Free Financial Advice

Aside from being a college senior not yet making a salaried income (hoping to get into market consultancy with my BS Psych), the major financial problem that myself and my family face is that we are well invested, but with old money, tied into assets that are difficult to mobilize without reaping horrible capital gains taxes. The company I was mainly invested in was a dog which I inherited after it grew to modern prices from a very low price - as such, capital gains taxes take a huge chunk of the money selling it. I’ve recently reshuffled quite a bit of it into other stocks that have much better growth numbers (General Electric, Emerson Electric, Procter & Gamble, and so further) that are firm growth but still yield dividends. I also did very well recently on Nintendo.

The problem I face, however, is that while I have a lot of money invested, I don’t have any cash on hand, really. I receive dividends but those don’t make for much and won’t pay off any investment into the stock in the timeframe I’m looking at holding investments. The Nintendo is unfortunately tied up in an irrevocable trust, or I’d have sold the investment and let the profit ride.

My parents are in a slump where the business isn’t pulling enough money and they’ve been liquidating for years, which is something I am not planning to get into. What I’m looking for and what I haven’t yet found is a way to work cash profit out of invested stock without liquidation - I somehow doubt there is a way to do this but it’s always worth asking.

Beyond investing in companies with high dividend yields, (the company the family owns is already very good for this), is there a way to make short-term profit from investments without attempting to day-trade or trade short-term? I have not discussed short-term trading options with my broker, but I don’t have the cash capital to work with that anyways at the moment nor do I really have the time to do my research. I’m really just looking to float the next year of school before I get a salaried position and can leave the invested wealth aside to play on its own, so to speak. Anyone else in similar situations? If so, how did you/are you dealing with it?

Let me see if I got this straight.

You have stocks that have been held for years. You think that you cannot sell them without large capital gains taxes. But you don’t say how long you’ve held them. IIRC, capital gains tax decreases the longer you hold a stock.

But then you say that you’ve “reshuffled” your inheritance into other stocks. Doesn’t that trigger a taxable gain?

Next, you’d like to know if there’s a way to make passive income from a stock without selling it. Other than dividends or some crazy investment scheme, I believe the answer to be no.

Then you reveal your investment timeline to be one year. That’s a bit risky to bet your income on the dividend yield of the stocks you own.

Here’s a thought: Why haven’t you moved your stocks into DRIP accounts? It sounds like your not making a whole lot of money on the dividends, but a DRIP account would allow you to reinvest those dividends into additional shares. If you don’t really need that money and you’re planning on holding onto those shares, a DRIP account may be what you need to “let it ride”.

Selling “covered calls” would be an option for you. An investor pays you a premium for the ability to purchase your shares at a certain price for a period of time. If the stock goes up beyond the strike price, they will purchase them from you at that price [trigging long-term capital gains tax]. If the stock doesn’t go beyond the strike price, then you keep the stock and the premium [less your broker’s fee].

Another possibility is to borrow on margin with your equities as collateral. Your brokerage account gives you a loan at a certain number of basis points above the nominal lending rate. Some brokerage houses will only let you buy equities, whereas others will allow you to take that money out as cash [I believe charlesSchwab allows this]. The brokerage will use your stock as collateral, and if the price of the stock drops sufficiently, will force you to sell to cover your loan.

If you posses shares of a different company/mutual fund that have declined in value, you could sell those and harvest the tax loss against the gain. You could then re-buy those same shares after 31 days using the IRS’s “wash-sale-rule”. You come out ahead if the price of the devalued shares don’t increase greatly within the timeframe you didn’t own them.

Finally, if you do sell the appreciated shares, you may want to specify a tax “lot”. If you pick the shares with the highest cost basis, then you will owe the least amount of tax in the near-term.

All of these options are advanced techniques: covered calls are tricky, the wash-sale-rule must be obeyed explicitly and your broker will charge you for all of these transactions. There are also rules about the tax lots that I won’t go into here. You should do a lot of research before utilizing any of them.

I’m not making any recommendation on what you should do, just enumerating the possibilities. Other people can chime in with their preferences. Personally, I think it would be easier to get student loans and use your investments to cover those loans in the future. It won’t be fun worrying about your margin account or covered calls while studying for exams.

At the start of this year, we Canadians have a new weapon in the fight against poverty or something.

The Tax Free Savings Account or TFSA is an account that provides tax benefits for saving in Canada. Contributions to a TFSA account are not deductible for income tax purposes but investment income, including capital gains, earned in a TFSA are not taxed, even when withdrawn.

The TFSA works like the opposite of a Registered Retirement Savings Plan (RRSP). After-tax income of up to $5,000 per year can be placed into a TFSA.[11] This money can then be withdrawn at any point of time, without penalty. Unlike RRSP’s, which must be withdrawn after the holder turns 71, the TFSA does not expire.

From Wikipedia (http://en.wikipedia.org/wiki/Tax_Free_Savings_Account)

This isn’t something you should maybe think about doing. This is something that you should take advantage of, period. This is an absolute no-brainer.

Here’s the official government page: http://www.tfsa.gc.ca/ which links to A helpful Howto.

I’ve gotten the RBC brochure and talked about it quickly with an agent. Aside from that, I haven’t really done much research. I’ll probably just stick to a high interest savings account at first.

