I understand why high net worth individuals with a significant amount of money invested through taxable accounts pay a lot of attention to the tax structure of their investments. If you are a high earner that taxably invests in REITs, for example, you could be looking at a 39.6% federal tax rate. If you live in a high state tax locale such as California, you could be looking at another 13.3% in taxes. A California doctor investing in a real estate investment trust in a taxable account could be paying out 52.9% of each dividend received.
When you make an investment, the price you pay for the asset is called your “cost basis.” This is the threshold amount for calculating the capital gains taxes that are required when you sell. If you buy 100 shares of Berkshire Hathaway (BRK.B) for $166 in 2016, and then sell them at $250 in 2021, your 23.8% tax requirement is one the difference between $166 and $250. The $84 gain requires a $19.99 tax payment, leaving the investor with $64.01 x 100 = $6,401 in net-of-tax investment gains that gets added to the $16,600 initial investment for a total investment value of $23,001.
When one of your financially savvy friends tells you get your estate planning together, you will often hear the line “You don’t want your assets to get stuck in probate!” wielded at the end of the conversation as though it were impending a disease. Why do finance guys use the word “probate” in the same tone that is used to warn of salmonella poisoning risks?
Well, there are three reason: your beneficiaries have to wait longer for the money, they have to pay thousands of dollars in expenses to go through the probate process, and they open up parts of their financial life to the general public.
According to the research of Wharton finance professor Dr. Jeremy Siegel, 82% of stocks that are removed from the S&P 500 go on to outperform the stock that replaced them in the index during his examination of subsequent three-year performance of the stocks.
This finding seems counterintuitive. If a stock gets added to the S&P 500, it must be riding a momentum wave that has seen its valuation increase. Likewise, a stock that is removed from the S&P 500 must have been riding a wave of sluggish performance that warranted its exclusion from the index. What gives?
When you make a contribution to an individual retirement account (IRA), you cannot make a direct transfer of stock, bonds, or real estate into the IRA. If you plan to put $5,500 into a traditional IRA in 2017, you must actually deposit those funds into the account with cash. If you an account holding $5,500 worth of Brown Forman (BF.A) sitting in a taxable account at the same brokerage house that holds your IRA, you are not permitted to make a direct in-kind transfer of the Brown Forman shares from your taxable brokerage account to your traditional IRA.