Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
I haven't found a discussion of the fiscal cliff on the other boards so I hope I'm in the right place.

It seems to me letting the tax rate on dividends increase would discourage investment in dividend paying stocks. These value stocks have been a part of my portfolio for years but now I'm seriously starting to think of selling all shares in all stocks, hang onto the cash until after tax season then reinvest elsewhere.

When thinking of reinvesting I've been told to purchase the same stocks in my RothIRA, I have some dividend stocks there today but not all. This concerns me.

I heard comments that even the RothIRA is subject to change with the Government's focus on collecting more taxes.

So what are other people doing? My current brokerage account has a mixture of gains and losses so I think selling all would produce a very small taxable gain. I just don't like the idea that I have to stop using one of the vehicles I have been relying on for growth toward retirement.

Any thoughts on what to do in 2012 to minimize the tax impact and have a safe investment plan for the future?

Thanks, Steve
Print the post Back To Top
No. of Recommendations: 14
It seems to me letting the tax rate on dividends increase would discourage investment in dividend paying stocks. These value stocks have been a part of my portfolio for years but now I'm seriously starting to think of selling all shares in all stocks, hang onto the cash until after tax season then reinvest elsewhere.

I smell tax-phobia, a leading cause of letting the tax tail wag the investment dog. I don't know your definition of "for years," but in the grand scheme of things dividends have received special tax treatment for but the blink of an eye.

My recommended analysis of holdings remains "Does this investment still meet the criteria I used to buy it?" If yes, keep it. If no, dump it and look elsewhere (which can include sitting on cash).

Oh, and all that stuff you're hearing about what may happen. The more certain the person is, the less (s)he knows.

Phil
Rule Your Retirement Home Fool
Print the post Back To Top
No. of Recommendations: 12
Hi Steve,

I'm of the opinion that companies paid dividends before the Bush Tax Cuts were enacted and those same companies will very likely continue to pay dividends after the Bush Tax Cuts expire. Indeed, just this month, I started a real-money portfolio on the fool.com site that's focused on companies that pay and have regularly increased their dividend payments. Many of those companies have dividend track records that go back decades -- well before even the first Bush was President.

I learned a long time ago -- through watching something in the neighborhood of a $6,000 gain turn into an approximately $11,000 loss while waiting for a stock to move to "long term" tax treatment -- that letting taxes drive investment decisions is very often a bad idea. I still pay attention to taxes, of course, but it's just one factor in the buy/sell/hold decision rather than the key factor.

From a tax perspective, I think of it this way: The S&P Depository Receipt has a yield of about 2%. If I have $10,000 invested, that translates to about $200 per year in income. In the 25% tax bracket, I'd lose about $50 to taxes -- 0.5% of the investment. Under the Bush dividend tax rates, I'd still be paying 15% to taxes -- about $30. So in essence, it's a tax increase of $20 per $10,000 invested. (Your results may vary depending on your tax rate, portfolio size, and investment choices.) It's real money, to be sure, but an extra 0.2% annual friction cost on my portfolio isn't enough in and of itself to force me to radically change my investment plans.

-Chuck
Inside Value Home Fool
Print the post Back To Top
No. of Recommendations: 8
I own several stocks paying 3% to 4% dividends based on current price. My GE shares are paying around 10% on my original investment and the stock price has almost tripled. Imagine if I had put that money in a CD instead of shares. I'd be lucky to be getting 2% today and the interest would be taxed as ordinary income. Last I checked CDs don't increase in market value either.

As Phil said, don't let taxes make your investment decisions for you. You'll end up making bad investment decisions and that will cost you a lot more than the tax.
Print the post Back To Top
No. of Recommendations: 1
I own several stocks paying 3% to 4% dividends based on current price. My GE shares are paying around 10% on my original investment and the stock price has almost tripled. Imagine if I had put that money in a CD instead of shares. I'd be lucky to be getting 2% today and the interest would be taxed as ordinary income. Last I checked CDs don't increase in market value either.

