Death and Higher Taxes?

Occasionally I come across something in my industry that can only be the portent of bad things to come.  Consider this excerpt from an email I received from my brokerage house:

As you may know, brokerage firms will be required to report to the IRS detailed cost basis, gain and loss, holding period and other tax information for the disposition of clients’ covered securities – i.e., stocks acquired on or after January 1, 2011. [Emphasis added]

In a moment, I will flesh out what this means and why it is an ominous sign, but first I want to emphasize two points:

1. That the custodians of your investment assets are now REQUIRED to be functionaries of the IRS; and
2. That, at least in the case of my brokerage house, this is being applied to QUALIFIED as well as non-qualified accounts (more on this in a minute).

The practice up to this point in time is that people who bought and sold securities in non-retirement accounts were required to keep track of the purchase price, purchase date, sales price and sales date of the securities in their portfolio.  They also had to declare their capital gains or losses on their tax returns upon the disposition of those securities.  One could argue the reasonableness (or unreasonableness) of capital gains taxes, but those were the rules.

But these rules did not reach to qualified (retirement) accounts, because when people took distributions from those accounts, they were not subject to capital gains taxes, but to income taxes.  Yes, there were built up "gains" in these accounts, but since the securities were always sold before any cash distributions and since income tax rates were higher than cap gains rates, the government happily assessed the distributions at income tax rates.

It appears now that the government may be setting up the system by which they collect both capital gains and income taxes on qualified (retirement) accounts.  Why else would they require custodians to report "detailed cost basis information" on these accounts?  This may be the first stages of the planned changes to retirement account taxation that I wrote about earlier in this blog.

I think Mr. Franklin's quote might more properly have been: "The only thing certain in life are death and HIGHER taxes."  Especially when a government goes about spending its people into a multi-trillion dollar debt notwithstanding the objections of all sane economists and the majority of the people. 

So what is there to do?  Well everyone needs to speak to their financial advisor or CPA to determine the immediate financial moves to consider.  But, in truth, the greater issue is reigning in a government that has clearly stopped trying to "establish justice...and secure the blessings of liberty" for us and has become one that perpetuates the gravest injustices and destroys our liberty.  Sooner rather than later, we better all stand up and say ENOUGH!

The Best Investment In The World...Isn't One

Let me say from the front end that I am not going to fully explain that cryptic title in this article.  For the full explanation of it you will have to agree to two things: First, to read a book that I will provide to you, and second, to sit down with me and allow me to explain what you must do to take advantage of the best investment in the world.  This article is simply meant to demonstrate the findings of my years of research into this issue and to accelerate your arrival at the same conclusion.  

    So what issue am I addressing anyway?  For what problem am I promising you the “best” solution?

    There are two answers to that question.  The first answer is helping you determine the best place to store (invest) your money.  

    The second answer is more complex, but describes the mental processes that I have gone through over my years of examining the financial services arena.  If people were only concerned about the return on their investment, the answer to the above question would be the highest yielding investment.  However, my experience has shown me that people are actually concerned about many more things than just the return on their investments.  Some of these concerns are whether the money is liquid or not, whether or not there is a risk of loss, whether or not there are tax implications to the investments, whether these assets are subject to loss through lawsuits and how much control they have (or don’t have) over the assets.  If these concerns have ever crossed your mind, then you have an idea of what the real issue is.  Perhaps it can be summed up like this:  Is there a place where I can invest my money that alleviates all or most of my concerns as well as the pitfalls of other investments?

Past Results Are No Guarantee of Future Returns

    The “Past Results” disclaimer is on every piece of investment literature you see.  What it is really saying is that despite the rosy picture we have drawn showing the market generally proceeding upward, it is possible that we could be wrong and that the market could go down and you could lose it all.  Not a very comfortable thought is it?  And even if you don’t “lose it all,” what if you are the unlucky soul who is slated to retire the same year that the market has a major correction of say 40-60 percent?  Could you retire then?

    Most people that I advise simply ignore this fear.  It is not that they don’t recognize the potential of the market working against them, they just assume that nothing is guaranteed and that the market is as good a place as any to risk it.  Actually, that is how most “professionals” sell market investments!

