Historically over the last 40 years, capital gains and dividends were taxed as much as 70%. The 15% rate we are getting now is likely not to last. The new House Health Care Bill is even cutting FSAs to $2500. It's clear to see that preferential capital gains tax treatment is going to come to an end soon.
On one hand, it's bad to spread anti-government propaganda and to speculate on future tax changes. However, it's plainly obvious that this tax is very likely to change within the next few years, and once it does change, it will be too late.
Here are some ways to protect yourself:
1) Max out as much in tax-sheltered savings as possible. If you were only hitting the matching level to your 401k and saving the rest in taxable stocks, think again.
2) Put stocks in deferred accounts. It's considered a bad idea to keep stocks in tax-deferred accounts because then you convert long term capital gains into marginal taxed gains. If preferential treatment leaves, then it's better to invest stocks in deferred, and low yielding bonds in taxable. If you wait for the new tax to come into effect, then you will have to sell the stocks at a taxable gain to move them into deferred. Sell NOW, while you are still at a loss, and repurchase the stocks within the deferred accounts. Then use the bond portion of your asset allocation within muni bonds or low cost (USAA/Vanguard) annuities.
3) Reconsider how much you have for retirement. If you were planning on selling 30 years gains of taxable stocks at 15% tax rate, think again. Re-plan to pay 25% or more in taxes on those gains, otherwise you may not have enough to retire.
4) Borrow money to max out your tax-sheltered accounts if possible. If your HELOC is 5% or less, and you can invest another $10k in your 401k to hit the annual cap, borrow the $8k from HELOC, live off of it, and divert your paycheck to the $10k into the 401k. Then in future years, you pay back the HELOC and got to max out tax-shelters every year.
Message edited by: tripleB on 2009-11-09 18:07:00 CST
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Go into tax free munis and you'll be fine. Doubtful the Increased Capital Gains/Dividends Tax would go over 25% after 2011 expire date. If we get a Republican in the debt house in 2012, then they will be renewed. In addition, since they expire in an election year, it will most likely get extended. Hence the reason as to why they did it like that; at least that is what I believe.
Not feeling good about maxing out 401K. Who knows what the tax rates will be XX years from now. At the rate the gooberment is printing money, I won't be surprised to see marginal rates way over 50% by the time some us will be ready to start cashing out 401K's.
If your employer matches a portion, then put away up until the max match, otherwise, with tax rates still at historical lows, you're probably better off taking the after-tax cash and socking it away in munis.
samiam68 said:Not feeling good about maxing out 401K. Who knows what the tax rates will be XX years from now. At the rate the gooberment is printing money, I won't be surprised to see marginal rates way over 50% by the time some us will be ready to start cashing out 401K's.
If your employer matches a portion, then put away up until the max match, otherwise, with tax rates still at historical lows, you're probably better off taking the after-tax cash and socking it away in munis.
But then you will be paying taxes for the next 30 years at the higher rates on the earnings. You mention Munis but earning 3% doesn't seem as good as the 10% likely returns of the stock market.
tripleB said:samiam68 said:Not feeling good about maxing out 401K. Who knows what the tax rates will be XX years from now. At the rate the gooberment is printing money, I won't be surprised to see marginal rates way over 50% by the time some us will be ready to start cashing out 401K's.
If your employer matches a portion, then put away up until the max match, otherwise, with tax rates still at historical lows, you're probably better off taking the after-tax cash and socking it away in munis.
But then you will be paying taxes for the next 30 years at the higher rates on the earnings. You mention Munis but earning 3% doesn't seem as good as the 10% likely returns of the stock market.
Munis average 4-5% tax free. Having 4-5% return with fairly stable principal will let you sleep at night and live longer. Stocks will cause you stress and give you a heart attack far sooner. Therefore the compounding of 4-5% over a longer period might be more profitable.
tripleB said:samiam68 said:Not feeling good about maxing out 401K. Who knows what the tax rates will be XX years from now. At the rate the gooberment is printing money, I won't be surprised to see marginal rates way over 50% by the time some us will be ready to start cashing out 401K's.
