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Author: ORWAHOO Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121189  
Subject: Investment/Tax Strategy Date: 5/23/1997 5:12 PM
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I want to thank TMF Taxes and the folks at Motley Fool for this invaluable service.

Now for my question: This is one of those questions that is also related to Investment strategies, but I need to understand the tax angle.

First, background on me: I'm a 29 year-old Foolish investor. I manage my own IRA and a decent-size (for a 29 year-old) non-IRA portfolio. I'm fully invested in stocks and hold for the long term. I'm investment "savvy," but not necessarily tax "savvy." But, like many Fools, my investment knowledge is focused on individual stocks, and not mutual funds or bonds.

My father, in seeing my knowledge about the stock market (he has NO experience in investing), asked me to invest $100,000 for him. He's still a decade away from retirement, and, as a successful attorney, does not have immediate need for the money. Needless to say, he's in the highest tax bracket.

I plan on investing over a period of time (dollar cost averaging). I'll immediately put 20% into BTD stocks and perhaps short 10-20%. Then, every month or two, I'll buy a block of stock worth about $7,000. Over a 12-24 month period, I plan on eventually fully investing him in stocks.

(Tax question alert)

In the meanwhile, he will have a substantial amount of cash on hand. Should we keep this in a broker's money market account? Or, for tax purposes, should he have the cash in a tax-free bond fund, while periodically withdrawing money to invest in stocks? But, by periodically withdrawing from the bond fund, is he "selling shares," and therefore opening himself up to short-term capital gains?

I obviously want to maximize his return, and will likely (hopefully) have some short-term capital gains from successful shorts. I appreciate your thoughts on this.
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26 of 121189
Subject: Re: Investment/Tax Strategy Date: 5/27/1997 12:47 PM
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On Fri, 23 May 97 17:12:24 -0600, ORWAHOO wrote:
<<

I want to thank TMF Taxes and the folks at Motley Fool for this invaluable service.



Now for my question: This is one of those questions that is also related to Investment strategies, but I need to understand the tax angle.



First, background on me: I'm a 29 year-old Foolish investor. I manage my own IRA and a decent-size (for a 29 year-old) non-IRA portfolio. I'm fully invested in stocks and hold for the long term. I'm investment 'savvy,' but not necessarily tax 'savvy.' But, like many Fools, my investment knowledge is focused on individual stocks, and not mutual funds or bonds.



My father, in seeing my knowledge about the stock market (he has NO experience in investing), asked me to invest $100,000 for him. He's still a decade away from retirement, and, as a successful attorney, does not have immediate need for the money. Needless to say, he's in the highest tax bracket.



I plan on investing over a period of time (dollar cost averaging). I'll immediately put 20% into BTD stocks and perhaps short 10-20%. Then, every month or two, I'll buy a block of stock worth about $7,000. Over a 12-24 month period, I plan on eventually fully investing him in stocks.



(Tax question alert)



In the meanwhile, he will have a substantial amount of cash on hand. Should we keep this in a broker's money market account? Or, for tax purposes, should he have the cash in a tax-free bond fund, while periodically withdrawing money to invest in stocks? But, by periodically withdrawing from the bond fund, is he 'selling shares,' and therefore opening himself up to short-term capital gains?



I obviously want to maximize his return, and will likely (hopefully) have some short-term capital gains from successful shorts. I appreciate your thoughts on this.>>

Not knowing Dad's individual tax situation, it is difficult to provide you with an exact answer. But we can certainly kick around a few ideas.

It may certainly make sense to had Dad's cash in a double tax free municipal bond money market account. You'll have to do some computations in order to determine his "after tax" return for the MM fund versus the broker cash fund. For example, lets say that the brokers fund pays 5% interest. Lets also assume that you can find a double tax free MM fund that pays 3% interest. Lets also assume that Dad is in the 40% tax bracket.

The after tax return on the 5% earned from the broker would actually amount to 3%. The other 2% would be eaten up in taxes. (do the math...the after tax return would be 60% of 5%, or 3%). Compare that to the tax free MM fund, and you see that there is no difference. So the decision would be an either/or situation. But in many cases, and with high bracket taxpayers, you may find that the tax free MM account is the better way to go.

You should also be aware that many brokers offer double tax free MM accounts where you can park your free cash. Again, if that is offered, you'll have to do the math and determine the after tax rate of return. Only then can you make a decision.

Finally, in the above explanation, you will not that I have used a MONEY MARKET double tax free fund, and NOT a pure municipal mutual fund. Why? Certainly there may be other gains and losses generated by the fund (that will be taxable to Dad). But more importantly, your cash is generally for short term use. Jumping in and out of a municipal mutual fund could be a problem when looking at principal preservation. You'll have costs, fees, and expenses to pay with each purchase and/or redemption. Plus, any short term fluctiuations in interest rates might severly reduce Dad's principal in the fund. On the other hand, a MONEY MARKET fund allows you to put $1 in, and take $1 out. More like a savings account. The principal is more secure, and not subject to short term fluctuation.

The downside is that a MM fund will pay less in returns than a full blown mutual fund. Is that a problem? Again, you'll have to compare after tax rates of return.

