Thursday, May 26, 2011

Tax Form 5498

Have you received a tax form in the mail recently? If not, then disregard this post. If, however, you did receive a 2010 IRS Tax Form 5498 recently, do not panic. Form 5498 is generated by investment custodians every May for Traditional or Roth IRAs with activity during the previous tax year and usually does not lead to an amended tax filing. Tax Form 5498 is informational. The IRS reconciles this activity with your Tax Return. If you received this form, ask yourself: Did I contribute to a Roth or Traditional IRA last year? Did I roll money into an IRA last year? Did I convert IRA money to a Roth IRA last year? If any of this activity applies to you, you received Form 5498. Contribution information is typically requested on an accountant's questionnaire. Rollovers and conversions generate a 1099-R. Either way, your accountant should already be aware of the activity. Then what should I do with my copy? In most cases, simply add it to your freshly started tax folder for 2011. As your accountant reviews next year's tax file, he or she can confirm that the activity was addressed.

The above explanation is summarized and generic. Please consult your tax professional with any specific questions.

Tuesday, May 10, 2011

Client Adventures

What does retirement mean to you? What will it look like? What will you do? A blog post last May focused on these questions. The post encouraged contemplation without too many pre-conceived limitations. We often encourage clients to come up with their own definition of retirement. To ponder life today. To ponder life tomorrow. To choose the “special balance” that works for you. There is much to consider. It is, after all, just money without purpose.

What does this have to do with the title “Client Adventures”? Many of you have considered these questions. Many of you have come up with your own definition of retirement. Some of you have even shared your stories with us through our “Client Adventures”. We have recently altered our website to highlight these “Client Adventures” from our Newsletter. We love these stories. We love these adventures. We love these pictures. It is these stories that remind us why we do what we do.

To surf these stories click on the following link to our website: Click on “Client Adventures” and enjoy. Thank you for sharing these experiences with all of us. And keep them coming...

Do you have a client adventure you would like to share? If so email Tiffany at

Thursday, May 5, 2011


Pathways Advisory Group, Inc.
Jeff Karst, Associate Planner

With investment portfolios, we always discuss diversification (a key component to reducing risk). Diversification comes from investing in US, foreign, and emerging markets. Within those areas we invest in large, small, value, and market (growth) stocks. By diversifying among these areas, we can build (what we believe are) excellent portfolios. There is another aspect of diversification that we have begun to discuss: tax diversification.
When investing, we have the option to use three basic types of “tax” accounts. First, is a taxable account (Personal, Community Property, or Trust account). Here, you pay taxes in the year that you realize a gain or receive a dividend. Currently, long-term capital gains and qualified dividends are taxed at a maximum 15% rate. Ordinary dividends and short-term capital gains are taxed at your ordinary rate (maximum of 35%). You pay taxes each year even if you don’t withdraw money from the account. This is the “Pay As You Go” method.
The second type of account is a tax-deferred account such as a Traditional deductible IRA or 401(k). These accounts provide a tax deduction now for the amount that is deposited. If you contribute $10,000 to your 401(k), then your taxable income is reduced by $10,000. The money then grows on a tax-deferred basis. You will pay ordinary income tax on the amount withdrawn. This is the “Save Taxes Now, But Pay Later” approach.
My favorite option is a tax-free Roth IRA. The money contributed to a Roth is already taxed. You don’t pay any tax on earnings as it grows within the Roth IRA and qualified withdrawals are tax-free. The downside of these accounts is not everyone is eligible to contribute and there is a maximum amount that can be contributed each year. This is the “Already Paid And Pay Nothing Later” method.
Choosing among these “tax” options is not always easy. There are several questions to ask yourself. Would I rather be taxed now or in the future? What will my tax bracket be when I retire? Will Congress change the tax bracket levels in the future? What are the consequences if the 15% rate (for long-term capital gains and qualified dividends) goes away? Sometimes the best answer is to diversify among all three. No one knows what taxes will look like in the future. Any prediction would be purely speculative. Tax diversification is a way to mitigate the risk of an unknown tax future.