Investment Losses Can Lower Your Tax Bill (?)

Investors who are not disturbed by this title should – seriously - check their investment IQs. If you have investments in the stock market my guess is, they are in hell at the moment. It would be the biggest understatement to mention that 2008 was a horrific year – with the DOW, NASDAQ and S&P 500 Index each plunging well over 30 percent.

Investing directly in the stock market - in my opinion - is dangerous, speculative and unnecessary in building a steady, realistic nest egg. By that I mean, financial advisers (regardless of the college they attended or the length of time they’ve been wearing suit and tie) cannot predict the future movements of the stock market, but there’s absolutely NO need to gamble and risk crashing.

Just for the record: our clients have NOT lost even a penny during this meltdown! Wondering how? It’s simple; we use common-sense instead of speculation. Hopefully, investors are finally waking-up to smell the coffee.

In an effort to calm frayed nerves, so-called financial advisers (who live on Mars) are arguing that those significant, troubling losses may actually be good for investors (haha). They suggest:

1. Capitalize on the opportunity to convert your 401(k), 403(b) or traditional IRA to a Roth IRA. To paraphrase: since you just lost over 30 percent of your nest egg, your tax bill will be lower – because -you get to convert the lower value.

2. You can use your realized capital losses (from the sale of your depressed securities) to offset up to $3,000 in ordinary income annually. Any unused losses may be rolled forward to cover any gains and income until they are all used up.

So you see after all it’s a “good” thing! Boy oh boy - no further comments.

Why Did You Invest?

People invest in order to build retirement nest eggs period! Their well-paid financial advisers promise to “manage”, “properly diversify” and “re-balance” their portfolios. As well as keep (very) close eyes on them. These investors were – and are still - being advised to relax and focus on the long-term. You see, in the long-term they’ll all of a sudden enjoy amazingly comfortable lifestyles! (or at least that’s what conventional advisers tell angry investors).

How much would you have invested if your adviser told you something like this: If you invest directly in the stock market, your nest egg may experience significant losses. But never mind, you can use the losses to reduce your taxable income by as much as $3,000 per year?

The sad fact is many retirees have watched helplessly as their life’s savings evaporate within a matter of months. They have losses to write-off for the rest of their lives and still have enough to last their children and grand children. Are there people who invest so they could write-off losses (LOSSES!) on their tax returns? Could someone tell those so-called experts to get real? PLEASE!

If Roth IRAs were that awesome (in the view of these advisers), how come their clients were (and are) invested in different plans? Let me guess: so they can lose significant amounts of their life’s savings – to make way for “the Roth conversion advice”. Sounds smart to you? Sounds – sort of – stupid to me.

How I See It

Every retiree facing this predicament has to endure living on a drastically reduced income (assuming a nest egg is presently generating income or about to). And that means lower taxable income. Therefore, they may not need the supposed – very expensive – additional break provided by realized capital losses. Yet, some so-called financial advisers see “good” news in that.

Numbers Don’t Lie, They Just Muddle

I see a bunch of confusing, twisted numbers in hundreds (if not thousands) of colorful, convincing 401(k), 403(b), IRA and TSA brochures – and on some websites. These sources usually portray – and wrongfully profess - that all things being equal using pre-tax contributions and deferring taxes will result in a bigger nest egg. Therefore, those who use such accounts will end up with higher net spendable incomes. That’s simply not true.

Our firm has proved over and over again that, if a nest egg is taxable (all qualified plans are under current law) you can still run out of money! Someone who uses after-tax contributions - under the same set of circumstances - will end up with the same outcome but with much less restrictions and more certainty (in terms of taxes).

Mathematical ILLUSION

Let’s assume a return of 7.2 percent (Rule of 72 makes for easy math) and a 25 percent federal marginal tax rate (presently every dollar over $33,950 -single and $67,900 – married filing jointly - is taxed at this rate).