So get your calculator out and do some computations. You'll need to know your Dad's combined Fed and State tax rate, and the return rates on the various investments that you are reviewing. But all of that information should allow you to make your best assessment of the investment landscape, given your timing and need for the funds.

TMF Taxes
Roy Lewis

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Author: MontanaFool One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29 of 121189
Subject: Re: Investment/Tax Strategy Date: 5/28/1997 2:11 AM
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On Tue, 27 May 97 12:47:15 -0600, TMFTaxes wrote:
<<On Fri, 23 May 97 17:12:24 -0600, ORWAHOO wrote:
...
I plan on investing over a period of time (dollar cost averaging). I'll immediately put 20% into BTD stocks and perhaps short 10-20%. Then, every month or two, I'll buy a block of stock worth about $7,000. Over a 12-24 month period, I plan on eventually fully investing him in stocks.
...>>

TMF Taxes,

It may not be a tax question but why would anyone want to do this in the first place instead of immediately becomming fulling invested in stocks with all available funds. For me, "dollar cost averaging" is something one does with future income over many years. What do I fail to understand here? Thanks.

Fooling in the Flathead

Tom Kuffel, kuffel@cyberport.net


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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30 of 121189
Subject: Re: Investment/Tax Strategy Date: 5/28/1997 7:43 AM
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On Wed, 28 May 97 02:11:00 -0600, MontanaFool wrote:
<<On Tue, 27 May 97 12:47:15 -0600, TMFTaxes wrote:

<<On Fri, 23 May 97 17:12:24 -0600, ORWAHOO wrote:
...
I plan on investing over a period of time (dollar cost averaging). I'll immediately put 20% into BTD stocks and perhaps short 10-20%. Then, every month or two, I'll buy a block of stock worth about $7,000. Over a 12-24 month period, I plan on eventually fully investing him in stocks.
...>>
It may not be a tax question but why would anyone want to do this in the first place instead of immediately becomming fulling invested in stocks with all available funds. For me, 'dollar cost averaging' is something one does with future income over many years. What do I fail to understand here? Thanks.

Fooling in the Flathead

Tom Kuffel, kuffel@cyberport.net
>>
Perhaps he wants to give his brother, the stock-broker, a present by paying more commissions than necessary. They raise the cost-basis of his purchases and thereby lower the eventual capital-gains tax (by reducing the profits or increasing the losses, as the case may be).

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32 of 121189
Subject: Re: Investment/Tax Strategy Date: 5/28/1997 11:50 AM
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On Wed, 28 May 97 02:11:00 -0600, MontanaFool wrote:
<<

On Tue, 27 May 97 12:47:15 -0600, TMFTaxes wrote:

<<On Fri, 23 May 97 17:12:24 -0600, ORWAHOO wrote:

...

I plan on investing over a period of time (dollar cost averaging). I'll immediately put 20% into BTD stocks and perhaps short 10-20%. Then, every month or two, I'll buy a block of stock worth about $7,000. Over a 12-24 month period, I plan on eventually fully investing him in stocks.

...>>



TMF Taxes,



It may not be a tax question but why would anyone want to do this in the first place instead of immediately becomming fulling invested in stocks with all available funds. For me, 'dollar cost averaging' is something one does with future income over many years. What do I fail to understand here? Thanks.



Fooling in the Flathead



Tom Kuffel, kuffel@cyberport.net



>>

Good point. As another poster pointed out, unless these shares are to be purchased through a DRIP plan, the commissions would be greater when buying over a period of time rather than being fully invested. And you are right...dollar cost averaging is something usually done with future income.

I suppose that there could be a wonderful reason to dollar cost rather than immediately become fully invested, but I can't think of what it would be right now. Perhaps the original poster could provide some insight as to the reasoning.

TMF Taxes
Roy Lewis

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Author: johnhjay One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33 of 121189
Subject: Re: Investment/Tax Strategy Date: 5/28/1997 5:38 PM
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On Wed, 28 May 97 02:11:00 -0600, MontanaFool wrote:
<<On Tue, 27 May 97 12:47:15 -0600, TMFTaxes wrote:
<<On Fri, 23 May 97 17:12:24 -0600, ORWAHOO wrote:

I plan on investing over a period of time (dollar cost averaging). I'll immediately put 20% into BTD stocks and perhaps short 10-20%. Then, every month or two, I'll buy a block of stock worth about $7,000. Over a 12-24 month period, I plan on eventually fully investing him in stocks.
...>>

TMF Taxes,

It may not be a tax question but why would anyone want to do this in the first place instead of immediately becomming fulling invested in stocks with all available funds. For me, 'dollar cost averaging' is something one does with future income over many years. What do I fail to understand here? Thanks.

Fooling in the Flathead
Tom Kuffel, kuffel@cyberport.net

>>I don't know about you, but, if it were my nest egg, I, too, might want to hold off committing all my investable resources at once, particularly at a moment when most measures of stock valuation indicate stocks have become very expensive by historical standards. One can cite all the historical statistics showing the market goes up 75% of the time and that no one can predict where the market is going, etc. But, when a market has risen this far and this long, longer than any bull market in history, I do not think it unreasonable for a new investor to want to "dip a toe in the water" gradually, rather than plunging in all at once. He or she has plenty of company in the present market, and I don't think it is only among the Wise.

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