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Rating Bonds

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Bonds word in wooden blocks with coins stacked in increasing stacks. Bonds increasing concept. Copy spaceBefore you add bonds to your portfolio, you should understand how they work and what variations exist among them. Just as importantly, you need to identify the risks that come with owning bonds and how you can protect yourself from them.

Bond Basics

Bonds are essentially IOUs, issued by federal, state, and municipal governments as well as by corporations and governmental agencies. They are intended to raise revenue for a wide variety of activities. For example, governments issue bonds to finance the construction of infrastructure projects, such as roads, bridges, airports, public housing, and schools. Corporations may use the proceeds of bonds to pay for the construction of new manufacturing facilities, research and development, or to expand into new markets.

Bond investors essentially loan money to the bond’s issuer. In return, they receive interest payments at specified intervals plus a promise that the issuer will return the bond principal to investors when the bond’s term ends on its maturity date.1

Interest Rate Risk

Bonds are not a risk-free investment. Rising interest rates may reduce the desirability of the bonds you own because there is an inverse relationship between bond prices and yield. If you opt to sell a bond before it matures because interest rates on newly issued bonds have gone up, you will most likely have to accept a lower price than you paid for it.

The Importance of Credit Quality

Credit risk — or the risk that a bond issuer will fail to make promised interest and principal payments — is another important consideration. Bonds issued by companies or entities that are financially healthy are not as risky as bonds from issuers that are less financially sound. Bonds with low credit ratings offer higher yields to compensate for added risk to your portfolio.

Rating Agencies

Rating services assess municipal bonds, all types of corporate bonds, and international bonds. U.S. Treasury bonds are not rated. Before rating a bond, analysts assess various factors that could affect the issuer’s willingness and ability to meet its obligations to bondholders. For example, they examine other debt the company carries and how fast the company’s revenues and profits are growing. They take a holistic approach in that they also review the state of the economy and the financial health of other companies in the same business. In the case of municipal bond issuers, they examine and compare municipalities of a similar size and similar budget.

Credit ratings influence the interest rate an issuer must pay in order to sell its bonds. However, credit ratings are opinions about credit risk. Even though credit ratings are forward looking in that they assess the impact of foreseeable future events and can be useful to investors, they are not a guarantee that an investment will pay out or that an issuer will not default. While investors may use credit ratings in making investment decisions, they are not indicators of investment worth nor are they buy, sell, or hold recommendations. You can learn more about the rating systems of the two major services, Standard & Poor’s and Moody’s, on their websites.

This information is not meant as tailored investment or tax advice. Before building a portfolio that includes bonds, you may find it helpful to discuss your strategy with a financial professional.

1Bonds can gain or lose value based on economic conditions and market events. Principal is not guaranteed.

Bookkeeping & Accounting Tips for Small Business Owners

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Running a small business is a demanding task, requiring you to wear many hats, from managing operations to marketing and customer service. Among these responsibilities, bookkeeping and accounting are crucial for the financial health and sustainability of your business. While it may seem daunting, effective financial management doesn’t have to be overly complicated. Here are some essential bookkeeping and accounting tips to help small business owners stay organized, compliant, and financially sound.

1. Separate Personal and Business Finances

One of the first steps for any small business owner is to separate personal and business finances. Open a dedicated business bank account and use it exclusively for business transactions. This separation simplifies bookkeeping, aids in tax preparation, and ensures legal protection of personal assets.

2. Use Accounting Software

Investing in accounting software can save you time and reduce the risk of errors. Tools like QuickBooks, Xero, or FreshBooks offer user-friendly interfaces and automate many bookkeeping tasks, such as invoicing, expense tracking, and financial reporting. Many of these platforms also integrate with your bank account, further streamlining the process.

3. Track All Expenses

Maintain meticulous records of all business expenses. Use your accounting software or apps to capture and categorize receipts immediately. Keeping a detailed record of expenses not only helps in managing cash flow but also ensures you can claim all possible tax deductions.

4. Regularly Reconcile Bank Statements

Reconcile your bank statements at least once a month. This process involves comparing your accounting records with your bank statements to ensure they match. Reconciling accounts helps identify discrepancies, catch errors, and detect potential fraud early.

