muses of the moment

June 27, 2012

Taxmageddon

Filed under: 401K and IRAs, DOW and S&P500, Taxes — totallygroovygirlfriday @ 1:44 am

Click here for Newshour audio on the coming tax storm. It’s going to be ugly if they don’t do something soon. Very important information here. This is part 2, you can also access part 1 on the main website.

As you listen to this audio and the tax changes coming, here are a few things to think about:

  • If they extend the tax cuts, like they did in 2010, it will solve the problem short-term, but people/businesses will not plan beyond the extension because they do not know what the future tax consequences will be.
  • If they wait until the last minute to extend the tax cuts, investors and businesses will have already prepared for the coming taxmageddon and the damage to the economy will still be done. It’s not like they can let the tax cuts expire on December 31 and everyone can sell at that moment to protect their profits. They will sell prior to the expiration.
  • The tax consequences effect how profitable an investment will be. In this way government affects investments.
  • Groovygirl has said on many occasions that 401ks are not the best way to invest. One of her main reasons for this is the fact that when you take money out of your 401k to spend on expenses during retirement, you are taxed at a wage rate, not an investment rate. With the Bush tax cuts, a 401k structure forces you to lose profit through taxes. However, if the Bush tax cuts were expire or investment tax rates were to go up at some point in time, that may not be the case anymore.
  • Groovygirl has also said that she always suggests that you keep your 401k, but not put any money into it. Instead take the same amount of money and invest outside the 401k system. The unknown of future tax rates is the very reason she suggests this. We can not predict what the government will do with taxes, so at some point in the next 20 years, the 401k may be the best place to invest, at another point, it may be outside that system. And different investments may be better than others simply because of the tax rate.
  • You must take a long-term approach in your investment structures, your estimated income at/during retirement, and their possible tax consequences. If you do not, you may lose profit and if it is over a 10-20 year period, you will lose compounded profit.
  • Most people just focus on the amount of money they have in their 401k or other savings accounts. You can’t just say invest in stocks, put money in a 401k, or even invest in gold over a 30-50 year period and get the results you need before and after retirement. Value of currencies, tax laws, debt collapses, even regular business cycles affect all those investment vehicles. What is good at one point may take all your profit at another point.
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