Investment Timing

[james.hendrickson]

Using tax consequences to guide your investment decisions is often ill-conceived, yet strangely is often the most common driver of of investment decisions in today's world. The IRA is often viewed as the holy grail because the monies you invest and earnings are tax DEFERRED. Big deal. That doesn't automatically place IRA instruments at the top of the heap in terms of wise investments. Far from it.

You can't get rich by saving a few dollars on your taxes. Make the best investment decisions you can. Hopefully you will owe bucket fulls of taxes because you made dumpster loads of profit.

TexasHuskar,

its correct that you can't get rich by saving on your taxes. That said, its most peoples major expense, and it makes good sense to reduce or eliminate as much tax liability as you are legally permitted to do. Legal aggressive tax avoidance is a healthy part of building net worth.

[disneysteve]

Using tax consequences to guide your investment decisions is often ill-conceived

True. You should never let the tax consequences be the driver for your decisions, but you shouldn't ignore the tax consequences either because doing so can cost you thousands of dollars unnecessarily.

The IRA is often viewed as the holy grail because the monies you invest and earnings are tax DEFERRED.

Not if it's a Roth. That is tax-free which is much different than tax-deferred.

[disneysteve]

Hopefully you will owe bucket fulls of taxes because you made dumpster loads of profit.

I can't tell you how many times I've had to explain this to people.

When I was a resident, I took a lot of moonlighting jobs where I would work in a doctor's office on a part-time basis, usually in the evening. Moonlighting paid very well. I was making $50/hour back in 1991-93 which was a lot of money back then, especially for someone still in school. But I had fellow residents who declined moonlighting jobs because it would have put them in a higher tax bracket. Sorry but I would much rather earn a lot more money and pay a lot more taxes. In the end, my net was still far higher than if I turned down that work.

[TexasHusker]

I can't tell you how many times I've had to explain this to people.

When I was a resident, I took a lot of moonlighting jobs where I would work in a doctor's office on a part-time basis, usually in the evening. Moonlighting paid very well. I was making $50/hour back in 1991-93 which was a lot of money back then, especially for someone still in school. But I had fellow residents who declined moonlighting jobs because it would have put them in a higher tax bracket. Sorry but I would much rather earn a lot more money and pay a lot more taxes. In the end, my net was still far higher than if I turned down that work.

A friend of mine back in my hospital admin days did kind of the same thing. He was making something like $110,000 and was due a bonus that year of another $11,000. He told them he didn't want it because it would put him in a higher tax bracket. And this guy had an MBA from Baylor.

Talk about ignorance at its highest. And he thought he was being clever...

[TexasHusker]

TexasHuskar,

its correct that you can't get rich by saving on your taxes. That said, its most peoples major expense, and it makes good sense to reduce or eliminate as much tax liability as you are legally permitted to do. Legal aggressive tax avoidance is a healthy part of building net worth.

My point is that it shouldn't be the driver in your investment decisions.

[disneysteve]

My point is that it shouldn't be the driver in your investment decisions.

Agreed, but you suggested that nothing should change just because we turn the calendar to January. The reality is that entering a new year (or approaching the end of the current year) is important for tax planning purposes. By failing to take care of certain financial matters before 12/31, you can lose the benefit of doing them.

[disneysteve]

He told them he didn't want it because it would put him in a higher tax bracket. And this guy had an MBA from Baylor.

It's sad how many people don't understand the basics of how our tax system works. Being in the 25% bracket does not mean that every dollar you earn is taxed at 25%. It's a tiered system. You don't need an MBA to understand that (and apparently even having one doesn't mean you understand it).

[TexasHusker]

Agreed, but you suggested that nothing should change just because we turn the calendar to January. The reality is that entering a new year (or approaching the end of the current year) is important for tax planning purposes. By failing to take care of certain financial matters before 12/31, you can lose the benefit of doing them.

I can see that in certain situations.

[TexasHusker]

It's sad how many people don't understand the basics of how our tax system works. Being in the 25% bracket does not mean that every dollar you earn is taxed at 25%. It's a tiered system. You don't need an MBA to understand that (and apparently even having one doesn't mean you understand it).

