Is spread betting tax free is its your sole source of income?
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How to not get ruined with Options - Part 3a of 4 - Simple Strategies
Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM Post 2: Basics: Buying and Selling, the Greeks Post 3a: Simple Strategies Post 3b: Advanced Strategies Post 4a: Example of trades (short puts, covered calls, and verticals) Post 4b: Example of trades (calendars and hedges) --- Ok. So I lied. This post was getting way too long, so I had to split in two (3a and 3b) In the previous posts 1 and 2, I explained how to buy and sell options, and how their price is calculated and evolves over time depending on the share price, volatility, and days to expiration. In this post 3a (and the next 3b), I am going to explain in more detail how and when you can use multiple contracts together to create more profitable trades in various market conditions. Just a reminder of the building blocks: You expect that, by expiration, the stock price will … ... go up more than the premium you paid → Buy a call … go down more than the premium you paid → Buy a put ... not go up more than the premium you got paid → Sell a call ... not go down more than the premium you got paid → Sell a put Buying Straight Calls: But why would you buy calls to begin with? Why not just buy the underlying shares? Conversely, why would you buy puts? Why not just short the underlying shares? Let’s take long shares and long calls as an example, but this applies with puts as well. If you were to buy 100 shares of the company ABC currently trading at $20. You would have to spend $2000. Now imagine that the share price goes up to $25, you would now have $2500 worth of shares. Or a 25% profit. If you were convinced that the price would go up, you could instead buy call options ATM or OTM. For example, an ATM call with a strike of $20 might be worth $2 per share, so $200 per contract. You buy 10 contracts for $2000, so the same cost as buying 100 shares. Except that this time, if the share price hits $25 at expiration, each contract is now worth $500, and you now have $5000, for a $3000 gain, or a 150% profit. You could even have bought an OTM call with a strike of $22.50 for a lower premium and an even higher profit. But it is fairly obvious that this method of buying calls is a good way to lose money quickly. When you own shares, the price goes up and down, but as long as the company does not get bankrupt or never recovers, you will always have your shares. Sometimes you just have to be very patient for the shares to come back (buying an index ETF increases your chances there). But by buying $2000 worth of calls, if you are wrong on the direction, the amplitude, or the time, those options become worthless, and it’s a 100% loss, which rarely happens when you buy shares. Now, you could buy only one contract for $200. Except for the premium that you paid, you would have a similar profit curve as buying the shares outright. You have the advantage though that if the stock price dropped to $15, instead of losing $500 by owning the shares, you would only lose the $200 you paid for the premium. However, if you lose these $200 the first month, what about the next month? Are you going to bet $200 again, and again… You can see that buying calls outright is not scalable long term. You need a very strong conviction over a specific period of time. How to buy cheaper shares? Sell Cash Covered Put. Let’s continue on the example above with the company ABC trading at $20. You may think that it is a bit expensive, and you consider that $18 is a more acceptable price for you to own that company. You could sell a put ATM with a $20 strike, for $2. Your break-even point would be $18, i.e. you would start losing money if the share price dropped below $18. But also remember that if you did buy the shares outright, you would have lost more money in case of a price drop, because you did not get a premium to offset that loss. If the price stays above $20, your return for the month will be 11% ($200 / $1800). Note that in this example, we picked the ATM strike of $20, but you could have picked a lower strike for your short put, like an OTM strike of $17.50. Sure, the premium would be lower, maybe $1 per share, but your break-even point would drop from $18 to $16.50 (only 6% return then per month, not too shabby). The option trade will usually be written like this: SELL -1 ABC 100 17 JUL 20 17.5 PUT @ 1.00 This means we sold 1 PUT on ABC, 100 shares per contract, the expiration date is July 17, 2020, and the strike is $17.5, and we sold it for $1 per share (so $100 credit minus fees). With your $20 short put, you will get assigned the shares if the price drops below $20 and you keep it until expiration, however, you will have paid them the equivalent of $18 each (we’ll actually talk more about the assignment later). If your short put expires worthless, you keep the premium, and you may decide to redo the same trade again. The share price may have gone up so much that the new ATM strike does not make you comfortable, and that’s fine as you were not willing to spend more than $18 per share, to begin with, anyway. You will have to wait for some better conditions. This strategy is called a cash covered put. In a taxable account, depending on your broker, you can have it on margin with no cash needed (you will need to have some other positions to provide the buying power). Beware that if you don’t have the cash to cover the shares, it is adding some leverage to your overall position. Make sure you account for all your potential risks at all times. The nice thing about this position is that as long as you are not assigned, you don’t actually need to borrow some money, it won’t cost you anything. In an IRA account, you will need to have the cash available for the assignment (remember in this example, you only need $1800, plus trading fees). Let’s roll! Now one month later, the share price is between $18 and $22, there are few days of expiration left, and you don’t want to be assigned, but you want to continue the same process for next month. You could close the current position, and reopen a new short put, or you could in one single transaction buy back your current short put, and sell another put for next month. Doing one trade instead of two is usually cheaper because you reduce the slippage cost. The closing of the old position and re-opening of a new short position for the next expiration is called rolling the short option (from month to month, but you can also do this with weekly options). The croll can be done a week or even a few days before expiration. Remember to avoid expiration days, and be careful being short an option on ex-dividend dates. When you roll month to month with the same strike, for most cases, you will get some money out of it. However, the farther your strike is from the current share price, the less additional premium you will get (due to the lower extrinsic value on the new option), and it can end up being close to $0. At that point, given the risk incurred, you may prefer to close the trade altogether or just be assigned. During the roll, depending on if the share price moved a bit, you can adjust the roll up or down. For example, you buy back your short put at $18, and you sell a new short put at $17 or $19, or whatever value makes the most sense. Assignment Now, let’s say that the share price finally dropped below $20, and you decided not to roll, or it dropped so much that the roll would not make sense. You ended up getting your shares assigned at a strike price of $18 per share. Note that the assigned share may have a current price much lower than $18 though. If that’s the case, remember that you earned more money than if you bought the shares outright at $20 (at least, you got to keep the $2 premium). And if you rolled multiple times, every premium that you got is additional money in your account. Want to sell at a premium? Sell Covered Calls. You could decide to hold onto the shares that you got at a discount, or you may decide that the stock price is going to go sideways, and you are fine collecting more theta. For example, you could sell a call at a strike of $20, for example for $1 (as it is OTM now given the stock price dropped). SELL -1 ABC 100 17 JUL 20 20 CALL @ 1.00 When close to the expiration time, you can either roll your calls again, the same way that you rolled your puts, as much as you can, or just get assigned if the share price went up. As you get assigned, your shares are called away, and you receive $2000 from the 100 shares at $20 each. Except that you accumulated more money due to all the premiums you got along the way. This sequence of the short put, roll, roll, roll, assignment, the short call, roll, roll, roll, is called the wheel. It is a great strategy to use when the market is trading sideways and volatility is high (like currently). It is a low-risk trade provided that the share you pick is not a risky one (pick a market ETF to start) perfect to get create some income with options. There are two drawbacks though:
If the share dropped too much, you are stuck with it.
You will have to be patient for the share to go back up, but often you can end up with many shares at a loss if the market has been tanking. As a rule of thumb, if I get assigned, I never ever sell a call below my assignment strike minus the premium. In case the market jumps back up, I can get back to my original position, with an additional premium on the way. Market and shares can drop like a stone and bounce back up very quickly (you remember this March and April?), and you really don’t want to lock a loss. Here is a very quick example of something to not do: Assigned at $18, current price is $15, sell a call at $16 for $1, share goes back up to $22. I get assigned at $16. In summary, I bought a share at $18, and sold it at $17 ($16 + $1 premium), I lost $1 between the two assignments. That’s bad.
If the share goes up too fast, you missed some opportunity for gain, potentially big gains.
You will have to find some other companies to do the wheel on. If it softens the blow a bit, your retirement account may be purely long, so you’ll not have totally missed the upside anyway. A short put is a bullish position. A short call is a bearish position. Alternating between the two gives you a strategy looking for a reversion to the mean. Both of these positions are positive theta, and negative vega (see part 2). Now that I explained the advantage of the long calls and puts, and how to use short calls and puts, we can explore a combination of both. Verticals Most option beginners are going to use long calls (or even puts). They are going to gain some money here and there, but for most parts, they will lose money. It is worse if they profited a bit at the beginning, they became confident, bet a bigger amount, and ended up losing a lot. They either buy too much (50% of my account on this call trade that can’t fail), too high of a volatility (got to buy those NKLA calls or puts), or too short / too long of an expiration (I don’t want to lose theta, or I overspent on theta). As we discussed earlier, a straight long call or put is one of the worst positions to be in. You are significantly negative theta and positive vega. But if you take a step back, you will realize that not accounting for the premium, buying a call gives you the upside of stock up to the infinity (and buying a put gives you the upside of the stock going to $0). But in reality, you rarely are betting that the stock will go to infinity (or to $0). You are often just betting that the stock will go up (or down) by X%. Although the stock could go up (or down) by more than X%, you intuitively understand that there is a smaller chance for this to happen. Options are giving you leverage already, you don’t need to target even more gain. More importantly, you probably should not pay for a profit/risk profile that you don’t think is going to happen. Enter verticals. It is a combination of long and short calls (or puts). Say, the company ABC trades at $20, you want to take a bullish position, and the ATM call is $2. You probably would be happy if the stock reaches $25, and you don’t think that it will go much higher than that. You can buy a $20 call for $2, and sell a $25 call for $0.65. You will get the upside from $20 to $25, and you let someone else take the $25 to infinity range (highly improbable). The cost is $1.35 per share ($2.00 - $0.65). BUY +1 VERTICAL ABC 100 17 JUL 20 20/25 CALL @ 1.35 This position is interesting for multiple reasons. First, you still get the most probable range for profitability ($20 to $25). Your cost is $1.35 so 33% cheaper than the long call, and your max profit is $5 - $1.35 = $3.65. So your max gain is 270% of the risked amount, and this is for only a 25% increase in the stock price. This is really good already. You reduced your dependency on theta and vega, because the short side of the vertical is reducing your long side’s. You let someone else pay for it. Another advantage is that it limits your max profit, and it is not a bad thing. Why is it a good thing? Because it is too easy to be greedy and always wanting and hoping for more profit. The share reached $25. What about $30? It reached $30, what about $35? Dang it dropped back to $20, I should have sold everything at the top, now my call expires worthless. But with a vertical, you know the max gain, and you paid a premium for an exact profit/risk profile. As soon as you enter the vertical, you could enter a close order at 90% of the max value (buy at $1.35, sell at $4.50), good till to cancel, and you hope that the trade will eventually be executed. It can only hit 100% profit at expiration, so you have to target a bit less to get out as soon as you can once you have a good enough profit. This way you lock your profit, and you have no risk anymore in case the market drops afterwards. These verticals (also called spreads) can be bullish or bearish and constructed as debit (you pay some money) or credit (you get paid some money). The debit or credit versions are equivalent, the credit version has a bit of a higher chance to get assigned sooner, but as long as you check the extrinsic value, ex-dividend date, and are not too deep ITM you will be fine. I personally prefer getting paid some money, I like having a bigger balance and never have to pay for margin. :) Here are the 4 trades for a $20 share price: CALL BUY 20 ATM / SELL 25 OTM - Bullish spread - Debit CALL BUY 25 OTM / SELL 20 ATM - Bearish spread - Credit PUT BUY 20 ATM / SELL 25 ITM - Bullish spread - Credit PUT BUY 25 ITM / SELL 20 ATM - Bearish spread - Debit Because both bullish trades are equivalent, you will notice that they both have the same profit/risk profile (despite having different debit and credit prices due to the OTM/ITM differences). Same for the bearish trades. Remember that the cost of an ITM option is greater than ATM, which in turn is greater than an OTM. And that relationship is what makes a vertical a credit or a debit. I understand that it can be a lot to take in. Let’s take a step back here. I picked a $20/$25 vertical, but with the share price at $20, I could have a similar $5 spread with $15/$20 (with the same 4 constructs). Or instead of 1 vertical $20/$25, I could have bought 5 verticals $20/$21. This is a $5 range as well, except that it has a higher probability for the share to be above $21. However, it also means that the spread will be more expensive (you’ll have to play with your broker tool to understand this better), and it also increases the trading fees and potentially overall slippage, as you have 5 times more contracts. Or you could even decide to pick OTM $25/$30, which would be even cheaper. In this case, you don’t need the share to reach $30 to get a lot of profit. The contracts will be much cheaper (for example, like $0.40 per share), and if the share price goes up to $25 quickly long before expiration, the vertical could be worth $1.00, and you would have 150% of profit without the share having to reach $30. If you decide to trade these verticals the first few times, look a lot at the numbers before you trade to make sure you are not making a mistake. With a debit vertical, the most you can lose per contract is the premium you paid. With a credit vertical, the most you can lose is the difference between your strikes, minus the premium you received. One last but important note about verticals: If your short side is too deep ITM, you may be assigned. It happens. If you bought some vertical with a high strike value, for example: SELL +20 VERTICAL SPY 100 17 JUL 20 350/351 PUT @ 0.95 Here, not accounting for trading fees and slippage, you paid $0.95 per share for 20 contracts that will be worth $1 per share if SPY is less than $350 by mid-July, which is pretty certain. That’s a 5% return in 4 weeks (in reality, the trading fees are going to reduce most of that). Your actual risk on this trade is $1900 (20 contracts * 100 shares * $0.95) plus trading fees. That’s a small trade, however the underlying instrument you are controlling is much more than that. Let’s see this in more detail: You enter the trade with a $1900 potential max loss, and you get assigned on the short put side (strike of $350) after a few weeks. Someone paid expensive puts and exercised 20 puts with a strike of $350 on their existing SPY shares (2000 of them, 20 contracts * 100 shares). You will suddenly receive 2000 shares on your account, that you paid $350 each. Thus your balance is going to show -$700,000 (you have 2000 shares to balance that). If that happens to you: DON’T PANIC. BREATHE. YOU ARE FINE. You owe $700k to your broker, but you have roughly the same amount in shares anyway. You are STILL protected by your long $351 puts. If the share price goes up by $1, you gain $2000 from the shares, but your long $351 put will lose $2000. Nothing changed. If the share price goes down by $1, you lose $2000 from the shares, but your long $350 put will gain $2000. Nothing changed. Just close your position nicely by selling your shares first, and just after selling your puts. Some brokers can do that in one single trade (put based covered stock). Don’t let the panic set in. Remember that you are hedged. Don’t forget about the slippage, don’t let the market makers take advantage of your panic. Worst case scenario, if you use a quality broker with good customer service, call them, and they will close your position for you, especially if this happens in an IRA. The reason I am insisting so much on this is because of last week’s event. Yes, the RH platform may have shown incorrect numbers for a while, but before you trade options you need to understand the various edge cases. Again if this happens to you, don’t panic, breathe, and please be safe. This concludes my post 3a. We talked about the trade-offs between buying shares, buying calls instead, selling puts to get some premium to buy some shares at a cheaper price, rolling your short puts, getting your puts assigned, selling calls to get some additional money in sideways markets, rolling your short calls, having your calls assigned too. We talked about the wheel, being this whole sequence spanning multiple months. After that, we discussed the concept of verticals, with bullish and bearish spreads that can be either built as a debit or a credit. And if there is one thing you need to learn from this, avoid buying straight calls or puts but use verticals instead, especially if the volatility is very high. And do not ever sell naked calls, again use verticals. The next post will explain more advanced and interesting option strategies. --- Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM Post 2: Basics: Buying and Selling, the greeks Post 3a: Simple Strategies Post 3b: Advanced Strategies Post 4a: Example of trades (short puts, covered calls, and verticals) Post 4b: Example of trades (calendars and hedges)
Can someone help me better understand dividend investing?