5. Implement a Consistent Invoicing System

A consistent invoicing system ensures you get paid on time. Send out invoices promptly, set clear payment terms, and follow up on overdue payments. Using accounting software for invoicing can automate reminders and track outstanding invoices.

6. Monitor Cash Flow

Cash flow is the lifeblood of any small business. Regularly monitor your cash flow to ensure you have enough funds to cover operating expenses and invest in growth opportunities. Create cash flow projections to anticipate future needs and adjust your operations accordingly.

7. Set Aside Money for Taxes

Avoid the year-end scramble by setting aside money for taxes throughout the year. Estimate your tax liability and regularly deposit a portion of your revenue into a separate tax account. Consider consulting with a tax professional to understand your tax obligations and maximize deductions.

8. Maintain Accurate Financial Records

Accurate financial records are essential for making informed business decisions. Regularly update your books and keep records of all financial transactions, including sales, purchases, payroll, and other expenses. Accurate records are also crucial for compliance with tax laws and regulations.

9. Prepare for Financial Reporting

Prepare financial statements, such as the balance sheet, income statement, and cash flow statement, on a regular basis. These reports provide insights into your business’s financial health and performance. Use these reports to identify trends, assess profitability, and make strategic decisions.

10. Seek Professional Advice

Consider hiring a professional accountant or bookkeeper, especially if your business finances become complex. A professional can provide valuable insights, ensure compliance with tax laws, and help you optimize your financial strategy. Many small business owners find that the cost of professional advice is outweighed by the benefits of improved financial management and peace of mind.

Effective bookkeeping and accounting are fundamental to the success of any small business. By implementing these tips, small business owners can maintain financial order, make informed decisions, and ensure their business thrives. While it may require an initial investment of time and resources, the long-term benefits of sound financial practices are well worth the effort.

A Checklist for Plan Sponsors

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task list is ticked off in detailOnce a retirement savings plan has been approved and is in place, it’s tempting to sit back and adopt an “I’m done,” hands-off attitude. However, to ensure that a plan will continue to operate effectively, employers should periodically review plan provisions and features. Here are some points to check.

  • How the plan is presented. The more convinced employees are of the wisdom of saving for retirement, the greater the level of employee participation. The greater the participation, the more the plan can benefit all employees — including highly compensated ones. Regular meetings, newsletters, and handouts are effective means of communicating plan advantages. Check to make sure printed materials are up to date and easy to understand, and distribute them frequently.
  • Plan investments. Employers that sponsor participant-directed plans can limit potential legal liability for losses caused by employees’ investment decisions if plan investment choices meet certain requirements under Section 404(c). Very generally, where 404(c) protection is sought, a plan should offer at least three “core” investment choices, allow employees to switch investments at least once each quarter, and provide participants with adequate disclosure of specified investment information.
  • Administration. Participants and beneficiaries must be given a copy of the Summary Plan Description (SPD) within 120 days after a plan is adopted or within 90 days after becoming eligible to participate in the plan or receive benefits. Review the SPD to make sure it accurately describes the provisions of your plan. If changes have been made to the plan document — which is likely, given the recent tax law changes — then all participants must receive a notification of these changes within 210 days after the end of the plan year in which the changes were adopted. Generally, all participants must receive a copy of the SPD every five years.
  • Summary annual reports (SARs). Summary annual reports must be distributed to participants within nine months after the close of the plan year. If a plan receives an extension to file its annual report (Form 5500) with the IRS, then the SAR must be distributed within two months after the end of the extension.
  • Plan rollovers. Qualified plans must allow a participant to elect direct rollover of any eligible distribution to an IRA or another employer-sponsored retirement plan. Your plan should have procedures in place to handle direct rollovers.
  • Bonding. Generally, plan fiduciaries and others who handle the assets of a plan must be bonded. The bond must be equal to at least 10% of the funds handled by the bonded individual, but cannot be for less than $1,000 and need not be for more than $500,000.
  • Loans to participants. Loans that are not properly administered may be treated as constructive distributions resulting in taxable income to the recipients. Review loans to make sure that loan balances do not exceed the maximum limitations. Unless used to finance the purchase of a principal residence, all loans must be repaid within five years. A plan may impose more stringent conditions on loans than the law requires.
  • Plan forms. All forms should meet current requirements. Forms that may need updating include beneficiary designation forms, benefit election forms, and the notice of distribution options.

