic Report of the President

Tip: The University of California at Santa Barbara keeps an archive of Economic Reports of the President from Harry Truman’s 1947 report to the 2016 edition.
Source: Presidency.ucsb.edu, 2016

In February, the White House released its 430-page book, “2016 Economic Report of the President.”¹ If you haven’t yet made time to peruse this weighty tome, don’t beat yourself up. Most people don’t take the time to read the report—still others don’t even know it exists.

What is the “Economic Report of the President” and what does it tell us about the economy and the future?

In the wake of World War II—and worried that the economy might fall back into another Great Depression—Congress passed the Employment Act of 1946, which established the President’s Council of Economic Advisors to analyze government programs and make recommendations on economic policy. It also mandated that the president submit an annual economic report to Congress. The first report was submitted by Harry Truman in 1947.²

The report is written by the Chair of the Council of Economic Advisors, (a post being filled by Jason Furman), and includes both text and extensive data appendices.³ It must be submitted to Congress no later than 10 days after the submission of the Federal budget by the President of the United States. Although each report is different, they generally include such information as

  • Current and foreseeable trends in employment, production, real income, and Federal expenses
  • Employment objectives for various labor sectors
  • Annual goals
  • A program for carrying out objectives.

Response to the Economic Report is often mixed. Opponents to the administration tend to be critical of the president’s approach. They point out that the objectives and recommendations in the report are inevitably influenced by the administration’s opinion and policy.

However it’s important not to overlook the sheer volume of data provided by the report. This information can help identify the forces driving—or dragging—the economy. For example, the 2016 report provides data and analysis on the progress of this country’s economic recovery, as well as how it may be influenced by international economies.4

If you don’t see yourself getting cozy with a cup of coffee and the Economic Report of the President, you might consider using the internet to get an overview of its most relevant topics. Understanding the current state of the economy—and the president’s objectives for the future—may help you make plans for your own future.

  1. Whitehouse.gov, 2016
  2. Presidency.ucsb.edu, 2016
  3. Whitehouse.gov, 2016
  4. Whitehouse.gov, 2016

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Getting a Head Start on College Savings

The U.S. Department of Agriculture estimates a middle-income family with a child born in 2015 can expect to spend about $275,000 to raise that child to the age of 17.¹ That’s roughly equal to the median value of a new home in the U.S.²

And if you’ve already traded that super-charged convertible dream for a minivan, you can expect your little one’s college education to cost as much as $336,132.³

But before you throw your hands up in the air and send junior out looking for a job, you might consider a few strategies to help you prepare for the cost of higher education.

First, take advantage of time. The time value of money is the concept that the money in your pocket today is worth more than the same amount will be worth tomorrow because it has more earning potential. If you put $100 a month toward your child’s college education, after 17 years’ time, you would have saved $20,400. But that same $100 a month would be worth over $32,000 if it had generated a 5% annual rate of return.⁴ The bottom line is, the earlier you start, the more time you give your money to grow.

Fast Fact: California posted an average 59% increase in tuition and fees at public two-year colleges between 2010-11 and 2015-16. Still, California’s price remains the lowest in the country.
Source: The College Board, 2015

Second, don’t panic. Every parent knows the feeling—one minute you’re holding a little miracle in your arms, the next you’re trying to figure out how to pay for braces, piano lessons, and summer camp. You may feel like saving for college is a pipe dream. But remember, many people get some sort of help in the form of financial aid and scholarships. Although it’s difficult to forecast how much help you may get in aid and scholarships, they can provide a valuable supplement to what you have already saved.

Finally, weigh your options.There are a number of federal and state-sponsored tax-advantaged college savings programs available. Some offer prepaid tuition plans and others offer tax-deferred savings.5 Many such plans are state sponsored so the details will vary from one state to the next. A number of private colleges and universities now also offer prepaid tuition plans for their institutions. It pays to do your homework to find the vehicle that may work best for you.

As a parent, you teach your children to dream big and believe in their ability to overcome any obstacle. By investing wisely, you can help tackle the financial obstacles of higher education for them—and smooth the way for them to pursue their dreams.

