Investing 102

[camcojb]

Greg,

if Congress raised taxes on capital gains to say 35% do you think that would have investors sitting on their investments instead of selling, or moving into a foreign market? Or would it have little effect on the way things are going? I would think that this move would not bring more revenue in necessarily, it may have the opposite effect.

[GregWeld]

Originally Posted by camcojb

Greg,

if Congress raised taxes on capital gains to say 35% do you think that would have investors sitting on their investments instead of selling, or moving into a foreign market? Or would it have little effect on the way things are going? I would think that this move would not bring more revenue in necessarily, it may have the opposite effect.

Greg enters the room with a funny hat/towel wrapped around his head - sits down at small table and stares into his crystal ball.... soft music (like Led Zeppelin or ZZ TOP) playing in the background...

And pronounces.......... wait for it.........


I have absolutely no idea.


IF -- HUGE - GIANT - LARGE - MONUMENTAL "IF" - Congress can do ANYTHING - they'll do it ALL WRONG. That's my bet. Don't even get me started with those 535 assholes - 536 if you count the head asshole.

If taxes revert to the code (we're currently enjoying a tax holiday) then it's a math issue. The TOTAL RETURN - vs some other investment. And there are calculators that will calculate the return you have to have, say, in a dividend at "X" tax rate to equal the return on a tax free bond.

So as interest rates RISE -- BOND face values will get hit first... since they are a known time - known interest rate... they'll sell off - because they have an inverse relationship - their face value has to DECREASE in order to pay the equivalent "new" interest rate. Too complicated??

Stock prices will no doubt DECREASE -- based on the same issue - the price has to go down in order to keep the dividend % "higher". Again - an inverse relationship. And if the dividend is now taxed at ordinary income levels -- people will sell and look for "other" investments - thus the price will decline (more sellers than buyers - and that in a nutshell is ANY MARKET FOR ANYTHING). They will also decrease because as the cost of money rises - it come out of operating profits... and the costs increase faster than the ability to raise prices and margins etc.

I'm very heavily invested in stocks and bonds - and I would tell you that I'd begin to move from taxable investments to more tax free income - but I'm LIVING off my dividend and interest income. If I was in an IRA/401K situation - I'd do absolutely nothing because those dividends etc aren't taxed until withdrawal.... so like most answers to these questions -- it all DEPENDS... age - length of time - what kinds of accounts - etc.

[camcojb]

Originally Posted by GregWeld

Greg enters the room with a funny hat/towel wrapped around his head - sits down at small table and stares into his crystal ball.... soft music (like Led Zeppelin or ZZ TOP) playing in the background...

And pronounces.......... wait for it.........


I have absolutely no idea.


IF -- HUGE - GIANT - LARGE - MONUMENTAL "IF" - Congress can do ANYTHING - they'll do it ALL WRONG. That's my bet. Don't even get me started with those 535 assholes - 536 if you count the head asshole.

If taxes revert to the code (we're currently enjoying a tax holiday) then it's a math issue. The TOTAL RETURN - vs some other investment. And there are calculators that will calculate the return you have to have, say, in a dividend at "X" tax rate to equal the return on a tax free bond.

So as interest rates RISE -- BOND face values will get hit first... since they are a known time - known interest rate... they'll sell off - because they have an inverse relationship - their face value has to DECREASE in order to pay the equivalent "new" interest rate. Too complicated??

Stock prices will no doubt DECREASE -- based on the same issue - the price has to go down in order to keep the dividend % "higher". Again - an inverse relationship. And if the dividend is now taxed at ordinary income levels -- people will sell and look for "other" investments - thus the price will decline (more sellers than buyers - and that in a nutshell is ANY MARKET FOR ANYTHING). They will also decrease because as the cost of money rises - it come out of operating profits... and the costs increase faster than the ability to raise prices and margins etc.

I'm very heavily invested in stocks and bonds - and I would tell you that I'd begin to move from taxable investments to more tax free income - but I'm LIVING off my dividend and interest income. If I was in an IRA/401K situation - I'd do absolutely nothing because those dividends etc aren't taxed until withdrawal.... so like most answers to these questions -- it all DEPENDS... age - length of time - what kinds of accounts - etc.

thank you Greg. Having a discussion regarding this on another board, and not sure that raising capital gains like that wouldn't have unintended consequences.

[GregWeld]

Originally Posted by camcojb

thank you Greg. Having a discussion regarding this on another board, and not sure that raising capital gains like that wouldn't have unintended consequences.

Oh - I think it will have major consequences... and that's the problem with messing with the tax code - people can't plan and can't invest not knowing what is going to be next year or the year after.

Congress ends up doing what is POLITICALLY CORRECT at any given time.... rather than doing what is the RIGHT thing for all time. They are a collective group of useless morons. Sadly we voted for them.

