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Webcast replay: Year-end prep: Taxes, investing, and more

December 05, 2013

Replay and transcript from a recent Vanguard webcast

We all have plenty on our plates (figuratively and literally) at the end of the year, but don't forget about the important financial tasks that await your action. In this live webcast aired November 19, 2013, financial and wealth planning experts Mary Ryan and Kevin Wick of Vanguard Asset Management Services™ provide a checklist of investing issues you can use to ensure your financial plan is up to date.

Watch the full replay »


Amy Chain

Amy Chain: Good afternoon, everyone, and welcome to this live Vanguard webcast. I'm Amy Chain, and we're happy to have you with us no matter where you are and whether it's from a computer, a tablet or even a smartphone.

Today, we're talking about financial tasks to tackle as year-end approaches. It feels like it gets here more quickly every year. During the webcast, you'll get tips and ideas from our experts about what actions to consider for your retirement investing, how to prepare now for a smoother tax-filing season and why looking at your wealth plan before year-end may make sense.

With us today are two experts from Vanguard Asset Management Services™: Mary Ryan, a senior financial advisor, and also Kevin Wick, a senior wealth planner. Kevin, Mary, thanks for being here today.

Kevin Wick: Thank you.

Mary Ryan: Thank you, glad to be here.

Amy Chain: Now, year-end is such a busy time for so many of us, and to help you all feel ready for the new year, Mary and Kevin are going to share some ideas about things that you can do now to ready your finances for the year to come.

We'll get started by chatting with our panelists, but, as always, this webcast is about you and your questions, which are pouring in already. We'll spend most of our broadcast answering those questions, and we'll continue to take them live during today's event.

Also, if you're on Twitter, you can send in your questions simply by using the #VGLive. Does that sound good?

Kevin Wick: Very good.

Amy Chain: Okay, fabulous. Now, before we get into our discussion, audience, we'd like to ask you a question. On the right-hand side of your screen you should see that question appearing now. And that question is, "Which of the following topics is the top year-end priority for you?" Your options are: retirement investing; taxes; gifting; or estate planning. So if you can't see the poll, check your browser setting, make sure it's set at 100%, and go ahead and weigh in with your answers. We'll get back and share those answers in just a few minutes.

While we wait for our audience to respond, though, we've gotten so many great questions ahead of time. I'd love to just jump right in and address some of these most popular questions right off the get-go. Does that sound like a good plan?

Kevin Wick: Perfect.

Amy Chain: All right, Mary, I'd like to come to you first. Rebalancing is something that came up quite a bit from our clients. In fact, John from Bel Air, Maryland, wrote in and said, "I'm considering rebalancing the investments in my account. Doing so will trigger long- and short-term capital gains. How should I decide if rebalancing and paying the resulting taxes is the right move for me?" What should we tell John?

Mary Ryan

Mary Ryan: Well, Amy, this is such an important topic to think about, rebalancing in general. And when we're thinking about year-end and preparing for our upcoming year, as you were just saying, sometimes a lot of other things get in the way to rebalancing. You tend to think, oh, I'll deal with it later. But it's very important to pay attention to it.

And to that point, a lot of times people do hesitate because of taxes. And they think, oh, but if I do this I'm going to incur capital gains and I don't want to do that. And so in a sense, they let the tax tail wag the dog, which we don't want to necessarily do.

So when we talk about rebalancing, we have to look at, one, what your best tolerance is, where you are, what are your goals, what are your overall feeling about your portfolio. And if you're finding that this portfolio is out of balance—and maybe we can touch on that a little bit in another segment—but if you're finding you're out of balance, you really do need to look to make sure that you are taking the profit off the table, taking some risk away.

Now, you can do that. You don't necessarily always have to do that in a taxable account. You can also do it in a tax-deferred account. So maybe look at your IRAs, look at your 401(k), look at other places to take advantage of this rebalancing.

Another thing to think about is, if you have a taxable account, perhaps you have some opportunities to take some losses to go against any of these gains, something we call "tax-loss harvesting," and perhaps you can take advantage of that as well.

But it's very, very important to not let that tax always dictate that you are or are not going to rebalance and, again, always check with your tax advisor before making a huge commitment to something like this, but make sure you are rebalancing. It's a very important part of what you need to do.

Amy Chain: So it sounds like taxes are one consideration when it comes to whether or not you should be rebalancing, but you should really be looking at both your whole portfolio and a longer list of considerations when deciding if and when the right time to rebalance would be.

Mary Ryan: Absolutely. It's a big picture like everything else. It's always a big picture. But you want to make sure that you're not taking on too much risk. And I think particularly in a situation or market that we've been in currently, the stock side has gone up. It's been wonderful, but a lot of clients may be finding, "Wow, I really am—my stocks are much heavier weighted than my bonds are now."

Amy Chain: My allocation is not quite what I set out for to date.

Mary Ryan: Not the way it was at the beginning, that's exactly right.

Amy Chain: Let's stay with this rebalancing topic for a second. We've got quite a few questions. Keiron from Kansas says, "What is the best way to rebalance a stock/bond portfolio; once a year, once a quarter, etc., or when the percentage difference between the stock and bond target holding is more than 5%, 10%, etc.?" So Keiron wants to know, when should I be thinking about this? What should be my trigger points?

Mary Ryan: That's great because I think that's another piece that we sort of get a little, you know, loose on it. It's okay, oh, well, we're only 3% or not even paying attention to the percentage of where I'm out of balance.

Generally it is very important to have a discipline to this and that you may want to look at it every six months and maybe quarterly and maybe annually. But let's say it's every six months that you look at that portfolio, and you try to take the emotion off the table, and I think that's what's so important because sometimes we look at it, and like now we may look at it, and say, "Oh, the stock market's doing so well. I don't really want to take the profit off the table. It's going up."

Take the emotion out and say, all right, it's at my six-month mark. This is what I'm going to do. And generally, if you wanted to look at it and say, when I'm more than 5% out of balance—and what I mean by that is, let's say that your original asset allocation was a 50% stock/50% bond allocation—and if because, for example, now the stock market's been going up and as opposed to 50%, maybe you're finding yourself 55%, 56%, 57%, and it's great, but all of a sudden, you're really out there on the stock side, and the markets correct at some point, so we want to make sure that we are doing that old adage of, "Let's sell high and buy low," and that's what we need to keep in mind.

