Taxes

Investment Lesson #6

Minimizing taxes will help increase your returns. Eventually and over time, you'll need to pay attention to taxes. The issues are very complex, however, and are different for many people. "What is to be done" about taxes depends on the tax rates, AMT or not, income expectations, prospects for tax rate change, etc.

Here are a few simple ideas.

For people able to save via an IRA, the Roth IRA is better for the long term. The traditional IRA is OK, however, if you are at least in the 25% rate bracket and can benefit from the income exclusion for IRA savings.

Having savings+investments in BOTH taxable accounts (normal brokerage, etc.) AND in tax-deferred accounts (IRA, 401K) is best. Then you can make adjustments to minimize taxes. Moves that result in gains are taken in the tax-deferred account; moves that result in taxable losses are taken in the regular account.

Try to keep the fixed income asset classes in the retirement accounts and the core parts of the long term equity classes in the regular taxable accounts. You'll not exchange those much, if ever, and any gain will be taxes at low, long term capital gains rates. The tax-deferred income can be reinvested tax free in the tax-deferred accounts, and when the income is drawn at retirement, it's simply taxed once.

Core gold & silver can be coins kept in the bank, but keep non-core amounts of the ETFs in a tax-deferred account. Those are taxes at higher rates so any exchanges (which are frequent) need to be done in a tax-deferred account.

I tend to dislike the tax-deferred annuity intensely; those are often sold to people who really should not invest in them and the fees are huge. One can buy VTI and not sell for 30 years, then pay a one time capital gains tax at a low rate. That's the ultimate tax-deferral and it costs nothing.

It's a complex area; be sure to consider any tax-driven decisions carefully.

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Word of the Day


"Transvalue" - verb, transitive [$100]
Transvalue means to re-estimate the value of, esp. on a basis differing from accepted standards, reappraise, reevaluate.

Sentence: A major change in one's marginal tax rates must cause one to transvalue one's long term investments.