Author Topic: Random investing, tax, and business questions (new investor)  (Read 2379 times)

pbc561

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Random investing, tax, and business questions (new investor)
« on: March 10, 2015, 08:28:21 PM »
So I'm fairly new to investing, and I listen to a lot of podcasts about finance and I write down all the questions I come up with as I listen. Below are some of my questions, ranging many different topics, some basic and some not. I appreciate all attempts to answer any questions, even if you can't answer them all.

1. As per http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New, assuming my taxable income as MFJ stays below $74,900, is it correct to say that all investments in my taxable accounts will grow tax free, the same way as in a Roth IRA?

2. Do capital gains add to taxable income, or is my capital gains rate 0% as long as my non-capital gains taxable income is under $74,900 for MFJ?

3. If I cross into the 25% tack bracket, do I pay 15% of all my capital gains or only some of it? If so, how is the amount that is and isn't taxed at 15% determined?

4. Why are tax-deferred investments almost always presented as better than a taxable account? Assuming the same tax bracket throughout someone's life time, wouldn't it be better to pay taxes up front and only pay the capital gains rate than the ordinary rate on everything when you retire?

5. Is there any sort of calculator or spreadsheet (that you're aware of) that will simply show the difference between a roth ira and traditional ira? If not, could you show a basic example?

6. If I withdraw principle from a Roth IRA for whatever reason, can I put that amount of money back in the roth ira at any point in time with the reinvesting not counting towards the contribution limit?

7. Is there a best and worst time to buy a mutual fund, stock, or ETF in relation to the x-dividend date or any other date? Could you explain why or why not (ie. tax implications)?

8. If I put money in a SEP IRA today, is this money rollable into a roth ira? If so, what's the earliest I can roll it in? And does the rolled amount count towards the contribution limits? Anything dangerous about doing this?

9. Do you have to pay any taxes when converting any type of account into a Roth IRA? If so, are there any strategies to avoid or limit the taxes?

10. How exactly do mutual funds compound? Is it annually, monthly, daily?

11. Is tax loss harvesting relevant only to taxable accounts, or can it apply to deductible IRAs?

12. Do stocks, ETFS, or mutual funds earn interest, or do only bonds earn interest? In other words, if you buy a stock or mutual fund and it goes up by 5%, you would say you earned 5% of _______?

13. If I google the ticker AAPL, using the little stock widget that pops up and click on the "5 YEAR" tab, and highlight the whole line graph for 5 years to where it shows 285.46% (as of now), can I divide that number by 5 and say that is the average annual return for past 5 years, or is that not the correct way to do it?

14. Risk tolerance aside, should everyone own some level of bonds? Is there proof to show that you would earn more in the long term by having bonds?

15. Not exactly an investment question, but hopefully someone can answer: Is it true that if I turn my sole proprietorship into an s-corp, that I could play less self employment taxes by paying myself a salary less than the business' net income, giving myself the rest of the net income in a dividend, and thus keep more money after tax? If so, could you explain this in a straightforward way?

Thanks for your help.

pbc561
« Last Edit: March 10, 2015, 10:29:44 PM by pbc561 »

MDM

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Re: Random investing, tax, and business questions (new investor)
« Reply #1 on: March 10, 2015, 09:34:03 PM »
1. As per http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New, assuming my taxable income as MFJ stays below $74,900, is it correct to say that all investments in my taxable accounts will grow tax free, the same way as in a Roth IRA?

2. Do capital gains add to taxable income, or is my capital gains rate 0% as long as my non-capital gains taxable income is under $74,900 for MFJ?

3. If I cross into the 25% tack bracket, do I pay 15% of all my capital gains or only some of it? If so, how is the amount that is and isn't taxed at 15% determined?
1. Correct, subject to the answers to #2 & #3.
2. Add to. 
3. See the Qualified Dividends and Long Term Capital Gains Worksheet in the Form 1040 Instructions, p. 43 here: http://www.irs.gov/pub/irs-pdf/i1040gi.pdf.  See also the Excel calculation for this in the case study spreadsheet, and other discussion in http://forum.mrmoneymustache.com/investor-alley/capital-gains-rate/.