Conversely, when the markets are going down, and you're the other way, that also can be very, very emotional of saying, "Well, golly, now I'm supposed to be 50/50, but I'm really 45%, 44% in stock, 43%." Same thing, though; you want to sell those bonds, buy the stocks, get yourself back to 50/50. Take the emotion off the table. So yes, that's a really important thing. Set a date, set a time; make sure you're rebalancing on a regular basis, and find that percentage—5% is generally a good benchmark, I think.

Amy Chain: That's great. I think we'll be back to talk about some more rebalancing topics throughout this webcast because I've seen a lot of questions come in, and, Kevin, I'd like to hear from you on the topic, as well.

But in the meantime, let's take a look at our poll results. Which of the following topics is the top year-end priority for our investors? It looks like by a long shot the elephant in the room is taxes. Does that surprise anybody?

Kevin Wick: Not at all, especially at year-end.

Amy Chain: Especially at year-end. I'm going to stick with you on this one, Kevin, because I want to talk to you a little bit about taxes. But before we get into that, audience, I'd like to throw another polling question out to you. And while we wait to hear from you on your answer, I'd like to talk with you a little bit about taxes.

So in the meantime, audience, we'd like to hear from you. "Which of the following are you most likely to put off doing at year-end: rebalancing my portfolio; contributing to my IRA; making a decision about a Roth conversion; reviewing my tax situation; or reviewing my estate plan and documents?" We've got a lot of procrastination options here for you, audience. Give it some thought, weigh in, and in the meantime, back to this elephant in the room. Let's talk taxes.

Gilgette from Illinois, actually wrote in ahead of time. He said, "Please review the highlights of the tax-law changes that are applicable to 2013 and going forward as we know today and how it applies to individual investors."

Kevin Wick

Kevin Wick: Correct, correct, yeah, new and applying for 2013, really for the first time. We have a new top estate tax rate—I'm sorry, income tax rate of 39.6%, and that will apply to, again, high-income earners at a threshold of $400,000 for individuals or $450,000 of income for married couples.

We have a higher capital gains rate for individuals who meet those same thresholds will pay now a 20% capital gains rate as opposed to 15% last year—that being on long-term capital gains. So a few issues that, again, from just those few numbers, apply to high-income individuals.

So the good news is that if you fall below say that maybe $200,000 threshold in income, there are fewer changes and less negative—if you look at taxes as a negative—but less negative impact. But most of the changes apply to high-income individuals.

And while obviously the elephant in the room—we'll talk about taxes quite a bit today. It's important, and Mary mentioned this before, whenever we're talking about taxes that the implication of these concepts will be different for everyone. It's important that individuals do consult with their own tax advisor to see exactly what it means to their own individual circumstances.

Amy Chain: So by and large it looks like we have some new tax laws and some strong market performance this year that no matter where you land on the spectrum it's going to be an interesting year come tax time.

Kevin Wick: Absolutely.

Amy Chain: Yeah, that's great, thank you. So let's take a look at where our audience has come in. Once again, we have an overwhelming response, which is "reviewing my estate plan documents." So our audience seems to have put off looking at their estate plan. Kevin, I'd like to talk to you about this. Is this surprising? Is this alarming? Should we tell them to stop what they're doing? Wait until the webcast is over to do this.

Kevin Wick: Yeah, well, we actually—we had a webcast at the beginning of October that talked specifically about estate planning, and we had some similar feedback that it's a difficult topic to talk about. I'm not surprised that at year-end it's one that you would probably put aside and, hopefully, the point being that they revisit it come next year.

There have been changes. The tax law brought some changes on the estate and gift tax side of things as well. We have an all-time-high exemption amount, which is the amount of assets individuals can pass, either during lifetime or at death, on to their heirs. This year is $5.25 million. For some, again, high-net-worth individuals, there's some planning that could come in with that, but it's not surprising that—again, we gave them a pretty good list of things they could procrastinate about—it's not surprising that estate planning would be the choice.

Amy Chain: So if they want to get started today, we have a lot of resources available on that they could log in. We've got videos and articles and tips to get started, so to not put off until tomorrow what you can get done today, right.

Kevin Wick: Yeah, lots of material that—good educational material—that gets you kind of at a good footing to then make some decision going forward, whether it's before year-end or after.

Amy Chain: That's great. Well, audience, thank you for your participation in our polling questions. Now, I think we should stop procrastinating and get to some of their questions. So we had a live question that just came in from Ed in Arkansas. And Ed would like to know, "Why would anyone own bonds if they have no place to go but down?" This is a big question that we're getting right now. Who wants to tackle it?

Mary Ryan: I'd be happy to. And I think we hear a great deal about bonds right now, and there's talk that they're only going to go down, and I think what we are losing sight when we talk about bonds is bonds are not stocks. They act differently than stocks. So when we talk about bonds, a bad year in bonds is certainly not what you're going to see in a bad year in stocks.

And the reason people should have bonds in a portfolio is because they do act differently than stocks. Again, to be clear, though, we don't expect that bonds are going to have some huge, big returns. We've seen some wonderful returns in bonds in the past, probably not that big going forward, but you have bonds for safety in the portfolio, for income in the portfolio, and you have stocks for your growth. That's where you're turning.

And as I like to say, you know, a bad year in stocks, 5%, maybe 7%, I mean, in bonds. A bad year in stocks is 30%. I'll take the bonds any day. So we have it for protection, but, again, the bonds that you're looking at, you need to make sure that they're appropriate for your portfolio. You know, when looking at bonds, you want to make sure you're diversified, that you've got a lot of different kinds of bonds, that you're very, you know, diversified as far as your maturities, as far as the kinds, as I say, it's not just, you know, looking at just Treasuries. You want to make sure that you also have some high-grade corporate bonds, you know, high-yield bonds. You need to look out for those. A lot of times people are chasing yield.

Amy Chain: I'm glad you mentioned that because that's been a big topic in this past year. With interest rates so low, we at Vanguard have been concerned that investors have been looking at the wrong types of bonds or the wrong types of exposure in their portfolio. Maybe we could talk a little bit about how investors should be looking at what should make up their bond allocation.

