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.
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.
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.
wilesmt
Senior Member
posted: Nov. 10, 2009 @ 8:00a
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.
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...
Auream
Senior Member - 1K
posted: Nov. 10, 2009 @ 3:38p
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
breaux124 said: 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?
In general, yes.
nt2008
Member
posted: Nov. 10, 2009 @ 4:23p
Thrilla said: breaux124 said: 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?
In general, yes.
the way i understand it, you can have NO BUY activity on that particular ticker symbol, 30 DAYS BEFORE AND AFTER your sale. Though I am not definite, check this info is correct before you act on it.
These are single and long duration bonds. Which is what I figured.
For the lay investor, a bond fund may make more sense, e.g. VWLTX. The yield of that fund will at least move relative to inflation/FIDO/whatever. Not that I am recommending this fund or any long term bonds, for that matter....
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
Thrilla said: breaux124 said: 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?
In general, yes.
If you invest in stock mutual funds then NO its NOT a wash sale. Just buy the Large Cap mutual fund for 30 years instead of The SP500 fund. They are 90% similar but are not considered a wash sale. Then within the 401k sell the large cap to rebuy SP500 after one month if you wish. Even if theres a gain, its not taxable since its sheltered.
ThePessimist
Ancient Member
posted: Nov. 10, 2009 @ 7:56p
comptalk said: I prefer long term bonds @ par or below. The problem with the >20 year bonds you're buying is the risk of inflation. If inflation winds up going to 5% a year, you're getting no real return on your money. If we have an inflationary period as in the 1970s, you could easily end up with a negative rate of return. Even if the inflationary period is brief, it can still devalue your principal enough to completely negate your interest returns. There's a reason these long bonds sell at >5% YTM.
If inflation and interest rates stay low, then the issuers will refinance the debt, call the bonds, and you won't get to take advantage of the high yields for for very long. Either way rates move, you lose.
Lock in the rates and guaranteed return. They are all callable within 2012 - 2015 anyway. Plus, you can sell at any time. Compare the 5% tax free yearly return while preserving the principle vs. going into the market in 97/98 and coming out with less now. Hmm, if you look at it like that, then you can see its not a bad place to be. I also have 25% of my money in corp. debt (Chase, GE, BNI, etc.). Another 25% in private placements. 20% in mutual funds (US/INTL/AGR. Grow). 5% in natural resources. Its a conservative portfolio to say the least.
"[P]ast performance is not a guarantee of future results."
comptalk said: Lock in the rates and guaranteed return. They are all callable within 2012 - 2015 anyway. Plus, you can sell at any time. Compare the 5% tax free yearly return while preserving the principle vs. going into the market in 97/98 and coming out with less now. Hmm, if you look at it like that, then you can see its not a bad place to be. I also have 25% of my money in corp. debt (Chase, GE, BNI, etc.). Another 25% in private placements. 20% in mutual funds (US/INTL/AGR. Grow). 5% in natural resources. Its a conservative portfolio to say the least.
comptalk said: Lock in the rates and guaranteed return. They are all callable within 2012 - 2015 anyway. Plus, you can sell at any time. ...I don't see a problem with the overall strategy, just want to point out if rates go higher they won't call it so you will be selling at a discount if you have to sell.
tripleB said: Thrilla said: breaux124 said: 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?
In general, yes.
If you invest in stock mutual funds then NO its NOT a wash sale. Just buy the Large Cap mutual fund for 30 years instead of The SP500 fund. They are 90% similar but are not considered a wash sale. Then within the 401k sell the large cap to rebuy SP500 after one month if you wish. Even if theres a gain, its not taxable since its sheltered.
That's why I replied, "In general, yes." because the question was about a stock, not funds. Also, your explanation has little to do with the question as it relates to whether or not processing those transactions in separate taxable and IRA accounts will result in a wash sale. The answer is yes. In your scenario with two different funds, it's not considered a wash sale regardless of the type of account anyways. That's a strategy for avoiding wash sale status on a specific transaction irrespective of the type of account. There's no need to do it in two separate accounts.
Additionally, the point isn't really about the gains so much about harvesting tax losses for wash sales.
The other option is, of course, wait until that time when capital gains rates are increased and realize some "wash gains" by selling and repurchasing stock for the sole purpose of realizing gain at the lower tax rates. But yes, overall I think we are going back towards a Clinton-era tax level in the future, so look at some of the late 90's era tax forms for guidance. Don't count on being able to realize 0% capital gain rates for taxpayers at the lowest income levels any time soon.