$200,000 in pre-tax contributions will double to $400,846.27 in ten years. If you take the same $200,000 and pay tax on the front end ($200,000 minus 25 percent tax), it amounts to $150,000. When that doubles, it grows to $300,643.70. It looks - as if – using pre-tax dollars is better than using the already-taxed (75-cent) dollars. So the illusion is that there is $100,202.57 less in the after-tax-dollar account. Or is it?

What those brochures/websites (and the consultants who use them) don’t explain is that taxes are due and MUST be paid on the entire $400,846.27 tax-deferred nest egg – upon voluntary withdrawal or when compelled by the IRS.

Once that happens, you end up with the same amount of money! Based on our example, the $400,846.27 minus 25 percent tax will net you $300,634.70. There is no difference between funding a retirement account with after-tax dollars or pre-tax dollars, assuming the same tax bracket and provided that the account funded with after-tax money grows and stays tax-free upon withdrawal (as they are under current law). Interesting, huh?

Y’see, the misconception is that because the pre-tax dollars grow to a bigger number it’s better. Remember, the supposed bigger balance includes unpaid taxes and the last time I checked, the IRS doesn’t play.

Other worthwhile facts to note

• As you approach retirement (if you’re like most retirees), you’ll have fewer deductions and exemptions compared to your earning years. That would probably bump up your tax bracket.
• Tax due on a pre-tax contribution account is based on rates in effect at the time of withdrawal (whether voluntary or compelled by the IRS).
• If you were the owner of the $300,634.70 tax-free account used in this example, you’ll not lose sleep over future tax rates. Why? Because your income is NOT taxable.

The next time you see one of those colorful brochures think about YOUR retirement.

Tax-Deferred is NOT Tax-Free!!!

It seems - to me - that a very tiny percentage of financial “gurus” understand the difference between tax-deferred and tax-free. Why? Check out my last post. If you are - sort of - crazy about qualified retirement plans (401(k)s/IRAs), the facts about to be revealed might disturb you.

I am pretty sure you’ve heard this standard advice given at every single 401(k) meeting, by conventional financial planners, conventional CPAs, conventional CFPs and the like:

“When planning for retirement, take your tax break toady while you are earning a higher income. After all, when you retire, your income will be lower, hence your tax bracket.”

My Comment: Those who give this advice don’t live here, on this planet. Seriously!

Okay, let’s take it S-L-O-W

The great thing about tax deferral is that your money gets to compound overtime and you don’t have to pay taxes on that growth – YET!

But, to defer is to put off until a later time (future). And, future is defined as an expected time to come. Therefore, all these programs are doing is putting off taxes to when the funds are withdrawn, or forced out at age 70 ½. (I’ll explain the forced out part at a later date).

Dear reader, - GET THIS - 100 percent of the money in these accounts is taxable, sooner or later. Understand that it doesn’t matter how smart or well connected your financial adviser may be, he/she CANNOT assure you that: you’ll be in a lower tax bracket when you begin taking withdrawals or are forced to at age 70 ½. If you’ve already been given this promise (or even implied), please, FIRE your adviser! And feel very, very good about it.

The one thing you can bet your house on is that the government pays for stuff with tax revenue. Do you think that when Uncle Sam needs more money, he pauses (for a second)? To consider the fact that someone may be retiring -so- increasing taxes might erode their income? I hate to tell you he doesn’t give a DAMN!

The federal government (Democrat, Republican or whoever is in power) MUST pay for Social Security, Medicare, and the largest federal debt in history. With what? From where?

According to David Walker, former Comptroller General of the General Accounting Office, “to balance the federal budget by 2014, taxes on corporate and individual incomes would have to increase by 38 percent or Social Security and Medicare would have to be cut by 55 percent”.

Here are a few questions for you (and your financial adviser/expert) to pounder:

If you were the federal government which of the two options would you pursue? – INCREASE taxes by 38 percent or CUT Social Security and Medicare by 55 percent?

