Investment Newsletter for the end of January, 2017

The market was essentially sidewise or slightly up this month. Everybody was up a bit.

My topic today is taxes and more particularly how they relate to investments. The goal, obviously, of investing is to increase your income, make your income last as long as possible, increase your wealth, etc. Profit is not the critical measure. Profit after tax is. What matters is what you are left with.

Your income is taxed at either long-term capital gains rates or much more expensive ordinary rates. Wages, interest, rents, retirement distributions, annuity distributions, short-term capital gains, and business profits are taxed at the higher rate. Long-term capital gains are the profits of investments held for more than one year. The rate of tax is far less, approximately half.

I deal with two basic kinds of accounts, retirement accounts and personal accounts. Retirement accounts are IRA’s, 401k’s, SEP, annuities, simples, etc. (ignoring Roth’s for the moment). They are tax deferred. You are taxed when you withdraw the money from the accounts. Despite what the annuity people will sometimes say, they are not tax free. Capital gain issues are ignored. For tax purposes, dividends and interest are ignored. Whether it is long or short does not matter. The only thing that matters is when it comes out and it is all ordinary when it comes out. It was a deduction when it was put in. Most of us, myself included, have much of our investments in this form. We want the deduction now. We want to reduce our tax now. The cost of this decision is that we pay more tax later.

Personal accounts are your savings, proceeds from real estate sales, inheritances, gifts, etc. When you create these accounts or add money to these accounts, there is no tax deduction. Once these accounts are funded, trading (buying and selling) starts happening. There are interest and dividends. All these have tax repercussions. It does not matter what and when you take money out of the account. The transactions are taxed on your personal tax return. Interest income is ordinary (high rate). Dividends are generally long-term capital gain (low rate). Trading profits are split into two piles. If the security being sold was held less than one year, then it is short term. More than one year, then it is long term. It does not matter if it was reinvested. You are still taxed on it.

Some brokers and investors like to trade often. They think they can outmaneuver the market. I think the strategy is bogus. Besides the obvious high commissions and poor logic, all the profits are short term (high rate). Taxes eat much of the supposed advantage. If positions were held over one year, taxes would be about half.

Two additional wrinkles are loss limitations and wash sale limitations. Losses are limited to $3,000 per year (net). You cannot use more than that amount to shelter income. The difference carries forward to offset future income. I once had a tax account for someone with over $200,000 in capital loss carry overs. He was taking them at his maximum $3,000 per year and he was already 75 years old. The wash sale rule is more complicated. Essentially, no loss is recognized if the same position is purchased back within 30 days.

Taxes and investments must be looked at together. As both a long-term CPA and CFP, I know both. Call me if you have any questions.

Faithfully Yours


Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. Please contact me if you want me to write about a particular topic. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

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