If they could do it they would do it for themselves.
There are people who do well investing one stock issue at a time. It takes discipline that most people do not have and it takes a wiring most people do not have.
There is evidence of this at times. People who have money do not brag. Let’s put it that way.
I met someone last night waiting on a woman to join him at our clubhouse bar. He told me he was a BTAS because he saved $6 million in taxes. I know he has no clue.
The former manager of the Invesco “Industrial Income” fund had a good system. His reputation was such that his moves in the fund were closely followed. So he used his own account to frontrun what he did in the fund, because he knew what he did in the fund would move the stocks. He was fired for violating the fund company’s ethics code. Yeah, that was a long time ago, when there was still something called “ethics”.
In the USA, this doesn’t mean all that much because short trades of options (like your selling of covered calls) is always (regardless of holding period) treated as short-term capital gains. That means that the gains are taxed at your normal marginal income tax rate (plus 3.8% NIIT for many people). So there isn’t any meaningful tax rate preference.
All money goes through the tax system at some point.
If you work for someone (W2 or 1099), it’s either taxed or invested in a 401K.
If you have a business, it’s subject to taxation rules also.
If you invest it in a Roth IRA, there are no more taxes on either capital gains or interest.
If you invest in a Traditional IRA, you pay ordinary income taxes on everything (capital gains, interest, original capital). The timing of paying those taxes is under your own control, so you can manage tax brackets for conversion.
If it’s in your brokerage account, interest is ordinary income, capital gains are lower rate (for now).
A risk-averse investor owning bonds/treasuries for income is better off in a Roth than holding them elsewhere where they will always be taxed as ordinary income.
In the US you need AI on Steroids (AIoS) to figure out the tax code. Back home in Venezuela I used to do tax returns, quite a simple exercise.
Still, buying and selling options is capital gains, not dividends. As an alien investor in the US I am taxed at 15% on dividends and interest (deductible at source), nothing on capital gains.
Agreed. That is not the problem with just the principal but with the low-interest rates. Even today interest rates are not raging high just sort of good.
I can not and would not dissuade anyone here from investing in bonds. It is just not my cup of tea and we all sort of have an idea why. Once the principal is nicked by taxes getting 5% or whatever with minor or no principal growth is hard. It is possibly the hardest way to get income in retirement. It is not necessarily the safest because ten years from now rates will probably have edged up. We face the economic cycle.
There are plenty of factors for people to invest in bonds. They do not make sense for my situation.
The OP (Wendy) is specifically very risk-averse. From her post:
I am risk averse and dislike stock market volatility. I hold a ladder of bonds which I hold to maturity to avoid price fluctuations due to interest rate movements. I have held stocks in the past. I do time the market and don’t plan to buy stocks until the next recession brings their prices out of the bubble range and into a more historically reasonable range. I don’t see any point in adding risk when I easily live on my current income. However, interest income is fully taxable.
My original response was a reminder that interest income is not fully taxable in a Roth.
But I’m pretty sure she knows that… (she’s pretty sharp)
To understand the whole tax system is indeed a big job. But the only people who need to do that are tax lawyers and tax accountants. And even those folks don’t actually do that. They tend to specialize, much like the medical profession.
Probably 90+% of people can easily grasp the portions of tax law that actually apply to their situation.
The problem is that while algorithms produce valid results LLMs only produce interesting if relevant stories unless the LLM is advanced enough to use tools, like logging in to a tax app.
Let’s start by interpreting that. They’re saying 90% of people e-file. Nothing more.
Now, I’d argue that using tax software has nothing to do with understanding your tax situation. I can do long division by hand, but unless the division is trivial, it’s much faster to use a calculator. Same with tax software. If you don’t understand your tax situation, software will only provide you with a pretty looking return.
You’d lose immediately. For the 2021 filing season (returns for the 2020 year) 16% of people filed on paper. Add in another 46% who use software, and we’re up to 62% of people who claim to understand their situation adequately to do the return on their own.
From my professional experience as a tax preparer for the last 30+ years, more than half of my clients have a decent grasp of their personal tax situation and could probably do their returns on their own. But they use me for a little peace of mind - a second look at things. More than one has mentioned they like having someone familiar with their financial situation as a bit of a back up as they age. That’s an issue which comes up around here with some regularity. And for some it’s just convenience. Rather than fill out forms themself, it takes less time to just gather up the info and bring it to me.
Then add in that most of the tax complexity is to deal with the top 10% of incomes, and I don’t think I’d be too far off of my 90%.
You are conflating using software with understanding how to do their taxes. My FIL uses Turbo Tax every year but would have no clue as to how to do his taxes. I can use excel to create an amortization schedule but that doesn’t mean that I could easily do with with pencil and paper. Being able to use software is not analogous to knowing the math behind the software.
And, like I stated, 90% might be too high but I would bet money that I am closer to 90% than you are.
Anecdotally, I work with affluent clients every day that haven’t the foggiest idea what tax bracket they are in. The could not even begin to read a 1099 without help.
