Investment Newsletter for the end of August, 2018

Despite the drama this month, despite who said what stupid thing, despite the international crisis because of the trade and tariff battles, all of you had a great month. The Dow is just below its all-time high. The S&P and Russell 2000 have set new records. As I mentioned before, different indexes behave differently and they all represent parts of the market. The base, of course, right now is the booming economy.

My topic today is taxes. Your return on investments does not matter for financial planning. What matters is your return after taxes. What matters is how much you get to keep after the government gets it’s cut.

First and most important, investment positions should be held at least one year. Short term trading, if you are LUCKY enough to win, generates high taxes. Losses are restricted to $3,000 per year. Long term trading is taxed at sharply reduced capital gains rates. While losses are still restricted, they are less likely. The economy with the back and forth over the years will gradually go up. Taxes are not relevant to IRA accounts but my comment on the economy is.

The order you withdraw your savings matter. At 59.5 you can draw money from your IRA (traditional, SIMPLE, 401K) but you do not have to. At 70.5 you have to start taking money. It is taxable as you take it. You can not roll it over to another IRA after 70.5. I recommend drawing your taxable accounts (personal, joint) first. Hold off of drawing the IRA’s until you are retired at least, if you can. If the withdrawal is taxable, I want you in a low tax bracket. Since your income will be low, the percentage tax (the tax the government gets from you) will low.

Do not take IRA money before 59.5. If you do so, half the money will disappear to taxes. First, you are likely in a high federal and state tax bracket. Second there is a 10% penalty for early withdrawal.

I would also hold off drawing out Roth IRAs as long as you can. They are not taxable when you withdraw money, but the economy will gradually improve their value. I would draw a Roth after your personal accounts and before your traditional IRA’s.

Your mortgage on your personal home is an investment. Technically, it would be a negative investment. You are paying 3.5% fixed every month. Paying off this loan saves you 3.5%. It doesn’t mean the same thing as earning 3.5% fixed on a bond. Under the new tax rules, most of you will not be itemizing deductions for federal. The standard deduction is now so high ($12,000 for a young person, $24,000 for a young couple, $26,000 for an old couple), that itemized deductions will not matter. If a bond paying 3.5% is taxable income and a negative bond, aka your mortgage, has no tax benefit, paying down your mortgage becomes better planning. To equal your 3.5% mortgage, your investment better be earning over 5% (depending on your tax bracket). I am recommending paying down your personal mortgage if you can. Do not pay off your rental property debt, until you have all other debts killed. Rental mortgages are still deductible.

In fact, I do not like any debt. I suppose that makes me a dinosaur. Oh well. Pay down debt in order of the interest rate after tax. Pay the most expensive loan first. Pay the 10% loan before the 9% loan. Pay the 9% loan before the 4% loan, etc.

Thanks for your continued business.


Investment Fee Schedule

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 whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. 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. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

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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