Understanding Total Return

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Hands of a young Asian businessman Man putting coins into piggy bank and holding money side by side to save expenses A savings plan that provides enough of his income for payments.A mutual fund’s performance — its total return — can be either positive or negative. In other words, a fund either made or lost money for a measured time period. There are three separate elements that contribute to total return: the distribution of fund income (interest and dividends received on the fund’s investments); the distribution of capital gains; and the rise or fall in the price of fund shares. A fuller understanding of these three elements can help you make more informed decisions as an investor.

Fund Income

Bond issuers, such as corporations and the U.S. government, pay interest on the money loaned to them by the investors that buy the bonds. If you buy a government bond, for example, you know how much interest the bond will pay you over the life of the bond. Bonds are also known as “fixed-income” investments because you can anticipate your earnings.

If you own shares in a bond fund rather than an individual bond, you will share in the interest earned by the bonds in the fund. However, if you own your bond fund through an employer’s retirement plan, you do not actually receive your share of the interest income in cash. Instead, your share of the interest is reinvested in the fund and is used to buy additional shares for your account.

If you own shares in a stock fund, you may receive a distribution of dividends the fund received on its various stock holdings. Your share of the dividends paid to a stock fund you own through an employer’s retirement plan is reinvested in that fund and used to buy additional shares.

Capital Gains Distributions

When fund managers sell an investment that has increased in price, the fund will have a capital gain. Funds, of course, have losers as well as winners. When a fund sells an investment for less than it paid for it, the fund suffers a loss. Most mutual funds distribute capital gains (minus capital losses) to their shareholders at the end of the year. If you own funds through a retirement account, then the capital gains distributions are reinvested in additional fund shares.

Rise or Fall in Fund Share Prices

The market prices of stocks and bonds rarely remain static — they typically rise and fall each trading day. Thus, the share price of a fund depends on the current value of the investments it holds in its portfolio, after deduction of expenses and liabilities. As an investor, it’s important to understand that until you sell your shares in a fund, any gain or loss in their value is only a gain or loss on paper.

Total Return and Fund Performance

There are several ways to measure fund performance, and total return plays a part in each method.

  • Average annual total return: One way to measure the performance of a mutual fund is to look at its average annual total return for different periods of time. A comparison of a fund’s return to a benchmark will show how the fund has performed relative to an index.
  • Cumulative total return: Looking at a fund’s cumulative total return shows how much a fund has earned over a specific period.
  • Year-by-year returns: It can be helpful to compare a fund’s performance from one year to the next. If you notice a wide variation year to year, the fund is most likely a highly volatile one.

You should consider the fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

Prices of fixed income securities may fluctuate due to interest rate changes. Investors may lose money if bonds are sold before maturity.

Stock investing involves a high degree of risk. Stock prices fluctuate and investors may lose money.

What are Tax Credits?

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Notebook with tax credit sign on a table. Business concept.Taxes are an integral part of running a business, and they often represent a substantial portion of your expenses. However, there’s good news for businesses looking to reduce their tax burden and stimulate growth – business tax credits. These credits provide financial incentives for companies to invest in various activities, from research and development to promoting renewable energy. In this article, we’ll explore what business tax credits are, how they work, and how they can benefit your company.

What Are Business Tax Credits?

Business tax credits are financial incentives offered by governments at the federal, state, or local level to encourage businesses to engage in certain activities that benefit society, the environment, or the economy. These credits work by reducing a company’s tax liability, effectively lowering the amount of taxes they owe. They serve as a reward for businesses that invest in activities that align with the government’s policy objectives.

Types of Business Tax Credits

There are various types of business tax credits available, each with its own set of eligibility criteria and benefits. Here are some common types:

1. Research and Development (R&D) Tax Credit: This credit is designed to encourage businesses to invest in innovation and research activities. It can help offset the costs associated with developing new products, processes, or technologies.

2. Renewable Energy Tax Credits: These credits are intended to promote the use of renewable energy sources, such as solar, wind, and geothermal energy. They can significantly reduce the cost of investing in clean energy initiatives.