Here’s another simple question. If you were to take a wild guess - regarding the direction of future tax rates - where would you think they are headed? Everyone (I have ever asked this question) believes higher – yes EVERYONE!

Yet, many allow themselves to be convinced by so-called financial advisers to postpone their tax liabilities. (DON’T forget, those advisers/experts don’t live on this planet. So, they don’t have a clue as to what is going on here).

Next question: If you were a farmer, would you opt to postpone the tax on the purchase of your seed but pay tax on sale of your harvest (which is the 401(k) idea), or would you rather pay tax on the seed and sell your harvest without any tax on the gain (non-qualified alternatives)?

On the planet that we live on, given the FACTs above (and the perfect storm), I’m here to tell you, it’s an ILLUSION (and quite frankly absurd) to think that future tax rates are likely to be lower.

But hey, you and your financial adviser (or whoever) are free to assume whatever you want (I like freedom of choice too)! I – really - hate to end this way but, your IRA/401(k) may be setting you up for a very nasty surprise!

Are IRAs & 401(k)s GOLDEN?

I have searched, and searched, and searched again. The best justification by proponents of the mantra - that qualified plans like, IRAs and 401(k)s are OUTSTANDING for retirement is - you get a tax break upfront and your money gets to compound on a tax deferred basis. They claim that DEFERRING taxes until retirement is advantageous because those nest eggs will likely be taxed at lower rates – Who knows? May be they are Uncle Sam. And, they’ll have a change of heart by the time you retire.

There are other reasons, like; your employer may match your contributions (you must read my two previous posts). In the category I will consider shameful, ridiculous, absurd, bizarre, farcical, comical and wacky is reasons like:

"They are good because all you do is simply fill out a form or two at work, and your tax-deferred investments begin."

"I recommend clients put a bit into both a 401(k) and a Roth IRA. But I prefer the 401(k), because it’s so easy for employees to set up at work."

These are absolutely unbelievable quotes from so-called financial experts. And, I mean, those who appear on TV Shows, radio programs and in magazines. I’m talking about people with HUGE titles, such as, Tax Specialist, CPA, CFP and VP of Retirement Services (Just for the record, I’m not against titles; I have a few of my own). Just use them (401(k)s & IRAs) to plan for your retirement! Because it’s easy to enroll – What has that got to do with someone’s retirement?

Come on! You’ve got to be kidding me, right? Seriously! Or, maybe I’m missing something? Should millions of hard working folks use qualified plans to save for retirement because of these reasons? Don’t you think there has to be a better reason than simply POSTPONING taxes? - That is a question I wish (for real) everyone would ask their financial adviser or whoever tries to push them into one of these programs.

The devil is in the DETAILS

Especially, now that its tax season, those short-sighted advisers are bombarding people with what I call the revolving-door, porous, quick-fix, ticking time bomb (I don’t mean the real one) solution – Oh, just throw some money into an IRA and save on taxes! REALLY? They never mention the other side – that you’ll likely get WHACKED later on by Uncle Sam – or, maybe these advisers are totally clueless?

Let me use this analogy: Ever heard or seen one of those pharmaceutical company commercials? Usually it’s about a new medicine (to cure a condition). Yet, at the end of these commercials (at an extremely fast pace), there is a list of several side effects – “some of which may be serious.” – But, go ahead, get the medicine TODAY! After you take them, should you experience any serious side effects, please call your doctor right away. Hmmm, I wonder why those side-effect segments are not presented at the same pace as the segments on how to acquire the medicine – may be when you have those conditions, you hear better at a speed of 500 WPS. - Isn’t full disclosure just wonderful?

In my opinion, when it comes to qualified retirement plans, most of what the vast majority of financial advisers profess fall right into this category. More serious though, is the fact that, they do NOT tell the millions of well meaning, hardworking folks about the POTENTIALLY DAMAGING side effects. Hey, at least the pharmaceutical industry kid of try to – let’s give them some credit.