I like the idea of dividend investing but I feel there are many arguments on BOTH sides. I'd like to present a few and discuss them. 1) Dividend stocks aren't good because they just remove from the stock price. So that's true. I don't think dividend stocks are good for growth. I think it is a great capital preservation if the company is solid like $T. They are the same price as they were four years ago and it is an excellent way to accumulate shares. My question: Is this more of a wealth preservation option? What about growth dividends? I'd say AAPL and SBUX are examples of this (although I think AAPL is starting to mature as a company, but that is a different problem set on its own). 2) If they don't grow, why bother? I'm not sure what to say about this. Hence the reach out for opinions. I feel that while they don't excel as much as growth stocks, they do grow faster than bonds. A safe bet, IMO. Of course, assuming it is a diversified spread like SPHD which I own a small portion of. My question: Can someone give opinions of good growth dividend stocks that I have not mentioned already? Secondly, can someone help me rationalize point two, where it gives a purpose for dividend investing? 3) DRIP or no? I have a question on this one. Why not DRIP? If not drip, I guess you can use the dividend to invest in something else. However, I want to drip so that my dividend stocks accumulate faster. Catch22? My question: I only gave an example of why DRIP is good or not good. Can someone give an argument for both sides? 4) When to buy? I think it is best to buy dividend stocks during a recession. I say this for three good reasons. The first reason is to accumulate as many shares as possible. You can not only buy cheap shares at times of recession, you also accumulate shares with dividends. It is a win win if you ask me. My next reason is that I don't really have to worry about selling out. Finally, with dividends, I do have a cash flow coming in if I needed it (hopefully not relying on dividend income though lmao). Getting a few low thousand a months through dividends is not that far off or unattainable IMO? With a grain of salt though, because companies cancel their dividend like Disney and Ford. Fair enough, but that's why I try to mitigate that risk by avoiding individual companies or selecting individual companies with historical dividends (Look up dividend aristocrats). Companies like KO etc. Of course if KO stops giving dividends, then we are in bigger trouble than we realize and cash would be a better alternative. My question: I say the best time is to buy Dividend stocks during recessions. Why? Best way to accumulate shares. Can someone puncture my argument? Secondly, What dividend strategy do you use (loaded question, would appreciate it though)? 5) Placement This one is easy, put it in your tax advantaged accounts. My question is, is there a good position or opportunity in a taxable account? I would put it in a taxable account if I needed to withdraw the dividend income (not DRIP). Unfortunately I live in California so I am dicked. My question: Can anyone think of a scenario/strategy where taxation would be mitigated or even somewhat effective? More specifically and in addition to, when/how would you put in a taxable account? Please don't say when you have no additional room in your tax-advantaged. That is assumed in this question. Thank you guys for reading. Please be safe during these hard times. Best. Edit: I think the answer are growth stocks (SBUX, DIS, QCOMM, MSFT, etc). But, I would still love to hear thorough answers regarding the questions I posted.
Hi all, My understanding was that if you trade by 'spread betting' HMRC would class this as gambling therefore non taxable unless it is your only source of income (badges of trade etc). However, what would it be deemed as if it was a managed account and someone else was trading and you was receiving a percentage of it per month? Interest??
I wanted to share a few of my numbers, goals and priorities. Both because it's helpful for me to organize my goals and plans, and because the posts and comments on this sub have helped me out and I thought I'd chip in my 2 cents. Basic stats: 31M, married, wife the same age. My annual income (software engineer, large company) around 125k + 20k bonus + 5k stock + 4.5% 401k match + ESPP magic of 1.5% salary or more. Wife's salary around 105k with a 2% 401k match at a non-profit. No kids yet, just a dog. I started working the summer I was 16, for a nickel above federal minimum wage at the time, I think it was around $5.15 / hr. This was a miserable and yet incredibly enlightening experience. I realized I could make it on my own with hard work but I sure didn't want to be stuck there. I went to college, worked part-time and summers through school at only slightly better pay and less-miserable conditions. Wife and I were extremely fortunate to have had families who paid most of college (along with some scholarships and benefits), and we graduated with no debt. Real income started coming in after I graduated college with an engineering degree in 2007, starting salary was $65k. My wife and I lived basically as we had while in school, renting a cheap place, maxing out the 401ks and Roths, and saving a small amount of taxable income too. Here's my SSA reported earnings (pretty sure I had some W2 income in 2005, not sure why it's missing). Wife's salary has been just a little bit less than mine over the years as she has worked at non-profits and spent two more years in school. It's been just shy of ten years since we graduated and started working and saving. Here's Mint's (ragged) picture of our net worth as far back as Mint knows about. Their older data is incomplete, the early years are missing several accounts that we had, and there is a discontinuity around our house purchase last year as Mint can't be made to understand the date we closed on our house and how that corresponds to the dip in cash. Right now we're still maxing 401ks, maxing my HSA, and average maybe $2000 or so of taxable savings per month. I'll be getting my first bonus check from my current job this year, and plan to save basically all of it, plus all my stock options and ESPP. If everything goes smoothly I hope we can save well over $75k this year. I have a goal set in Mint to get to $1M in cash and investments, and if the market doesn't take a dive and our savings stay on track, I hope to get there by early 2018. Our major expenses are dog-care ($600/month), mortgage ($3300/month incl. taxes and insurance), and some travel. Our net worth breakdown: Assets:
$104k in cash. I plan to move maybe half into the market slowly this year.
$823k in investments. Only $135k in a taxable brokerage account, the rest is spread across IRAs and 401ks.
Paid around $800k for our condo last summer -- very high COL area but I have some confidence property values will hold up well here even if there is another big downturn. Mint uses Zillow for its property estimate, which has a more conservative $735k estimate. Oh well.
$4700 currently on the credit cards (paid in full every month, that is just the current balances outstanding). Balance is high at the moment as we've just booked flights and lodgings for our summer vacation.
$590k owed on the mortgage, out of the $600k initial. We bought a condo last summer, with a 30-year mortgage, 10-year fixed rate around 2.9%. I plan to pay the minimum monthly for the next 10 years while our rate is cheap, and if the bank jacks up rates on us at that point I hope to have enough saved and accessible by then to pay off in full.
I mentioned already my wife and I were helped out significantly by having undergrad paid for and graduating debt free. I received an inheritance of around $200k a few years ago which also explains our growth. I say this to be transparent about where our money has come from and not write some inflated baloney. With those caveats and explanations, here are some lessons I've learned along the way that I'd like to share.
Prioritize your physical health first. Yes my first advice is actually to spend money -- investing in yourself and your health. Even if you are young and without major problems, go to your yearly physicals and dentist appointments. Nobody likes going to the doctor, but not going ends up being much worse.
I am in decent health, but I would gladly pay every dollar in all my retirement accounts to have my few health problems solved for good and be guaranteed a long, healthy, active life. In my case, that's not possible. Doctors can only do so much. Some of your health is decided by luck and genetics. But control the part that you can control -- lucky for all of us, it's usually a pretty large part. Eat your fresh fruits and vegetables, exercise, and don't eat out all the time -- not primarily because eating out is expensive, but because your health cannot be bought at any price, and making food yourself will simply be better for you.
Prioritize your mental health, happiness, and sanity second. Having a 90% savings rate will do nothing for you if you are depressed and suicidal. If you don't live long enough to enjoy your early retirement, all those years and decades of hard work were a waste. I'd much rather see someone making the bare minimum 401k contributions, with a job he enjoys, good friends, family support, loving spouse, than see an isolated and depressed wage-slave, spending all his time at a job he hates in a depressing environment, just to max out savings.
In fact, I see the entire idea of "financial independence" as a small part of a larger picture: determining what your priorities are in life, what really makes you happy now and will make you happy long-term, and then consciously investing your time, energy, and money to those pursuits. And cutting back on everything else. Build the life you want, then save for it
I can't tell you the number of posts I see on personalfinance where the biggest obstacle boils down to "I paid way too much for a new car I can't really afford and now I'm in big trouble". What's worse, the people that post are the ones smart enough to realize something is wrong and reach out for help, I worry about the rest.
I live in a New England city where a big snowfall will regularly bury us for a week or two at a stretch in the winter. It is mind-boggling the number of cars I see here, weeks after a snowstorm, still parked on the street completely buried by snow -- the owners have more cars than they need, so what the hell, just leave the extra cars abandoned on the street (for "free" of course), buried in the snow. Car insurance for me and my wife here costs, for one car, north of $1k/year and we both have spotless driving records. Plus motor vehicle excise tax, registration, emissions test, plates, AAA, etc. And those are just the fixed costs, without putting any miles on the car! I am simply astounded by these abandoned cars hanging out for weeks.
Buy a damn bicycle and start somewhere. The number of excuses I hear about why one can't bike is just insane. Work is too far, it's too cold, too wet, too dangerous, I'm out of shape, I don't have a bike, I don't really know how to bike, bikes get stolen, I'll get sweaty, and on and on. Look. Go to your local bike shop, or Craigslist, or hell even Walmart. Spend $150-$200 on a used or (crappy) new bike. Get a helmet and maybe a lock. And just try going somewhere on a nice cool, sunny day. Go to a coffee shop, park, bookstore, post office, whatever. You lock up basically anywhere. No coins or credit card for the meter, no circling for parking. Time how long it took you. If it's somewhere close, and you live in a city, it probably wasn't much slower than driving and dealing with parking, maybe even faster. And remember how infuriating it is to be stuck in a car in a traffic jam? That will never happen to you on a bike.
Commuting to work every day by bike may not be for you. Maybe you can do it on nice days in the spring and fall. Maybe you can do a few errands here and there. Maybe just for fun rides on the weekend. Read the true cost of commuting by the great Mr. Money Moustache if you want financial motivation. I wonder if I have MMM beat with my bike commuting stats ? But just try riding a bike a few times and see how you like it. If you hate it, fine, it's not for you.
Spend some time getting VERY familiar with your work benefits. It is easy to miss out on free money. A few examples from my own experience:
If you have an employer match, be careful about front-loading your 401k contributions, even just a little bit, e.g. meeting the 401k contribution limit by November in the year. Depending on how it is set up, the match may only kick in, say, up to a 5% match of each pay period. So if you front-load and are maxed out by November, you would have only gotten a 5% match for 11 months, not 12 months.
If you have an employer HSA and your employer is generous enough to have incentive programs to reward you with money for exercise, preventative care, health counseling, etc. get on top of those and max them out. It's free money!
The workplace ESPP plans I've had access to are also free money (often a 15% guaranteed ROI after 6 months if company stock is flat or goes down, with the potential for much more if the company stock goes up). You are crazy if you don't contribute the full amount here.
Be on the lookout for other fringe employee benefits. We recently found out my wife's work offers reimbursement up to $20/month for bicycle commuting expenses. Ka-ching.
Understanding the details of your vacation policy (PTO) is critical. How often do they accrue? Do you have other days ("floating holidays") and how are they different? What is your cap on the max. number of days accrued? Do they roll-over year to year? Do they get paid out when you leave the company? Time is money, these days are precious, don't waste any of them.
On the same lines, the easiest credit card sign-ups and bank sign-ups are no-brainers, great money for a minimal time investment. You don't have to go overboard like the hardcore folks at churning , but just signing up and canceling one or two cards per year can net you an easy $200-$500 bonus each time. Even better, the credit card bonuses are generally treated as discounts on purchases, not income, so not treated as taxable income by the IRS.
Make a to-do list of financial fixes, bill cuts, home improvements, and work on them regularly. My quick list is:
rollover wife's old 401k to an IRA
set up a backdoor Roth for me and my wife this year
do an easy credit card sign-up bonus
take advantage of a state program to pay for insulation in our house
Think about what makes you happy and do more of it. Stop for a moment and ponder -- what are the top three things that you love doing, that when you are old and grey you will look back fondly on?