Mary Ryan: And that's what's happening is we're finding that people are looking to high- dividend-paying stocks and high-yield bonds. A stock is a stock; dividend paying or not, it is still a stock. And a high-yield bond acts like a stock. There's a great deal of risk associated with high-yield bonds. They can be appropriate in certain portfolios, but if you're buying bonds for safety, they may not be the best choice.

One may want to consider, again, getting as broadly diversified as you can, you know, making sure that you're covering the spectrum, maybe leaning a little bit towards intermediate if appropriate, but making sure that you've got the quality in there, which is I think also very important. They're not going to be the big home run. You have your stocks for that.

Kevin Wick: It's definitely tough to take the emotion out of investing, and Mary spoke to it earlier. In today's markets, low interest rates, low yield, low income return, especially for those who need that out of their portfolio, but it is important, as you mentioned, to take the emotion out, have a long-term view of what you're doing. Understand the role that bonds play, and it isn't just a short term they're going down or people say it's going down. You have to take the view long term and understand why it's there and the risk hedge that it gives you.

All of those aspects have to be taken into account. If you're strictly making decisions based on emotion, then you're likely to get into some trouble at some point.

Amy Chain: That's great. Let's stay on the topic of bonds for a minute. We have a question from Tony. Tony, thanks for your question. Tony wants us to talk a little bit about the differences between the risks in individual bonds and bond funds. Throw it out to both of you?

Mary Ryan: There are a couple of different things when looking at individual bonds or bond funds. One is when you have an individual bond, of course, that you're sort of looking at whoever the issuer is of that bond, so you're taking on risk right there of the issuer. And of course, we want to look for quality, if that's what you're looking for—safety.

The other is, yes, granted you do hold the bond, or could hold the bond until maturity. But if interest rates are rising during that time and you're holding a bond with the maturity where it is today, and then the interest rates are going up, you're taking on interest rate risk there as well.

When looking at a bond fund, however, you're going to have a very diverse bond portfolio, and along the way, and particularly a large bond fund, is going to have bonds that are coming due every day. So if interest rates are going up, you're participating in that by buying those bonds with higher interest rates. So yes, I think a lot of times people look at it and say, "But if I hold the bond to maturity, I don't lose anything," which could be very true. But along the way you could also be giving up some interest that could be going up. So we tend to—would rather see people, depending on your portfolio, be more diversified in a portfolio of bonds than maybe just having individual holdings.

Kevin Wick: The thought that I'd add is just on sort of the research side of things—and this probably applies with any element of your portfolio, but specifically to bonds—when you're buying a bond fund, especially at Vanguard, we have dedicated analysts that their job is to be researching the creditworthiness of the various bond issuers all across the country and worldwide; whereas the individual looking at an individual bond from a particular municipality, whatever the case might be, how much time do they have to really delve into that?

And so, again, looking at things on the risk spectrum, when you have dedicated professionals who are doing that work already for you, you have a little bit of safety in a bond fund compared to the individual issuers.

Amy Chain: That's a great point. That's an excellent point, thank you. Thank you both. I want to go to another topic that we heard quite a bit about leading into today's webcast—in fact, we've been hearing a lot about it this year and the last couple of years—and that's the Roth IRA and  Roth conversions. In particular, Walt from Murray, Kentucky, says, "Please explain Roth conversions—traditional IRA to a Roth IRA." Mary, can I start with you on this one?

Mary Ryan: Sure, sure. So in talking about conversions, I think before we get into that, just to touch a little bit on the difference between a traditional IRA and a Roth IRA, and to explain that, and then to talk about the conversion piece.

A traditional IRA is, of course, the money goes into a traditional IRA, it is tax-deductible today and it grows tax-deferred, so when you take it out, it is taxable at that time as income.

Amy Chain: So no taxes now, taxes later.

Mary Ryan: Correct, thank you. And when looking at a traditional IRA, you also, at 70½ have a required minimum distribution, which you need to take out. You also can—the money will be growing tax-deferred, but again, at some point, you do have to pay the taxes on it.

A Roth IRA on the other hand, the money goes in taxable today, so it's after-tax dollars that are going into the Roth IRA, but it is growing tax-free as opposed to deferred. So when you take the money out of a Roth IRA, you're not paying any taxes on it.

So what—the conversion piece, how that plays into it is we are allowed today to be able to convert some of our IRA dollars into Roth IRA dollars. And a lot of times people would think, but if I do that—and they're right—they pay taxes on that conversion today. So the question is, "Do you think taxes will be going up in the future or not?" Who really knows?

Amy Chain: And do you think you will be paying in a higher tax bracket later than you are today?

Mary Ryan: Exactly. So do you want to pay it now or pay it later? One of the things that I look at when talking about conversions, of course, when you think about it, we diversify your stock portfolio. You diversify your bond portfolio. Why not diversify your tax portfolio? So it's another way to take advantage of diversification. I would strongly suggest, however, before somebody jumps into starting to convert these dollars, you definitely want to talk to your tax advisor about it because you can maybe have a conversion amount that gets you to just below the next tax bracket, and take advantage of those limitations, things like that. But you definitely want to talk to somebody.

One other piece on a Roth conversion; the government very seldom gives us a chance to do a do-over. But the one thing on a Roth conversion is they will let you get into next year, and you have until October 15 of next year, of 2014, to look at it and think, oops, I made a mistake. I want to fix it. It's a recharacterization, and you are allowed to do it.

So I'm not saying just jump in and just go do it, but they do give you that opportunity to have a Roth conversion. If you get into it and then want to recharacterize it, you absolutely can.

Amy Chain: Now, there's been this topic of "backdoor Roth" out there for some time. Kevin, can you talk to us a little bit maybe about the backdoor Roth?

Kevin Wick: Yeah, the idea of a backdoor Roth—and actually one quick point on the traditional and then we'll speak on the backdoor. Another important planning point is if you're considering doing a conversion, it's important to have available assets to pay the taxes that are outside of that traditional IRA. So you don't want to further reduce your traditional IRA and incur an income tax—a larger income tax liability—to create cash to pay the taxes.

Amy Chain: You've put all this money aside for retirement. Don't take from it if you don't have to.

Kevin Wick: Right. It usually makes most sense to be able to have a pot somewhere else that you can draw from to pay those taxes.

Amy Chain: That's a great point.

