Tricky Government

Income inequality is real and it isn’t being fueled by hard work and perseverance. In Vox Day’s opinion, it’s being fueled by “…neo-feudal largesse distributed by the federal government to the financial aristocracy through the central bank.”

Sounds reasonable to me.

If it’s true, one of the pillars of financial success is to avoid investments in the stock market, Wall Street, equity bankers & stock brokers; don’t finance anything and consider alternatives to the federal reserve backed banking system. Of course this is possible for some of us and impossible for others. If you own a business, you’re basically stuck with the banking system. But the stock market is a whole different issue.

I had some clients who took this to heart. Both business owners. One buried his money in his back yard. Apparently $100,000 in $100 bills fits nicely in a Folgers coffee can. No problems. Happy guy. Another client rat holed money in the basement of his restaurant. The day before the closing was scheduled on a new restaurant purchase, he learned a squirrel had discovered his cache and made off with most of his $100 bills. This guy died young. Somewhere in that mountain village, there’s a very expensive squirrel nest.

Even if you avoid Wall Street and do all the other things I listed, the government can still take your money and peel it off to the ‘financial aristocracy’, which, if you remember the ‘bail out’, they’re perfectly happy to do. And it really doesn’t matter whether you vote R or D. They’re just different sides of the same coin.

An uncomfortable conversation I often have with clients is when I tell them the government didn’t institute IRA’s to help you prepare for retirement. They instituted IRAs to drive investment in the stock markets in order to line the pockets of equity bankers. And it worked like a charm.  All but a few dollars of all the money in those IRAs and 401(k)s is invested in the stock market.

First of all, let’s cover the basics. You deduct it when you invest in a tax advantaged retirement account, and you pay tax on it when you take it out. For the purposes of this article we’ll assume this is a wash or very nearly a wash. (Time value of money be damned. See below.)

As far as I’m concerned, it’s a more efficient use of your money to avoid all tax advantaged retirement vehicles.  If your goal is for your investments to increase in value (and if it’s not, what the hell are you doing?), it’s far better, in my opinion, to invest in your personal name (or an LLC) instead of an IRA. You may leave the money in your IRA for more than 40 years, so it’s reasonable to expect a tidy gain on your investment. (After all, these are professionals investing your money.) But if they do a good job of investing and you do make a profit, you have to pay taxes on everything, profit and all, at ordinary rates. Which are twice what capital gains rates are.  If the profits were in your personal name, instead of the IRA or 401(k), you would pay tax only on the profits at capital gains rates, (less money at half the rate).

One more time to make sure you’ve got it. Every penny you take out of an IRA or 401(k) is taxed at ordinary rates. But if you sell a personal investment, only the profit is taxed, the original investment isn’t taxed, and the profit is taxed at capital gains rates. A phenomenal savings on the back end.

A word of warning. The people who howl the loudest about what I just wrote are the people who make money off the system. They will talk about a lot of things like the current value of money. (Here’s what the current value of money is today >> the interest rate on my recently opened money market account is .0001, one, one hundredth of one percent. Not much.) Plug them in with equity bankers. Although to be perfectly honest, my argument will probably catch your retirement planner by surprise. He probably thinks he’s helping you.

There is one caveat to this; that’s if your employer is matching all or part of your 401(k) investment. If that’s the case, jump in with both feet. You might still lose money, but with no gains or losses, you have a fighting chance that your employer will pay your taxes for you, leaving you even with where you started and getting today’s tax savings for free.

Two interesting facts.

Most people invest in tax advantaged retirement accounts not to prepare for retirement, but to save on taxes. Tax savings is the lure the government used to lure your money into the stock market.  If a client says he wants to save $100,000 on taxes, I tell him to send me a $200,000 check. So for, no takers, but a lot of people who are a little smarter. It costs you 100% to save 50% (or less). The only genuine tax shelter today is a cash flow business.

I once did a survey of my clients with stock market investments. They were all carrying losses forward. That means none of them had made enough profits to cover all their losses.

Just saying.

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