3. Investment Tax Credits: These credits reward businesses for investing in specific projects or assets that promote economic growth or job creation. They are often used to stimulate investment in economically distressed areas.

4. Low-Income Housing Tax Credit: Aimed at promoting the development of affordable housing, this credit provides incentives for businesses to invest in housing projects for low-income individuals and families.

5. Work Opportunity Tax Credit: This credit encourages the hiring of individuals from specific target groups, such as veterans and individuals with disabilities. It can offset a portion of the costs associated with employing these individuals.

Benefits of Business Tax Credits

Business tax credits offer numerous advantages for companies:

1. Reduced Tax Liability: The most apparent benefit is the reduction of your company’s tax liability. This translates into cost savings that can be reinvested in your business, used for expansion, or allocated to other vital activities.

2. Encouragement for Investment: Tax credits provide a financial incentive to invest in areas such as research and development, clean energy, or affordable housing. This encourages businesses to participate in activities that contribute positively to society and the economy.

3. Competitive Advantage: By taking advantage of available tax credits, your business can gain a competitive edge. This is especially relevant in industries where innovation, sustainability, and social responsibility play a significant role.

4. Stimulated Growth: Many tax credits are designed to spur economic growth, create jobs, and improve local communities. By participating in these initiatives, your business can be a catalyst for positive change.

How to Access Business Tax Credits

To access business tax credits, follow these steps:

1. Identify Eligibility: Determine which tax credits your business may be eligible for. Consult with a tax professional to assess your eligibility accurately.

2. Document Activities: Keep meticulous records of the activities that make you eligible for the tax credits. Proper documentation is essential to substantiate your claims.

3. File Accurate Tax Returns: Ensure your tax returns accurately reflect the credits you are claiming. Mistakes can lead to delays and audits.

4. Consult with Professionals: Tax professionals, accountants, and legal experts can help you navigate the complex world of tax credits, ensuring you maximize your benefits while staying compliant with tax laws.

Business tax credits offer a valuable opportunity for businesses to reduce their tax liabilities and invest in activities that promote growth, innovation, and social responsibility. By understanding the available credits and working with professionals to access them, your business can not only thrive financially but also contribute to positive change in your community and beyond.

Help Your Working Teen Get a Jump-Start on Saving

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Happy family watching funny video on laptop together with their adopted daughter during leisure time at homeYou may have a teen in your family who holds down a part-time job or works full-time during the summer. You can help your child lay the groundwork for future retirement security early on by encouraging your child to open an individual retirement account (IRA).

You may, or may not, get some resistance, especially if your child has other plans for spending the money. However, you should persist since the benefits can be significant over the long term. Here are some points you can bring up as you make your case.

Savings Can Grow Over Time

When it comes to building savings, your child’s age is a major advantage. Given enough time, even a relatively small investment could grow into a significant sum due to the power of compounding. For example, a one-time investment of $6,000 could grow to $110,521 in 50 years, assuming a hypothetical 6% annual return. Invest $6,000 every year for 50 years at 6%, and your child could accumulate over $1.7 million. Of course, investment returns can vary from year to year and are not guaranteed.

IRAs Offer Tax Advantages

As long as your teen does not participate in an employer’s retirement plan, contributions to a traditional IRA will be fully tax deductible. (With plan participation, income limits may apply.) Any earnings that investments in the IRA make will grow tax deferred. Your child won’t have to pay any income taxes on the IRA funds until they are withdrawn from the IRA.

Contributions to a Roth IRA are not tax deductible, but they can be withdrawn tax free at any time for any purpose. Earnings accumulate tax deferred and can be withdrawn tax free once your child reaches age 59½ and has had a Roth IRA for at least five tax years. Tax-free withdrawals are also available after five years for first-time home buying expenses (to a maximum of $10,000) or on account of disability or death.

Your teen can contribute up to $6,500 to one or more IRAs in 2023 or the amount of his or her annual compensation, if less. The IRS adjusts this IRA contribution limit periodically for inflation. Your child has until the April tax-filing deadline to contribute to an IRA for the prior tax year.

If you would like some help deciding which type if IRA may make the most sense for your teen child, be sure to get in touch with your financial professional.