Kevin Wick: So another important consideration when you're thinking about that option. A backdoor Roth, just quickly, is the idea that you can make—those who perhaps aren't eligible for—it can be a number of reasons—to make traditional Roth IRA contributions, those tax-deferred or those pre-tax contributions, you can actually make post-tax contributions to a traditional IRA and then nondeductible contributions to a traditional IRA and then later on do the conversion process.

And it's something that doesn't apply for everyone, but it is an opportunity if, for some reason, the more, again, traditional route doesn't work for you.

Amy Chain: I know that's something that we've, over the last year or so gotten a lot of questions about. And, in fact, we have lots of resources, again, available on videos, articles. If you'd like to learn more about some of the topics we just talked about with regard to a Roth IRA, feel free to check it out online.

While we're on the topic of a Roth IRA, though, we did get a live question from Andre in California, who asks, "Are the gains from a Roth IRA, when withdrawn, taxable as regular income, capital gains, or a combination?"

Kevin Wick: It's not taxed at all.

Mary Ryan: It's not taxed at all.

Kevin Wick: That's the good news of a Roth IRA.

Mary Ryan: Yep.

Kevin Wick: As Mary mentioned before, you pay the tax on the money before it's gone in, so the money going in has already been taxed, so it grows over time tax-free, and when you take it out, those withdrawals come out tax-free. So those gains will not be taxed inside of that Roth IRA.

Mary Ryan: It's very powerful.

Amy Chain: So when you invest in a Roth IRA you pay taxes today for tax-free withdrawals later. When you invest in a traditional IRA, you avoid taxes today, but you pay taxes on those distributions in the future.

Kevin Wick: Correct.

Mary Ryan: And then again, not knowing where your tax bracket's going to be, but it is a good way to look at diversifying your taxes for down the road, as I said.

Kevin Wick: And even if you want to look further down the road, if you happen to be in a position—this is more of an estate planning view of things—if you happen to be in a position where you may not need to draw on that Roth IRA or maybe need small amounts from it, you can then be passing on an asset to your children that will be tax-free to them down the road, as well. So you can take a broader generational view to that particular planning element.

Amy Chain: That's a fabulous point. I'm glad you added it on. Let's take a turn to talk about some wealth planning objectives, since, Kevin, you and I are chatting here. William from Texas, wants to know, "What are your recommendations for wealth planning objectives?" It's a broad question, but since you mentioned taking this holistic view, let's talk about it.

Kevin Wick: Yeah, and that's really the approach we at Vanguard take to wealth planning is a broad, holistic view to things, really kind of starting big, starting long term and then working down from there.

So thinking about a simple, initial question is, "What is the purpose of your wealth?" So you have accumulated, or are accumulating, certain assets over time of which you may want to pass some or all of that on to family members. You may want to do some charitable gifting at some point along the way. So think about—and even in terms of perhaps even three simple buckets—what is your tolerance for taxes, and then what do you want to see pass on to your family, and to what degree is charitable giving part of your overall planning?

And an answer to those couple of thoughts can help derive what your wealth objectives would be over time, whether you're doing charitable gifting during your lifetime, whether you're doing it on your passing, whether you're actually gifting assets to kids or grandkids during your lifetime or not, how you're looking at educational planning for children or grandchildren.

And then it also incorporates all kinds of other things that we'll talk about today—your retirement planning and whether you should have traditional IRAs or Roth IRAs, whether life insurance is part of your overall investment mix. All of those pieces really encompass a wealth plan, but it starts with, "What is the purpose of that wealth that you've put together, and what do you want to see happen during your lifetime and thereafter," and those answers help direct what you're going to do from there—really take that top-down, holistic approach.

Amy Chain: Good, good. Mary, I'd like to come back to you here. We have a question from Catherine in Sutton, Massachusetts. Catherine asks about RMDs. Catherine says, "My husband turned 70½ this month and has questions about the timing of the required minimum distribution." What can we tell Catherine to help her husband?

Mary Ryan: I got to say I'm very glad Catherine brought this up. I touched on required minimum distribution when talking about traditional IRAs and that this is something particularly at year-end is so important to make sure you're focused on in looking at it. A required minimum distribution, as I mentioned before, is something you must take from a traditional IRA or other qualified plans. One does not have to take one from a Roth IRA, however, just to be clear.

When looking at a required minimum distribution, the government says at 70½ you need to take a required minimum distribution from your IRA, and you need to take one every year thereafter. It's based on age and a formula as to what the amount is.

Amy Chain: Essentially the government's saying you've got to pay taxes some time.

Mary Ryan: They want their money, that's right. We let you have it deferred just long enough. We want your money now. Now, the one piece to this, however—and this is important for 70½ that you don't necessarily—that does not apply any other year. The year in which you turn 70½ you can defer that required minimum distribution to the next year.

So for example, in 2013, as in this case, her husband turned 70½. Let's say that he was working this year but he's planning on retiring after the 31st of this year, so next year his income would be down quite a bit.

This year he could be in a really high tax bracket and he may not really want to take that required minimum distribution for this year. And so he can postpone it to next year, 2014. Now, of course, there's always a—here you go, there's another piece to it. In 2014, however, he must take two required minimum distributions: the one he needed to take in 2013 and then the one that is in 2014. The one for 2013 he must take by April 1 of 2014. You must meet that requirement and then the other he has to take by December 31.

And to that point, as I was just saying, the reason I talk about it at year-end is people postpone taking their required minimum distribution so the dollars can continue to grow tax-deferred, which is fine. But you do not want to make the mistake of missing your required minimum distribution for the year. It's a 50% penalty if you do.

Amy Chain 50% penalty on?

Mary Ryan: The amount that you're supposed to take.

Amy Chain: That's a very important point.

Mary Ryan: It is huge. So I'm so glad we brought that up because that was on my bucket list of things to discuss.

Amy Chain: That was the elephant in your room today.

Mary Ryan: That was my elephant, yes, RMDs, very important.

Amy Chain: Before we move off the topic of IRAs, though, we did get a clarifying question. Larry from California asked us to clarify the Roth holding period. I'm glad you brought this up, Larry. "To avoid taxes on a Roth, don't you need to hold it for at least five years?"

Kevin Wick: Yeah, that is correct.

Amy Chain: So, Larry, yes, that is correct. So you pay taxes before the money goes in. It has to sit in the account for five years, and as long as it does that, you're able to take the distributions tax-free.

