My federal tax bracket is 15%, so my long-term capital gains rate is zero. Should I periodically sell the winners, and then immediately buy them back, in order to increase their cost basis? Although my long-term capital gains rate is zero, I would be subject to a 3% state income tax. This is money that I won’t need for 10 years or more.
If you are in an ordinary income tax bracket of 15% or below, you can sell stock at a 0% gains rate. For 2013, a couple (MFJ) can have up to $72,500 and a single person up to $36,250 in taxable income and still be in the 15% ordinary income bracket. If you add in the standard deduction and personal exemptions, that equals an adjusted gross income of up to $92,500 for a couple and $46,250 for a single filer.
It is a decent idea, but we are not a fan of paying taxes and commissions. If you are going to incur 3% state tax by doing this, it would depend on what your income is going to be next year and the next. If your income is going to stay similar to this year keeping you in the 15% bracket, why go ahead and pay 3% now? If your income is going up next year and you would be paying capital gains rates at 15% or 20% next year, then yes, you may want to consider selling and re-buying to increase the basis for selling later down the road.
You may also be able to harvest your losses to offset some gains. This is part of active portfolio management that most people do not do. We recommend discussing your situation with your tax adviser before you make any moves.
To take this a step further, let’s say you are a few years before you are required to withdraw from your IRA and your AGI was around $40,000 MFJ. If your required minimum distributions would push you into a higher tax bracket, you might consider taking up to $30,000 out of your IRA and paying 15% tax on it now rather than wait until you are 70 ½ when you may be paying tax at a 25%.
Can I roll a retirement plan distribution into an IRA?
If you have a 401(k) or other retirement plan through a former employer, most retirement plans allow you to roll your plan funds over into an IRA after you’ve left your employer’s service.
If the check is made out to you, it is a taxable distribution. Instead, you want to do a direct rollover, also called a trustee to trustee transfer. The administrator of your 401(k) plan should send the check right to the trustee of the IRA you have selected. The plan administrator may also give a check made payable to the IRA trustee for your benefit for you to deliver to the IRA trustee.
We recently worked with a client who had five 401(k) plans from previous employers, and he was contributing to his sixth with his current employer. We recommended rolling all of these plans to an IRA. This should give the investor more flexibility in his investments and reduce the paperwork he has to keep.
I bought into Scripps Networks about a year ago. I’m coming up on my date to qualify for long-term capital gains. Should I sell it or hold on to this stock?
Scripps Networks (NYSE: SNI) is a developer of lifestyle-oriented television networks such as the Food Network, Home & Garden TV and Great American Country (GAC) for domestic and international markets. They also recently acquired Travel Channel International, Inc.
The stock looks a bit expensive with a price-to-earnings-to growth of 1.67 on expected long-term growth of 12.55%. The stock has appreciated around 39.45% year-to-date, vs. the S&P 500 at 25.5%. If you are in the 35% tax bracket, your after tax return would be closer to 23.28%.
There are probably better choices in the market at this time. We like Twenty-First Century Fox (NASDAQ: FOXA), which is the core of the old News Corp which recently split. The company has done well since the breakup, and we expect this to continue as long as we continue to see economic growth. We also like The Walt Disney Company (NYSE: DIS). We think both are in a better position with their programming because of the sports networks.
However, Scripps Networks is a good company. You are OK to hold it. However if it is close to 3% of your portfolio, we recommend trimming your position.
Twitter Inc. recently announced their stock price will be between $17 and $20 and they are looking to raise $1 billion in their IPO. What do you think of this?
We recommend avoiding Twitter’s IPO. Aside from the fact we do not recommend IPOs, Twitter does not currently have any profits. We think the market learned its lesson with Facebook’s IPO. The stock was overpriced and fell immediately. Still, Twitter will have to find a way to monetize their advertising.
At Henssler Financial we believe you should Live Ready, which includes understanding your stock holdings–not jumping on the latest IPO. If you have questions regarding your investment strategy, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at email@example.com.