So politically I would EXPECT them to vote for higher taxes -- and what that does is once again - affect the people that don't understand what's going on - the most. In their effort to ever spend MORE AND MORE of your money - they'll grab every last dollar they can see or get their hands on. And when they do that - the PEOPLE are smarter - and they just move in a different direction. Like the 10% "luxury tax" the idiots put on boats and cars and furs a few years back --- the only people that hurt was the boat builders and the people that worked there. Congress is reactive not proactive. They never get it right.

However - I will come back to what I've always said about taxes.... they only take a percentage so I'm happiest when I have to pay - because that means I've made money. End of story. I'd prefer to pay them the maximum over the minimum. To think of it any other way - is just wrong headed.

[camcojb]

Originally Posted by GregWeld

Oh - I think it will have major consequences... and that's the problem with messing with the tax code - people can't plan and can't invest not knowing what is going to be next year or the year after.

Congress ends up doing what is POLITICALLY CORRECT at any given time.... rather than doing what is the RIGHT thing for all time. They are a collective group of useless morons. Sadly we voted for them.

So politically I would EXPECT them to vote for higher taxes -- and what that does is once again - affect the people that don't understand what's going on - the most. In their effort to ever spend MORE AND MORE of your money - they'll grab every last dollar they can see or get their hands on. And when they do that - the PEOPLE are smarter - and they just move in a different direction. Like the 10% "luxury tax" the idiots put on boats and cars and furs a few years back --- the only people that hurt was the boat builders and the people that worked there. Congress is reactive not proactive. They never get it right.

However - I will come back to what I've always said about taxes.... they only take a percentage so I'm happiest when I have to pay - because that means I've made money. End of story. I'd prefer to pay them the maximum over the minimum. To think of it any other way - is just wrong headed.

those damned unintended consequences coming back to haunt 'ya. Thanks Greg, appreciate the input.

[sik68]

I am young (28, everyone on this forum tells me this is young) and have been biding my time until 2012 to convert my SEP into a Roth IRA...my wife started school, so her not working lowers our tax rate. Seems to be prudent to switch to a Roth early in your investing career or other low tax situations, when your income is less. Give as little to the man as possible.

The Roth cynics have warned me that in the long run, congress will not be able to keep their hands off the Roths and will implement a tax to get us again at withdraw. Can't say I disagree with their cynicism but I'm sure you will still come out way ahead vs. not converting in the first place.

PS Greg, I put some of my money where your mouth is today...did you feel the bump in your portfolio?

Steven

[realcoray]

Originally Posted by sik68

I am young (28, everyone on this forum tells me this is young) and have been biding my time until 2012 to convert my SEP into a Roth IRA...my wife started school, so her not working lowers our tax rate. Seems to be prudent to switch to a Roth early in your investing career or other low tax situations, when your income is less. Give as little to the man as possible.

The Roth cynics have warned me that in the long run, congress will not be able to keep their hands off the Roths and will implement a tax to get us again at withdraw. Can't say I disagree with their cynicism but I'm sure you will still come out way ahead vs. not converting in the first place.

It's hard to predict what will happen but it seems unlikely that they'd go after roths as they are essentially for the middle class, and Congress has shown an aversion to doing anything that will bother older people, the people who tend to vote, and by the time they would consider this (after they look at the various other ways being talked about in this thread), most people with strong Roths would be part of that group.

[GregWeld]

Originally Posted by sik68

I am young (28, everyone on this forum tells me this is young) and have been biding my time until 2012 to convert my SEP into a Roth IRA...my wife started school, so her not working lowers our tax rate. Seems to be prudent to switch to a Roth early in your investing career or other low tax situations, when your income is less. Give as little to the man as possible.

The Roth cynics have warned me that in the long run, congress will not be able to keep their hands off the Roths and will implement a tax to get us again at withdraw. Can't say I disagree with their cynicism but I'm sure you will still come out way ahead vs. not converting in the first place.

PS Greg, I put some of my money where your mouth is today...did you feel the bump in your portfolio?

Steven

Steven -- I agree with RealCoray that the idiots in congress would try to suddenly backtrack on one of the greatest savings inventions of all time... and they'd have legal fights for years from huge groups of people - so I really doubt there's going to be any changes to that program.

On the other note --- I'm glad you're getting started... but my portfolio went backwards today (in the one Schwab account I always use for this thread) because of the Xmas gift I got my lovely wife Gwen -- I'd written a check out of this account to pay for it. BUT -- my bond account rose nicely with a whole slew of interest payments on the first of the year - so all in all a "wash".

[GregWeld]

PS -- STEVEN --- Very smart move at your age to do the ROTH conversion! You have say 40 years to retirement - and hopefully you live at least another 30 years after that! So you have many many great years for that ROTH to grow absolutely tax free.... It just doesn't get any better than that!

[CRCRFT78]

I also jumped on the Roth IRA bandwagon today. Now I've got to get these accounts stuffed with some money and look towards acquiring some other assets that pay. Made a couple of stock moves (sell the duds and picked up some new ones) also. Looking forward to a financially fit 2012. We'll see where its at this time next year.