I bet that "compulsively checking Facebook" wasn't on your list. Or "sitting in traffic on the way to work". Financial Independence is all about taking control of your life. But you don't need some magic amount of money saved to do this. Being financially independent is more of a spectrum than a binary. Just having a small emergency fund saved will give you confidence at work, give you flexibility to interview for other jobs, allow you to sleep better at night, invest in yourself, etc.
And after taking care of yourself and your immediate family, think about your other close friends and more extended family (well, the ones you love, at least). Just as our families have sacrificed for us, I see my extended family members who have needed help over the years and have tried to help out quite a bit, financially and otherwise. This is actually what I look forward to the most as our nest egg slowly fills in. I don't want to be a Scrooge sticking to a leanfire budget for 40+ years of retirement with no wiggle room. I aspire to be able to help friends, family, and charities I care about.
[THE INTELLIGENT INVESTOR, CH4] General Portfolio Policy: The Defensive Investor
Welcome to the Chapter 4 Summary!
The rate of return is dependent on intelligent effort rather than risk tolerance.
If an investor wants something passive the rate of return is not going to be as high as someone who actively and aggressively looks for the best area of investment.
Old rule of thumb for defensive investors: have a 25/75 bond/stock split
Because markets were, and are currently, at their market high, this should be revised to a 50/50 bond/equity split.
Generally, when the market level is lower common stocks should account for more of the portfolio; and when the market level is considered high, common stocks should be less than 50%.
Two questions arise immediately:
1) Taxable or tax-free?
Mainly a matter of calculation based upon yields offered and individual tax rates.
Most investors should consider municipal (tax-free) bonds over taxable corporate issues.
2) Short or long maturity?
Consider whether an investor wants be safeguarded from the decline in price the price at the cost of a lower annual yield and the loss of the possibility of an appreciable gain in principal value.
The answer will be discussed in chapter eight.
For a long time, the most logical bonds to buy as an individual was a US savings issue
They’re still the easiest and best choice for small investors.
Several major bonds:
Take into consideration that those in high income-tax brackets would do better from tax-free issues than taxable ones. 1) US Savings Bond:
Income is taxed federally, not at the state or local level
Rates could be lower, but the backing of the government and tax advantages make them a safe bet.
2) Other US Bonds:
Income is taxed federally, not at the state or local level
The bond is created and issued by a department in the government for a particular reason.
3) State and Municipal Bonds:
Usually only taxed locally.
Not as strongly-backed as other bonds, so not the best choice for a defensive investor.
Should stay with only AAA rated bonds.
4) Corporate Bonds:
Taxed on the federal and state level.
Offer the highest yield, but also have the highest risk (not backed by the government of course)
Interestingly, if the company were to default, they are responsible first to the bond holder and then to stock holder
5) Higher-Yield Bond Investments:
Higher risk for the potential of higher reward
Contemporary side note: though still risky, there is the option of using a mutual fund that will spread the risk and do the research necessary to find a good opportunity.
Straight (nonconvertible) Preferred Stocks: "Preferred Stocks should only be bought on a bargain basis or not at all" because the shareholder becomes dependent on the company’s desire to pay dividends.
Age is not an important factor. Every situation is personal and needs to be looked into on an individual basis.
Easier said than done, but don’t buy and sell on impulse. Do the necessary research, buy the stock, and hold.
Equivalent to spread betting for BTC or other Crypto.
Trading for fun, is much less fun when you have to keep detailed tax records every time you move between different crypto currencies. Are there any exchanges (or crpyto token trading systems) that allow you to do the equivalent of spread betting? (Which is not taxable)
10-11 23:23 - '[quote] Nah, [it didn't]. Bitcoin is the perfect safe haven, it is a limited-supply decentralized worldwide-distributed unconfiscable and uncorrelated asset. And it is due for its next bullish cycle, this is a great time to b...' by /u/Jumpingcords removed from /r/news within 34-44min
Bitcoin tanked today too. How is that "safety"?
Nah, [it didn't]1 . Bitcoin is the perfect safe haven, it is a limited-supply decentralized worldwide-distributed unconfiscable and uncorrelated asset. And it is due for its next bullish cycle, this is a great time to buy some, it bottomed around $6000 after the last bubble popped. Its cycles/growth/adoption is exponential. [And the party is just barely starting]2 . Edit: Your [yesterday's posts]3 didn't age well. You keep posting about how great the economy is, but go to read this excellent post: [link]16
More evidence that the recent tax plans were based on personal greed rather than any actual economic policy. I did some pretty basic math on just how much an economy would have to grow to make up for any tax cuts. You can see the [full table here]4 . If you cut taxes by 10%, you'd need your (taxable) economy to grow by 11% just to get the same total revenue. If you cut taxes by 20%, you'd need your (taxable) economy to grow by 25% just to get the same total revenue. If you cut taxes by 50%, you'd need your (taxable) economy to grow by 100% to get the same revenue. If you cut taxes by 90%, you'd need your (taxable) economy to grow by 9900% to get the same revenue. Now, the highest year-over-year GDP growth (which isn't exactly equal to taxable asset growth, but it's a stand in for now), is around [18% in momentary spikes]5 , but the average for long-term growth was around 5% and has been declining pretty harshly. Since 2000, annual growth hasn't passed 4%, and since 2010, annual growth hasn't passed 3%. So, if you cut your taxes by much more than 10%, you're saying that you're expecting one of three things:
You're betting to see a level of growth that we've NEVER experienced in this country to compensate
You're betting that you can cut an equivalent 10% of the budget for a bit to make up for the loss in revenue
You're betting that you can make up the shortfall with debt that you pay off later
The first is what's so often talked about, but it's the second and third that actually happen. The real problem here, though, is that most states & the nation as a whole are pretty strapped for cash as is. The infrastructure crisis is well known, but there are any number of problems from education funding to healthcare to social security to understaffed law enforcement & justice systems that plague any given budget book. So, if you cut the budget, then you're gouging already strained departments. If you take on the debt, then you're hurting your ability to deal with a real, external crisis in the future. All while betting on nearly unheard of growth to occur to compensate for a system that was likely doing just fine in comparison to the artificial crisis now being imposed upon it. In fact, the reduced quality and stability of your state's services is very likely to dampen growth. No one likes crumbling infrastructure or non-functioning schools, and they will take those things into account equally, or more so than your lower tax rate. Not only that, but you have to consider what happens if you do get that growth. A 25% increase in your economy means more jobs, and more people. They need infrastructure, and courts, and policing. The more people, the more the state now needs to spend to handle things. Yet, all you've really done is gone back to your initial total revenue, while your per-capita revenue is still lower. Basically, you need your economy to grow in a way that brings in revenue without additional costs to the government, and happens fast enough to keep you from making major cuts or taking on significant additional debt. That just does not happen in reality. Period. Full stop. Rather than unleashing the incredible growth to compensate for losses, which Republicans sold to as much of the public as possible, tax revenue as a percentage of GDP is down. Not the lowest, but no where near the highest. [The highest revenue to GDP ratio was reached in 1945]6 , at 19.8%. The next highest was in 2000 at 19.7%. [2019's forecasted tax revenue]7 is $3.42T, and the [forcasted GDP]8 is $21.136T, meaning we'd have a Revenue as percent of GDP value of 16.2%. This is down from 2018's ratio of 16.6%, and down even more from 2017's ratio of 17.3%. The year-over-year increase in tax revenue from 2018 to 2019 is expected to be 2.4%, which is a problem since U.S. inflation rates hit 2.4% in March, and have been climbing since, now at 2.7%. [Inflation rates are expected to stay at ~3% for the next year or so]9 , and not go back down until 2020, to 2.5%. Basically, federal revenue has not only dropped as a percent of GDP, but also compared to inflation. All while we increase federal spending. Not only that, but our over all tax revenue in comparison to other developed nations is pretty bad. In 2015, according to the OECD, [we paid taxes at all levels of government equivalent to 26% of our national GDP]10 . Now a quick google search says that the U.S.'s GDP in 2015 was $18.4 Trillion, which would give us a total tax revenue of $4.69 Trillion. If we paid just the average for developed nations, at 34%, that would have given us a total revenue of $6.13 Trillion. Granted that doesn't all go to the federal government, but I bet that extra $1.44 Trillion would have still wiped out the $435 Billion deficit in 2015, and had a good bit left to fill in funding gaps. Hell, if we went as high as Denmark, with ~48%, then we'd be getting $8.832 Trillion across the nation, and we'd be in surplus. We could afford all the bloated military spending, a bunch of infrastructure, a doubled or tripled up space program, a ton of pet-projects, and still be balanced. In fact, [when you run out the numbers]11 by comparing Denmark's GDP growth rate to the U.S.'s, as well as the tax ratio to GDP, it turns out that Denmark is the one doing things better. If you started with the same GDP, and used constant forms of the real-world values from 2015, it would take 94 Years before the U.S.'s total tax revenue collected outpaced Denmark's. That's 94 years of more money with which to invest more and create larger growth than Denmark's base rate. After all, with the U.S.'s larger base economy, the magnitude of wealth that we'd be bringing in would be something to behold in terms of buying power. Not only that, but there are tons of other savings points that we could tap into right now. We could stop buying the Pentagon [things they don't ask for]12 , actually do something about the [Pentagon's audit problems]13 , increase funding to the [IRS to close the tax gap]14 , shift to [Medicare-for-All]15 , and I'm sure tap tons of other places that are being mishandled. Between all of that, we'd have MASSIVE amounts of additional funding to handle pretty much every problem thrown at us. Lots of military spending and lots of infrastructure spending and lots of social spending, etc. etc. The current Republican Party doesn't seem to want to do that though. "Fiscally-responsible" my ass.
In March of 2017, eight years after it was brought "online", a friend mentioned Bitcoin. I knew nothing. So, I bought $50 worth. By then, there were already multiple millionaires in existence from it's rise. At that time, just 9 months ago, BTC (Bitcoin) was $900. Today, December 11, 2017, it is at $16,600. Needless to say, I regret not being more aggressive. Is it a bubble now? Why would it be now? They've been saying that off and on for 8 years. Keep in mind that those previous 8 years were BEFORE CBOE or CME even mentioned offering futures contracts. IF you've already read my articles; "What is the Blockchain?" and "What is Bitcoin?" - then you have a greater understanding that what we are facing here isn't about Bitcoin alone. If you haven't, then you'll likely finish this article just as apprehensive and confused as you might be already (assuming you are new to this subject). There's not enough space to repeat everything here, so I'm going to condense the important points. Your questions about hacking; EMP's; not being backed were already answered in the other articles. I think if I draw parallels between blockchain/internet; and cryptocurrencies/domain names - you'll get the idea. Why the focus on BTC? It is simply because it was the FIRST blockchain-associated currency mined and put into use (2009). It is NOT controlled by any government or single entity. Today, there are over 1,000 various blockchain tokens & coins available. Some are absolutely pointless and worthless - while others are going to revolutionize currency exchange, data storage, records transmission and security. IF you know what the blockchain is - then you know that it is the real value. It is further streamlining, securing, and bringing another level of data and currency utility to the world. All of the cryptocurrencies and tokens are the equivalent of what domain names & websites where to the internet when it was introduced. Without the internet, there would be no domains or websites. So, the blockchain could be thought of as "Internet 2.0". Many scoffed at the internet when it was becoming semi-mainstream in the late 80's. The first domain name was registered in 1985. The first commercial ISP (internet service provider) was formed in 1989. It was dial-up. Look at us now… If you are familiar with the dot-com bubble of 2000-2002, you've got a big red flag going up in your head while watching the meteoric rise in BTC. If you bought into the internet investments when they came out (early 90's), you likely bought domain names, internet stocks, online shopping stocks, etc. Internet stocks bubbled and burst by 2003. So, from 1990-2000 (ten years) was the adaptation phase of the internet. Then the mainstream investment interest was 2000-2002. Those at the end of the rally (13 years after internet intro) lost big. I was one of them. I bought Microsoft when I thought it couldn't go any lower. I did the same thing with oil in 2009. There's no doubt in my mind there will be a few mini-bubbles in BTC. There might also be a big bubble at some point that will burst. Nobody can guess when it will be. Me personally, I expect a plateau - not a bubble. Irregardless, the stage is set right now. Bitcoin, altcoins, tokens, and the blockchain is just now BECOMING mainstream. It's on the news. It's just started trading in futures (12/10/17). What should be envisioned next? All the research, listening, watching the big banks & the chatter points me to some conclusions and expectations of my own. Could I be wrong? Yes. But I try to use logic, because I got in early enough to where I don't feel like I have much risk. Futures trading just started. The thing with futures is that you don't have to own anything to place an order. While it spreads awareness of BTC, it doesn't neccessarily infuse a ton of investment market share. As a comparison, gold has about a 7 Trillion USD market share vs. BTC's 70 Billion USD. Lot's of room to grow. Not only that, I'd be willing to bet most futures traders are betting on a rise - not a fall in price. Here's something that I DO think will help BTC's stability and momentum at the same time: both VanEck and REX have each filed for introduction of a BTC ETF. That is big news. An ETF doesn't "short" a property. Futures can short a property. So, here we have another injection of "mainstream" into BTC. If you own BTC, you know that there are all sorts of pitfalls associated with wallets, buying it, and tax concerns. The ETF takes all the headache out of it. I believe that the futures and ETF markets will spread awareness, bring in investors, increase demand and raise the price. You may not know this - but the banking industry is implementing blockchain tokens as we speak. Those tokens are the little guys - not worth much... yet. What about regulation? One word... TAX. The countries that are on-board will have a tax windfall on the gains. The IRS is already digging into the exchanges to reveal investors from the last two years. They also have their talons into the miners - calling BTC a taxable income - even though the SEC won't all it a currency. They want their piece. It's like marijuana. It's going to be a huge tax revenue base when it's all legalized and regulated at the federal level. There's no reason for Washington to try to hide the dollar signs in their eyes... Score another reason for BTC's support. Bitcoin's algorithm (SHA-256) has a built in cap of 21 million coins. As mainstream investors, especially the wealthy who want a "whole" bitcoin or more, put in demand - the price goes up. It's like gold - but you can't hold it. Did I mention that the dollar isn't backed by ANYTHING? The discussion on intrinsic value is written in another article. Can't they change the cap? Yes, but the economic majority (who hold coins) would have to collectively agree to it. Why would you? You want it to go down? No. A hard fork has happened - but all it did was create an offshoot coin with a different symbol. It didn't change the cap on the original BTC. Also, those who held BTC were GIVEN some free portion of the new forked coins. After the rush is over (hopefully not a bubble) - where does BTC go from here? To that, I direct your attention to the other tokens, coins, and cryptocurrencies out there. Let's say BTC plateau in value -after all the ETF's have been around for a couple years and everyone has a piece. What will all the little altcoins do? If you have been watching the charts of all the less-known-but-useful alt's out there - you'll see they all tracked BTC for the most part. They didn't gain as much - but they all went UP. Over these next couple years, I expect that people will take notice of the alt's and want them in the ETF's and futures as well. Some of these altcoins and tokens are worth just 5 cents right now. Needless to say, there's room to grow. Not likely they will be as meteoric as BTC - but nonetheless, still a good way to diversify and get some gains. Amazon has purchased several cryptocurrency-related domain names. Well, that's about all I have to say at this point. I just wanted to point out some thoughts. However, there are at least 20 other reasons that support the usefulness (hence value) of this "new thing" they call the blockchain & it's associated parts that give us a new opportunity to beat the stock market. Not investing advice here - just my opinion for my personal investing. Talk to a tax advisor, certified investment advisor, and do your own due diligence - don't take my word for it. I'm not a financial advisor. Good Luck!
