How tax diversification can fuel your savings goals

Tax season is an opportune time for you and your financial advisor to review the tax treatment of your retirement assets. Strategically distributing your assets among three tax categories can help you keep more money in your pocket. 

This category includes:

  • 401(k)3,11, 403(b)and 457(b) defined contribution plans
  • Traditional IRAs3,6,10
  • Pension plans3
  • Deferred annuities3

The majority of U.S. retirement assets are held in tax-deferred employer plans, which offer the benefits of pre-tax contributions (lowering your annual taxable income) and tax-free growth to accumulate more savings for retirement.

Beginning at age 59 1/2, your withdrawals are taxed as ordinary income, but you won’t pay the 10% early withdrawal penalty.

While it’s wise to take advantage of available employer contributions and annual tax savings, funding your future exclusively with tax-deferred investments can result in a heavier tax burden in retirement.

This category includes:

  • Roth IRAs1,3
  • Municipal bonds/funds2
  • 529 savings plans8
  • Cash-value life insurance policies1,9

Consider some tax-free investments, especially if you expect to be in a higher tax bracket in retirement. You generally won’t pay taxes on withdrawals if certain requirements are met.

Because these investment vehicles aren’t subject to annual required minimum distributions, you can accumulate tax-free earnings for as long as you like.

This category includes:

  • Bank accounts5
  • Brokerage accounts
  • After-tax mutual funds

Taxable assets help support your cash management strategy. Accumulating one to three years of living expenses in liquid assets can help you ride out volatility in a down market without selling other investments at a loss.

While the earnings and sale of taxable assets are subject to current taxes, you may be able to receive preferential tax treatment on long-term capital gains and qualified dividends.

We can help

Meet with your tax and financial advisors to implement a tax-diversification strategy. Doing so could provide you with greater financial flexibility and control today and increase your income in retirement.

Disclosures

Necessary requirements must be met. Consult with your tax advisor.
2 Certain tax-exempt income may be subject to the alternative minimum tax, or state or local taxes. Taxable capital gains or losses may be incurred.
Withdrawal before age 59½ may result in a 10% IRS penalty on taxable earnings.
4 Dividends and long-term capital gains may be taxed at a lower rate. Interest may be taxable even if not received, for example, if from a CD or OID. For certain short-term debt instruments, interest is taxed at maturity.
5 Bank deposits are FDIC insured up to $250,000 per depositor.
6 Funded with after-tax dollars.
7 May elect to tax increase in value currently.
8 When used for qualified higher education expenses; otherwise, you may have to pay income tax plus a 10% penalty to the extent of earnings.
9 Death proceeds generally are not subject to income tax. Loans from a non-Modified Endowment Contract (MEC) policy are not subject to income tax unless the contract lapses or is surrendered. Loans from an MEC policy are subject to income tax to the extent that there is gain in the policy. Partial or full surrenders from a life insurance contract may be subject to income tax to the extent of earnings.
10 Assumes that contributions to the IRA are deductible.
11 Special rules apply to appreciated employer securities in qualified retirement plans.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial Services, Inc. Member FINRA and SIPC

Market volatility: Keeping market moving headlines in perspective to achieve your goals

During your busy day, an alert sounds on your smartphone with geopolitical news that could affect your investments. You might wonder about the potential impact to your portfolio and how much time you have to react — or whether you should react.

Current market headlines: News or noise?

Is it news or just noise? Columbia Threadneedle Investments Global Chief Investment Officer Colin Moore helps clarify daily market headlines. (0:39)

By working with your Ameriprise advisor, your decisions can better reflect the goals, risk tolerance and time horizon you factored into your investment strategy at the outset and as you’ve adjusted along the way.

A well-diversified portfolio can offer you the perspective and time to make objective, goal-focused decisions. By looking beyond the headlines and the emotions they can provoke, you could potentially limit the negative impact to your long-term investments.

Think long-term

Sound investment decisions are based on informed and rational reactions to financial updates and analysis, not just the headlines. However, keeping news in perspective can be easier said than done. Our hyper-connected world continuously informs us of developments that may cause us to panic, even when we’ve built a well-planned investment strategy with a financial advisor. “Most of what we get today in the news is just noise,” says Colin Moore, global chief investment officer at Columbia Threadneedle Investments. “It’s not a material change in economic direction, and therefore you shouldn’t really be reacting to it.”

While daily headlines and news can give the impression that short-term events have a large impact on your portfolio, it’s important to keep headlines in perspective. What happens at one moment in time could reverse or materially shift just a few weeks or months later. For example:

  • In the first eight weeks of 2019, the technology, energy and industrials sectors generated the best performance out of the 11 sectors that make up the S&P 500 Index.
  • However, these sectors were the worst-performing segments of the market during the severe equity market sell-off during the fourth quarter of 2018 — arguably fueled by fears of a recession, higher interest rates and trade tensions.

When should you respond to market-moving headlines?

Most big news events don’t have a large impact on the global economy, even if they’re a cause of significant short-term turmoil — but some do.

When you’re unsure about whether a portfolio adjustment is warranted, begin by asking yourself three questions. If the answer is yes to any of these questions, there could be a longer-term effect on asset values. If the answer is no, the news story — and its effect on your portfolio — will most likely pass.

