Taxes Archives

The lure for those fortunate enough to have highly appreciated company stock in their 401(k) is to pay lower taxes by utilizing what is called Net Unrealized Appreciation (NUA). To do so, it takes a triggering event: reaching age 59 ½, separating from service, becoming disabled, or death. NUA’s tax advantage stems from lower long-term capital gains rates on the stock’s appreciation. By contrast, if the company stock is sold within the 401(k), the withdrawal is taxed at a higher income tax rate. In the example below, the income tax rate is in the 33% tax bracket which appears relatively high.

Costs matter. Whether buying a car or selecting an investment strategy, costs are likely to be an important factor. When you buy a car, for example, the sticker price tells you approximately how much you can expect to pay. But the sticker price is only one part of the overall cost of owning a car. Sales taxes, insurance, routine maintenance costs, and the potential cost of unexpected repairs are also important. When investing in mutual funds, less familiar investment costs need to be considered for evaluating the overall cost effectiveness of a strategy.

Asset location impacts after-tax performance


Asset Location: Tax-Smart Portfolio Decisions

It is often said that the three most important factors in a home’s price are: location, location, location. With your investment accounts, asset location can play a somewhat similar role. Arranging your investments among your accounts may boost long-term, after-tax performance, with estimates of improved performance ranging from 0.2% to 0.5% annually1. That’s $2,000 to $5,000 per year for every $1,000,000 invested and a nice enhancement when interest rates are low and expected stock returns appear depressed.

Capital Gains“What is one really trying to do in the investment world? Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound.”

Warren Buffett

Without legislative action in the waning days of 2012, next year’s maximum long-term capital gains tax rate will rise from 15% to 20%.  This means, for example, selling an investment with accumulated long-term capital gains of $100,000 will generate taxes of $15,000 in 2012. Beginning January 1, the same sale will cost $20,000 in taxes. Happy New Year.