Five Critical Moves to Make Before December 31st
We’ve spent a lot of time in the past few weeks talking about how to maximize your investment returns.
But there’s another side to building wealth in the markets… keeping it.
If you’re thinking I’m going to launch into an article on “risk management,” that’s great, because it means you’re thinking like a market maven and that our time together is worth it.
But, actually, I’m not talking about risk management at all today.
I’m talking about five simple tactics – moves you can make right now – to legally minimize your tax bill come April 15th, 2015.
Most investors don’t pay nearly enough attention to this and, as a result, pay a terrible price down the line. I’ve heard every excuse in the book over the years as to why but really it comes down to two things: 1) they think it doesn’t matter unless you’re a 1%er or 2) that this is just a subject for high-powered CEOs with billions sheltered offshore.
That’s a shame because keeping more of what you make is a Total Wealth tactic that’s every bit as important as trailing stops, free trades, or even lowball orders – all of which we’ve discussed recently. Maybe even more so.
First, here’s why taxes matter.
In contrast to previous generations, the biggest problem we face today is not finding big winners – the markets are literally loaded with opportunity, if you know where to look like we do.
No, the biggest problem we face is the possibility of outliving our money.
The latest estimates suggest that by 2040 people will routinely be expected to live to 140. That’s nearly double the 90 years of age used by even the most aggressive financial planners and insurance salesmen today. Living to 100 simply isn’t that big a deal anymore.
We all need way more money than we used to.
Fortunately, with Total Wealth trends, tactics, and risk management, it’s not that hard.
If you invest $10,000 a year and generate 6.86% a year for the next 35 years, you’ll walk away with a cool $1.4 million in today’s dollars ($350,000 invested plus $1.05 million in gains). That’s according to CNNMoney’s Brian Stoffel.
The other thing to think about is that 6.86% is not a pie-in-the-sky number. It’s actually the true annualized return of the stock market since 1871. Capture a few 100% gainers, like we did with our first recommendation, Ekso Bionics Holdings Inc. (OTCBB:EKSO), or like my Money Map Report subscribers just did yesterday with Becton, Dickinson & Co. (NYSE:BDX), and suddenly the $1.4 million jumps exponentially.
Unfortunately – and here’s where these tactics come in – that means Uncle Sam will show up every April with his hand out. The U.S. government is bound and determined to take what you earn away from you.
And it’s getting worse.
Last year President Obama raised the maximum short-term capital gains tax rate to 39.6% from 35%. At the same time, he’s boosted the top tax on dividends to the same amount. And, in a still more controversial move, he’s also tacked on an additional 3.9% to pay for the Affordable Care Act, better known by its moniker “Obamacare.”
Those increases may seem small in the scheme of things, but every one of these changes pushes your financial security further away.
That’s why you want to make these five moves right now to ensure that you are as tax-efficient as possible so that you can legally keep what is yours… and build wealth for decades to come.
First, hold the right investments in the right accounts.
In general, you want to hold tax-efficient investments like stocks, index funds, master limited partnerships (MLPs), and ETFs, for example, in regular, non-retirement, brokerage accounts.
Put all the inefficient stuff, like bonds, high-dividend stocks, and real estate investment trusts (REITS), into retirement accounts where taxes are minimized.
Second, consider losing money selectively.
Normally, I hate taking losses. But if you’re coming into the end of the year with some big winners, it can really pay off to let go of some of your underperformers at a loss – right now.
That’s because the IRS allows you to use capital losses as a way to offset realized capital gains. You can even carry $3,000 in losses forward for use at a future date. I think that’s one of the very few sensible IRS regulations there are.
Third, consider shifting all or a dominant share of any Treasuries and corporate bonds you own to municipal bonds.
This boosts your income by immediately converting compounding to a tax-free activity.
Fourth, try to hold your investments until they’re long-term.
Time your investments – not the markets. What I mean by this is that, whenever possible, you want to hold your stocks for at least 12 months. That way you’ll qualify for more favorable long-term tax treatment than you would if you sold inside of a year. I realize that this is getting harder as the markets get choppier thanks to high-speed trading and increasing computerization, but that doesn’t invalidate the thinking.
It’s worth noting, by the way, that this is a very important consideration in and of itself because you can combine this knowledge with some of our favorite risk management techniques like stop-losses, trailing stops, averaging in, and more. Just know that if you sell within 12 months, your tax liability is higher.
Fifth, do any short-term trading you want to do in your IRA or tax advantaged retirement accounts.
By doing so, you’re effectively saving the 39.6% maximum tax rate on realized gains and, instead, deferring it to a later date.
Obviously, I’ve just scratched the surface here.
You can take this game as far as you want. Thanks to the hopelessly convoluted nature of our tax system, there’s a billion-dollar industry centered on “internationalizing” your assets.
Some of the more commonly accepted practices that can take legally saving money to the next level include relocating offshore, reincorporating your assets in far flung places, or forming family trusts just to name a few. But be very, very careful. It’s hard to know if you’re getting good – or even legal – advice.
In closing, I want to leave you with one thought.
I’m not one of those guys who doesn’t want to pay taxes or thinks you shouldn’t.
The way I look at things, paying taxes is a good problem to have, because it means you’ve had a good year.
What I have a problem with is forking over money to a government that wastes it and which is acting at the expense of the people it ostensibly serves. But that’s just me – you may have a different opinion and I respect that completely.
At the end of the day, what matters most is that building wealth has two components – making money and legally doing everything you can to keep it.
Because you’re sure gonna need it.
We all will.
Be back with you in a couple days with a closer look at an “Unstoppable Trend” that seems to be slowing down…
Best regards until next time,