Developing a personal investment policy

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Develop your own  personal investment policy

Take the time to develop a written personal investment policy now to improve your investment results over the long term.

by Tony Novak, CPA, MBA, MT
, revised 11/20/2011

How are your investments doing lately? Are you meeting your goals? These are simple questions, but not easily answered by most. The fact is that calculating performance is difficult and often clouded by psychological influences not directly related to financial performance.

Most business people believe that a business that has a written plan is more likely to be successful than one that does not. There appears to be enough independent evidence to support this conclusion. So it follows that individual investors with a written plan are more likely to achieve their financial goals than one who manages finances with a less formal strategy. Recent research supports this belief.

Following are a list of considerations that may be important when developing your own personal investment policy:

1. Empty nesters often find that it pays to downsize the home. Married couples can exclude up to $500,000 ($250,000 for single people) gain can be excluded on the sale of a home. That means possibly a half million dollars completely free of income tax! No other provision in the tax law is as generous. Considering the recent run-up in housing prices in many areas, now may be the time to consider cashing in and trading for a less expensive dwelling. There is no need to reinvest the gain in another house, so this is a perfect for empty-nesters who may be ready to downsize.

2. Self-employed individuals can stretch pension deductions. Self-employed individuals can deduct up to 100% of income or up to $205,000 for contributions to a private pension plan. This is an extraordinary opportunity for high income people close to retirement age who are self-employed or work in a small business.

3. Write-off of up to $100,000 of purchases used for business. This break has been nicknamed the Range Rover write-off. Even if you bought it with a 100% loan and have not yet made the first payment, the entire purchase price is immediately tax-deductible. This tax break was meant to provide extra spark to the economy, and it seems to be working.

4. Receive tax-free reimbursement for out-of-pocket health care expenses. Use a Medical Savings Account (MSA) if you are self-employed or a Health Reimbursement Arrangement (HRA) if you are an employee. Even better tax-saving opportunities are expected soon using Health Savings Accounts (HSA). This should be an easy way to save $1000 per year in taxes.

5. Tax credit for low income individuals who make retirement plan contributions. The federal government effectively matches 50% of your deposit with a tax credit. Of course, the problem is that low income people do not have money to make retirement plan contributions. But parents could make a gift of IRA deposits to their children, for example, to effectively earn an immediate 50% return on their investment.

6. Eliminate taxable dividends and short term capital gains. Mutual funds are not tax-efficient for most investors. Exchange-traded funds, on the other hand eliminate all of the unwanted taxable distributions and put funds on the same tax platform as individual stocks.   

7. Use executive benefits to defer income. Despite recent tightening of rules for stock options and deferred compensation plans using corporate-owned life insurance, it is still easy to defer income using an employee benefit plan.

8. Do not overlook cash value life Insurance. All investment gains and death benefits are tax free to your named beneficiary. Living benefits taken in the form of policy loans are also tax-free in a properly constructed policy. Few other financial vehicles offer this liberal tax treatment.

9. Non-cash deduction for real estate depreciation. While you watching your rental properties rise in value, you may write off part of the purchase price and fix-up costs up to $25,000 per year even if most of the purchase price was borrowed.  

10. Asset-based lending for affluent individuals make it easy to finance 100% of the value of a primary home or vacation house. While these loans are more difficult to find than a few years ago, they still present an opportunity for those who own substantial investments and want to take advantage of today’s depressed market prices. The interest cost is deductible and borrowing rates are at a historic low. Since “cash out” refinancing is not typically available through traditional mortgage lenders, it may be necessary to use a professional adviser or broker who maintains a relationship with asset-based lenders.


Before committing to any tax strategy, complete a pro-forma tax return to test the strategies for your unique situation. Pay special attention to income based phase-outs and the alternate minimum tax.

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tonynovak.comThis Web site is independently owned and operated by Tony Novak operating under the trademarks “Freedom Benefits”, “OnlineAdviser” and “OnlineNavigator”. Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier and has no financial position in any stocks mentioned. Novak may act as and be compensated as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to the companies listed on this site or other commercial companies and non-governmental insurance exchanges. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

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