Short Term & Long Term Capital Gains Tax

June 2nd, 2008  |  Published in Investing  |  4 Comments

When it comes to taxes, it makes a big deal how long you’ve held your investments. If you’ve held your investments for over a year before selling, you are taxed at the long term capital gains tax. If you’ve held them for less than a year before selling, you’re taxed at the short term capital gains tax. The two tax rates are very very different.

To calculate how much your tax is, you first have to figure out which tax bracket you’re in. Here are the 2008 tax brackets.

Short Term Capital Gains Tax

This is easy, your gains are taxed at your tax rate as ordinary income.

Long Term Capital Gains Tax

If you are in the 10% and 15% tax brackets, you pay 0% in long term capital gains tax. If you are in the 25%, 28%, 33% or 35% tax brackets, you will pay 15% on your long term capital gains.

By waiting a full year, you can save quite a bit on capital gains taxes… but don’t let tax considerations by your main reason for buying or selling stocks. You’ll get yourself in deep trouble that way. 🙂


The Carnival of Personal Finance is now available at Mpolanomy, my TradeKing review was included.

Don’t Use Tax Advantaged Investments in 401K, IRA

May 30th, 2008  |  Published in Investing  |  Comments Off on Don’t Use Tax Advantaged Investments in 401K, IRA

Given the recent Supreme Court ruling that upheld the tax advantaged status of investments such as municipal bonds, you may be tempted to begin investing in these instruments. If you do, don’t invest in them through a 401K or an IRA (either Roth or Traditional). You want to take full advantage of their tax advantaged status by investing in them in a fully taxable brokerage account.

The benefit of municipal bonds is that they are exempt from federal, state and local income taxes if they meet certain qualifications. If you live in Maryland and purchase a Maryland municipal bond, then those earnings are exempt from federal, state, and local income taxes – thus pushing up its yield (because you’d be paying taxes on the earnings of any other investment).

If you invest in those types of securities in a 401K, you lose the tax exempt status because you ultimately pay taxes on distributions in the 401K (the same for a Traditional IRA). If you invested in a Roth IRA, you are still exempt but all appreciation in a Roth IRA is exempt from taxes. You are essentially no longer getting the same advantage and thus not maximizing your yield.

Rebalance Your Portfolio For Greater Gains

May 26th, 2008  |  Published in Retirement  |  1 Comment

Buy low sell high, that’s the mantra of Wall Street (actually, it’s probably “Buy low very often, sell high very often,” but I digress), and one that you can achieve every single time you rebalance your portfolio. Rebalancing your portfolio is a task that no one likes to do because it’s so mechanical, it’s so unsexy, but it’s so necessary and one that can guarantee that you’ll be buying low and selling high. How is this guaranteed?

Rebalancing is the act of adjusting your portfolio such that the asset allocation is shifted back to your target asset allocation. Throughout the year, your various assets will rise and fall in market value, resulting in a shift of allocation. If stocks performed better than your other asset classes, they will comprise a greater percentage of your portfolio. If you had a conservative mix of 50% stocks and 50% bonds and stocks rose 10% while bonds rose only 5%, you now have 51.16% stocks and 48.84% bonds. In rebalancing, you’d be bringing both assets back to 50% by selling some stocks and buying more bonds.

How does this guarantee buying low and selling high? If your asset allocation remains the same, you will be selling the better performers for the weaker performers. In the above example, if stocks had fallen relative to bonds, you’d be selling bonds to buy more stock. As you saw above, both can appreciate and you would shift from the better performing asset to the weaker asset.

What if you’re worried about selling a shooting star midway in its path? Well, there’s always the risk of that but since you’re only rebalancing once a year (or twice), the other benefits outweigh the possibility of that happening. Also, consider yourself banking some of the earning all the way up. Plenty of dot com folks watched shooting stars fly… and then crash, with nothing to show for it.

Investing in Wine, Art, Collectibles

May 14th, 2008  |  Published in Investing  |  Comments Off on Investing in Wine, Art, Collectibles

I always thought of investing in collectibles such as wine, scotch, or art, as something the fantastically wealthy did as they played polo on their front lawn and retired to their private libraries to smoke their fancy cigars. That got me thinking for a moment and wondering if investing in collectibles is something that the general public should start doing… then I came to my senses.

You Don’t Understand It

You should not invest in art because you probably don’t understand it. I studied art history for one year in high school and the only thing I learned as that you had to be the first to do something. You had to be the first to use cubes to represent people (Picasso) if you wanted to be famous. You had to be the first to repeat images and make them crazy colors (Warhol) if you wanted to be famous. You had to be the first to draw vertical and horizontal lines and start coloring them in with primary colors (Mondrian) if you wanted to be famous. Are you seeing a trend? You have to be first and lucky and even then there was no certainty for the artist him or herself! So you want to invest in it? If you don’t understand it, you can’t possible make money in it.

Probably Too Expensive & Limited Demand

Do you really want to put a few thousand (or even a few hundred) on a collectible with a limited demand? The stock market is hard enough and there are millions of people at any moment willing to buy your stock from you. The collectible market is even less fluid and so you run the risk of never finding a buyer for your great artistic find.

They Do It For Fun

When the fantastically wealthy invest in art or scotch or wine or whatever, it’s more for entertainment than it is as an investment. Regular people compare cars and the number of bedrooms and bathrooms in their homes, fantastically rich people talk about how they paid $5,000 for a bottle of this limited edition wine from some obscure place that no one else has.

Don’t invest in collectibles. 🙂

What Is A Self-Directed IRA?

May 13th, 2008  |  Published in Retirement  |  Comments Off on What Is A Self-Directed IRA?

A self-directed IRA is a type of Traditional or Roth IRA in which you’re allowed to invest in things other than stocks, bonds, or mutual funds – such as investing directly in a hot new biotechnology or traditional technology startup. In fact, it’s the only way you’d be able to invest your IRA dollars into anything non-traditional to include but not limited to real estate, race horses, and basically anything else (as long as you follow a few rules).


The biggest rule is that you can’t do anything that makes it appear as if you’re using deferred funds for current use. The biggest example is in real estate investing. If you use your IRA funds to “invest” in a property that you end up using and the IRS finds out, then your entire IRA could be disqualified, considered distributed, and you’ll have to pay any associated taxes and withdrawal penalties if you’re under 59 1/2. The disqualification aspect is the biggest danger associated with self-directed IRAs because it can sink you.

There are some categories that are explicitly not allowed and the two biggest are life insurance and collectibles. The “current use” rule regarding life insurance is clear, you’re technically always using it, right? With collectibles, it appears that the rule exists simply because there’s no way to enforce the “current use” rule otherwise. If the IRS ever asks, you could simply give your cousin the piece of art and say they were using it.

How To

This part is pretty simple, just head on over to your bank’s trust department or open an account with a custodial firm (many traditional brokerages, such as Vanguard, also handle self-directed IRAs). They handle all the accounting from disbursing the funds to collecting the profits but they stay mum on all other issues, they are not allowed to give advice. The fees are typically higher than your normal IRA account but that’s because they do a lot more work handling all those esoteric investments you’re thinking about.