I understand that a lot of people are hurting financially at the moment. But, I believe now is the time to pause. And really get it RIGHT once and for all. May be there are some better explanations out there - I have not found anything outside the realm of what I mentioned earlier.

You know what? Let me pause here for now. Please! Please!! If I’m missing other worthwhile reasons, would you kindly (sincerely), let all of us know? I’ll make the case as to why in my opinion, based on FACTS and PRACTICAL APPLICATION, there are MUCH, MUCH, MUCH superior options to these 401(k)s. Stay tuned!!!

What Percentage should You Dump into a 401(k) or NOT?

My common-sense view is that if a retirement savings vehicle is good, it is good, PERIOD! It doesn’t become good simply because of some DISCRETIONARY matching by an employer. So, the entire buzz about 401(k) plans being “awesome” – due to matching employer contributions - is frankly nonsense. What if the matching stops? My guess is they suddenly become atrocious.

I am startled by the fact that, an overwhelming majority of conventional financial advisers are telling people to simply sign up because of matching dollars. They claim that if, for instance, you contribute $1 and receive a $0.50 matching, you have a 50 percent return. The truth is you have $1.50 earning interest (assuming your portfolio does not take a spanking). The BIG ILLUSION, however, is that you are receiving a 50 percent return on your money – That’s NOT exactly true.

It is only your principal that increased 50 percent, but the interest rate from that point forward is whatever your portfolio earns. Your account does NOT compound at a 50 percent return annually.

Today’s Matching Environment

I know there are employers still matching employees’ contributions. However, more and more, companies, including names like, Kodak, FedEx, General Motors, 7-Eleven, Ford, Eddie Bauer, U.S. Steel, Motorola, Saks Inc., Sears Holding Corp., Frontier Airlines, Cushman & Wakefield, Chrysler (and the list goes on) have announced plans to either change or suspend matching contributions to their 401(k)s. – So, now what?

True Matching

In my opinion, true employer matching is:

1. Where an employer contributes a certain percentage of an employee’s gross income to a 401(k) (or whatever qualified plan) REGARDLESS of whether the employee is contributing anything - and it is 100 percent vested.
2. Where an employer matches dollar for dollar on a certain percentage of an employee’s contributions.
3. Where an employer provides 50 percent matching benefit on a certain percentage of an employee’s income.

I know you’ve been waiting - here is my general rule of thumb:

All other things being equal, an employee should not contribute any funds to a 401(k) plan beyond the amount required to receive true matching employer contributions. For example, if the same yield can be achieved in a non-qualified retirement account (that is income tax-free on the back end), I would generally advise an employee to contribute to a 401(k) plan only up to the amount that receives true employer matching.

Before making such a CRITICAL decision (about your retirement), I would advise you to carefully consider a variety of factors such as: yield, available portfolio choices, strings attached (or flexibility), as well as tax implications (which greatly impacts the net spend-able retirement income) among others. After all, you are planning for retirement. So what should the focus be? I would think number one on the list should be a plan that will provide the most spend-able retirement income.

Almost on a daily basis I talk to people who are already in retirement or very close. And, they overwhelmingly echo the fact that, if they had known the entire story (if they had received clear, understandable, full disclosure information), they would have made different choices regarding their wealth accumulation vehicles.

I am going to tell you the often untold portion of the retirement story (in the coming weeks). My hope is that you’ll take the necessary action before it turns out to be too late.

Should You Contribute To A 401(k) Plan BECAUSE Of Matching Employer Contributions?

The conventional “golden rule” seems to be:

You should contribute to a 401(k) (or whatever) program your employer offers, if your contributions are matched. In other words, the test to determine whether you should contribute (or not) is if your contributions are matched.

This may come as a surprise; but that notion is one of the greatest financial myths of our time. Don’t get me wrong, matching benefits may be very useful (after all who doesn’t want free money? especially from their employer). But, (and that’s a BIG but) we need to examine these opportunities carefully, as these benefits have their limits.