Kevin Wick: Correct. Yeah, it's something, again, you want to look at as a long-term planning tool for that very reason.

Amy Chain: That's great, fabulous. Okay, Kevin, I want to ask you another charitable distribution question. Virgil from Tennessee, asks, "What procedure do I need to go through to make a qualified charitable distribution as part of my minimum required distribution from my Vanguard IRA?"

Kevin Wick: It's a good follow-up to the discussion on RMDs, and we have a unique opportunity. It's one we've seen in years past. It's an opportunity that, as we sit here today, only exists now for 2013 barring some other change, legislative change, in Washington. You have—if you are in a position to have to take an RMD, so you're at least 70½—you have the opportunity to actually direct some or all of that RMD up to a maximum of $100,000 to a charity of your choice, a public charity. And in doing so, it has to go right from your IRA provider directly to that charity. And in doing so, then you are not taxed on the amount of that distribution.

Amy Chain: And this has gotten some attention this year. This is the QDC—

Kevin Wick: QCD.

Amy Chain: Qualified charitable distribution, right?

Kevin Wick: Correct, yes, exactly.

Amy Chain: Okay, good, so for folks that maybe have heard that acronym, this is what we're talking about.

Kevin Wick: Yeah, exactly. And in the example that Mary gave, if we have the individual who doesn't need the money this year, maybe retiring next year, or even play out that scenario differently, it's an opportunity to basically not be taxed on some or all of that RMD this year. You send it to charity, it goes tax-free; the individual pays no tax on the amount that is taken out.

The flipside is even though it's going to charity, though, you do not get a charitable income tax deduction because you never paid taxes on the income to begin with. But it's an excellent way to reduce your income this year and serve a favorite charitable cause at the same time. And as far as doing it at Vanguard, it's as simple as calling up, talking to one of our retirement specialists, and they'll walk you through the steps of making that happen.

Amy Chain: That's great, and it sounds like we're back to the point you started with, which is look at the whole picture together. Don't look at one particular retirement account type or one particular—don't look at just your taxable income for the year. You have to look at how all of the pieces come together to figure out what are the right decisions to make for you.

Kevin Wick: Correct.

Amy Chain: Great. Kevin, let's stay with you here. We have another question coming in from Texas. This one comes from Greg. Greg asks, "How much can a couple gift to each of their children without incurring taxes. Staying below the threshold, does it have any adverse impact on estate taxes they would pay when we die?" Changing gears a little bit here.

Kevin Wick: Yeah, certainly. But a couple of elements to gifting, and they involve taxation and avoiding taxation on those gifts. There's a concept known as the "annual exclusion amount" or an "annual exclusion gift," and I think that's the first part of what he's getting to. It's the ability to make gifts to, in this case, your children. It can be, frankly, to any individuals you want to of up to $14,000. That's the number for 2013, up to $14,000 in a calendar year.

And each individual has the ability to give as many of those away as they want to. And that gift, not exceeding the $14,000 threshold, does not incur any gift tax and does not incur the requirement to do any reporting of that gift. So that's probably the first part of his question that he's getting to.

And another benefit of that amount, that $14,000 annual exclusion amount, is you are also not using any of your estate and gift-tax exemption. I mentioned it in an earlier question, $5.25 million is the exemption amount that everyone holds. If you stay under the $14,000 amount in any calendar year, you are not using up any of your exemption. If you exceed $14,000, then the amount over that will actually use some of your exemption amount each and every year.

And so that's what he's speaking to there is that threshold would be $14,000. If you stay below that, then you're not doing anything that will affect estate or gift taxes in the future. If you go over the amount, then you're starting to reduce the amount of money that you can give tax-free to your family when you pass away. So that kind of covers those two gifting issues.

One third element that might have application here as well is the ability to make payments for tuition and medical expenses for children, grandchildren, frankly any individual, to the extent that those payments are made directly to a school, directly to a medical provider. Those are not considered a gift under the tax code, and they don't use any exemption amount. So, all three of those elements relate to gifting. All are done in a tax-free manner but affect kind of the long-term picture a little bit differently.

Amy Chain: That's great. Greg, I hope we answered your question and the questions of many others out there. Mary, I want to talk a little bit more about rebalancing. We actually had a question come in on Twitter from Carmen Couch. Carmen, thank you for the question. Carmen just asks us to please pause and talk a little bit about what we mean by rebalancing.

"We're so fortunate that we do get the end of the year and a new year. It's a very visible time to take an inventory personally as well as look at our finances. And, you know, I was joking with somebody. I said before you pop the bubbly on New Year's Eve, make sure you've done your due diligence on your finances and what you need to do. It's very important."

Mary Ryan: Thank you, Carmen, because I think we had touched on this and said we were going to talk about that and then we got on to other topics. So thank you. So when setting up a portfolio, generally speaking, you're going to have a combination of stocks, bonds, and cash. And I'm going to focus primarily on the stocks and bonds for this portion of the conversation because cash is generally your short-term needs and goals and that sort of thing. So I'm really going to focus on stocks and bonds.

And when setting up a portfolio, you're going to have your stock portion, which is—if you're at Vanguard—generally going to be with mutual funds, things like that, and then you're going to have your bond funds.

When looking at your asset allocation—I'm going to back into the conversation of rebalancing—you want to look at your risk tolerance, you want to look at where you're comfortable, and asset allocation is that relationship in your portfolio between stocks and bonds.

Now, you've started out, you're all set, and I used a 50/50 allocation previously. So 50% in stocks and 50% in bonds, and you're all set, and all of a sudden the markets are moving. The markets are going up, the markets are going down. So we need to rebalance that portfolio. We want to get back to your original asset allocation, that original relationship of stocks and bonds in your portfolio of that 50/50.

And, again, we touched on the idea that to rebalance, you want to look at doing it pretty regularly, and you want to do it on a set time.

Amy Chain: So it doesn't have to be a year-end thing.

Mary Ryan: No.

Amy Chain: But it should be some sort of regular interval where you're making sure.

Mary Ryan: You're making sure you're doing it, and again we touched on it. Maybe that's 5% that you're out of balance, so you need to rebalance back to your 50/50 in this particular conversation. And it's very important because, again, I talk about where we are now, and the stocks have been fantastic. I mean, it's been a wonderful year. But I know a lot of people have kind of been really out there a little bit more, taking on more risk than they should, or that they originally prepared for, and now they have to rebalance. And that is taking their profit off the table, doing the big "selling high, buying low" strategy.

