Fund Formula

[swsop]

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Hellow All:


Many mutual fund investors (and investors in general) send
a good portion of their profits to the IRS as well as to
state and local tax collectors. Fortunately, knowledge
of the rules and some savvy planning can help you keep
more of your investment income for yourself.

If you invest outside of a retirement plan and put your
money into mutual funds, you'll owe tax each year on net
earnings realized by the fund. That's true even if you hold
onto your fund shares and reinvest all the distributions.

Suppose, for example, you put your money into a mutual fund
and the manager decides to sell many of the fund's long-term
holdings, which generates a gain. That gain will be passed
through to you, as a shareholder, and you'll owe tax right
away, even if you instruct the fund that all distributions
are to be reinvested.

Therefore, if you're going to sell a fund at a loss, sell
before it makes a capital gains distribution, because your
tax loss will be greater. Similarly, try to avoid buying a
fund before right before a distribution, because you'll
receive that distribution and owe taxes. Most funds will
tell callers when distributions can be expected.

Another tactic is to buy a? Tax-managed? Mutual fund. Funds
that are intentionally tax-efficient usually avoid taxable
distributions by low turnover of their securities or by
taking losses to offset realized gains.

Home Sweet Tax Shelter
Homeowners generally can deduct the interest they pay on their
mortgages? But that's not the only tax benefit available if
you own a home.


Barbara

 

[Mike]

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That's why I think it's best to invest in mutual funds in the retirement accounts only and go for ETF's / stocks for the taxable side of things. It makes life a bit simpler.

 

[Birchtree]

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Mike-you appear to be level headed-only with a watchful eye.

I only buy a mutual fund when I am in a situation where I am forced into it. Why pay for all that overhead, those guys make way to much money in salary. Over the years I've built my own mutual fund with my own stock purchases. And when I retire I wll have the flexibility to take my capital gains when I choose and control exactly how much I desire to take. Dividend income at present is reinvested every 3 months for dollar cost averaging. I've picked up some painfully good buys since the top in March.

My plan is to retire and keep my tax bracket at 15%. I certainly have to plan and work at it. But if successful, my taxes for capital gains and dividend income will only be taxed at 5%. That is 95% tax free. Leaving stocks to heirs is also much simpler than even the IRAs.

There is only one catch to all these plans. One must be level headed and keep a critical eye out for controversy. The markets can be humbling and they take no prisoners. Dennis

 

[azanon]

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Why pay for all that overhead, those guys make way to much money in salary. Over the years I've built my own mutual fund with my own stock purchases.

Cause they're more qualified to know when to buy and sell? Because it takes time to keep up with when to buy and sell, and time = money? You almost sound as if you think it would be fair for them to do these things for you for free.

And when I retire I wll have the flexibility to take my capital gains when I choose and control exactly how much I desire to take.

I use Roth IRA's for the bulk of my retirement, so I will have no capital gains (with my Roth IRA mutual funds). For non-Roth IRA's, I can sell mutual funds when i want to, and decide how much to sell thus controlling the amount of capital gains. Even Traditional IRA mutual funds have no capital gains until you sell them.

Dividend income at present is reinvested every 3 months for dollar cost averaging. I've picked up some painfully good buys since the top in March.

If so, then that means you have toplace an order to do that and you are charged for it,based on whatever your brokerage charges for stock purchases. Unless you have some heafty dividends coming in, i imagine the cost to reinvest shares via a new stock purchase could get pretty high from a percentage standpoint.

My dividendsat my mutual fund company are reinvested for free because I dont use loaded mutual funds.

My plan is to retire and keep my tax bracket at 15%. I certainly have to plan and work at it. But if successful, my taxes for capital gains and dividend income will only be taxed at 5%. That is 95% tax free.

Tax alchemy; sounds neat. The tax rate on long-term capital gains is 15%, not 5%. Unless you plan on cheating the IRS, you'll be paying 15%.

Leaving stocks to heirs is also much simpler than even the IRAs.