As Phil said, don't let taxes make your investment decisions for you. You'll end up making bad investment decisions and that will cost you a lot more than the tax.

------------


Amen.
Well said.

AM
Print the post Back To Top
No. of Recommendations: 2
It seems to me letting the tax rate on dividends increase would discourage investment in dividend paying stocks. These value stocks have been a part of my portfolio for years but now I'm seriously starting to think of selling all shares in all stocks, hang onto the cash until after tax season then reinvest elsewhere.

If I understand correctly this means that you'd be recognizing substantial capital gains in the process, such that you need to wait until the tax returns are done to know how much cash you have available.

I'd suggest that you make a serious estimate of the taxes due BEFORE you sell, to evaluate this strategy properly. (Some people actually pay us for this kind of advice.)

And as to reinvesting elsewhere, in what? Bonds? The yield on bonds have never been worse in my memory, perhaps not in my lifetime.Preferred stocks? Maybe. But fixed income investments are just that - fixed - without growth in dividends that common stocks provides. REITS? Maybe. But they're at least as risky as stocks.

There is some merit to recognizing gains this year instead of next year, with other things being equal , as capital taxes will probably never be lower, and might well be higher in 2013. BUT other things being equal in this case means you're inclined to sell in the first place.

When thinking of reinvesting I've been told to purchase the same stocks in my RothIRA, I have some dividend stocks there today but not all. This concerns me.

What concerns you? Having investments in a Roth IRA makes whatever you invest in equal in terms of tax considerations, as does a traditional IRA.

And as long as you have investments in taxable personal accounts, they have to be invested in something sensible.

Bill
Print the post Back To Top
No. of Recommendations: 5
I might say that the dividends in REITs are not qualified so you pay your income tax at the income rate. The same goes for their preferred stocks. Yet, lots of people invest in these stocks, including myself.

There are some preferreds by financial companies, I believe, where the dividends are qualified, but these usually have a maturity date and they can skip 5 yrs of dividends. I've never bought any so I'm not really up on them.

As for corporate bonds, you get no qualified rate either nor do you on CD dividneds. I don't know of any mutual funds that give qualified dividends, but there may be some.

As Warren Buffet has said, suppose he came to you and said he had found the best investment he has seen in some time and he is going all in. Would you join him or would you first say you'd have to see what the tax rate on dividends and long-term capital gains would be?

brucedoe
Print the post Back To Top
No. of Recommendations: 4
As for corporate bonds, you get no qualified rate either nor do you on CD dividneds. I don't know of any mutual funds that give qualified dividends, but there may be some.

Any mutual fund that invests in securities that pay dividends that would be qualified if held directly by an investor also pay qualified dividends. The year-end 1099 details what portion of the mutual fund dividends are qualified, ordinary, capital gain distributions, etc.

Ira
Print the post Back To Top
No. of Recommendations: 0
If you want to gamble money and looking for yield you might consider SLM corp (Sallie Mae) long bonds under par are paying 5.5% under par.

Disclosure own serveral Sallie Mae bonds.
Print the post Back To Top
No. of Recommendations: 1
If you want to gamble money and looking for yield you might consider SLM corp (Sallie Mae) long bonds under par are paying 5.5% under par.

Personally, I'd call that strategy 'having a high likelihood of throwing money away in order to get a tax break from capital losses', rather than 'gambling when looking for yield'. Especially when you look at the recent trend in delinquency rates on student loans: http://www.zerohedge.com/news/2012-11-27/scariest-chart-quar...

AJ
Print the post Back To Top
No. of Recommendations: 0
Ira

Indeed you are correct and I should have known better as my 1009s clearly state what is qualified and what is not on my mutual funds, mostly with Vanguard. I apologize.

Still, peoole invest in things that are not qualified. I would hate for my main point to be lost because of my sloppiness on mutual funds.

brucedoe
Print the post Back To Top