Amy Chain: And Kevin, you touched earlier on taking the emotion out of some of this. You know, it might be hard to sell when you feel the market doing so well. Some of the balanced portfolios help with this, right. So whether it's, say, the Balanced Index, or the Wellington™ Fund, or even a Target Retirement Fund, these funds, the managers of these funds, keep the allocations set so you don't have to worry about it. Is that fair?

Kevin Wick: And certainly some of your investment choices can help with that. I mean, those two topics, your asset allocation and rebalancing, are two major tenets of disciplined, if not unemotional investing. And you do take the time to figure out what that asset allocation should be based on a number of factors, and all good reasons, and for those good reasons is why you should take the step to rebalance in a periodic way to get back to that allocation that you've determined, either on your own or with some investment help, fits for you and your family, long term, short term, all of that. So those two tenets are extremely important and, yes, some of those elements can be helped with depending on what particular investments you choose.

Amy Chain: Let's take a market lens on this rebalancing question. So we have a question that came in from Marvin in East Windsor, New Jersey, and Marvin says, "Because stocks did so well in 2013, I think I should rebalance my holdings. However, with interest rates having nowhere to go but up, driving bond fund prices down, will I be moving my money into an almost certain loss situation?" Let's talk about it.

Kevin Wick: It's possible in the short term. But, again, that discipline, taking the emotion out, taking a long-term view of things, you really can't worry about what's going to happen in the near term. You can think about what you'd want to have happen long term, and that goes back to big picture goals, some of those disciplined, basic tenets of investing, and taking emotion out. It's hard to do. There's no doubt about it, and it's why we talk about it a lot. But it's something, you know, to have success over the long term, you really can't afford to ride that emotional wave of ups and downs.

Amy Chain: Anything to add, Mary?

Mary Ryan: Yeah, because that is so true because I think if many of us can go back and remember days when the market wasn't doing so well, and nobody wanted to put money into the market when it was not doing too well, and we were very emotional about that, and now look what the market's done in the last four years. It's been wonderful.

But it's the same thing when looking at the bond market now. Everybody's, "Oh, I don't think I should be in bonds. Bonds are going to go down." It's long-term investing, and if you stay disciplined, and you stay the course—and that isn't just a figure of speech. It isn't saying do nothing. It is saying make sure you are rebalancing and staying on top of—

Amy Chain: And staying diversified above all else, right. Make sure that your portfolio spans the risk spectrum and the asset spectrum.

Mary Ryan: Exactly, that you're not taking bets on what you think is going to happen in the short run. We don't know. I'd love to say we did, but, you know, the short run—but long term, with that discipline, you can see the fruits of your labor of staying the course. It does work. It really does.

Amy Chain: I want to toss a follow-up question to you, Kevin, real quick. This one just came in from Robert in Texas. It's a follow-up to the conversation we had about gifting, and that is, "Is the $14,000 total to all or to one person?"

Kevin Wick: To one person.

Amy Chain: To one person.

Kevin Wick: Excellent follow-up question. So that's per individual, $14,000 per recipient is the limitation, and, again, that can be to then $14,000 to multiple recipients, multiple kids, grandkids, whatever the case might be.

Amy Chain: One giver, infinite receivers.

Kevin Wick: Multiple. Yeah, infinite, correct.

Amy Chain: Okay, good, great.

Mary Ryan: So a husband and wife can each give—they can each do their $14,000.

Kevin Wick: Absolutely.

Mary Ryan: So if you need to reduce the estate—

Kevin Wick: Yeah, you can double that then for a husband and wife. So if it's a husband and wife together you can give $28,000 to each child, to each grandchild, whatever the case might be, absolutely.

Amy Chain: Great. Thank you for clarifying. Let's talk about qualified charitable deduction. "If you don't get an income deduction, there's really no tax benefit, correct?" This question is from Ed in California. Ed, thank you.

Kevin Wick: I would say not correct. The benefit is you—because—in that situation you already have to take some required minimum distribution for 2013. And that RMD is going to be taxable to you. There may be situations where perhaps your overall tax picture and other elements, like deductions, mean you pay little or no taxes. So in that sense, it's possible that his conclusion is correct.

But assuming that you do have taxable income otherwise in sending your RMD or some of it to charity, you're reducing the amount of income you're going to have in that year, which generally is going to mean a better tax situation. It certainly can be different for individual situations. But in a general sense, just because you don't get the charitable deduction doesn't mean there isn't benefit to doing it.

Amy Chain: Great. I'm staying with you, Kevin. Mary, feel free to chime in. We're getting a lot of live questions. This is great. Diana from Pennsylvania—Diana, maybe you're down the road from us. Hopefully—we've had a lot of traffic here today. Hopefully you're not too nearby. Diana asks, "Can you please talk more about the $5.2 million tax exemption? Does this mean $5.2 million can be left to family members tax-free?"

Kevin Wick: The short answer to her question is yes. And so in 2013, the amount of assets that can be left to your family or your chosen heirs, whoever that might be, is $5.25 million. That amount is indexed for inflation. That's going to go up a little bit next year, and you would assume it would in years ahead. But for 2013, $5.25 million you can give to your family free of the estate tax. The estate tax at the federal level is 40%, so that's a pretty substantial tax savings. There are state tax laws that may bring in estate level tax at different asset levels, so that exemption doesn't necessarily apply to the state. There are many states that don't have estate tax, but it's important to think about what is the state implication for my individual situation, my individual estate?

And similar to Mary's comment on the gifting, husband and wife, married couple, then you put those together—double it. So in 2013, a married couple can send $10.5 million of their assets free of the federal estate tax on to their chosen heirs.

Amy Chain: Great, thank you. Kevin, I've got lots more coming your way, but Mary, I want to come to you first. This question comes in from Cyndi. Cyndi asks, "Please explain why most financial advisors recommend choosing funds that have low turnover rates or capital gains." I'm glad that Cyndi asked this question because it's important, and not many people do ask it. So let's talk about it.