  • Is a superpower involved? If the one of the top five — the United States, Russia, China, Germany, United Kingdom — is involved or has the potential to be quickly drawn into a situation, there’s potential for longer-term concern.
  • Is there a risk to oil prices? Oil is the most important commodity in the world, providing fuel that keeps industry and transportation systems moving and economies growing. Prices could spike upward if turmoil causes a significant disruption to supply.
  • Is there a risk to the global financial system? The global economy could begin to seize up if an event looks likely to undermine confidence in systemically important banks. Also watch for whether key global currencies and banks can’t take deposits, lend money, facilitate payments or support cross-border trade.

Check your investment goals and strategy regularly

When a headline concerns you, remain grounded and realistic by asking yourself:

  • “Will my investment objectives be materially affected by ups and downs in the market?”
  • “Am I still comfortable with the amount of diversification and risk in my portfolio?”
  • “Do I have time to recover losses before I begin using my investments for retirement income?”

Partner with your advisor

During a period of market movement, talk with your Ameriprise advisor to see if any action is needed. Your advisor can help you make objective decisions based on your long-term financial goals and a diversified investment strategy. Together, you can cut through the noise of news headlines and stay on track to achieve your goals.d stay on track to achieve your goals.

Disclosures

This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns.
Diversification does not assure a profit or protect against loss. Investing involves risk including the risk of loss of principal.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

3 strategies to help reduce investment risk

History shows that when people invest and stay invested, they’re more likely to earn positive returns in the long run. When markets start to fluctuate, it may be tempting to make financial decisions in reaction to changes to your portfolio. But people who base their financial decisions on emotion often end up buying when the market is high and selling when prices are low. These investors ultimately have a harder time reaching their long-term financial goals.

How can you avoid making these common investing mistakes? Consider these investment strategies, which can help you reduce the risks associated with investing and potentially earn more consistent returns over time.

Strategy 1: Asset allocation

Appropriate asset allocation refers to the way you weight the investments in your portfolio to try to meet a specific objective — and it may be the single most important factor in the success of your portfolio. 

For instance, if your goal is to pursue growth, and you’re willing to take on market risk to reach that goal, you may decide to place as much as 80% of your assets in stocks and as little as 20% in bonds. Before you decide how you’ll divide the asset classes in your portfolio, make sure you know your investment timeframe and the possible risks and rewards of each asset class.

Risks and rewards of major asset classes

Stocks

  • Can carry a high level of market risk over the short term due to fluctuating markets
  • Historically earn higher long-term returns than other asset classes
  • Generally outpace inflation better than most other investments over the long term

Bonds

  • Generally have less severe short-term price fluctuations than stocks and therefore offer lower market risk
  • Can preserve principal and tend to provide lower long-term returns and have higher inflation risks over time
  • Bond prices are likely to fall when interest rates rise (if you sell a bond before it matures, you may get a higher or lower price than you paid, depending on the direction of interest rates)

Money market instruments

  • Among the most stable of all asset classes in terms of returns, money market instruments carry low market risk (managers of these securities try to keep the per-share price at $1 and distribute returns as dividends)
  • Generally don’t have the potential to outpace inflation by a large margin
  • Not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency (there’s no guarantee that any fund will maintain a stable $1 share price)

Different asset classes offer varying levels of potential return and market risk. For example, unlike stocks and corporate bonds, government T-bills offer guaranteed principal and interest — although money market funds that invest in them do not. As with any security, past performance doesn’t necessarily indicate future results. And asset allocation does not guarantee a profit.

Strategy 2: Portfolio diversification

Asset allocation and portfolio diversification go hand in hand. 

Portfolio diversification is the process of selecting a variety of investments within each asset class to help reduce investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.

How portfolio diversification works

If you were to invest in the stock of just one company, you’d be taking on greater risk by relying solely on the performance of that company to grow your investment. This is known as “single-security risk” — the risk that your investment will fluctuate widely in value with the price of one holding. 

But if you instead buy stocks in 15 or 20 companies in several different industries, you can reduce the potential for a substantial loss. If the return on one investment is falling, the return on another may be rising, which may help offset the poor performer.

Keep in mind, this doesn’t eliminate risk, and there is no guarantee against investment loss.

Strategy 3: Dollar-cost averaging

Dollar-cost averaging is a disciplined investment strategy that can help smooth out the effects of market fluctuations in your portfolio.

With this approach, you apply a specific dollar amount toward the purchase of stocks, bonds and/or mutual funds on a regular basis. As a result, you purchase more shares when prices are low and fewer shares when prices are high. Over time, the average cost of your shares will usually be lower than the average price of those shares. And because this strategy is systematic, it can help you avoid making emotional investment decisions.

How dollar-cost averaging might work in rising and declining markets

In the illustration below, the cost of the investment ranges between $10 and $25 from January through April. A fixed monthly investment of $100 buys as many as 10 shares when the price is lowest but only four shares when the price is highest. In this example, dollar-cost averaging results in a lower average share price during the period, while the market average price — for someone who bought an equal number of shares each month — is higher.

Dollar-cost averaging at $100 per month

Rising market
 
 
Month
When the price is
You buy
January
$10
10.00 shares
February
$15
6.67 shares
March
$20
5.00 shares
April
$25
4.00 shares

Declining market
 
 
Month
When the price is
You buy
January
$25
4.00 shares
February
$20
5.00 shares
March
$10
10.00 shares
April
$5
20.00 shares

Your Ameriprise financial advisor can help you feel more confident about your financial future, so discuss these strategies with your advisor to see if they may be right for you.

Disclosures

Asset allocation, diversification and dollar-cost averaging do not assure a profit or protect against loss.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities.
Stock investments have an element of risk. High-quality stocks may be appropriate for some investments strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with stocks before investing, as they can lose value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.