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4. Why are tax-deferred investments almost always presented as better than a taxable account? Assuming the same tax bracket throughout someone's life time, wouldn't it be better to pay taxes up front and only pay the capital gains rate than the ordinary rate on everything when you retire?
Depends on the specific tax rates.  E.g., for someone in the 25% bracket it is better to pay 25% once, instead of 25% once and 15% another time.

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5. Is there any sort of calculator or spreadsheet (that you're aware of) that will simply show the difference between a roth ira and traditional ira? If not, could you show a basic example?
See https://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758 for some equations one could enter into Excel.

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6. If I withdraw principle from a Roth IRA for whatever reason, can I put that amount of money back in the roth ira at any point in time with the reinvesting not counting towards the contribution limit?
No, if you are talking about withdrawing money that was contributed in a previous tax year.  Not sure whether, for example, you could contribute $5K every Monday and withdraw that $5K every Thursday during the year (even assuming your investment return was always positive).

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9. Do you have to pay any taxes when converting any type of account into a Roth IRA?
Yes.  Your taxes are independent of your decision to put the money into a Roth.  Thus...
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If so, are there any strategies to avoid or limit the taxes?
...the strategies are the same (e.g., sell specific lots, keep taxable income low, etc.) regardless of whether a Roth is ultimately involved.

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10. How exactly do mutual funds compound? Is it annually, monthly, daily?
12. Do stocks, ETFS, or mutual funds earn interest, or do only bonds earn interest? In other words, if you buy a stock or mutual fund and it goes up by 5%, you would say you earned 5% of _______?
They don't compound the way a savings account does.  Their values rise (or fall) as the underlying stock prices rise (or fall).

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11. Is tax loss harvesting relevant only to taxable accounts, or can it apply to deductible IRAs?
It is useful only in a taxable account.  If you have equivalent investments in both taxable and non-taxable accounts, you do need to be aware of wash sale rules that apply across all your investments.

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13. If I google the ticker AAPL, using the little stock widget that pops up and click on the "5 YEAR" tab, and highlight the whole line graph for 5 years to where it shows 285.46% (as of now), can I divide that number by 5 and say that is the average annual return for past 5 years, or is that not the correct way to do it?
285.46% = 124.77/32.37 - 1.  You want to know "i" in 32.37 * (1 + i)^5 = 124.77, so take the 5th root of 124.77/32.37 and subtract 1 to get 31%.

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14. Risk tolerance aside, should everyone own some level of bonds? Is there proof to show that you would earn more in the long term by having bonds?
Risk tolerance is the primary reason.  There is no proof of future returns.


Didn't address all the questions....

a1smith

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Re: Random investing, tax, and business questions (new investor)
« Reply #2 on: March 10, 2015, 11:03:10 PM »
7. Is there a best and worst time to buy a mutual fund, stock, or ETF in relation to the x-dividend date or any other date? Could you explain why or why not (ie. tax implications)?

A lot of mutual funds do long and short term capital gains distributions near the end of the year for the LT and ST gains they incurred that year.  If you own shares of the fund on the day of the distributions you will get them.  If you bought the day before you would get the ST and LT distributions, basically have the same dollar value of the fund (if reinvesting), but owe taxes on the whole year's worth of ST and LT capital gains that you did not participate in.  What a great deal, eh?

seattlecyclone

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Re: Random investing, tax, and business questions (new investor)
« Reply #3 on: March 11, 2015, 06:59:05 PM »
1. As per http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New, assuming my taxable income as MFJ stays below $74,900, is it correct to say that all investments in my taxable accounts will grow tax free, the same way as in a Roth IRA?

Not quite. The base tax rate on capital gains and qualified dividends is 0% under the top of the 15% tax bracket, true. However, Obamacare subsidies and many other tax credits will be reduced or eliminated at higher AGI levels, which means that your de facto tax rate for this income may be higher than zero. Your state may also tax this income at a non-zero rate. It depends on your individual situation.

Also, not all investment income meets the criteria for "qualified dividends." Bond interest is taxed at your regular tax rate. REIT dividends are typically taxed this way as well. This Vanguard page lists their equity-holding funds and the ratio of their dividend payments that meet the qualified dividend requirements. Many of their funds (Total Stock Market, 500 Index, Large Cap, others) are allowed to count 100% of their dividend payments as qualified. The REIT funds, balanced funds, small/mid-cap funds, international funds, and others have dividends where only a portion counts as a qualified dividend. The rest will be taxed at your regular income tax rate.