Wednesday, December 20, 2006

Stock Market and Taxes

STOCK MARKET and someTAX ASPECTS to consider

Suppose you have a Rollover IRA, a Roth IRA and a margin account.
The best place to take profits would be in the Roth IRA since the profits won’t be taxed.

The next best place for profits would be in the Rollover IRA since taxes will be deferred.

The worst place would be in your margin account which would be taxed. The best kind of gain to have in a margin account would be a LONG-TERM capital gain due to lower tax rates on LTCGs.
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For losses, it would be just the opposite.

The best place to take a loss, for tax purposes, would be in your margin account.

Margin account losses are deductible on your return (but any loss over $ 3,000 has to be carried over to the next year—involving rules for capital gains that I won’t discuss at present).

The next best place for a loss would be in the Rollover IRA since eventually the money coming out will be taxed, so losses here would reduce future taxes.

The worst place for a loss is in the Roth IRA since the loss is not deductible now or in the future unless all of your Roth IRAs are distributed and the amount is less than your cost.

NOTE: If all traditional IRAs are distributed in total, a loss can be taken on them also.
For either a Roth or traditional IRA, any such loss is not fully deductible since is a “Miscellaneous” deduction from which 2% of your Adjusted Gross income must be subtracted. This one is tricky, so, if you want to take this as a loss, maybe you should “not attempt to do this at home.” In other words, see a tax professional (CPA, EA or a qualified non-licensed prparer).

There are three tactics used by investors:


Asset Allocation with periodic rebalancing and

‘Technical analysis’

and you can combine these techniques.

Asset Allocation:
Allocation can be among different types of assets: stocks, bonds, real estate, gold, etc.
A simple example would be 60% stocks and 40% bonds. Reallocation would involve selling selling some stocks if their value rose to 70% and buying enough bonds to rebalance. Taking it further, you might allocate stocks beween Large cap, mid cap, small cap domestic stocks, global stocks or funds and emerging market stocks or funds.

Technical Analysis:
Technical analysis can become a mind-boggling task and often causes you to be ‘whipsawed’. However, it can also get you out of a plummeting bear market before you lose your shirt. A simple technique would be to use a 50 or 100 or 200 day moving average as your buy/sell signal—and might work just as well as a more complicated system.
After a long, extended bull market, you might use a shorter period as your sell signal.

After a long, extended bear market you might use an upward penetration of the shorter moving average as your buy signal. (This may be confusing. If you need some clarification and examples, post your questions as a comment to this blog item) and I will prepare a blog to elaborate on use of moving averages—simple and exponential MAs)

This information is not intended to be advice to the recipient.In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this correspondence was not intended or written to be used and cannot be used for the purposes of avoiding penalties

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