Mary Ryan: Yes, so thank you, Cyndi, because you're exactly right. It is one of those pieces that we sort of overlook. It's always performance, performance, performance. And when talking about performance or a mutual fund, there are certain things that we could look at, and perhaps I use the word "control," and I use that word loosely, but we can control.

I don't know what the market's going to do tomorrow, nobody does. But we can look at it and say, "Let's keep our taxes down as low as possible, and let's keep our costs down as low as possible."

There are certain funds that may incur more taxes than others. So for example, an index fund, just because it doesn't have a lot of turnover, meaning there's not a lot of buying and selling in an index fund, so you're not going to be faced with these capital gains at the end of the year. Even if you've never sold anything, the fund itself could "declare" them is the term.

Amy Chain: And this information is generally pretty readily available on a fund. You can look up what its turnover is, and low-turnover funds tend to be more tax efficient.

Mary Ryan: They just—they are just by the very nature. And as far as costs are concerned, right there, it's what you're keeping. You want to keep as much as you can. And if you're paying a lot out in taxes, and you're paying a lot out in fees, well, right there at the beginning, you're behind the eight ball. So as I sort of, you know, say to people, the first of the year, the fund manager of an actively managed fund turns the light switch on. They're probably going to have capital gains they have to overcome, and they're going to have costs by the fund itself just because it costs to run a fund, whereas an index fund can be a bit more efficient, if it's appropriate for a portfolio to use an index fund, because they are lower on both sides. So it's just staying ahead of the game.

Amy Chain: That's great, thank you. Anything to add? It looked like you might have been about to jump in. But if not, I've got plenty of questions for you.

Kevin Wick: No.

Amy Chain: Okay. Let's change topic here. We've had several questions that came in about donor-advised funds. Ellen from Pittsburgh, asks, "How can you use a donor-advised fund for estate planning?" We have a few other questions about donor-advised funds that came in. Let's pause and just talk about what is a donor-advised fund?

Kevin Wick: A donor-advised fund is an opportunity, a planning tool, for charitable gifting, whether it's during your lifetime or at death or a combination thereof. Sometimes it's referred to as an alternative to a private foundation, which certainly wealthy individuals consider to do and to control to some degree their own charitable giving.

But the donor-advised fund is an opportunity—one way I've heard it described is sort of a "charitable checkbook." It's an opportunity to make a charitable contribution in a given year to an account that you then have some say over, you're the advisor on. And Vanguard offers this planning opportunity, as do many other institutions.

And so for example, if you open an account at Vanguard Charitable, it happens to be a $25,000 minimum, and so in that given year, you would have made a $25,000 charitable contribution to this charitable checkbook, if you will, and—

Amy Chain: For tax purposes, the contribution happened.

Kevin Wick: Correct. For tax purposes it happened and you have the opportunity to have a charitable income tax deduction based on your own individual circumstances. Then inside of that donor-advised fund, that donor-advised account, you, as the advisor, then say whether it's in that year or whether it's a year later or three years later, whatever the case might be, I want to take $5,000 from my account and send it to my favorite charity. That is the opportunity—that's sort of the charitable checkbook idea. You've created now an account, a fund, that you've funded previously, whether it's at one lump sum or over time or, frankly, at any time you choose to. And then, again, when you choose to make those charitable distributions, can come from there at any point in time, if it's a public charity, a 501(c)(3) public charity.

And benefits to that is you can do some income tax planning. So if there is a particular year where you have a lot of income and you want to reduce your tax impact, you might give some additional assets into your donor-advised account in that given year. And then from an estate planning perspective, this can then be an account that grows. It's invested.

In the instance of Vanguard Charitable, it's invested in Vanguard funds, and then so over time this account can grow. And if the account still exists when you pass away, you can set it up so that your children become the advisors, and so you can create, really, a charitable legacy in a very simple, streamlined, low-cost environment.

Amy Chain: And it can be a way to bring the family in sooner than later. It can be a family discussion to talk about the investments. It can be a family discussion to talk about the distributions.

Kevin Wick: Correct. Yeah, all of those elements—it can be a really valuable long-term planning tool for the family. It can have short-term objectives. It can have income tax objectives. Certainly any assets that you contribute to that are now out of your estate, so it can help you reduce an estate tax liability in the future. All of those things come into play. And absolutely there are very sort of intangible benefits to bringing the family in and having them see how you might do research on a charity, how you might do research on investments. It's really an excellent tool from a number—a couple of different aspects.

Amy Chain: That's great. Let's stay on this topic of donor-advised funds. We have a question. "I want to make a tax-deductible contribution to my donor-advised fund. Can I manage capital gains taxes by making a direct contribution of low cost basis mutual fund shares, or do I need to sell the shares incurring the capital gains and contribute the proceeds?" This comes from Beatty—I'm not sure if I'm pronouncing your name correctly. I apologize. But the question comes from Massachusetts.

Kevin Wick: Yeah, and so we've talked about sort of what is the donor-advised fund? How you actually fund it, contribute to it, is another question. And certainly it can be as simple as cash. You can write a check. But another, again, from a planning perspective, if you have highly appreciated securities—stocks, bonds, mutual fund shares—you can contribute those directly to your donor-advised fund and then avoid what would have otherwise been a capital gains tax on the growth of that particular asset.

And this can be, again, advantageous so that if, in the alternative, you were to sell it, you have to pay capital gains tax on that difference, and then you're contributing cash later on. So you avoid any capital gains impact from that particular asset, and the charity itself receives the full fair market value of that appreciated asset. So it really can be a win-win.

And, again, with some careful planning and consideration of your individual circumstances, you can do some strategic things as far as when—as far as what assets. If you happen to have a very concentrated stock position, that might be a good way to get a little bit of diversification into your overall portfolio by sending some of that concentrated stock to your donor-advised account. So many elements that come into play as how it can be valuable for your individual situation.

Amy Chain: Great. I'm going to change gears a little bit, Mary, and come back to you. We're still talking a little bit of bonds here, bonds and allocation. This question comes from—

Mary Ryan: It's a hot topic.

Amy Chain: It sure is. Rob from Atlanta, Georgia, asks, "I have a fair amount invested in intermediate-term U.S. Treasuries. Should I keep these or convert them to short-term Treasuries? I am concerned about loss of value if interest rates go up next year."

