I sometimes seem to be better at knowing what to do than I am at doing it. This is a common human foible, one that costs even the smartest among us money. Though there is no such thing as easy money, re-allocating investments in your portfolio is the next best thing. It just takes fighting human nature, that tendency we all have toward complacency. Here's how.
When it comes to finance, I sometimes seem to be better at knowing what to do than I am at doing it. This is a common human foible, one that costs even the smartest among us money. The idea is to not only know what to do financially, but to actually do it.
For example, last week I decided to check my tax-advantaged and taxable investment portfolios for any transgressions of my recently written guidelines in Smart Investing in Tax-Advantaged Accounts and Tax-Smart Investment Strategies: Part II. Initially, I wanted to determine if I had placed any high-dividend yielding, relatively low-risk stock or exchange traded funds (ETFs) in my taxed account. If so, I would be paying more in dividend taxes than needed. (It’s even more crucial to do this exercise now, because many think dividend and capital gains taxes increase dramatically soon.) By shifting high-yielding investments into my tax-advantaged accounts, it would ultimately put more money in my pocket.
To my surprise, I did find some trespassers in the taxable accounts, i.e. relatively safe bets with high-dividend yields. Here’s an example that reveals how much can be saved: Johnson & Johnson (NYSE: JNJ) common stock was the worst offender. It has a yearly dividend of $2.16, with a yield of 3.60%. Since I had 500 shares in my taxable account, I was paying Uncle Sam a percentage of the dividend for each share. The total annual dividend came to $1,080 ($2.16 x 500 shares). If the dividend is “qualified,” meaning that the stocks or ETFs were held more than 60 days, that $1,080 is taxed at 15%. (If the dividend is non-qualified, meaning that it was held less than 60 days, the income is taxed at the investor’s individual income tax rate.) The least I could save in taxes by switching my J&J shares to a tax-advantaged account is about $150 each year; the most would be about $320 if taxed at my bracket of 32%.
That may not sound like much, but what if I had 5,000 shares instead of 500? The loss would be 10 times as much, conservatively $1,500. Additionally, compound the unneeded payments to Uncle Sam by other stocks misplaced in the taxed account that should be in the tax-advantaged and we’re talking about real money -- money that could be growing tax-deferred.
Though there is no such thing as easy money, re-allocating investments in your portfolio is the next best thing. It just takes fighting human nature, that tendency we all have toward complacency.
To implement this strategy, these may prove helpful:
• When re-jiggering your portfolio in an up market, buy the stock or ETF in the tax-advantaged account first and sell its mirror image in the taxable account second. This increases the chance that the stock and/or ETF will be purchased for less than it is sold. The reverse applies in a down market.
This information and content is offered for informative and educational purposes only. MyMoneyMD, LLC is not acting as a Registered Investment Advisor, Investment Counsel, Tax Advisor, or Legal Advisor.