Episode 032:
Don’t Let Tax Drag Drag Your Investments Down!

Interior Design Update from R = F! The new table – dedicated exclusively to all things pod – has finally arrived and the co-hosts are upping their game accordingly!

The Girl Scout Cookies Are In! Tip of the hat to Josh’s wife Missy, the Cookie Coordinator, for managing distribution of 1,700 boxes for her daughter’s troop of about 20 Daisies (first-grade Girl Scouts to be).

Josh is sharing a cute anecdote about Alex, who is all in on the guitar and currently practicing one of his dad’s fan faves! His two younger siblings are waiting in the wings, ready to form a band, should their brother be interested!

The focus of the past few months has been tax-oriented: Social Security, 401ks, Roth conversions, the Secure Act 2.0 … and this episode piggybacks on that theme.

Why it can be easier to manage investments that are inside of a retirement account (such as an IRA, 401k or Roth IRA) as compared with non-qualified brokerage accounts, where there are more tax variables and impacts to consider.

The Theory of Tax Drag: The loss or reduction of potential income on investments that are unsheltered versus tax-protected investment vehicles like retirement accounts.

What’s a Dividend? It’s the shareholder distribution of profits made by publicly traded companies – and taxable.

Not All Investments Pay Dividends:

• Some grow via taxable dividends (or interest income).
• Others grow via capital appreciation. Instead of taxable dividends, the value-add is in increased stock value.

What You Need to Know About Mutual Funds:

• They offer an excellent way to diversify assets and hold investments in just one basket.
• They can be expensive and extremely tax-inefficient.
• The overhead costs for mutual fund management can be anywhere from .25% to 1.25%.
• You have no control over what happens inside of a mutual fund, including the timing of dividend and capital gains distributions.

Capital Gains Explained: The difference between your purchase and sale prices when an investment (stock or real estate, for instance) grows in value over time.

Josh predicts that it could be a rough tax season for people whose mutual funds were impacted by necessary year-end capital gain distributions – insult to injury given the overall down market. Dave is feeling good about his investment in Bombas socks – the actual things you wear on your feet, not the company itself.

It’s important for mutual fund holders to be aware of tax inefficiencies and strategies to manage, which is where a financial advisor can be very helpful.

A Brief Break to Feature Dave’s Recipe for "Naughty Dip:” Put a log of Jimmy Dean Sausage, a brick of cream cheese and a can of Ro-Tel tomatoes into a pot. Dip big Fritos into the cooked mixture.

Have a Plan, Stan! (Not literally you, Stan.) While it may seem tempting to shift into avoidance mode, if you’ve got a tax liability in your mutual fund or anywhere else, it’s better to bite the bullet and put a strategy in place asap.

Holding Onto Stocks to Avoid Paying Capital Gains Taxes? You may achieve that goal but at what cost? Your money is perpetually locked up, for starters.

The Theory of Rebalancing: It’s a methodical plan for diversification, based on variables like risk tolerance that can trigger buys and sells that result in capital gains distributions.

Important to Know: Thanks to new technologies and user-friendly investing platforms, we can own and manage stock index fund-type investments directly ourselves and avoid the added expenses that mutual funds impose.

Room to Dance? Cue the jingle and Get to Know Josh and Dave! What’s your favorite flavor of Girl Scout cookies?

• Dave: He’s eager to try the latest, but – even though in general he loathes all things coconut, his standing favorite is Samoas (now known as Caramel deLites).
• Josh: Despite his longstanding love of Thin Mints, he’s going with S'mores – with an important caveat. They differ regionally and his special passion is for the non-Chicago ones chocolate-dipped on the outside with marshmallow on the inside.

DR2R, including a belated shout-out to Mr. Mark Thomas – the rebound king, the rubber band, the glue. Trapped on the Satellite of Love, unable to escape his predicament Mystery Science Theatre 3K protagonist Joel is stuck. Very stuck. But we don’t have to be! We can get expert help and escape the scourge of non-qualified investment distributions. Even though Josh doesn’t “get” or care about MST3K, he can get on board with the idea that help is out there an expert financial planner can get you unstuck, at least in this galaxy.

Stay tuned for our follow-up episode with solutions that will transform the way you think about spending – and enjoying – your assets! There are strategies and things you can do to minimize tax drag – and increase your portfolio’s overall net value!