Order's important when tapping into assets -- USA Today

A pretty good overview of this subject.

I'll throw out for you one idea not in the article, useful if you have built up your investments nicely, and are blessed with substantial money in taxable, tax-deferred, and even tax-free (Roth IRA) accounts. What follows is of course directed at US readers.

You can tweak where you take the money from to legally play the tax code like a violin, in other words, minimize your taxes. For example, you could take out money up to the top of the 15% tax bracket from your 401(k) or traditional IRA -- these distributions are taxed as ordinary income; than take additional money from the taxable account at long-term gains rates on the portion that is LT gains; finally, even a bit more from the Roth when you have to. All of this bearing in mind the relative amounts you have to work with, and avoiding depleting any one of the three types of sources unduly. Cool, huh? Not always very easy to execute, but the concept is powerful., and it beats a simple-minded "hit the taxable account until it's gone, then the IRA/401(k), then last, drain the Roth" approach. I am an IAR and have my own RIA firm, and am not a tax practitioner now, so before using this or anybody else's neat ideas, you be certain to check out what your own tax adviser says.


Investing: Order's important when tapping into assets - USATODAY.com

Mr. Buffett and the Unknown Advisor Differ on That!

"Buffett blasts system that lets him pay less tax than secretary." He did not pay less than his secretary. He made $46 million and paid 17.7 percent, or $8,142,000 in tax. She is said to have made $60,000 and to have paid 30 percent in tax, or $18,000. Hmmm, now, eight million is more than eighteen thousand.

He apparently did pay a smaller percentage of his income in taxes than she did. So what. Presumably, he used every trick the tax code allows, and well, the cost of those things is typically lower investment performance. So he traded some investment performance away for lower taxes. I would too. So would you. Also, we are dealing here with capital, not wages. His salary, being greater, would indeed have been taxed at a higher rate. Buffet is being mendacious here. He knows all this, he just wants you to have higher taxes, to build a new age of big government, funded by big tax rates, under his favorite Presidential candidate, whose initials are HRC.

If taxes go up, investors will invest to have something left after taxes, rather than to maximize their long term gains. So our investment outcomes will suffer. Then we will all eat cat food and cut pills in half in our old age, excepting him, Hillary and Bill. He'll still be able to afford his cheeseburgers, and to buy theirs also.


Buffett blasts system that lets him pay less tax than secretary - Times Online

IBD Op-Ed: "our tax code is massively redistributionist..."

"...and it's becoming increasingly hard to have an honest discussion of it."

But are there any votes to be gained for politicians who speak truth about it?



IBD Editorials: Who Really Pays?

Please, Read Financial Publications and Websites Critically!

That includes this blog, of course.

This morning, in one publication I follow (the excellent Financial Times in this instance,) I saw the blurb on the front page: "How Long will markets be able to defy gravity?" in reference to Martin Wolf's column. Now, I ask you: Is it within the realm of possibility that an outright agenda is reflected there, or what? Mr. Wolf has recently written columns advocating greater progresivity of income taxes in the US (boo on that idea), more international cooperation to tax people in such a way as to preclude them fleeing to tax havens (boo on that also), and reconstruction of the welfare state in the USA (boo, pbbbbht, hiss on that) so, upon looking at a few columns, we see something more of the mindset of the author. Apparently another statist European, who views personal income as the rightful property of the great and wise state, if it only has the resolve to tax it away and do many great and fine things with it, like buy votes.

The problem is that taxation changes taxpayer behavior. They try to cope, lawfully, let's hope! If you tax dividends at a higher rate than capital gains, corporations will pay out less of their profits in dividends. If you raise the taxes on higher incomes, then people will go into the perilous woods of tax shelter forest, and the tax shelter wolves may get them. in other words people will invest to minimize taxes instead of growing their money. Bad situation. To borrow someone's wise illustration, (sorry, I don't have the citation), if Uncle Sam were to tax 100 percent of the money I make every Friday, I would not go in to work on Fridays. Would you? If he only taxes away fifteen percent of what I make on Mondays and Tuesdays, I will go in to the office on those days! If Wednesdays' earnings are taxed at twenty five percent, I will sigh, but hey, I need the money. On Thursdays the tax is thirty percent. I grumble. I probably still go in. I need the money. I would suggest that in Euroland they are taxing Fridays heavily so people are working the other days, and the economies have lower growth.

A cynical comment I once heard, and I do not have the attribution: The problem with popular democracy is that at some point the mob (rabble sounds so undemocratic) may discover that they can vote themselves the contents of the public treasury. Couple that with an attitude that what is yours can be taxed away from you and placed in the public treasury first, and Karl Marx himself would stand up and cheer.

Bankrate.com via yahoo Finance: "Don't let your tax break get washed away"

Pretty good review. If you captured some short-term losses last year, but want back in, be a little careful how you do so, as the article discusses. Incidentally, if you are in an advisory relationship, a way you might evaluate the service your advisor is giving you, if you have some money in a taxable account, is does he harvest material short-term losses for you each year when they exist? If not, ask why, and get a good explanation.

Also, does he only think about this subject near the end of the year? You can take short-term losses whenever they come along, unless you are invested in such a way as to preclude your doing so. For example, some otherwise excellent no-load mutual funds have short-term redemption fees. And of course if you've been placed in load funds, where there are sales charges, etc., the whole idea becomes problematical.

ETFs are very usable for tax loss harvesting, and usually there are pretty good choices for replacement holdings to avoid the possibility of a wash sale rule problem


Yahoo! Personal Finance

MarketWatch: "IRS cracks down on donor advised funds", article by Thomas Kostigan

IRS cracks down on donor advised funds - MarketWatch

When you invest in a non-straightforward way, to primarily "get the best of the tax code", you may get an outcome you did not seek. Watch yourself. There are plenty of tax-efficient ways to invest. Good advisors can earn their keep for you, or you can educate yourself to become a good do-it-youselfer.

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From Larry Kudlow: "Don't Mess with Success"

Kudlow's Money Politic$: Don't Mess with Success

"...In 1993, before the 13 years of no tax hikes began, the federal deficit was 3.9% of GDP. Today, after 13 years of tax cuts, it's about 2.5%.

And back in 1993 the cumulative federal debt was 49% of GDP. Now it's only 39%."

Larry says it pretty well indeed. When taxes on investment gains are low, investors have a better reward for taking the risks of investing. When taxes on gains are higher, investors have less of a reward from investing. Everyone say it together: "Taxation alters taxpayers' behavior."

In investing, higher tax burdens deter the acceptance of risk, as the risk is less-well compensated. Acceptance of less risk means lower investor returns. That is not at all what the country needs now, as the baby boomers are heading into their retirement years significantly underfunded as a group.

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