First Reddit Post, my key financial lessons of 2017
I hope this will help some of you out. It's a summary of the most important Canadian Personal Finance lessons from my research for all of 2017. Most of these are key posts from The Greater Fool Blog, which I highly recommend as a daily read. Investing Strategy and Advice Random Advice · Everybody should strive to maximize their TFSAs, then ensure the money stays in there, invested in diversified growth assets like equity ETFs. Remember – a hundred bucks a week invested here for 30 years making 7% will end up being $532,000. That should yield an annual income of $32,000 without depleting the principal and without reducing your CPP or OAS payments by a single penny. So this is job one. · After that, shovel cash into an RRSP, using the refund to contribute to the TFSA. Unless you have a defined-benefit pension (guaranteed, stable employer-funded payments), this is an excellent way to reduce tax, invest for tax-free growth then support you efficiently when some dingdong CEO destroys your employer. · Obviously having a cash reserve for an event like this would be a great idea, but establishing a personal line of credit in advance is almost as good. It costs you nothing to set up at the bank, zero to carry and can be tapped only as you require it. Go, get one now. · The best way to own preferreds is through an ETF, where you can hold a basket of high-qualify assets. An example would be CPD (just an example – this is not a recommendation), which pays investors a dividend yield of 4.3%, which is twice the return of a GIC and it’s still 100% liquid. But there’s more. This exchange-traded fund has increased in value (besides the dividends paid) by 12.7% in 2017 – which far outstrips the 3.8% return of the TSX in general. Since the beginning of last year (when prefs were sooo cheap) the gain in capital value has been 28%. (CPD also went on sale Wednesday after the latest Bank of Canada report. Sweet.) · But all he need do to effectively slash his long-term interest costs is to switch from a monthly-pay to a weekly-pay mortgage. Over the course of 12 months he’ll make the equivalent of one extra payment (no big deal) and it will end up shortening his amortization by years, saving more than a variable-rate loan ever would. He just needs to ensure he gets the right kind of weekly mortgage, since some of them are bank rip-offs. May 2017 – Current Recommended Weightings · cash, 5%; · corporate bond 6%; · provincials 3%; · short-term bond 5%; · high-yield 3%; · preferreds 18%; · Cdn equity 16%; · REITs 5%; · US equity 21% (some hedged); · international equity 18% (some hedged). Investment Portfolio Breakdown - Greater Fool – September 20th 2017 · Start with the TFSA. When that’s full split money between an RRSP (to shift tax into other years) and a non-registered portfolio (to benefit from capital gains and dividends). Stick with it, max the tax-free account with pre-authorized debits from your bank account and never, ever listen to [email protected], eschewing costly mutual funds and brain-dead GICs. · Have a balanced portfolio, with 40% in safe stuff and 60% more growth-oriented. Since rates are rising, keep the bond exposure slim (they pay nothing but reduce volatility) but have lots of rate-reset preferreds which swell along with bond yields. Carefully weight Canadian, US and international assets, taking into consideration that we’re currently on fire, Trump’s a time bomb, the US is expanding, Europe’s in recovery and nobody should bet against China. Never hold individual stocks (unless you have seven figures to invest and can achieve diversification – which requires about 60 positions). · If you have a little money, hold three or four ETFs. If you have a lot, then 17 should be about right. And keep a small cash position, since that’s a defensive asset as well as ammo if an opportunity arises. · So, 2% cash in a HISA, 20% in a mixture of government, corporate, provincial and high-yield bonds plus 18% in preferreds make up the safer stuff. Put 5% in REITs, then hold 16% in Canadian equities, an equal amount in US markets and 23% in internationals, for the growth portion. Rebalance once a year. Put higher-taxed stuff (bonds) in a tax shelter. Reserve the TFSA for fast growers (like emerging markets). Enjoy a 50% tax break on capital gains in your non-registered. And don’t forget about income-splitting with your squeeze, which can be done through a spousal plan or maybe a joint account. Why TFSAs are the #1 Priority The long-term growth, free of tax, is epic. Invest $5,500 this year, then add $100 a week for the next three decades in growth assets making 7%, and you end up with $576,338 of which $414,838 is growth. Besides tax-free compounding of investment returns, the real benefit of this thing is that it will throw off income in retirement (or anytime else) which is not counted as income. So in the example just given, forty grand a year could be earned with zero tax payable on it. Now let’s look at two 40-year-olds who have wisely maxed their TFSAs with $52,000 in each. If they keep their accounts topped up and full of ETFs giving the same return, at 65 they’ll claim $1.26 million, of which almost nine hundred grand is taxless growth. In retirement that amount can provide an annual income of about $90,000, and these guys can still collect their CPP and OAS without having any of it clawed back (assuming no other income source). If they had $1.26 million in RRSPs, the after-tax income would be about $52,000 and they’d have a marginal tax rate of 29.65%. No contest. For anyone with a good company pension plan, and especially for the Aristocracy Among Us with gold-plated, defined-benefit schemes (teachers, cops, retired finance ministers) investing in this vehicle is far better than feeding an RRSP. At age 71 all registered retirement plans must be partially unwound, with the income being added on top of pension payments, often boosting you into a higher tax bracket. But no matter how much is skimmed off a fat TFSA, nothing is taxed or even recorded as income. Of course, TFSAs can be used for income-splitting, too. You can gift your spouse or your adult kids money to invest in one. None of the gains will be attributed back to you. You can withdraw money and, unlike an RRSP, put it back the following calendar year. Unused room can be carried forward indefinitely. And a tax-free account can hold almost any investment asset, so keeping a moribund high-interest savings account or a brain-dead GIC in there is a big fail. Why Mutual Funds Suck: S&P regularly provides its SPIVA Scorecard, which examines the performance of actively managed Canadian mutual funds versus that of their benchmarks and corrects for survivorship bias. Survivorship bias? Yes, mutual fund companies have this habit of discontinuing funds that have poor performance thus, ostensibly, wiping away that unflattering data forever. The SPIVA Scorecard attempts to account for this performance, essentially holding the mutual fund companies’ feet to the fire. The data reveals, unsurprisingly, that the vast majority of mutual funds underperform their benchmarks—with high management fees being the main reason. The table below shows their dismal long-term track record. S&P, by the way, also does a scorecard for US mutual funds with similar results. 📷 📷No doubt, there are financial advisors who have a careful and highly effective system for identifying the 9% or so of equity mutual funds that actually do outperform their benchmarks over the long term. More power to these advisors. However, what I’ve seen more often is a less rigorous due-diligence system of simply selecting the funds that are ranked highest by Morningstar, the industry’s most widely known mutual-fund evaluator. However, as a recent article by The Wall Street Journal has shown, chasing the best star ratings has its drawbacks. The Journal pointed out, after examining the performance of thousands of funds, that only 12% of 5-star-rated funds maintained this rating after five years. Basically, the Journal highlighted that the Morningstar five-star rating is not a good indicator of future outperformance. Source: The Wall Street Journal Here are a few things to remember. First, on mutual funds (since most people own them): fees are significant, and buried in the cost of ownership. The person selling you these animals at the bank will tell you s/he doesn’t charge anything to perform that charitable service. In reality, the funds turn out trailer fees so every month you stay invested, somebody gets paid. To Rob’s point, mutual fund fees aren’t tax-deductible. So if you own a fund with a 2.5% MER and you’re in the 40% tax bracket, that’s actually costing 3.5%. Ouch. The same principle applies to ETFs, all of which have embedded fees which are not deductible. The big difference is the average fee across a portfolio made up of exchange-traded funds might be 0.2% – or one tenth of the cost of owning a mutual. What about other fees and investment costs? Management fees, charged by fee-based advisors, are 100% deductible from taxable income on non-registered accounts. With RRSPs, the money taken to pay an advisor is not counted as taxable income. That means you got a tax break for putting that in, but there’s no tax when it exits – so the government is also subsidizing you. Fees on TFSAs, however, are non-deductible. Somebody in the top tax bracket, then, with accounts run by a professional offering tax advice and portfolio management who charges 1% will end up paying closer to 0.6% – while the poor single Mom with a few grand in the bank’s funds will shell out 2.6%. Unfair? You bet. But that’s the law. So, fees are deductible. Commissions are not. MERs are embedded, invisible and can kill returns. If you remember just those three facts, they’ll serve you well. More on Mutual Funds – Dec 11 2017 What’s a mutual fund? It’s a pot of money made up of contributions from many investors that a manager then uses to buy stuff. Like stocks or corporate and government bonds. Managers charge big money to do this job (they have Porsches, too) which is charged back to the investors, and in return try to add ‘alpha’. That’s financial speak for ‘special sauce’, which means they attempt to get better returns than you’d achieve just buying the same assets and holding them. In doing this job they buy and sell frequently, often generating capital gains taxes, which the unitholders also pay. Trouble is, most of these cowboys fail. Last year, for example, the number of Canadian mutual funds which focus on US stocks and which outperformed the index was… zero. Nada. Donuts. Not one. In the States almost 70% of fund managers investing in large-cap stocks failed to match the index and yet charged big bucks to do so. Over the last 15 years, the failure rate among managers is 90%. Ouch. Makes you wonder what you’re paying for. What also hurts is that the fees these non-alpha dudes charge are buried within the funds themselves, unseen by investors who cannot even deduct them from any gains they might make for tax purposes. Meanwhile the so-called advisors who collect the trailer fees from selling funds do not actually engage in any investing themselves and often collect an extra upfront fee for selling them to folks, or create a seven-year mutual-fund prison that penalizes anyone trying to get out. Difference between Mutual Funds and ETFs Simple. ETFs are like Teslas – they drive themselves. There is no manager, so there’s no fat management fee for investors to pay. They don’t compensate some fancy guy to try and beat the market, then have to explain why he didn’t. They just pace the market itself. What the S&P 500 does this year, for example (up 18.4%), is what an ETF holding those 500 companies does. Plus, they’re traded on the stock market, which means you can buy or sell with the click of a mouse and get instant liquidity. Try doing that with a mutual fund (you can’t). In fact, most funds have the ability to halt redemptions, so if a crisis emerged you might not be able to sell when you wanted (just like Bitcoin). ETFs are not free, however. Across a balanced portfolio you can expect to pay an embedded cost of about 0.2% – which is a hell of a lot cheaper than 2.0%. Now, mutual fund salesguys, for obvious reasons, hate it when they hear such talk. And being in sales, they are daunting adversaries, able to woe naive investors with tales of giant, throbbing Alpha and heaving bosoms. (I may have exaggerated there.) Jane, in fact, encountered exactly this schtick after she told her mutual fund guy she was leaving to embrace ETFs. “I talked to him today for the formal “thank you and best of luck” nicety and needless to say he thinks I’m making a huge mistake. I feel quite defenceless when it comes to talking to financial advisors. My boyfriend tried to do his best to help explain it and then reverted to “Ask Garth.” For ease I will just lay out what was said by mutual fund guy in bullet form and hopefully you can help me out
ETFs are cheaper but that is because they have a much lower rate of return. So if you compared mutual funds to ETFs, Mutual funds are far better.
Fee-based advisors are cheaper because they do not actively manage my account, unlike mutual fund account managers. He said the MER is to pay for someone to manage my account. ETFs don’t charge this because no one is managing anything.
ETFs are for old people in their 50’s that can’t absorb a loss.
In 2008 ETFs took a much harder hit than mutual funds (50% compared to 20%)
Young people should be aggressively investing and diversity is for old people and wusses
“Can you shed some light on this for me? My mutual fund guy did make me feel a touch uneasy. I would appreciate the insight just for building my own knowledge and confidence.” You betcha, Janey. ETFs are cheaper because they don’t come attached to some Bay Street smartie with three kids in private school. They are pure reflections of a transparent market. The rate of return for nine out of ten has been higher than an actively-managed mutual fund, at a fraction of the cost. Fee-based advisors (who should collect a fee of no more than 1%) actually build and manage client portfolios. They all shop at Costco and recycle their socks. ETFs for old people? Did he mention dwarfs? As for the 2008-9 crisis, a balanced ETF portfolio declined 20% while the stock market slid 55%. It recovered all lost ground in a year, then advanced 17%. It’s not the structure of the asset that is owned (active or passive fund), but the weightings between various asset classes that will protect you in declines. You can be as conservative or aggressive as you want with either kind of funds. But if you like paying more for less, mutuals are for you. (He was really zooming you on that one.) The benefit of Bonds in a Portfolio Bonds help reduce volatility One common way to measure volatility is using standard deviation, which measures the variability of returns around the long-term average – the higher the number the higher the volatility. Over the last 10 years, the TSX has exhibited price volatility of 14.1%, meaning that TSX returns have been 14.1% above/below the long-term average return over the last 10 years. Volatility (standard deviation) has been 11.4% for the S&P 500 over this period. And for the average Canadian balanced portfolio, the standard deviation has been much lower at 8.3%. So, we prefer balanced portfolios to an all-equity portfolio since the ride is much smoother and with more consistent yearly returns.
