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How To Avoid Blowback From 'The Tax Torpedo'

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March 08, 2013 - How to Avoid Blowback From 'The Tax Torpedo' - by Morningstar Investment Research

Stocks are hitting new highs by the day, and bond yields are miserly. At times like these, an investor's best friend is a checklist of what she can truly control. That means crafting a sensible asset-allocation plan, making sure your planned in-retirement spending rate is reasonable, and limiting investment-related costs at every turn. It also means paying close attention to how taxes affect your assets and your spendable income. For many people, that last lever--controlling taxes--becomes even more meaningful during retirement than it did while they were working. The benefits of limiting ta xes during retirement may seem obvious. But one less frequently discussed consideration is the interplay between adjusted gross income and Social Security benefits. Morningstar director of personal finance Christine Benz detailed what seniors and retirement-planning experts sometimes call "the tax torpedo."

Cost-Basis Choices Not Set in Stone

If I choose a specific cost-basis method when I open a mutual fund account, do I have to stick with that method as long as the account is open, or can I change to a different method at a later time?

Morningstar assistant site editor Adam Zoll addressed this question by stating that understanding which cost-basis method makes the most sense for you can be a tricky business, and cost-basis reporting rules have changed in recent years, so it's perfectly understandable if you're not quite clear as to what your choices are. Cost basis is the amount an investor has paid to acquire a security and is used to calculate any capital gain or loss, and therefore any taxes owed, once the security is sold (provided it is held in a taxable account--if held in a tax-deferred account such as a 401(k) no tax is owed until the investor begins taking distributions, at which time the investor will owe tax at his or her ordinary income tax rate). Read more here.

Among the other topics we addressed this week:

Should You Rebalance Into (Gulp) Bonds? Morningstar's Christine Benz and other financial experts weigh in on what to do when a sound portfolio practice collides with an unattractive asset class.

Ratings Changes for Funds From Fidelity, T. Rowe, and American. We've got upgrades, downgrades, and new ratings to share.

Our 5 Favorite ETFs Launched in the Past 6 Months. Some new funds may help protect against the long-term effects of quantitative easing. Others offer access to low-cost baskets of emerging-markets stocks and high-dividend-paying companies.

When a Wide Moat Is Not Enough. These stocks have sustainable competitive advantages but are selling well above our fair value estimates.

The Case for a Concentrated 1-Star Fund. This fund's comeback from the financial crisis ha s been balky, but it still has promise.

Wells Fargo Advantage Has Cleaned House, but a Few Cobwebs Remain. The firm's many mergers have yielded some good funds, though beware the price tags.

Soft Closes for Large Vanguard, Oppenheimer Funds. Manager changes at MFS and Pioneer, Lord Abbett to merge away its small-blend fund, and Alger hires three former members of Allianz's international equity team.

Uncovering an E&P Gem. Tourmaline Oil looks like a takeover candidate as it outshines other natural gas producers.

Big Pharma Looks Abroad to Continue Its Run. This pharmaceutical-themed ETF uses a stock-selection methodology rather than a traditional index-weighting scheme.

Evaluating Tax Liabilities in Closed-End Funds. A walk-through for calculating accrued tax liabilities.

Key Themes for Muni Investors. How the sequester will affect state and local governments is undoubtedly going to be negative, yet the specifics are murky.

Corporate-Bond Markets Yawn at Bernanke, While Sequester Generally a Non-Event. While the sequester will affect some sectors more than others, it won't have a significant near-term impact on the corporate credit markets, says Morningstar's Dave Sekera.

Is It Wise to Pay Extra on a Mortgage at Today's Low Rates? Readers share philosophies on this surprisingly complicated question.

Vanguard Reduces Expense Ratios on 8 More ETFs, Including VWO. ProShares, ALPS, and First Trust all roll out very niche ETFs. Plus, the week's best- and worst-performing funds.

Are North American Farm Equipment Sales in a Bubble? After several strong years of U.S. and Canadian machinery purchases, growth rates look to slow.

What Investors Were Researching in February. Investors continued their search for income and equity bargains last month.

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