If your employer matches a portion, then put away up until the max match, otherwise, with tax rates still at historical lows, you're probably better off taking the after-tax cash and socking it away in munis.
But then you will be paying taxes for the next 30 years at the higher rates on the earnings. You mention Munis but earning 3% doesn't seem as good as the 10% likely returns of the stock market.10% is pretty high to be considered likely, even including dividends. 10% after taxes (especially considering 50% tax rates that you think may happen), is really high IMHO.
3%? Who do you have managing your money? I am well over-weighted in muni bonds with insurance (the actual bonds not funds). Purchased within the last year, averaging 5% all tax free. And no, not many in Cali or Florida. If you need a good broker, let me know.
Message edited by: comptalk on 2009-11-09 22:06:19 CST
theman2 said:You mention Munis but earning 3% doesn't seem as good as the 10% likely returns of the stock market.10% is pretty high to be considered likely, even including dividends. 10% after taxes (especially considering 50% tax rates that you think may happen), is really high IMHO.
If you bothered to read my post you would have seen where I wrote that one should consider switching stocks to tax-sheltered accounts. 10% return is not uncalled for over the next 30 years. If you bought in January you would already be up 40%. The stock market could sit flat for 3 years and you would still be at the 10% annualized goal.
comptalk said:3%? Who do you have managing your money? I am well over-weighted in muni bonds with insurance (the actual bonds not funds). Purchased within the last year, averaging 5% all tax free. And no, not many in Cali or Florida. If you need a good broker, let me know.
Congratulations. You bought Munis in 2008 and late 2009 when they have been at historically high yields. You got a nice 10 to 20% appreciation on the principal. The yields are now down to 3% and will likely push lower to 2.5% within the next year.
It's ridiculous to suggest that an investment plan will be buying 5% tax free munis for the next 30 years. This was a once in a lifetime deal.
comptalk said:Just bought 3 munis today from NY, NJ, WA. Paying respectively 5.2%, 5.5%, 5.1%. You need a new broker bro.
Considering Vanguard's muni funds have dropped to about 3% yield and they are conservative in buying good bonds, I imagine you bought some junk muni bonds. I googled this and you can find 7% yielding junk munis today with a historical default rate of about 5%. So after defaults you get 2% return.
Message edited by: tripleB on 2009-11-10 08:08:25 CST
No CUSIPs listed in my account, only bond names. One correction, it was a WI not WA bond on the last. B3, I will not buy junk bonds. Junk bonds also do not have insurance.
Here they are.
NEW JERSEY ECONOMIC DEV AUTH REV CIGARETTE TAX BAA2 / BBB- 5.500% Due : 6/15/2031
NEW YORK N Y CITY GENL OBLIG SER-I SUBSER I-1 AA3 / AA 5.250% Due : 4/1/2032
tripleB said:H2) Put stocks in deferred accounts. It's considered a bad idea to keep stocks in tax-deferred accounts because then you convert long term capital gains into marginal taxed gains. If preferential treatment leaves, then it's better to invest stocks in deferred, and low yielding bonds in taxable. If you wait for the new tax to come into effect, then you will have to sell the stocks at a taxable gain to move them into deferred. Sell NOW, while you are still at a loss, and repurchase the stocks within the deferred accounts. Then use the bond portion of your asset allocation within muni bonds or low cost (USAA/Vanguard) annuities.
Would you hit the "Wash Sales" rules, if you try to dump the stock at a loss and then buy back in the other account?
[1) Max out as much in tax-sheltered savings as possible. If you were only hitting the matching level to your 401k and saving the rest in taxable stocks, think again. ]
well they changed the rules (or will change) on HSAs, what makes this statement true - they can change the rules on our 401k, roth, traditional, etc...
comptalk said:No CUSIPs listed in my account, only bond names. One correction, it was a WI not WA bond on the last. B3, I will not buy junk bonds. Junk bonds also do not have insurance.
Here they are.
NEW JERSEY ECONOMIC DEV AUTH REV CIGARETTE TAX BAA2 / BBB- 5.500% Due : 6/15/2031
NEW YORK N Y CITY GENL OBLIG SER-I SUBSER I-1 AA3 / AA 5.250% Due : 4/1/2032
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