📷Volatility of Different Investments
The other important reason we like balanced portfolios is because bonds often zig when equities zag. This dynamic is why a balanced portfolio exhibits lower volatility. In good economic times corporate profits rise and investors feel more optimistic about the outlook that they are willing to pay higher multiples (e.g., P/Es) for stocks. This combination of rising corporate profits and valuations pushes stock prices higher. Central banks in turn tighten monetary policy by hiking interest rates. This helps to push bond prices lower (prices move inversely with yields). So stocks go up and bond prices go down, generally, in a strong economy. 📷Conversely, in a weak economy stocks typically decline and central banks lower interest rates to help spur growth which leads to higher bond prices. Again, bonds zig when equities zag. This is perfectly captured in the chart below which shows the relative performance of Canadian bonds and the TSX. Note how bonds will outperform stocks over certain periods (in green) and underperform stocks in other periods (in red). This chart captures the essence of why a solidly constructed and well-managed balanced portfolio works!
Bonds/Equities Out/Underperform Over Time
Finally, how should investors structure their bond holdings in this rising interest rate environment? First is to focus on lower duration bonds. Duration measures a bond’s price sensitivity to changing interest rates. If a bond (or in our case a bond ETF) has a duration of 8, it means the bond will decline approximately 8% for every 1% increase in interest rates, or rise 8% for every 1% decrease in rates; the higher the duration the higher the price sensitivity to rising rates. Given our view that rates are going to continue to slowly rise, we are positioning our balanced portfolio with lower duration bond ETFs so as to minimize the impact of rising rates. Later when interest rates are higher we’ll look to reverse this call and shift into higher duration/yielding bond ETFs. The other key strategy for bonds in a rising rate environment is to overweight corporate bonds versus government bonds. With the Fed and BoC now hiking rates, government bond yields are moving up and prices lower. This of course weighs on all bonds but corporate bonds tend to outperform when rates rise. This happens for a few reasons. First corporate bonds offer higher coupons (yields), which help lower the duration relative to lower yielding government bonds. Second, because investors are feeling more optimistic about the economy and financial markets they are more willing to buy corporate bonds, which pushes up their prices relative to government bonds resulting in compression of the yield spread over government bonds. Below is a chart comparing US investment grade corporate bond yields to comparable US government bond yields. Currently with US corporate bonds yielding 4.25% and US government bonds yielding 2.35%, this results in a “spread” of 190 bps. As the economy picks up this spread compresses which results in corporate bonds outperforming government bonds. We believe this spread could compress a bit further resulting in additional outperformance from corporate bonds. We’ll look to reverse this trade as we start to believe the economy is rolling over.
US Credit Spreads
📷We get it. In a raging bull market like we’ve been in for some years, bonds can be disappointing and cause us to deviate away from a balanced portfolio, focusing more on equities. But as we’ve shown, the benefits of including bonds in a portfolio are to reduce volatility and provide more consistent returns. And we’re not always going to be in a bull market so you’ll need protection against this inevitability. I feel confident that our client will call me up to thank me for our recent portfolio adjustments, likely when that dreaded bear market rears its ugly head. How are you positioned for this eventuality? Well, here are ten of my fav ways to reduce your tax bill thanks to two simple words – income-splitting (as opposed to sprinkling).
If you make more money than your spouse (in a higher tax bracket) take your piteous crumbs and use them to pay the household expenses. Have your spouse devote all of his/her take-home income to investing. Because your squeeze has a lower marginal rate, your family will keep more of the investment gains.
Open a spousal retirement plan for a less-taxed partner. The full deduction comes off your bigger income but the other person gets the money. Wait three years, and it can be withdrawn at the lower spousal rate. Can result in big savings.
Swap stuff. She gives you her departed mother’s irreplaceable jewelry (for God’s sake, don’t lose it) and you give her a bunch of ETFs. Now the financial assets are still in your family, but taxed in her hands at a lower rate (assuming there’s an income disparity between you).
Take the beefy monthly cheque T2 now sends you for having kids and invest it in growth assets in their names. Capital gains made here will not be attributed back to you. If they grow up and become rock stars, you keep it.
If you’re a wrinkly, split your CPP or pension with your spouse.
Give money to your adult children. No, not for a condo down payment, but instead to maximize their TFSAs – on the understanding they give it all back (with gains) when they turn 50 and leave the basement.
Loan your spouse a whack of money to invest. You will need to collect a tiny bit of interest annually on the loan (the rate is just 1%) but all the money the other person makes will not be attributed back to you. So if your partner’s in a lower bracket, it’s a big win. Plus the interest paid is tax-deductible.
Max your RRSP, of course. Not so much for retirement, but for tax-shifting between periods of your life. Layoffs, job losses, mat leaves, sabbaticals – there are many times when regular income drops and tapping into money which grew tax-free can save your marriage.
Stick the max into an RESP for your kids. No deduction for doing so, but the money will grow without tax and the feds will send a grant worth up to 20% of what you contribute annually. Open a family plan, not singles. And beware the hospital-stalking baby vultures with their crappy offerings. Go self-directed.
Hire your spouse or your kids to labour in your small business doing useful things. Yes, this is exactly what Bill Morneau is throwing a hissy-fit over, but you’ll get the immense satisfaction of watching some CRA goon burn up hours of time only to conclude that, yes, your wife is actually a productive, contributing human being worth being paid. Plus, she’s deductible. What a turn on.
You can get free money to educate your children simply by opening an RESP using cash the government sent you because you have children. The guaranteed return on investment is 20%, which beats buying a semi in Toronto. The rules allow you to go back and make up missed contributions (collecting the grant a year at a time), and if your kid becomes a rock legend instead of a dentist most of the tax-free growth can be wrapped inside your RRSP.
If you think income-splitting is kaput, you’re mistaken. You and your lower-income squeeze have a plethora of ways to starve Mr. Socks. If you make more money, pay your spouse’s taxes so s/he can invest at their lower tax rate. Ditto for the household expenses. You can certainly open a spousal RRSP, writing off the contribution against your high taxes but making the money the property of your less-taxed spouse. Open a joint investment account, splitting taxable gains instead of paying them at your fat rate. And lend your spouse money to invest at the CRA’s proscribed and silly rate of 1%. So long as s/he pays you interest (tax-deductible) no money made by the investments will be attributed back to you.
Don’t forget the registered retirement account, either, which is actually more of a tax deferral device than a way to fund your later years. RRSP room jumps with your income, so it’s of greatest benefit to those old, rich, high-earning guys that everyone currently hates. Revenge. Sweet. Having a ton of RRSP room sure helps if you get a retirement package or a pension to commute, so bear that in mind. Meanwhile you can borrow money to invest, then use the refund to pay down the loan, ending up with free equity. Or just transfer assets you already own into an RRSP (called a ‘contribution in kind’) and Justin will send you money for selling yourself something you already owned. There are no words.
Borrowing to invest increases risk, but it sure is tempting. A secured line of credit against your house costs 3.7% and the interest is 100% tax-deductible. Meanwhile a balanced portfolio in 2017 returned 11%. Last year it was 8.5%. Looks like more is coming. So you can keep all that equity sitting in a house doing diddly, or put it to work. Just promise me you will not buy Bitcoin.
10 Ways to Reduce your Tax – Oct 29
Do you and your squeeze both work? If one earns more than the other, have the chief breadwinner pay all of the regular expenses – mortgage, rent, food, daycare, weed, insurance, booze, clothes, rehab. Make the lesser-monied spouse the chief investor in the family, so the returns (capital gains, dividends, interest) will be taxed at a lower rate.
Ditto for registered retirement savings. If you earn considerably more than s/he does, or have a defined-benefit pension, use up all your RRSP room for a spousal plan. You write the contribution off your higher taxed income while your spouse gains control of the money. After three years it can be withdrawn at their lower rate – so you’ve just sprinkled!
Here’s another one, if there’s an income disparity between you: loan your less-taxed spouse a bunch of money for investment purposes. S/he puts it into a nice little non-registered account and starts collecting dividends and earning capital gains in a tax-efficient way. Even though it’s your money, none of that income is attributed back to you – so long as this is set up as a loan at the CRA’s prescribed rate of interest which is, believe it or not, just 1%. Interest must be paid annually by the end of January but all of that is tax-deductible. Yes, your spouse can write it off the investment returns. This works for kids over 18, too. More sprinkling!
Also with income-splitting: if you are a wrinkly collecting CPP (everybody should start taking it at 60, no exceptions), this can also be split with your less-taxed spouse.
If you didn’t listen to the advice on this blog, bought individual equities and were handed your rear end by Mr. Market, sell those dogs before Christmas in order to realize a capital loss which can be used to reduce taxes on capital gains. Losses can be used to neutralize gains not only in the current tax year, but going back three more years. This can help you recover taxes that you paid as far back as 2014.
You can also take crap assets that dropped in value and dump them on your kid. Another great reason to have children! Investments can be transferred to a minor child and that will also trigger a tax loss in your hands which can be used to offset gains. Now your spawn has an asset that, when it recovers in value, will be essentially tax-free with none of the gain attributed back to you.
Fill up your TFSA, obviously. Also that of your spouse. And your kids over the age of 18. Gift money to all of them with no gains TFSAs attributed back to you. Remember, $5,500 a year for 35 years earning 7% will result in $819,000, of which more than six hundred grand is compound growth. So ensure these are not savings accounts, but investment accounts – no GICs, HISAs or other dorky stuff. Also when you retire, a $819,000 TFSA will give you about $50,000 a year in taxless income which will not reduce your CPP or OAS by one cent.
If you’re 71 and have to convert an RRSP to a RRIF, be thankful you robbed the cradle and married a babe younger than you. Your mandatory retirement fund withdrawals can be based on the age of your spouse, keeping them to a minimum and allowing your nest egg to grow larger, longer.
Obviously put money into a RESP for your kids. The feds will give you an automatic grant equal to 20% – so for a $2,500 contribution you receive $500, up to a lifetime total of $7,200. Free money. Duh. Why would you not do this? If your kid grows up to be a rock star or a high-net-worth, Mercedes-driving plumber you can fold much of the RESP money into your RRSP. Remember to buy growth assets. Establish a family plan for multiple kids, not separate ones. And, for God’s sake, avoid the RESP-flogging baby vultures that skulk around hospitals. Go self-directed.