ThePessimist
Ancient Member
posted: Nov. 11, 2009 @ 8:40a
Thrilla said: In your scenario with two different funds, it's not considered a wash sale regardless of the type of account anyways. Even there you have to be careful. You have to make sure the two funds follow different indexes. If you sell an S&P 500 index fund, and buy a different fund family's S&P index fund, the IRS can still consider it a wash sale as the securities are "substantially similar."
GoogledToDeath
Member
posted: Nov. 11, 2009 @ 9:02a
tripleB said: 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.
Instead of borrowing from a HELOC, I would borrow against the 401k itself, and then readjust your assest allocation to a riskier mix because of the garunteed rate you'll be paying yourself.
xerty
Senior Member - 2K
posted: Nov. 11, 2009 @ 9:17a
ThePessimist said: If you sell an S&P 500 index fund, and buy a different fund family's S&P index fund, the IRS can still consider it a wash sale as the securities are "substantially similar." They might, but the standard is "substantially identical" not just "similar". A detailed reading of the current law basically means that the only securities that will count as identical for wash sale purposes (aside from the same actual security) are situations like different share classes of the same underlying fund (VEIEX and VWO for Vanguard Emerging Markets) or the company stocks in an impending stock merger. Different index funds based on the same index will still confer different voting rights, the management will make different decisions about index sampling vs full replication, they will hold different amounts of cash-on-hand for redemptions, etc. Similar yes, but not identical.
Of course the IRS could make some over-reaching decision that they wanted to treat similar things as wash sales, but that's a very slippery slope and one they are probably not qualified to assess anyway. Is the S&P100 different than the S&P500? What about a top 450 vs a top 500? What about GM and Chrysler? Sure a lot of these things will move very similarly under most economic conditions, but that's not the standard Congress wrote into law. Contrast this with the straddle rules and you'll see they are fully capable of using a broad "similar" standard if they want, and here they didn't.
wilesmt
Senior Member
posted: Nov. 18, 2009 @ 9:49a
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
And to top it off, it has 22 years to maturity and is cont callable.
Not a bond I would have looked at, but to each his own. I think right now, ~5 years to maturity is the sweet spot.
And to my knownledge, B3 is junk, but I bet people define junk at different levels.
adavypromos
Member
posted: Dec. 10, 2009 @ 11:30a
Maybe I'm just not thinking this through deeply enough (sorry long week) but wouldn't the following logic typically apply, even if cap gains rates WERE to rise:
1. Account where the gains and principal are taxable (i.e. T401K and TIRA accounts): invest in assets likely to have the lowest cap gains and/or tax exempt cap gains, i.e. invest in bonds and munis here
2. Account where the gains and principal are not taxable (i.e. Roth accounts): invest in assets likely to have the highest cap gains, i.e. invest in stocks
This seems far too simple and logical to be correct in light of our retarded tax system. Where am I going wrong all?
wilesmt said: And to my knownledge, B3 is junk, but I bet people define junk at different levels.
I consider BBB to be junk too.
dshibb
Senior Member - 3K
posted: Dec. 10, 2009 @ 4:55p
A TIRA and T401k taxes the gains on the muni's so no don't do this.
Muni's = normal taxable accounts regardless--not TIRA ro T401k.
Without a ton of analysis yet this is how I'd break things down right now.
Tax free vehicles(Roth) = Aggressive Stocks(high turnover) and potentially aggressive bonds Taxable accounts = Muni's, low interest conservative bonds, cds, etc., and potentially low turnover conservative stock investment Tax-deductible accounts = Middle ground if anything aggressive it would be aggressive bonds.
Your most aggressive assets should be in newly contributed and newly rolled Roth accounts. Separate account for the year as to allow for recharacterization tricks to be employed if they go sour.
Adjustable to your asset allocation.
I would further add this could change based on age. Young individuals given the amount of time involved would probably say that the more aggressive stuff would want be held away from taxes because over time they would think that more times than not the aggressive stuff would work in there favor. An older person might be more focused on loss deductions and turn this entire list on its head(with exception of muni's). Thereby having the more aggressive stuff(most likely to pay out loss deductions if the investments went south) be in taxable and the lesser aggressive stuff held in tax-deductible accounts, and the medium stuff held in the tax free vehicles.
To each is own. They are insured. Guess some people do not know what a Cigarette Tax Bond is. A cigarette tax bond guarantees that the seller pays taxes on the sale of tobacco to the government. Cigarette tax bonds are a financial guarantee. Your 10% in gains is not guaranteed. Add the various taxes you need to pay and you are anywhere from 5.5% - 7.0% NET. Mine are a bit lower, not by much. But they are guaranteed income with zero tax liability. Its doubtful NJ will be defaulting. But, if you want to gamble in this market, I will not stop you. Knock yourselves out.
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