Mary Ryan: And as I just said, it's a hot topic. And, you know, we've been talking about interest rates going up for years now, actually, so it's not something that's new. It's just we're hearing more and more about it. I think that the answer to that isn't for me to say, yes, do this and buy this and there you go. It's looking at making sure you're diversified appropriately. You know, so if you're overweighted in one particular area, maybe considering rebalancing and diversifying a bit more would be appropriate.

When interest rates go up, is it going to be on the short part of the yield curve? Is it the long part of the yield curve? I don't—we don't know. So to make sure that you are broadly diversified and, again, looking at high quality—and Treasuries or high-grade corporate bonds that are very good. You know, to look at, again, that diversification piece is probably more important than chasing a perceived risk or gain. So making sure that you're adequately diversified is probably the best answer to that.

Amy Chain: So it comes down to, as we always say, having an allocation that allows you to sleep at night, relying on sort of the old adages for how you should diversify your portfolio, stocks, bonds, how and where to be conservative and then not trying to chase any changes.

Mary Ryan: And I see so much of this sort of perceived, again, gain or risk. Gain is in the stock market. There's this perceived notion right now that, you know, the stocks are just going to go up and up and up. They might. They might not. And the same thing on risk of looking at bonds. It's this perceived risk. And, again, risk is all relative as to what is—where we need to be. So you know, I think to make sure you're diversified is, again, most important.

Amy Chain: All right.

Kevin Wick: Take the emotion out.

Amy Chain: Take the emotion out. That's the phrase of the day. In 2014—no emotion. Okay, let's see here. Kevin, let's send a question your way. This question comes from Joseph in West Deptford, New Jersey. Joseph asks, "Please discuss the phaseout of deductions for higher income tax payers."

Kevin Wick: Certainly. It's another element that is new for 2013 as part of some of the income tax changes that happened in January. And so individuals who, generally speaking, exceed $250,000 of adjusted gross income—for couples it's $300,000—you will, to the extent that you exceed those thresholds, your deductions, whether it be your personal exemptions, sort of the per individual amount that you get based on the number of individuals in your family as well as your itemized deductions, those are both pieces that can be reduced or even phased out for high-income individuals to the extent that they exceed those thresholds.

And so for every amount that you exceed the threshold, small pieces of that will be reduced or phased out. And that is another new impact from the tax legislation in January for high-income individuals, another important reason to consider talking with your tax advisor. If you fall into that category, whether it impacts you, will depend on what kinds of deductions you have for this year, how much deductions, your individual circumstances.

But generally speaking, for high-income individuals, then the ability to use some of those deductions will be phased out as the income goes up.

Amy Chain: Great. We are getting close on time. We may have time for one or two more questions. Mary, I'd like to send one your way. This one comes from Francis in Hilton Head. Francis asks, "How does one decide it is time to have a financial planner, and what are the running costs for having the service?"

Mary Ryan: And that's a very broad and big question because it's very personal. A lot of times, when people are looking for a financial planner, there's a reason they're looking for a financial planner. There's something in the back of your mind that you're thinking, I don't know that I'm fully grasping all the things that I need to do, even those—a company like Vanguard, we offer lots of information.

Sometimes you think, "Oh, I'm just missing something. I want to make sure I'm getting all the information that I can, and I'm getting the right advice, and I'm rebalancing my portfolio appropriately," and all the looking at the estate piece, all of that. And that could be something that you want to shop around and talk to advisors and hear what they have to say. Talk about their costs. Don't be afraid to ask, and I think that's something sometimes when people are talking to advisors, they're afraid to ask the question, "How much are you going to charge me for this?"

It's a fair question. It's like looking in a store and looking to buy something in a store, you look at the price. You want to know what you're going to get. So, again, just like we were talking about mutual funds, and whether you're buying an index fund or a managed fund, there are costs associated with things, and it's okay. But just know that cost does go against whatever you may be earning, so to be very, very careful when looking at costs, but make sure you're comfortable with that advisor, that you really know what your expectations are, what you're looking for, and why are you looking for an advisor?

Amy Chain: I think you hit an important point. What are your expectations because there is many shades of help that you can get. There's onetime help. There's ongoing help. Ask the questions. Figure out what your needs are, and then make the decision from there.

Mary Ryan: You really are at a time in your life when you need to—you maybe don't want to think about it anymore. I want to retire. I do not want to think about it anymore. Great. Or you're starting to get started, and you're building your assets, and you're working, and you just don't have any time. You need help. Fine, just know why.

Kevin Wick: We've talked in a couple different ways about how some of these things can be difficult to do, and if they are difficult for you, then certainly seeking out an advisor, some professional help, will assist with the disciplined approach, taking out the emotion. When the time is right for you, it's certainly a reason to consider. And do your homework. Do your due diligence, definitely.

Amy Chain: Well, this sounds like a great place to wrap up our conversation for today. Kevin and Mary, thanks for being with us. Any final thoughts to share before we close out?

Kevin Wick: I would just—as we've talked about again in a few different ways—think about your overall investments as part of long-term planning. There is your investment planning. There is your retirement planning. There's education planning for kids and grandkids. There's your estate planning.

All of that encompasses what we've referred to before as your wealth planning. And think about those things. This is a good time at year-end, if you haven't already this year, to make it a point to do so. If you need to push it off to the beginning of the year, okay, but make sure you pick it up at the first part of next year. These are decisions that can't be put off year after year. You need to address them.

You need to address them periodically like we've talked about in a couple of different ways. So don't just shove those down into the foxhole.

Amy Chain: Don't procrastinate.

Kevin Wick: Exactly.

Amy Chain: Mary, any final thoughts?

Mary Ryan: And that's exactly it because we're so fortunate that we do get the end of the year; we have a new year. It's a very visible time to take an inventory personally as well as look at our finances. And, you know, I was joking with somebody. I said before you pop the bubbly on January, you know, it's New Year's Eve, make sure you've done your due diligence on your finances and what you need to do. It's very important.

Amy Chain: That's a great closing thought. Thanks to both of you, and thanks to all of you out there for staying with us today. We got some great live questions. I loved having this engaged audience. So thank you.

Stay tuned to Vanguard. We will send you an e-mail in a few weeks with a link to some replays from today's event and also a transcript, and if we could have just a few more moments of your time before you sign off for today, a survey will appear when this webcast is over. We love your feedback. So for all of us here at Vanguard, thank you for tuning in, and we'll see you next time.

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