10.And, yes, use RRSPs. They’re still the best tax-shifting vehicle around, allowing you to write off up to $25,000 in taxable income a year. You can borrow money cheap to contribute, then use the refund to pay much of it back. Or open a plan, shift in assets you already own, and get paid money by Bill Morneau for selling yourself stuff you already own. That should make his head all splody. Legal aspects of selling a house If you’re selling a house – with more market declines ahead thanks to the new stress test – make damn sure the deal is solid. No long close. A mother of a deposit (ask for 10%). No buyer visits prior to closing. Deposit held in your lawyer’s trust account, not that of the listing broker. No condition on the buyer finding ‘satisfactory’ financing. And a clause giving you a day or two for legal approval of the offer. Also do something radical – find out who the buyer is before you enter into a contract with them. Job? Circumstances? Background? Can they afford it? After all, you’d never rent your cheapo condo to someone without a credit application, references, credit check and income/employment verification. Why sell a $1.5 million house to a stranger and make huge life changes based on a closing months away that may never happen? HELOC & Risk Investment Strategy – August 7th So he wrote me with an idea and a question: I’m curious to know if you’d recommend pulling out 100k in equity in a house NOT to buy a rental house but to invest in a diversified portfolio and hopefully make a 6% to 8% yearly return only to turn around and put it back down onto the mortgage to pay it off faster? I’ve been contemplating on things to do to pay down the mortgage and create some income, no good having this equity just sitting here when it can be working for us! Seems starting a corporation is out of the question now thanks to T2 and his finance guru. Given that real estate’s fat days are behind us but debt isn’t going anywhere, does this make sense? Maybe. Let’s roll it around. Millions of people have, collectively, billions in real estate equity. When house prices stop going up, this becomes dead money. The only value you can really ascribe is what it might save you in equivalent rent. For example, a $1.5 million house can normally be rented for $3,000 a month. The family with a $500,000 mortgage and $1 million in equity is spending $2,400 (monthly) on the mortgage plus about $600 in property tax, insurance and utilities (water, sewer) that renters never pay. So they ‘own’ a home for the same monthly outlay as the family who rents it. But they have put down $1 million to live there. If that were conservatively invested, and returned 6% annually, it’s $5,000 a month. So the house actually costs $8,000, and could yield a non-deductible capital loss as easily as a non-taxable capital gain. In other words, in a declining, flat, comatose or normal housing market, the cost of ownership when real estate has climbed to these levels is insane. Renters who invest win, ten times out of ten. If interest rates creep up and mortgages renew higher, the economics of owning get worse. In the current environment, a lot of people have to be asking themselves – like Kevin – if there isn’t some way to use that dead equity which is no longer supporting a rising asset. Yes, a HELOC is one way of unleashing equity. It’s a line of credit secured by real estate, which means the debt is registered against the property but also that it comes with a preferential rate of interest. That’s normally prime + 0.5%. These days that equates to 3.45% (and it may rise to 3.7% in October). The line’s rate is almost always variable, so it will increase along with the bank prime. And HELOCs are demand loans. If real estate prices truly collapsed or another credit crisis hit, the bank could ask you for the money back in, oh, 30 days. The good news is all of the interest is deductible from your taxable income if the money is used to generate more money. Yup, that could be real estate paying you rent or (wiser) a balanced and diversified portfolio of financial assets. So, if you earn $120,000 and live in BC, for example, you effectively reduce the loan interest rate by 41%. Now the HELOC costs you just 2%. Given that well-managed, non-cowboy, globally-balanced and diversified ETF portfolios have pumped out an average of 6.5% over the last seven years (two of which were market stinkers), this mean a spread in the 4% range. Last time I checked, that was better than the 0% home equity is currently paying. So to Kev’s question. If he borrowed $100,000 on a HELOC and invested it for a 7% return, then used the cash flow generated ($7,000) to pay down his existing mortgage faster, would it make sense? Well, interest-only payments on the line would cost $3,450, but he’d reduce his income tax by $1,400 (if he earns enough). So he’s up five grand. That’s cool – it can be used as a pre-payment on the amortized mortgage. But wait. Kevin now owes another $100,000. But wait again. He has a $100,000 liquid investment portfolio. By removing equity and borrowing, the Harley dude has (a) diversified his net worth, (b) reduced his income tax bill and (c) accelerated the mortgage payments, saving a whack of interest. This is not a slam-dunk strategy for everyone. If rates rise and the payments get hard to make, you lose. If the world goes to crap and the loan is called, you lose. If your house craters and the bank finds out, you lose. If your job fades, you lose. If you invest in the wrong stuff (like gold, bitcoins, weed stock or junior oil & gas), you lose. If the feds drop the hammer on HELOCs again, you lose. Debt is debt. The world’s soaked in it. Most people would be unwise to shoulder more. The best strategy, history will show, is to trash debt by selling high. This is high. Complex home buying tax strategy, courtesy ofDerek Holt – the chief economist at Scotiabank · Make a $19.2k RRSP contribution just three months in advance of buying a home… • …assuming a 30% tax rate, deposit $6k tax refund back into RRSP… • …then withdraw the allowed $25k maximum under the HomeBuyers’ • …to be repaid to the RRSP in equal installments over 15 years starting 2 years after withdrawal with no interest penalty and the payments are not counted in mortgage serviceability calculations… • …at, say, a 4% rate of interest, this equals $8k in interest savings over 15yrs… • …which means the initial $19.2k RRSP deposit has been parlayed into an effective down payment of about $33k, or an extra 70%+ • No restrictions on the source of the original RRSP deposit (can borrow for it, ‘gift’, etc). • ie: the zero-down mortgage can still theoretically exist • If a couple, and both are first time homebuyers, double all of the math above (ie: turn $38k from liberally allowed sources into a $65k down payment) · If a major bank’s showing clients how to take $38,000 and game it into $65,000 through exploiting the system, it might indicate we’ve all hit a tax wall. And this is even before T2 Hoovers out the savings of small business operators, vets, docs and the local John Deere dealership.
Help: I'm in a legal arrangement with my former employer who failed to pay me for 3 months. The arrangement calls for payments over 12 months, how are taxes structured with such a schedule?
Back Story: I worked for what is considered a software house for about year before issues began to arise. This was a smaller LLC (about 15 employees) with over 30 years under their belt. Employees were paid monthly, and on time, until about early 2015 when the checks started coming a month behind. I was making good money, and was understanding of the situation and trudged on for a few more months hoping for the best. However in June they failed to pay me (my already 1-month behind) paycheck. I immediately began to look for other jobs, as quitting on the spot, even though I wanted to, was not the best option financially. One month later, that new job was secured and I was able to quit. At this point there was 3 months of pay I had yet to receive ($18k). My now ex-company begged me for more time to secure funds to pay me with, which I agreed to at the time (probably naive, but I am right out of college and didn't know better at the time, plus I didn't want to burn bridges so early in my career.) I gave them another month to come up with the cash. That month came and went with nothing to show monetarily. At this time I contacted a local labor-law lawyer who worked out an arrangement with my ex-employer to pay me double the amount and lawyer fees ($37.5k), spread out over the course of 12 months. It is important to note that my ex-company is still in business and has NOT filed for bankruptcy. Anyways my question about this whole matter boils down to one thing: taxes. Tax Questions: The payments I have been receiving from my ex-employer have been lump-sum, nothing tax-related has been calculated into what I have been receiving. The tax questions I have are the following: 1) Since I am receiving double what I have yet to be paid for in labor, what percentage is taxable? The taxes on the $18k that are wages should probably be taxed like any other job, correct? But what about the other $18k that I am receiving as compensation due to my states labor laws (NY)? 2) Since these payments are spread out over 12 months (from September 2015 to September 2016) WHEN do I have to pay taxes on what I receive? Do I pay taxes on what I receive in 2015 in 2015, or do I wait at do it all in 2016 when I have received everything? 3) If my ex-company sends me my 2015 W-2 stating that they paid me for those 3 months of labor (even though I will not be seeing those wages until 2016) do I have to pay taxes on those wages immediately? Bonus Question: I know this is more a legal question but...The scheduled payments I have been receiving are already behind by about a month. Even though in the legal arrangement it states that any late payment causes the entire sum to be due immediately, I feel as though I should just accept these payments, as long as they keep coming, and try to keep this whole debacle out of the courts. The last thing I want to do is drive my ex-company into bankruptcy (I assume they have to be pretty close to it…) where I believe it will be much harder for me to get any money from them. Plus, escalating the matter involves me throwing “good money” to a lawyer, betting on the return of possible “bad money.” Is this the right move? Thanks in advance for your insights tax, and sorry for the lengthy description!
Port-folio review, looking for long-term financial independence
Hello, Thanks to some luck and hard-work, I ended up joining early an US company which did well in the past years. It leaves me single, without debts and a large amount of money to invest at 29 years old. I never had to deal with that kind of money before and wanna make sure I'm doing this correctly. I'm also an EU citizen which raises some additional questions. I'll first go over my assets, then how I'm planning to allocate them, with a bunch of questions at the end.
Current retirement assets:
20.31%; Big private company stock
50.80%; Big private company non-qualified stock options
1.97%; Small/medium private company stock
Big private company is the one that did very well, the cash comes from a sale of its stock. It all sums up to a few million dollars.
1.00% VFFVX (Vanguard Target Retirement 2055 Fund Investor Shares) (Expense Ratio 0.15%)
No company match as I'm unemployed at the moment. I intend to roll this over into a TIRA.
My Roth IRA:
Additional data points:
Note that half of my net worth are stock options for this company. Those options will be taxed two ways:
At exercise time, I will pay income tax on the spread (difference) between my strike price (how much an option costs to exercise) and the current value of the company;
At sell time, I will pay long or short capital gains on that same spread (which truly are realized gains at this point).
While I intend to keep working in my industry, I do not intend to do that full-time anymore, unless my situation changes. I'm pretty frugal, but I intend to stay in an HCOL area for the foreseeable future. Relocating back in the EU (most likely permanently) is entirely plausible. I plan to rollover my 401k into a Traditional IRA, so that I can re-invest it.
Planned asset allocation (US):
50% SCHX (Schwab US Large-Cap ETF) (Expense Ratio 0.03%)
20% SPMD (SPDR Portfolio Mid/Small Cap ETF) (Expense Ratio 0.05%)
20% SCHF (Schwab International Equity ETF) (Expense Ratio 0.06%) -- See point below about my EU specificity though.
~9% VTEB (Vanguard Tax-Exempt Bond ETF) (Expense Ratio 0.09%)
~1% BLV (Vanguard Long-Term Bond ETF) (Expense Ratio 0.07%)
Many questions, hopefully some are straightforward:
Does this looks like a reasonable port-folio?
Should I just use SCHB (Schwab US Broad Market ETF, Expense Ratio 0.03%) instead of rolling my own sauce with SCHX and SPMD?
I'm not sure about my bonds allocation and the use of my IRAs, I'm thinking that the money in my RIRA should go into (taxable) bonds such as BLV, while I should actually invest in stock in my TIRA since I'll likely stay in the highest tax brackets. (And invest in tax-free VTEB from a taxable account).
As I grow older I guess it will be wise to re-invest BLV/VTEB into something like SCHZ (Schwab U.S. Aggregate Bond ETF, Expense Ratio 0.04%)?
Should I also invest in international bonds?
As an EU citizen I can convert some of my wealth into EUR and invest directly from Europe into a similar port-folio with ETFs or mutual funds (albeit the EU equivalents of those products seem to have more expensive fees). I'm wondering if investing a part of my money directly in EUR, would be a good idea? This would impact how I invest my money from the US (e.g. I wouldn't invest more than 20% of my USD into international non-EU stock, since I'd be already heavily "diversified" in EUR).
Would it make sense to make a small ladder to exercise the rest of my stock at big private company? By selling my current stock in that same company (~20% of my net worth at the current valuation of the company), I could pretty much pay the income tax to exercise the rest of my stock, then I later could sell it again at long term capital gains to exercise the rest. This bets on the fact that the value of big private company will rise.
Any question let me know, thank you! PS: Sorry for the use of a throw-away account.
After a non-payment issue with my ex-employer I have a legal arrangement where that company is paying me back over time. However, how should these payments be processed/handled come tax time?
Back Story: I worked for what is considered a software house for about year before issues began to arise. This was a smaller LLC (about 15 employees) with over 30 years under their belt. Employees were paid monthly, and on time, until about early 2015 when the checks started coming a month behind. I was making good money, and was understanding of the situation and trudged on for a few more months hoping for the best. However in June they failed to pay me (my already 1-month behind) paycheck. I immediately began to look for other jobs, as quitting on the spot, even though I wanted to, was not the best option financially. One month later, that new job was secured and I was able to quit. At this point there was 3 months of pay I had yet to receive ($18k). My now ex-company begged me for more time to secure funds to pay me with, which I agreed to at the time (probably naive, but I am right out of college and didn't know better at the time, plus I didn't want to burn bridges so early in my career.) I gave them another month to come up with the cash. That month came and went with nothing to show monetarily. At this time I contacted a local labor-law lawyer who worked out an arrangement with my ex-employer to pay me double the amount and lawyer fees ($37.5k), spread out over the course of 12 months. It is important to note that my ex-company is still in business and has NOT filed for bankruptcy. Anyways my question about this whole matter boils down to one thing: taxes. Tax Questions: The payments I have been receiving from my ex-employer have been lump-sum, nothing tax-related has been calculated into what I have been receiving. The tax questions I have are the following: 1) Since I am receiving double what I have yet to be paid for in labor, what percentage is taxable? The taxes on the $18k that are wages should probably be taxed like any other job, correct? But what about the other $18k that I am receiving as compensation due to my states labor laws (NY)? 2) Since these payments are spread out over 12 months (from September 2015 to September 2016) WHEN do I have to pay taxes on what I receive? Do I pay taxes on what I receive in 2015 in 2015, or do I wait at do it all in 2016 when I have received everything? 3) If my ex-company sends me my 2015 W-2 stating that they paid me for those 3 months of labor (even though I will not be seeing those wages until 2016) do I have to pay taxes on those wages immediately? Bonus Question: The scheduled payments I have been receiving are already behind by about a month. Even though in the legal arrangement it states that any late payment causes the entire sum to be due immediately, I feel as though I should just accept these payments, as long as they keep coming, and try to keep this whole debacle out of the courts. The last thing I want to do is drive my ex-company into bankruptcy (I assume they have to be pretty close to it…) where I believe it will be much harder for me to get any money from them. Plus, escalating the matter involves me throwing “good money” to a lawyer, betting on the return of possible “bad money.” Is this the right move? Thanks in advance for your insights PF, and sorry for the lengthy description!