  1. U.S. Department of Agriculture, 2015
  2. U.S. Census Bureau, 2015
  3. The College Board, 2015. (Based on average tuition and fees for private universities in 2015-2016 and assuming a 5% annual increase)
  4. The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for higher returns also carry a higher degree of risk. Actual results will fluctuate. Past performance does not guarantee future results.
  5. The tax implications of education savings programs can vary significantly from state to state, and some plans may provide advantages and benefits exclusively for their residents. Please consult legal or tax professionals for specific information regarding your individual situation. Withdrawals from tax-advantaged education savings programs that are not used for education are subject to ordinary income taxes and may be subject to penalties.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

A Decision Not Made Is Still a Decision

Whether through inertia or trepidation, investors who put off important investment decisions might consider the admonition offered by motivational speaker Brian Tracy, “Almost any decision is better than no decision at all.”¹

Investment inaction is played out in many ways, often silently, invisibly and with potential consequence to an individual’s future financial security.

Let’s review some of the forms this takes.

Your 401(k) Plan

The worst non-decision is the failure to enroll. Not only do non-participants sacrifice one of the best ways to save for their eventual retirement, but they also forfeit the money from any matching contributions their employer may offer. Not participating may be one of the most costly non-decisions one can make.

The other way individuals let indecision get the best of them is by not selecting the investments for the contributions they make to the 401(k) plan. When a participant fails to make an investment selection, the plan will have provisions for automatically investing that money. And that investment selection may not be consistent with the individual’s time horizon, risk tolerance and goals.

Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions. The 10% early withdrawal penalty may be avoided in the event of death or disability.

Non-Retirement Plan Investments

For homeowners, “stuff” just seems to accumulate over time. The same may be true for investors. Some buy investments based on articles they have read or on a recommendation from a family member. Others may have investments held in a previous employer’s 401(k) plan.

Over time, they can end up with a collection of investments that may have no connection to their investment objectives. Because the markets are dynamic, an investment that may have made good sense yesterday might no longer make sense today.

By periodically reviewing what they own, investors can determine whether their portfolio reflects their current investment objectives. If they find discrepancies, they are able to make changes that could positively affect their financial future.

Whatever your situation, your retirement investments require careful attention and benefit from deliberate, thoughtful decision making. Your retired self will one day be grateful that you invested the necessary time to make wise decisions today.

1. Brainy Quote, 2015

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

The Great Debate Continues: Active vs. Passive

Whether it’s sports, music or politics, life holds any number of “great debates” that never seem to reach a conclusion. In investments, that great debate asks the question, “Active or Passive Investing: Which Is Better?”

The fascinating aspect of this debate is that equally intelligent people can argue polar opposite positions, leaving the rest of us to wonder what the answer is—if one even exists.

Passive Pointers

The case for passive management is anchored in the evidence that the preponderance of money managers have failed consistently to beat their comparative index. This, the argument goes, is true for two primary reasons:

  1. Markets are efficient and all known information is already reflected in the price of the stock, making it difficult for managers to find companies that are expected to outperform.¹
  2. The hurdle of an elevated expense ratio typical of actively managed mutual funds makes it hard to match or exceed a low-expense index fund.

Active Arguments

Active managers counter that, while the markets may be generally efficient, there are windows of inefficiency created by the time it takes for information to be properly reflected in a stock’s price.

Active managers further argue that performance is not just about relative return, but also about managing risk. For instance, if an active manager can deliver a hypothetical 90% of the index return at 70% of its risk, then that constitutes a measured outperformance.²

Unlock the Combination

Ultimately, it’s a decision based on what you want to pursue. Do you prefer the approach taken by index funds or the strategy behind active management? For some, the combination of both methods represents an approach that takes no sides but seeks to tap into the distinctive benefits each offers.

Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

  1. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
  2. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

All Muni Bonds Are Not Created Equal

The city of Detroit emerged from bankruptcy in 2014. Still, its previous inability to pay investors left some questioning their long-held assumption about the relative safety of municipal bonds.¹ Without question, in the wake of Detroit’s troubles, gaining a better understanding of municipal bonds makes more sense than ever.²

At their most basic level, there are two types of municipal bonds:

  1. General obligation bonds, which are a promise by the issuer to levy taxes sufficient to make full and timely payments to investors, and
  2. Revenue bonds, which are bonds whose interest and principal are backed by the revenues of the project that the bonds are funding.

Types of Risk

Both general obligation and revenue bonds share certain investment risks, including but not limited to market risk (the risk that prices will fluctuate), credit risk (the possibility that the issuer will not be able to make payments), liquidity risk (muni markets may be illiquid and result in depressed sales prices) and inflation risk (the risk that inflation may erode the purchasing power of principal and interest payments). They also may share call risk, the risk that a bond may be redeemed prior to maturity.

Revenue bonds are considered riskier than general obligation bonds since they are only obligated to make repayments to the extent that the project funded by the bond generates the necessary revenue to meet payment obligations.

Managing Risk

Investors seeking to manage their risk may want to consider investing in general obligation bonds with investment-grade ratings.

Bonds used to support essential services, such as water or sewage, are also considered less risky since these services are normally unaffected by economic conditions that may impact other revenue bonds, such as private activity “munis,” which fund projects by private businesses or nongovernmental borrowers.

In light of the widespread uncertainty about the fiscal health of municipalities nationwide, diversification may be more critical now than ever before.³

Since municipal bonds generally are sold in increments of $5,000 and may be subject to disadvantageous pricing for smaller investors, many individuals look to mutual funds to manage their municipal bond portfolio, since they offer the diversification, research, analysis and buying power that most individuals can’t match.

Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

  1. Marketplace, January 29, 2015. A municipal bond issuer may be unable to make interest or principal payments, which may lead to the issuer defaulting on the bond. If this occurs, the municipal bond may have little or no value.
  2. Municipal bonds are free of federal income tax. Municipal bonds also may be free of state and local income taxes for investors who live in the area where the bond was issued. If a bondholder purchases shares of a municipal bond fund that invests in bonds issued by other states, the bondholder may have to pay income taxes. It’s possible that the interest on certain municipal bonds may be determined to be taxable after purchase.
  3. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if municipal bond prices decline.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

A Taxing Story: Capital Gains and Losses

Chris Rock once remarked, “You don’t pay taxes, they take taxes.”¹ That applies not only to income, but also to capital gains.

Capital gains result when an individual sells an investment for an amount greater than his or her purchase price. Capital gains are categorized as short-term (a gain realized on an asset held one year or less) or as long-term (a gain realized on an asset held longer than one year).

Long-Term vs. Short-Term Gains

Short-term capital gains are taxed at ordinary income tax rates, while long-term gains are taxed at a lower rate, based on an individual’s marginal income tax bracket.

If you are in the… your long-term capital gains rate will be…
10%-15% tax bracket 0%
25%-35% tax bracket 15%
39.6% tax bracket 20%

It should also be noted that taxpayers whose adjusted gross income is in excess of $200,000 (single filers) or $250,000 (joint filers) may be subject to an additional 3.8% tax as a net investment income tax.²

Also, keep in mind that the long-term capital gains rate for collectibles and precious metals remains at a maximum 28%.

Rules for Capital Losses

Capital losses may be used to offset capital gains.³ If the losses exceed the gains, up to $3,000 of those losses may be used to offset the taxes on other kinds of income. Should you have more than $3,000 in such capital losses, you may be able to carry the losses forward. You can continue to carry forward these losses until such time future realized gains exhaust them. Under current law, the ability to carry these losses forward is lost only on death.

Finally, for some assets, the calculation of a capital gain or loss may not be as simple and straightforward as it sounds. As with any matter dealing with taxes, individuals are encouraged to seek the counsel of a professional tax advisor before making any tax-related decisions.

  1. Brainy Quote, 2015
  2. IRS, 2015
  3. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.