Roth IRAs of any type (including mutual funds) dont have a requirement for mandatory withdrawal at 70 1/2, so provided one has a decent living will, you just cant get any easier than turning over any roth IRA to an heir. Stocks have no particular advantage over mutual funds in this regard.

 

[Birchtree]

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..Azanon,

It was kind of you to take me to task. You have engaged a renegade contrarian. There must be over 5000 mutual funds out there and a great many of them underperform their tracking or benchmark indexes. You choose which ones are best for you. After all it is your hard earned money. They all have Morningstar ratings and the majority of managers I believe are overpaid. Remember opinions are like armpits we all have them. The majority of good managers historically are usually long term stock or bond holders>5 years, they generally don't trade much. Those that do can have portfolio turn overs of 100%, you will pay a portion of those costs. Frankly you have as much expertise on when to buy and sell as they do. We operate on a fairly equal playing field-though some would question that comment.

Pyriel and I have had some conversations regarding IRAs. He is very knowledgeable in this area. The primary drawback for a Roth is the amount you can save. It should be a compliment to retirement, not a core holding. At a max of $4000 a year and even $5000 a year in 2008 it takes a mighty long time to get enough money to retire comfortably. Now if you have excellent performance that is a plus, but where and how do you find that?

 

[Birchtree]

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Believe me if you have an account outside of your TSP account you are looking at fees, both trading fees and maintenance fees. Even the internet brokers have to make a margin. But of course some funds are cheaper than others, especially no loads, but most often as usual you will get what you pay for.

Now regarding dividends and their investment fees. Most IRA accounts reinvest dividends for free. My stock account does the same thing, no pain there. If you own mutual funds aside from growth and income funds, they pay their dividends and capital gains once a year at the end of the year. This means you miss all the other opportunities to reinvest every 3 months that you get with stocks. You have more flexibility with dollar cost averaging and you choose the stocks you want to own with their attached dividends and the increases over time that may come with it. You also have an excellent opportunity to dollar cost average in the TSP accounts, the more you invest on a recurring basis the more you accumulate.

Here is my secrete for all to see and perhaps gain some learning leverage. Investing is not a game per se. But it certainly can be fun as well as painful. Takee like a renegade. I have an outside account with Merrill called the Advantage. If you maintain a certain long market value you are awarded free trades to purchase anything; stocks, mutuals, etfs and so on. You do have to pay a percentage on the long market value as a fee. The broker has to feed his family too. Mine is currently under 1%. I save a great deal of money this way-compared to what I've paid in the

 

[Birchtree]

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in the past. Presently I have a long market value that is deep into $850,000, that entitles me to 300 hundred free trades a year. A normal trade could cost around a minimum of $50. And if my long market value goes over 1 million (and I was at $935,000 in 4/05) I get an extra 100 trades for a total of 400 free trades yearly. Ain't no way you can touch that with a Roth son. You can however come close with a 401K or deferred comp plan where you can put away $15000 a year with a $5000 catch up if you are over fifty years old. But even in TSP you have certain limitations.

Now on to that tax bracket and capital gains. And don't even try to cheat the IRS they are worse than the Gestapo. There is just no place to hide with all the 1099s that are generated. Presently with the generous Bush tax cuts a 15% bracket for a married filing jointly is $14,000-$56,800. That ceiling is indexed to some index and will most likely increase over the coming years. If you keep you AGI (adjusted gross income) in that arena your tax is 15%. However, when your bracket is 15% , all capital gains and dividend income will be taxed at 5%. It is easy to control capital gains, just don't take that many. If you can stay in poverty (live off savings for a year) you would be in the 10% bracket, where capital gains and dividend income is taxed at 0%. Kool huh?

 

[Birchtree]

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Again you have to control your income when retired. Your life is based on your AGI.

Prolong your social security application if you can, roll a pension plan into a defined contribution plan if permitted. Stay in capital gain type assets. Presently my dividend income is slightly over $20,000 and will be growing this year-many companies are starting to increase their payouts to shareholders.