Cold War 2.0 COLD WAR 2.0Alex LuYesterday I went to a business dinner, and the trade war between China and US was a hot topic. But many people were extremely doubtful about Trump’s tariff’s policy. According to the vice-president of a famous bank, China had its own problems and the US just needed to be itself other than pushing it too hard as what President Trump was doing now. Another president of an information consultant Company took the same side, saying that “didn’t the Soviet Union fall apart by itself? A tons of inner conflictions of those totalitarian governments will make them break apart from its inside.”Alas! Even though I was one of the only two Chinese Americans there, I cannot hold my opinion anymore. I told them: We all know that the stone will finally become sands during weathering process, simply because stones are not made of single material, but of different type of crystals comprising multiple molecular structures. As times goes by, all sorts of natural environment such like temperature changes cause tensions among crystals, which leads to the final disintegration of the stone. However, what about if somebody removes the tension and uses superglue to stick all different crystals together?They all laughed: “How could such kind of superglue ever even exist which could penetrate into stones and perfectly combine all those crystals!”Yes it does exist!I brought out a piece of Dollar: this is the superglue of China and it’s made in USA. We can say that in the past decades, without supports of America, Chinese Economy won’t be any better than today’s Korea. At least its economic collapse would be a past tense already.The discussion later on didn’t lead to any unanimous answer. This is part of the American culture: If not for scrupulous academic discussion, all debates are superficial and depthless. Nobody is going to persuade another person.But I do understand their view point. It’s not fresh at all. It’s a perspective from the bi-hegemony era of US and the Soviet Union. And yes the result did happen according to this script. Or we could say that this was the very foundation of the Peaceful Evolution: Waiting in the forest for a bunny to run into a tree and knock itself out, as long as it is a stupid bunny.Obviously, today’s China is not a stupid bunny as the Soviet Union at all. Most importantly, China has connected itself economically with the US and the whole world. You are in me and I am in you. This is totally different as the era of Soviet Union. At that time, the western and eastern were having incompatible economical systems and rarely connected with each other. And this was the economical reason which caused the collapse of Soviet Union, and it is the most crucial reason as well.Apparently China learned a good lesson from the collapse of Soviet Union. It wrapped its own economic system tightly with the West, just like a leech on a cow. It doesn’t only stop on the surface of the cow, but deeply into its blood vine. Therefore, the fantasy of waiting for the collapse of Chinese economy is not reliable at all. The huge trade deficit of western world to China every year is analogous to a cow feeding leeches with its own blood, or adding superglue into a stone. The Trade War of President Trump is not pushing it too hard, but way too late. It can only stop the bleeding. That’s all. If we expect China to collapse like Soviet Union, another cold war is absolutely needed: THE COLD WAR 2.0.It has been more than a quarter of a century since the cold war ended. And it happened to be the three decades that China’s economy took off and the West lost itself. In these three decades, the prospering Science and technology didn’t bring more wealth and progress for the western society. To the opposite, we are facing more threats and vulnerability. Since the World War II, Islam became a disastrous impendence to the civil world unprecedentedly, which did not only stay in the Middle East but went deeply into Europe, the origin of modern civilization. Here I won’t discuss more about this. What’s more, the rise of China multiplied the variables to the global situation and this was why the Sino-America relationship became a main topic in a business dinner.After cold war, Dr. Fukuyama, in his ecstasy, wrote his book, The End of History and the Last Man, in which he proclaimed that the Democratic System is the final stop of human society. But now would he be as confident to himself as before?When it comes to Sino-America discussion, it would be absolutely defective if we only stopped at the Trade War. And this has been the deficit of all US presidents since Clinton: just like Dr. Fukuyama, the end of Cold War leads them to an illusion of overconfidence and arrogance against China, which generated the dilemma that the US and West have to confront today.(WRITTEN by Alex Lu, TWITTER: yjpc1989)1) Advantage of the SystemReferring to China’s advantage, westerners always concentrate on its large population and huge market. The advantage of population will disappear anyway. India is also populous, but from the past history until today, did any country ever worry about the rise of India? No. Therefore, here what I want to talk about is the advantage of Chinese system.I believe many people would already reject my standpoint when reading this. At least they took it for granted that Chinese system cannot rival the American one. Surely I am a rigid advocate of democracy. But it does not mean that democracy has natural advantage on all aspects and could shatter all other systems, including Chinese system.Firstly, how should we definite Chinese system? Political and cultural dictatorship and economic freedom. Characteristic Chinese corruption is the inevitable result of the combination of the two. Anybody who had business in both China and US would agree with this: the economic atmosphere is more liberal than US in many aspects. Specifically, this is an advantage under political dictatorship: under the rule of man, a certain kind of freedom is granted to economic behavior. China has no trade unions and no laws that rigidly restrict the behavior of capitalist ---- even if there are, it’s super flexible.We all know that the main driving force for economic development comes from capital. As people who hold capital, capitalists are certainly the impelling hand behind economic prosperity. If ten thousand workers were assigned to a government, the government would not be able to make sure all those workers earn a living for themselves, and it has to shoulder the cost of their living, not to mention to realize economic growth. But if one capitalist was assigned to a government, this capitalist would transfer local resources to economic vitality just for his own “small goals”.Compared with Chinese system, the western world has an almost perfect legal system, which greatly restricts government and protects human rights of every human being. This is why I vote for democratic system. But this system cannot positively propel economic development but drag it backward. This is the reason I strongly brace the idea of small-size government in the West, at least domestically. Looking at the results, the difference between economic managements by China and western government started to formulate a conception in people’s mind: Chinese system is more efficient than democracy. And this is where Xi Jinping’s illusionary confidence comes from.Of course, there are numerous evidences against this point. But if we only look at things from economic growth and social construction within a certain period of time, this perspective is very reasonable. Even in the United State, the New Deal by President Franklin D. Roosevelt had a lot of similarity with this kind of Chinese system: a government holding huge resources would stimulate investment.2) Cost of Extensive Human RightThe western world defeated its biggest rival in cold war, and went way too far in welfare society. The enforcement of law, together with the rising of human right, is dampening the enthusiasm of capitalists. No matter this is right or wrong, at least one of the serious consequences is the outflow of traditional industries, with the exception of some high-return business as those related with high-tech and innovation. Even without China, those traditional industries would drain to other countries. Actually it betrayed the modern western value: Extensive human right. If nobody in western countries would like to get involved into those seemingly-to-be low-end industries, why should they shift those industries to peoples from other countries? Surely it was caused by the inequality of economy. The low-cost of labor in China and other developing countries will definitely spur this industrial transfer. The cost of labor includes human right.The West gives way too much attention to human right, to an unimaginable extent, which greatly increased the cost of capital growth.Adam Smith, in his Wealth of Nations, wrote that the growth of national wealth is determined by one crucial element: technique, skill and judgment of labor. As an entrepreneur who owns business in both China and US, I am under the rough impression that individual Chinese workers are far less efficient than those in the US. Obviously, the technique, skill and judgment of labors in free and open society are a lot better than those in a dictatorial regime. This is why the US has only ¼ of the population of China but could create more wealth. This also means that the cost of labor in a bunch of local product is not skyrocketing to an unacceptable extent. For the same product, China need more labor time. I calculated a business program in 2015, including the transportation cost, the labor cost in the US is only 25 percent high than that in China. I would say this distance is not unbridgeable.However, if all those restrictions upon capitalists of American law ---- some time only the political correctness is more than enough ---- are taken into consideration, contrasting with the freedom of Chinese business environment, the overall American product are way higher than that of China. Basically all the American entrepreneurs had been sued by their employees. I personally experienced with one case brought by a previous employee (and I won), and it was absolutely fabricated false accusation. However, under the environment of extensive human right, an employee could falsely sue his boss without any cost (not even the lawyer fee), without concern of being punished if he lost the case. Is that fair? In contrast, most capitalists in China have never heard of that.(WRITTEN by Alex Lu, TWITTER: yjpc1989)So, this advantage from low human right originated from “rule of man”, instead of “rule of law”. The government is used to the “rule of man” and so are the common people. Especially, in business activities, the ruling man has enough executive power, with a certain extent of supervision from the upper level. This type of management in economic activities can lower the cost of gaining interest from capital, especially of those large capitals. In this case, the shift of industries is inevitable. Nobody can stop those western international companies from transferring their industries.Those benefiting from the industrial shift are countries such like Japan and South Korea, the democratic countries which has adopted similar political systems as the Europe and America. They changed their own domestic economic situation by accepting western manufacture industries and also reallocated wealth perfectly under the democratic government and benefited their people. However, for those countries who refused to take the democratic political mode, or those who do not have a stable democratic system, this industrial shift didn’t bring success to them. To the opposite, this industrial transfer only magnified the distances of the poor and rich, because those governments didn’t distribute the accumulated wealth from this fairly enough and it resulted the concentration of wealth into a few hands. And this is why those countries with low human right failed.If we can say that long time ago those countries have a small ration of population and wouldn’t affect other western countries, the large foundation of Chinese population totally crushed this industrial shift mode. Today, Chinese tycoons have been escalating the price of real estate in many European countries as well as in America, and this almost overturned the whole traditional western real estate market. In a word, the worldly enlargement of the distance between the rich and poor is mainly caused by the Chinese mode.On one side it is the western political system with extensive human right, and on the other side it is the Chinese one with low human right. There should be no reconciliation between the two if not for the globalization. High-technology made it extremely easy to communicate among people, information and capitals. It’s like adding water into heated oil and will surely go crackling and spluttering.I am all for human right. And I have been persecuted in China because the human rights are not protected there. However, in the current situation of heated oil mixing with water, should we re-considerate about if the western human right protection goes way to far that it became an obstacle of social progress especially economic development? If Adam Smith resurrect today, he would definitely lament: today’s western world is not the West with free market anymore! Any protection of human right that is beyond a necessary extent is becoming the burden of economic development. If the whole world are the same and own a united standard, I would vote for this kind of human right protection: whoever wouldn’t like the idea of eating without working! But tragically, the western world only has 1/10 of the global population and it is surrounded by wolves like China, Russia and Islam. It is time for us to wake up from the illusionary confidence of the Clinton Time!3) Poor Individuals, Prosperous CountryFor individualists, the wealth of people means the wealth of nation. Simply, the purpose of a nation is to serve its nationalities. But for those collectivists, whether the people is poor does not matter ---- even though they themselves don’t want to be poor either ---- what does matter is the power and wealth of a nation. This is actually the so called greatest achievement of China in the past thirty years: Poor people and powerful nation. Nevertheless, when two countries confront with each other, it means confrontation between two nations, and most directly, between governments who are on behalf of the nations. It is useless to compare the wealth between an individual American family and a Chinese family. From this aspect, Chinese government obviously has advantages that American government doesn’t have.Wake up! You conceited Yankees who believe that US will win. How could the US government fight against a government who can print money unlimitedly? How could the US government fight against a government who can add taxable items whenever they want to? How could the US government fight against a government who never needs to worry about unemployment rate? A government who doesn’t need to consider the insurance and pension of old people, a government who doesn’t need to concern about the inflation, the dropping down of stocks by its limit, a government who doesn’t care about those children dropping off from school, a government who controls the media and internet, a government who can slaughter its people as how they wish to, how could you fight against it?And such government could ever exist? Yes it doesn't only exist, but becomes the second biggest government in the world! Take a look! How unfair this world is! This is the fact. Those who are crying about how unfair the American government is, you’d better print this paragraph and stick it on your forehead. Whenever you are whining about how unfairly you are treated, look into the mirror and read it.Look at those poor Chinese people. Different as you Yankees who get fussy all the time about those trivial stuffs in your life, how submissive they are! In front of the powerful they are licking their ass; In front of Police Officer they would even control the way they walk! When seeing unfair things they would at most sigh, but probably just close their eyes, pretending that they didn’t see anything. If not forced to rebel the authority, they don’t even know how to complain. This is a race that the westerners can never understand, and they are controlled by a bully government. Moreover, the huge trade difference between China and US are made by their hands. In another words, they worked really hard with their own hands and built for themselves a most modernized pigsty! Isn’t that miserable? Isn’t that horrible!China’s overall GDP cannot compare with US and GDP per capita is lower than US too. China’s military strength and technology is not as good as US either. However, the resources under the control of Chinese government are way more than US government! Chinese government could drive their soldiers like animals, and a bunch of Chinese are stealing technology in the US and sending it back to China. This is the reality we got to know. Who is more powerful?Don’t use Soviet Union as an example. The collapse of that communist regime was not historically doomed! Otherwise, there wouldn’t be a second powerful government rising to be US’s rival in such a short period!4) Stability of PolicyWithout any doubt, one weakness of democratic system is that their policies are not stable enough. Like China, the Mao’s era could be three decades’ of Left Wing and after that is another three decades’ of Right Wing in Deng’s era. This is unimaginable in the US. Within a term of four years, a succeeding president is always eager to erase off all his predecessor’s policies to prove that he himself is freaking damn good. This US system has no problem domestically, because no matter whoever became the President, they have one explicit goal: doing good in economy. And they have one enemy: Economic Recession.As for its foreign policy, unless fighting with deadly enemies such as Germany and Japan in World War II, Soviet Union in Cold War, US even has difficulty to triumph over a small country. Some good examples are Korea War, Vietnam War, Iraq, and so like. Among all failures of those wars there was a same reason: Inconsistent policy. Democratic system weakened and blurred the resolution of the States and along with the end of a presidential term, game was over. In fact, every president has to face the mid-term election, plus the four-year limitation of a term. So, if a president just wants to destroy America intentionally just like OBAMA, or just wants to dawdle on his Presidential Seat like Clinton, his time would be super easy. However if he wants to have any achievement on Foreign Policy, he would have a really hard time. Therefore we should understand how resolute President Trump’s attitude is in launching the Trade War.Very different from the former Soviet Union, one the one hand, China is really good at gaining and utilizing favor from the US, who has never treated China as its rival in history, but not being grateful at all, or just pretending to be grateful. This is one of most absurd drama in World Political History. On the other hand, China knows all the weakness of the US. For this reason, even for a President like Bush, who swore to God to stall China in his election, all his aspiration was gone with the wind, depleted by China. We can say that China, among all US’s rivals in history, showed the best apprehension of America’s weakness. In these three decades, China’s most effective strategy against US is: to POSTPONE! Just wait, hold on, this President was gone. Another president came, with his new cabinet, just wait, and hold on, he