    Try this experiment: Go into your financial advisor or stock broker’s office and say, “Which of my portfolio holdings has a guaranteed return?”  The advisor will quickly put his finger to his lips, give you a loud SHHH and tell you, “We don’t use that word around here!”
    What if you could get an investment with a guaranteed return?  Would you prefer that investment over the riskier one?  Better yet, what if you could guarantee the rate of return too?  Is there such an animal?

Your Silent Partner

    No, your financial advisor can’t guarantee your returns, but he can promise to get the government out of your pocket…for now.  It’s called qualified money, but you probably know it by the more common names: IRAs, Roth IRAs, 401(k)s, Simples, SEPs, and a host of other tax-privileged investment vehicles.  

    Here’s the pitch: Invest your money in one of these programs and the earnings are not taxed as income (some even give you the added benefit of excluding the contributions from your taxable income).  Then after year one, your contributions plus the earnings grow even more (compounding) without tax again etc. etc. etc.  Usually these pitches are accompanied by beautiful graphs showing you the difference between this tax-deferred growth and the growth of a taxable (non-qualified) fund.  

    It’s a no-brainer.  You feel so good about beating the tax-burdened investments and getting one over on the government that you sign right up.  You’ve already forgotten that the return is not guaranteed.  In fact, the beautiful graphs that depict the growth of your investments use what are called “assumptions.”  Maybe you’ve heard the old adage about what happens when you assume…Ah, who cares, those graphs sure were impressive!

    Then you learn the price you pay for tax deferral.  For the wonderful benefit of not being taxed on your earnings, you get a host of federal legislation telling you when and how you can use the money.  First, there are limits to how much you can invest in these programs.  Next, there are taxes and penalties for early withdrawal (i.e. use) of the money.    Also, you may move the money, but it must always remain in a qualified plan and in the care of a qualified custodian.  Finally, the money can’t stay (and grow) in there forever.  You must take a “minimum required distribution” at age 70½ regardless of your need or desire or tax circumstances.  Say hello to your silent partner, the IRS.

    I can hear all the advisors out there right now criticizing me: “Oh, but the government is liberalizing the rules regarding early use of qualified money.”  But they just don’t get it.  What I find repugnant about this whole scheme is not how stingy (or generous) they are in their regulations, but the very idea of anyone telling me how to use my savings.

    Most people that I talk to want to be able to get to their money, even their retirement money, if they need to and they are not interested in paying taxes and penalties to do so.  Now as a financial advisor I should strive to find an investment choice that would provide that option without losing the benefits of tax deferral.  Is that possible?  

Two Taxing Problems

    Why wouldn’t it be possible?  I thought we lived in the land of the free!  If such an investment doesn’t exist, why couldn’t we create it tomorrow?  In fact, why couldn’t we create an investment vehicle that would have every attribute we wanted?  Just saying that sounds revolutionary!

    Therein lies the first taxing problem: getting people, investors and advisors, to think outside the box.  The limited choices being offered to the investing public are not due to a lack of options, but rather to a lack of thinking, a lack of knowledge.  The answers are there if you know what you are looking for.

    So let’s describe the best investment in the world.  We’ll start with the characteristics already discussed.  We want:

·    A guaranteed return
·    At a rate we specify
·    With tax deferral
·    Not susceptible to lawsuits
·    But, without losing our control over the assets
·    And maintaining liquidity

    Bring this list of features to most financial advisors and they will laugh at your outlandishness then tell you that you can’t have it all.  So which ones are you willing to sacrifice?

    My answer is none.  In fact, I would add another feature.  I want tax free income from my investments when I retire.  Can I get that too?  

    This is the second “taxing” problem.  It arises from another assumption made by financial advisors, namely that retirees will be in a lower income tax bracket when they retire so they will not mind paying taxes on their portfolio income.  There are two problems with this reasoning.  First, my experience is that many retirees are not in lower income tax brackets.  And second, everyone I know would prefer NOT to pay taxes or lower them if they can legally do so.  Is this a surprise to anyone?

The Best Investment in the World

    The best investment in the world does exist, but it isn’t one.  Sorry, but I told you I wasn’t going to explain that statement.  What I will tell you is that you can have the best investment in the world.  All that is required is a change of thinking, a change of doing and a commitment to achieve it.