Regarding heirs and IRAs both Roth and traditional IRAs have a RMD (required minimum distribution) for the heirs. There is no RMD for the original owner of a Roth. The IRA quagmire is complex and can be overly costly to heirs. There are several traps the IRS has set up- they are not magnanimus. This requires a whole new area of discussion at a later date. Get Pyriel involved.

If you have another minute I will demonstrate to you what I mean by flexibility in a stock account. 3/7 Recognizing the possibility of an intermediate short term market peak at Dow 10,997 the decision was made as a sacrifice to take a little off the table and readjust. I sold a 50% position in one of my drilling stocks locking in a $5000 LT gain. The total funds were then reinvested simultaneously to purchase 4 other stocks that I already owned at lower pricing and with good dididend yields. When I decide to make a sacrifice I like to take some advantage that is geared to the long term.

 

[Birchtree]

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3/30 As the correction continued I made the decision not to look the gift horse in the mouth and perpetraded another sacrifice. I say sacrifice because I know that everything I sell will eventually be worth more at higher pricing in the future. Also when I buy something in a correction I'm probably going to loose money initially, hurt me, I enjoy this kind of pain. Sometimes you get lucky and hit the exact bottom. I sold 3 stocks that had good gains built in but were weak on the dividend front. One was an independent oil refiner in the Rocky mountains, another a packaging company, and the last one was automotive and aerospace related. The total was for $59,000 with a $26,000 profit as a LT gain. I then took advantage of the opportunities a correction presents and reinvested that money into 28 other stocks for a round trip of $118,00. And with no fees. Love that Advantage. Most of what I purchased was lower in pricing allowing me to average down and accumulate higher yields for the future and more dividend income. Now some of these stocks went a bit lower, but I handle the pain and even did a little more buying. While I wait for the next leg money is coming in to buy more stock at higher yields. It can become a self feeding system if your account is large enough to drop $100,000. After I sold the oil company it went up another 10 points and split 2for1. Such as like, the other 2 both went down 2 points. I million here I come. Dennis

 

[Birchtree]

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Azanon,

To the rest of my tale. The saving grace in this type of portfolio is that dividends are paid every 3 months and then reinvested for free. I have a goodlynumber coming due in May. While I'm sitting waiting for a new day I still make money. You just have to be patient and the more you buy in a bear correction the more pain one intentionally inflicts upon oneself. But if you stay positive and recognize that the market is a discounting mechanism for the future you can keep your sanity and be prepared to play another day. Been there, done this before. Please dividends hurt me all you can.

On 4/14 right before the Dow cascaded into a 3 day waterfall decline I decided to take the remaining profit off my drilling stock I sold earilier for another $5000 profit since it was holding firm. I reinvested those funds in another 4 stocks I already owned - the pain is now really starting to feel good. The long market value as of yesterday is now $850,000 for a $89,000 value depreciation. I've taken further opportunity to hurt myself rather than cut and run. I've actually increased my asset base so that on the trip back up to the previous highs (more shares now owned) I

 

[Birchtree]

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most likely will come close to 1 million or exceed that number. I'm on the come back trail. Now you can see why I'm so darn BULLISH. I experienced the 1982 bottom and on that first leg I made $300,000 in 10 months, but of course nothing lasts forever. I gave a lot of it back in 18 months. B ut I certainly became aware of who I was and started developing my own style to become a renegade contrarian. I remember when that leg hit no one was a believer, they all refused to participate. They all listened to their bearish brokers and missed a great opportunity. As a contrarian I don't like to listen to the noise out there.

Anyway on 4/29 I sold a 50% position in one of my utility stocks that was putting in a new high. Just another sacrifice at the bottom to buy some more fun assets. This was a $6000 sale for a $3000 profit and I purchased 3 more stocks. Stll working on building income for retirement - all to be taxed at 5%. Now you can believe or not believe, player. At any rate still waiting for the tremendous move that is coming to take me to Dow 13,000 and sp500 to 1600. Take care and happy investiing. Dennis