Matching Stock

A good number of employer matching contributions come in the form of company stocks; and you know how they are turning out these days. You go to sleep and by the next morning your company’s stock has dropped from $40 per share to 18 bucks per share. And by the time you finish your morning cup of coffee (or tea); they are worth $8 per share.

To give you an idea, I looked up the price per share of two well-known giant companies over the past 30 (three, Zero) years:

General Electric: March, 1979 -$46, March, 1989 -$45.63, March, 1999 -$100.12, March 6, 2009 -$7.06.

General Motors: March, 1979 - $56.88, March, 1989 -$41.50, March, 1999 -$87, March 6, 2009 - $1.45

Matching Cash

OK, your employer’s matching is in cash! But you MUST invest that cash inside the portfolio choices offered by your employer’s plan. What if those funds are bogus? Is it possible you may end up losing ALL those matching dollars, and then some of your own contributions?

Let’s assume in 2008, you contributed $3,000 and your employer matched your contributions with $1,500 so you had $4,500 of seed money (I’m aware this may be different for some but I hope you grasp the concept and free yourself from the myth surrounding this issue once and for all). I can safely assume that this money was invested directly in the stock market via mutual funds and/or individual stocks. I am also going to assume that you lost roughly 35 percent. So at the end of 2008 your $4,500 seed money is down to $2,925 - You lost the $1,500 from your employer plus $75 of your own money.

Wait, before you say I am being too simplistic by focusing on only one year, let me remind you that you just lost 35 percent (based on my example) of the ENTIRE amount you had accumulated up until this point. So where does that leave you? How do all those years matter to you now? – Just ask those you know who have lost some money.

And, most importantly, what is the likelihood that the market will post a gain of 53.85 percent THIS YEAR so that your account will regain its value? You see, for the $2,925 to gain $1,575 so you can recover, your portfolio must gain 53.85 percent NOT the 35 percent you lost.

Now, do you think the test to determine whether you should contribute to a 401(k) (or not) be simply if your contributions are matched? Or there are a lot more variables to be considered before making such a critical move?

I believe that if employers are for real about matching employees’ contributions, they should be willing to do that regardless of the kind of plan employees choose (qualified or non-qualified).

Let me emphasize that my goal is to shed light on this question in a general manner, by providing a perspective that seems to elude a considerable number of good-minded working folks (I don’t care much for those in the financial planning field who should know better, yet remain totally clueless about the issue).

If you are in need of a specific solution, you may request a FREE consultation with a licensed Laser Financial Group professional.

If something you’ve always thought to be true, turned out not to be true; when would you like to know?

I ask this question because most of what majority of the American public have come to believe as financial truths are actually MYTHS.

FACT or MYTH?

1) Qualified plans like 401(k)s and IRAs always provide the most attractive retirement benefits.

2) The test to determine whether you should participate in your employer’s sponsored retirement plan is if your contributions are matched.

3) In order to grow a sizable nest-egg, you must invest directly in the stock market.

4) Diversify your portfolio and then focus on the long-term - Over the long-term you’ll always end up great.

5) When your stock or mutual fund portfolio goes down

in value due to market downturns; it’s only temporary. Don’t fret you’ll always recover.

6) You’ll be in a lower tax bracket when you retire.

7) Lower earned income means lower income taxes.

8) The Roth IRA is the best income tax-free vehicle there is.

9) Some financial gurus have the ability to predict the future of the stock and real estate markets.

10) When purchasing a house, make the biggest down payment you can afford and secure the smallest possible mortgage.

11) 15-year mortgages are better than 30-year mortgages.

12) The best way to pay off a house is to apply extra principal on the mortgage.

13) Paying down your mortgage aggressively enhances the value of your home.

14) Homeowners are not safe with high mortgage balances in relation to their house values.

15) Home equity is a prudent and safe investment.


I am not even going to try to guess your reaction. Here is the truth:

All of them are MYTHS!

This is what I can promise you right now: That over the next several weeks (and months), I will discuss each of them and give you the FACTS.