Greetings everyone and welcome to the most complete business program on radio. That’s how I begin every program as I attempt to provide education to the masses. Hosting a radio program that discusses income tax, estate tax planning, and a whole host of other financial issues, is a definite challenge. Trying to be entertaining and holding the attention of a public that desires a get rich quick strategy that will bring fame and fortune with little effort or knowledge proves to be a never-ending challenge. The truth of the matter is, building a portfolio requires understanding of at least some basic principals and it requires discipline as well as diligence. With a world of financial products and strategies being marched in front of our faces every minute of every day, it becomes necessary to decide which products will best suit a given set of financial goals. This of course assumes that there are goals established in the first place. I would like to make one serious warning at his time before we get started. Those offering a variety of products and strategies for investing are not all knowing and do not always have the best interest of their patrons at heart.

Let’s begin by introducing the two fundamental elements of building any efficient portfolio. These fundamental elements are really a basic strategy broken down into two parts: inside of a retirement plan and outside of a retirement plan. That’ really all there is to it in the big scheme of things. Understanding the nature of each strategy and the investments that should be under the umbrella of each is really the true foundation of the entire portfolio building process. When we are thinking of an inside the retirement plan strategy, we are considering investments that should be a little safer in nature and we should be realizing that any income generated by this strategy is protected from income tax by its very nature. This means that capital gains, interest income, dividend income, and the like are all exempt from income tax by nature of being inside a qualified retirement plan. This promotes a balanced approach in building a retirement portfolio in the sense of having income producing investments along with growth-oriented investments made up of small and large cap stocks (1). On the outside of the retirement plan (or taxable accounts), we form a different strategy for handling our investments.

Here, it makes sense for us to have in our portfolios tax-exempt bonds (typically municipal bonds), along with growth-oriented securities made up of a mixture of small and large cap companies. It is important to point out here that it makes more sense to sell and take gains off of the table more frequently on the retirement side of the portfolio as gains will escape income tax consequences. Conversely, it makes sense to hold positions for a longer period outside of the retirement plan side of our portfolio in order to take advantage of long-term capital gain rates and reduced taxes on dividends received (2). I hope that you are getting the picture of the point I am trying to make. If not, please re-read the above information and feel free to contact me for help (3).

The college tuition funding vehicles, or 529 plans, are important mentions in this first step toward portfolio building. As we have been told, the 529 plan is a tax-exempt trust or vehicle for our investments as long as we use the funds for the educating of our children. The claim that I will make to you here is that the 529 plan will be duplicating the same investment strategy that is maintained in the retirement part of one’s portfolio. My belief is that the average American can’t afford to duplicate investment strategies. Why not build a portfolio outside of the retirement plan with the thought that help can be given to a child on an as need basis. If the child gets a scholarship or is able to obtain a loan, there will be no need for the plan in the first place and we are able to move on with our investments intact. There are other ways to provide for the education of our children and I would recommend the reading of my article “Educating Your Children” (4). In addition, I will submit to you that it is possible to sell part of our taxable portfolio with limited or no income tax consequences. Please read my article on “Capital Gains and Losses” (5). We can accomplish the goals of a 529 plan without being subject to duplicating investment strategies.

The final discussion for this first step in portfolio building should include the following points. Believe it or not, there can be too much money built-up in qualified retirement plans and traditional IRA’s. Funds that are in qualified retirement plans and traditional IRA’s are ordinary income and will be taxed at ordinary rates upon taking retirement distributions. In addition, these retirement funds are what as know as income in respect of a decedent (IRD). This is an estate planning term that essentially means that there will two tiers of tax to pay by heirs upon inheriting a qualified plan or traditional IRA. They will be subject to estate taxes and income taxes as the qualified plan or traditional IRA must be distributed over time to beneficiaries. Careful planning from the beginning can prevent or lesson the affects of IRD such as contributing to Roth IRA’s or making sure that IRD has at least one tier of tax removed from the equation. This is done by making certain that IRD income does not exceed the estate tax exemption of $2,000,000 and that the estate in general is not over this limit. In addition, the beneficiaries can take distributions over their life expectancies and can even pass the IRA ownership to another generation thus lowering exposure to income tax.