ING offered one starting back in either November or December of last year (they paid double the interest on any balance to cover the taxes you would have had to pay). I don’t have anywhere near the amount in saving that I need to worry about paying taxes on it, but I opened an account anyway and ended up making a few bucks extra because of their “double interest”. Right now I’m just using it as a regular savings account, but eventually when I’m making more money it will be a very good thing to have.

John asked, “I have recently learned about the Military Savings Deposit Program because I will be stationed in a eligible area. What this also means is that my income will be tax free.”

Max it out.  A guaranteed 10% return is pretty damned impossible to find right now.

That said, there are many municipalities/government entities that need to issue bonds now for various reasons. Most of them are perfectly solid, well-funded organizations who are caught in the same credit market nastiness as everyone else and are stuck paying out. There are some tremendous returns available, tax-free, in muni bonds right now.

Pros: tax free. There are plenty of well-rated organizations that are paying the equivalent of 8% with the tax-free status factored in (assuming you’re an average American whose income would put those returns in the 25% bracket).

Cons: Much less liquid than a simple savings account.

Mannie wrote: I was married to a U.S. Navy serviceman, and he died in October 2007. While I did not receive his insurance (I have a post in A/T’s Legal Questions Megathread concerning that situation,) I did receive some death benefits totaling ~$122k.

I receive monthly payments from the government now as well - $1288 per month total without educational assistance; $2203 per month with it. I only receive the extra amount during the times I’m enrolled in school.

I have health/dental insurance provided by the government. I receive this for free for three years from the time my husband died, which means I have a little less than two years remaining now. After the free period, I will pay at the retiree rate.

I will be graduating from my university in December 2009 with a B.S. in Management, Human Resource Management concentration. I have a 3.89 GPA right now; I’m confident that it will be in the 3.9s when I graduate. I do not have any student loans; my parents funded my tuition and books for the first half of my college career, and the government now funds the rest.

Because I commute to school, I bought myself a 2006 Honda Civic in February 2008. I paid ~$3k down, placed $15k in a share certificate at my credit union, and then borrowed against it in order to build my credit. I got into some trouble with credit cards when I was younger (I will turn thirty in April 2009,) but my credit report looks clean now. I have a mediocre score of 637, but I fear that it will soon drop because an old closed account in good standing will soon vanish.

I live at home, and I have very little expenses. I pay for the monthly DirectTV bill, and I pay for our family cellphone plan. I also pay my “car payment,” which is just what I call the payment for the loan at my credit union.

I have $100k in CDs at my bank; I took advantage of a 4.16% APR / 4.25% APY promotion there. This rate was only for one year, and my CDs will mature in September 2009. ~$600 is in a special savings account that earns higher interest, but it’s based on transferring $1 from my checking account each time I use my Visa debit card. I can transfer a maximum of $100 to this account each month, which is what I do. The remainder of my funds are in an interest-bearing checking account, but the rate is minuscule at 0.05%.

I do not work, and I have not worked in several years. I’ll be actively trying to find an internship/entry-level job over the summer months.

Okay! Now that everything has been explained, here are my questions:

1. Is there anything that I could/should be doing with my $100k other than CDs? I know I have to pay taxes on the interest.

2. What steps can I take to build my credit score? I’m not ready to buy a house right now, but it’s definitely something I want to do within the next five years. However, I do qualify for a VA loan (up to $200k, I believe.) Also, I have no credit cards - and thus no credit card debt.

3. I will be starting my career “life” at age thirty (provided that I obtain an internship/job this summer, which is a task in which I’m confident I’ll succeed.) Will I still be able to have a nice retirement as long as I plan for it? In other words, have I started financial planning too late?

I know that these may seem like basic questions, but I’m just now learning about financial planning. Even though I’m in the business program at my school, I haven’t had a lot of exposure to the intricacies of investing soundly.

And, to answer the inevitable question of “where will I live after graduation,” let me say that right now I’m not sure. I’ve been set on attending graduate school in my boyfriend’s hometown, which means that I would be staying with him. We’ve been looking at a brand-new two-bedroom apartment that he can obtain for half rent, which means our expenses would be minimal. However, my school supposedly has a program where my graduate program there would be paid as long as I agreed to teach for a year (or so) afterward. I still have to find out information on this program, and the professor who knows is on sabbatical this semester.

I’m aware that it would be in my best interest to speak with a fee-only financial planner, but I want to have a bit more knowledge at my disposal first.

If you don’t belong to USAA, you should join. They tend to have low rates on all kinds of things, especially things like car insurance.

Other than that, does anyone in your family have a credit card with a high limit in good standing? My dad added me to one of his once when I might suddenly need it in an emergency, and it jumped my credit rating a surprising amount.

It seems like most people around here get a card with reward points of some kind and use their cards for everything, then pay them off completely every month. Might be better than a store card if you can get a good one.

Don’t delay with the car insurance. My husband and I both have clean driving records. I know AAA is hardly considered to be cheap insurance, but I was still surprised when we got married and were able to insure both cars and add renters insurance for more coverage and less money than I’d been paying for just my car at AAA. When I went in to cancel, the AAA woman was asking me about why I was leaving, like maybe she was going to offer me something better, but when I said I was switching to USAA, she just dropped it and canceled the policy.

If the store card has advantages, there’s really no reason not to get one, as long as you don’t a) buy more because of the discount, thus wiping out the discount; or b) fail to pay it off in full every month.