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Book Preview – Chapter 7

Posted in Big Ideas

Here is this Friday’s installment of Avoiding Investment Strategy Flame-outs, a short book we are previewing for subscribers. Chapter previews will continue for the next two Fridays.

Chapter 7: “Thinking about Taxes”

“To the extent that governments tax different kinds of income/investment returns (interest, dividends, long-term capital gains and short-term capital gains) differently, taxes may be decisive for some individuals in designing a strategy or selecting one strategy over another.

“Taxes are more personal than other investment frictions. Relevant questions include:

    1. What is the investor’s expected marginal tax rate?
    2. Does the investor have any capital losses carried forward from prior years that may offset future gains?
    3. Are the funds in a tax-advantaged account, such as (in the U.S.): a conventional Individual Retirement Account (IRA), subject to tax rates at the time of withdrawal (whatever they may be); or, a Roth IRA, subject to no taxes at withdrawal (as the rules stand now)?

“An obvious risk to long-term strategies including assumptions about taxes is that governments may change the rules at any time.

“The next two sections explore how incorporating tax avoidance into an investment strategy might impact returns.”

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