It's the same thought process as advocating raising the minimum wage to $12 an hour (or choose your dollar amount). People never seem to understand that "minimum wage" will always be "minimum wage" regardless of what arbitrary number you select for it.

You could set it at $100 an hour (yahoo!!!!) and a loaf of bread would suddenly cost $50. A movie ticket would be $100. A Big Mac would be $60.

[sv2007]

Using tax consequences to guide your investment decisions is often ill-conceived, yet strangely is often the most common driver of of investment decisions in today's world. The IRA is often viewed as the holy grail because the monies you invest and earnings are tax DEFERRED. Big deal. That doesn't automatically place IRA instruments at the top of the heap in terms of wise investments. Far from it.

You can't get rich by saving a few dollars on your taxes. Make the best investment decisions you can. Hopefully you will owe bucket fulls of taxes because you made dumpster loads of profit.

There's not as much immediate tax consequences in the IRA as money there isn't being taxed immediately. However, imagine a taxable account. And in even this most simplistic example (which actually happens very often), you've realized a gain of $100. You want to sell a stock at a loss, it might pay to sell it end of the year vs beginning of next year to offset some of the gains immediately in the same tax year. Now, if we are talking short term gains, tax can be 40%; not a small number.

We didn't do any of tax planning during our beginning years so we still havea lot in carryover losses (based on what I read, it's more than many folk's net worth here); this isn't a very enviable situation.

I do agree that tax shouldn't be the only focus; but it definitely should be one of the many things an investor must be aware of. So there's some movements at the end of the year. Some movement is also due to holiday spending, which is also should be part of an investor's focus. After a while, all this becomes kind of second nature, where you don't have to think a whole lot, it just becomes part of the investment reflex. Only once a while, you'd realize that you made a silly mistake (which can mean anywhere from 10%-50% of your gains, that's a lot of money).

I like FOREX and options trading as a learning tool; esp. FOREX. Why? They move fast due to leverage. Also, they expose you to a ton of investment possibilities (e.g. how many stock investors here know about covered calls? how hedging works? or even what companies are in their ETF/mutual funds? Does their SP500 fund hold all companeis the equally? so many more. As an investor one should at the very least know what's available otherwise, it's like boxing without knowing the rules like there's a bell that ends a round. Without knowing the rules, there cannot even be talk of strategy. ) Here, you can test whether you are ready as an investor because in a few days, you can almost project how you'll do in a few months/years. Will you be able to stay the course of your strategy? Or is emotional moves too hard to resist? Take a portion of your investments and try it out as a teaching tool.

Anyway, back to topic, tax year is a definite part of the investment landscape. Whether it is very significant or not, it'll be up to you. Ignore it, and you may just regret that decision for years to come.

But as a warning, we've also lost money (and here, I know it is higher than almost everybody net worth here) because of tax planning. Fortunately we've learned all these early on, so we are now a bit better investors (which is very important since as people grow older they also tend to have more $ invested and mistakes cost proportionally more.

[sv2007]

A friend of mine back in my hospital admin days did kind of the same thing. He was making something like $110,000 and was due a bonus that year of another $11,000. He told them he didn't want it because it would put him in a higher tax bracket. And this guy had an MBA from Baylor.

Talk about ignorance at its highest. And he thought he was being clever...

This is another case of being tax unaware, not much different than investing without caring about tax.

[corn18]

I would love to pay $1M in taxes in a year.

[sv2007]

I would love to pay $1M in taxes in a year.

Funny how people think paying tax can only mean that you've got enough money for taxes and more.

[corn18]

Funny how people think paying tax can only mean that you've got enough money for taxes and more.

If I paid $1M in taxes, I would net about $2M in regular income or $4M investment income. Even more if I owned my own business or real estate. So yeah, I agree with your assertion.

[disneysteve]

Funny how people think paying tax can only mean that you've got enough money for taxes and more.

Yep. That's pretty much how it works. Since taxes are only a portion of the income earned, in order to pay X in taxes, that means you will have earned 2 to 6 times X in income. That's not a bad thing.