will be gone! (WRITTEN by Alex Lu, TWITTER: yjpc1989)And China itself, not to mention that Xi Jinping is going to be lifetime president, even in the Era of Jiang Zemin and Hu Jintao, their opinions are unanimous towards how to deal with the US. So, if there is confrontation between China and the US, if not a life-and-death battle, here is a good bet: China Wins.5) Trade War CANNOT solve the problemIf only from the perspective of trade balance, US will certainly win the trade war. Just like what President Trump said, a country losing almost 400 billion dollars every year has nothing to lose. However, it is too shallow to analyze Sino-American relationship from the aspect of economic interest only. The importance of this trade war is that it would probably determine the direction of what human civilization will go in the next one hundred years.Problem between China and the US is not the trade balance, but the conflict between two ways and two cultures. The West is in trust of Multi-culture and this belief itself is part of its culture. In Chinese history, it has been a uniform country with a single culture. Two hundred years ago, all different countries lived by themselves. But in an internet age like now, it is impossible to segregate each other from the network of people and information. Conflict is unavoidable. It was not so distinct before only because the West is too powerful and China has no confidence in challenging. Nevertheless, along with the expansion of China’s economic power today, the confidence in Chinese traditional culture with its contemptuousness is doomed to emerge. It was an incidental event that Xi Jinping came to power, and if another person was in his position perhaps China would not be as aggressive as it is today. Yet the ideology of “Divined Dynasty, Centric Empire” inherited from thousands years of traditional Chinese culture is extremely liable to explode. Think about South Korea, a nation raped by North Korea, when it comes to the issue of United South and North Korea, or national self-esteem, it immediately loses its rationality. This is the essence of Oriental Culture.It is said that Sino-American relationship is different from that of US and Soviet Union because there is no collision of ideology. But what is more lethal is that not only there is cultural conflict but ideology is only part of culture. If we can say that the culture of Soviet Union is essentially western and concentrates on individualism, Chinese culture is oriental by its nature and it emphasizes collectivism. If not the advanced western technology defeated China in Tsing Dynasty, would Chinese people ever want to change their own life style? By no means! Therefore, why there are so many young patriots in China is not only a consequence of brain wash by the government. Instead, government maneuvered the conceitedness of collectivism derived from Oriental Culture.Ultimately, the confrontation between China and US is that of individualism and collectivism. Individualists pursue freedom and collectivists focus on succession. Which one is right? Which one is wrong? It is not important any more. It doesn’t matter. What does matter is which one is going to win the battle.6) COLD WAR 2.0Human being is living for his or her ideas. What we think is right might be very wrong in other people’s eyes. It won’t really affect our lives until one side is determined to annihilate the other one and wipe him from the earth. To withdraw cannot avoid confrontation.Nowadays China is exactly the one side haunting and stalking to devour and ravage the other one. Seemingly this confrontation was triggered by Trump’s trade war but actually it came from Xi Jinping’s imperial ambition. If my argument goes to the right direction, Xi Jinping is an extraordinarily ambitious leader. However, his passion is significantly inconsistent with the value of modern civilization. He wants to be one of those outstanding emperors in Chinese history such like Tangtaizong (唐太宗) , Kangxi (康熙) and so like. As for how much the people suffered under their reign doesn’t matter to him at all. If he determined to emulate those emperors, assuredly the most achievement he could ever think of is to confront and defeat the US. We have to admit that considering the reality, Xi Jinping might not be too determined to start the war against the US. Other than that, his secondary objective is to take over US’s hegemonic position in the world. This is probably the target in Xi Jinping’s plan, or at least, he wants China to become the former Soviet Union, standing as the other pole as same as the US.Allegedly, China doesn’t have the same ideology as the Soviet Union. However, it has its culture: a pragmatism culture that is reckless and heedless. This is a prolongation of Chinese traditional culture and it substantially exceeds the communism and is way more vigorous. This could explain why Russians seemed to be more honest in their competition with US. For example, during the Cuban Missile Crisis, Russians promised not to set the missile system in Cuba and they didn’t do it, even though there were several presidential shifts in the US after that. If China was in that situation, after it promised to President Kennedy, during President Johnson’s term it would stealthily ship its missile to Cuba again. Wasn’t it what happened after they made their promises in WTO?Therefore, the seemingly-to-be military and economic confrontation between China and US is actually cultural confrontation: Rule of Man versus Rule of Law, Stratum versus Equality, Privilege versus Human Right, and Corruption versus Honesty: in a word, Evil versus Virtue!In fact, I am not really contented with the extravagant virtue of the West. This kind of “virtue” has reached a point of harming oneself without impairing enemies. There is no pure “virtue” on the earth and all virtues should be practiced on the condition of self-protection. Other than that, “virtue” means foolishness. But if I have to choose one between “Evil” and “Foolishness”, I would rather choose “virtue”.Even if the trade balance between US and China is realized, is their confrontation preventable? Is China’s occupation of Taiwan preventable? Is it preventable for China to buy and corrupt some small countries and spread their virus of this “evil” culture? By no means!The Trade War is a poor choice out of no choice and it was delayed for at least a decade. If today we still cannot realize the destined confrontation between China and the US, after ten years we have to regret another loss of a decade!So what we should do now is to launch the COLD WAR 2.0 between China and US!In 1946, right after the World War II, George Kennan, deputy chief of the mission in Moscow, sent the famous “long telegram” to the State Department, in which he explained in detail Soviet Domestic society and its foreign policy, and formulated the policy of “containment”, the long-term United States strategy for fighting against the Soviet Union. The policy of containment finally became the basic strategy of US. Now when talking about Kennan’s contribution, all nice words putting together are not enough to salute him. Without the containment policy, there wouldn’t be the COLD WAR later on. Though, for a country like US with no consistent policy, that Kennan’s strategy could be adopted for several decades is not because of his GOD-like influence, but because the powerfulness of Soviet Union was intimidating enough to threaten the national security of the US. Kennan only made Americans realize the danger of Soviet Union. Until today, the US has lost at least ten years. The dust from the newly started Trade War is not settled down yet. Is there going to be a peaceful result, or a deteriorated situation? It depends on the negotiation between China and US leadership. But undoubtedly, Americans need a new contemporary Kennan to send them another “long telegram”: Without a COLD WAR 2.0, the US is doomed to lose! Not only a problem of losing the trade war, but a huge retrogression of human civilization!20180406 Submitted April 20, 2018 at 02:20PM by alexlu1989 https://www.reddit.com/The\_Donald/comments/8dpsdh/cold\_war\_20/?utm\_source=ifttt via The Cucks at /The_Donald
Hi I am looking for advice as I start my first job out of college (i'm 22) on how to spread out my money. I am mostly concerned with what to do with extra cash after I take out some for retirement. I have more money than I know what to do with (poor me) from working my ass off and so I want to be very careful with it. My current allocation: ~40k in cash // Taxable Investments ~3.5k in USAUX ~3k in USATX // Retirement 401k: $0 (I havn't had a job yet) Roth IRA: $6.1k (opened almost a year ago) My salary is: $100k. Assuming about $70k take home. I already plan on pretty much maxing out the retirement accounts, but after that, I will have some left over to save. So my question is, where do I put it? I have no debt. I am looking for something that would let me save for a couple years that's better than a savings in order to buy a car or something like that. Does this leave me with short term bonds as a solid bet? Should I just put this money into the USATX I already own? Thanks for any help
This is actually a great question, as easy as it sounds.
First of all, as a college student, you don't have many options. If you have a job, and pay for college via student loans, you may have slightly more to work with.
For the second question, it's almost always better for your parents to claim you, because they will have more income, and therefore more tax to pay. To claim yourself, you must provide at least 50% of your own support (requiring a job and student loans). But I did find the scenario last year where it saved a few thousand by having the college student claim themselves.
File them all at once under a "Tax Amnesty Program". Most states offer these as well. The IRS is willing to forgive late payment if you are filing and paying several years. You will need to call the IRS Taxpayer Advocate Hotline to go this route.
That sounds extremely questionable. Strategies like this that are set up only to avoid taxes are looked at very closely by the IRS, and if they ever consider it to be "fraud", they are allowed to go back much farther and assess taxes. I would be careful calling anything a "church" that isn't one. Especially in the next 5 years.
Well, because you were consistent, it's not a red flag. The statute is 3 years for the IRS, so if you don't see anything by 2015, you are probably in the clear. I would recommend trying other tax saving strategies in the future.
I've never seen a case of them catching phony donations by auditing actual churches. However, if your employer gets audited, then you are much more likely to get audited. Also, if your name ends in a vowel, you are 40% more likely to get audited.
I would change the claim to 0 exemptions for your W-4 and adjust your withholding. You can only claim 1 dependent (yourself). The loss of a child will be a big hit come tax time, there are a lot of related deductions and credits for children. You may also be better off claiming the child in the future, and pay your ex the difference it makes on her return.
However, you may not be able to claim a loss against your other income depending on the amount of time you rented the apartment vs the amount of time you lived there. Have this information available when you go to do your taxes. Having rental losses can be a big help for taxpayers making under $150,000.
Alright, my conservative friend. For most taxpayers, the way that you can get money from the government is by investing in solar energy, investing in small business, paying for college, etc. It costs money to make money.
If you are poor, then you get money back by having a bunch of kids and making barely any money. See the Earned Income Credit. This can be up to $3,000 of all government money back. Not a return of their own money, like most other refunds.
I'd say "What up, O-Town. Why don't we switch to a combination flat tax and value added tax (modified sales tax) that works very well in places like New Zealand?"
I think more people are likely to pay their taxes if it was lower and simpler. I would venture a guess that making taxes easier to calculate and having less to pay would outweigh the lost revenue of a lower tax rate.
Not necessarily. More like, if you made $50,000, you pay 5%, regardless of your other situations. If you made $200,000, then you pay 8%, regardless of your situation. Just simplified, no itemized deductions, no phaseouts, no AMT, no credits. Just figure out the income, hit them with a tax percentage that much lower than normal, and call it a day.
To be honest, I got into accounting for one thing: The Ladies.
But seriously, I started for the money, and because I knew I could get a job. It's a very interesting and competitive field, and I get to work with a lot of professionals and all-stars. It's very fulfilling, but demanding.
The only "stress" is in a high volume of work and deadlines. It's nice because you can go home at the end of the day and not worry about work at all. Most accountants have serious hobbies to get them through the busy seasons.
I would definitely recommend accounting degree if you can do it. There's a lot of opportunity in other fields if you don't end up being "an accountant".
Yes, I do have some tips. An LLC is not a tax saver. It's purely a legal liability shelter. However, LLCs can file a form 8832 to be elected to be taxed as a corporation, and then elect S-Corporation Status. This can save a great deal of self-employment tax. I would still recommend going to a tax guy to help with this.
The more medical expenses that you can push into your business the better, taxwise. Medical deductions are now subject to 10% of your income normally. If you can set up a medical reimbursement plan and have the business pay, you can deduct the full amount of medical expenses. Be careful if you have other employees working for you. It probably has to be offered to all employees.
Here's the basic rundown - If you pay the employees as employees, then you pick up the payroll taxes, FICA, have to file additional tax returns, etc. The employe picks up everything, but its much better for the employee. If you pay as independent contractors, the employee picks up the taxes on their end. Much easier for you, not for them.
I'm not sure I understand You are an independent contractor, correct?
So in other words, you run your own one-man business that operates out of your house, with your own vehicle, and you treat your own employee to lunch every day?
It sounds like you have a lot of expenses to write off. Hopefully that will put you in pretty good shape. Keep track of car mileage, and track your home utilities, and put your lunches on a the same credit card and print the statement at the end of the year!
Love these questions. I came into the job for the money. And I love it for the people. Honestly. I work with some great people, and I get to work for some great people. It feels like I'm helping people save money, while doing a public service and making sure taxes get paid.
The W-4 calculator is never as reliable as hoped. If you claim 0 exemptions, then you should be in decent shape for tax time. The more exemptions, the higher the risk of owing. I would gauge your W-4 based on your tax return each year. If you owe too much, decrease your exemptions. if you are getting a large refund, then increase. It's a new game every year. Good luck!
It depends on the amount of money you made, and how you made it (W-2, independent contractor, etc)
I would recommend at least looking into filing using free federal online software, because most people who don't file because they don't owe are actually missing out on a refundable "Earned Income" credit or refunded withholdings.
When a house passes through inheritance, the heir receives a "stepped up basis" on the house that may lower the amount of gain you have to report upon sale of the house. If you sell the house within a year after death, you generally do not end up with a taxable gain on sale, since the sales price = stepped up basis.
I'm sure the lawyer is covering the legal side, and has more details, so I'm going to defer to him. But just ask what the exact purpose of the receipt will be. If it's to support a higher basis for the sale, ask about this.
Here is the general guideline for home office. If you legitimately work out of your home, and can document it properly, then you have a lot of expenses available for deduction. However, be aware that a Home Office is a major red flag for audit purposes, and I've seen a number of audits for only this reason.
As long as you have the proper backup, it shouldn't be sketchy because many people work out of their home without an "office". Just use the square footage.
I would recommend keeping track of all remotely business expenses and bring them with you for tax prep. If you are working out of your home, any transportation and car use may be deductible as well.
It looks like a lot of people like this question. However, I do see some good answers in the comments already.
As Raytothe pointed out, this mileage would be an unreimbursed business expense, subject to 2% of AGI. You would probably need to drive 20,000 miles per year at least to get a benefit unless you own a house and have other itemized deductions.
This is a good strategy for people who already itemize, but probably will not help you as much as hoped.
The important thing here is to track your mileage driven rather than gas receipts. Keep a small book to record each time you drive the car on the clock.
Often, tips are included right in the number on your W-2, so look out to see if they are actually included, just not separately. It sounds like your employer could get in some trouble if they aren't doing things the right way.
In theory, you are supposed to report all this income and pay taxes on it. In reality, this probably happens a lot.
Link to www.irs.gov Use this if you have more specific questions about the proper procedures for tips.
Whoa, getting a little trickier there Shrimp Whiskers! (totally using that now)
Imputed income tax is used to cover the taxes on imputed income related to the increased cost of health insurance paid by the employer. It is always possible to get income tax withheld back, as long as you have enough other deductions (Business losses, charity, tax credits).
However, if you are only working with a W-2 with the imputed income, you probably won't see much, if any of it back. That's the cost of insurance coverage that may not be available otherwise.
Tax Benefits: Spread betting is considered gambling in some jurisdictions, and subsequently any realized gains may not be taxable. A: In my view, it is very unlikely that spread betting will ever become taxable. The reason is very simple - more money is lost than is won and if the gains were to be taxable the losses would be tax-deductable. Yes, profits from spread betting in the UK and Ireland are tax-free. This is because spread betting winnings are regarded as gambling winnings by the HMRC, however do note that this ruling is intended for recreational betters. To be taxable, the spread-betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. This could happen if, for example, you were a professional stockbroker or share trader, in which case your spread-betting profits would probably be taxable. ‘To be taxable, the spread betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. Whether or not a particular spread bet is taxable will depend on the terms of the contract and the economic substance of what is done.’ The way I understand it is that there is no tax on
Figuring Out the Differences: CFD Trading and Spread Betting
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