A few weeks ago I took my daughter and two of her friends to see Bruno Mars in concert. There’s something about hearing a performer live that’s really amazing, and I’m happy to take them to more concerts in the future. And the Big Guy(tm) was there for me with a parking space. $34 to park in the lot at TD Bank Garden (formerly, The Boston Garden) but a spot was waiting for me right down the street, $2 for a meter. I like that. 
See this case of water? $4 this week at my supermarket. 6 bottles for $1. At the show, on the way into the building, there was an icecream stand, and they happened to sell water, $2, and I bought one for my daughter. Up the stairs, 50 feet later was the entrance to the show. “Can’t bring in outside water.” $2 went right into the trash. After 45 minutes of screaming, I get a request, “dad, can you buy me a water?” No problem. Then I found out why the thugs on the way in had me toss our $2 bottle. The concession stand inside the arena charged $5 for the same sized bottle. $5? It’s amazing to me how a gas station or hardware store can be accused of price gouging when they raise the price just bit on something when the weather turns bad. Here, the arena has a captive audience and charges 30X the price I’d pay a few streets away at a supermarket, and 5X the price that would still make them money but not make me feel ripped off. Before you ask – yes, I bring my own water into the movie theater, no they don’t stop me.
A guest post today - Let me introduce you to a simple concept, one that is overlooked by most IRA owners and unfortunately even many financial advisors. Not all investments are taxed the same way by IRS. Therefore, if you understand how different investments are taxed, you can use that information to pay the lowest taxes by using the correct investments in your IRA and the correct investments outside of your IRA.
Here are the basics. Some investments are taxed at 0%. These would be tax-free bonds and of course you would never place these in your IRA because when distributing them from your IRA, you would pay tax at your full rate, let’s say 30% for the purpose of this post. The next investment would be individual stocks. As long as you hold them for more than a year, the dividends you receive and the profit on your appreciation is taxed at 15% (for most taxpayers). However, if you had that same stock in your IRA, eventually, when you distribute the principal and dividends, you would pay tax at 30%. Therefore, it is foolish to hold stocks that will qualify for long-term capital gains treatment in your IRA. It is best to hold that type of investment outside of your IRA to take advantage of the very favorable tax treatment.
Alternatively, it’s likely that many investors buy mutual funds rather than individual stocks. Let’s assume the mutual fund is a growth mutual fund.  Morningstar reports that the average growth mutual fund has a turnover rate of 100% annually. This means that the average stock in the fund is held for six months and any profits would not qualify for long-term capital gains treatment (which requires holding a stock for at least six months). If this mutual fund is held outside of your IRA, you pay your share of tax each year even if you make no withdrawals. So if the fund is generating the majority of its profits as short-term capital gains, you will pay tax on these at your regular income tax rate. In other words, if you earn $60,000 a year, and the fund generates $3,000 in short-term gains, that $3,000 is added on top of your income and taxed at the top rate applicable to you. Again, let’s say this is 30%. If you will be paying the same rate of tax later when you withdrawal these funds from an IRA, it certainly makes sense to hold such an investment inside an IRA so that you benefit from the years of tax deferred growth.
So let’s summarize so far. Assets that qualify for long-term capital gains treatment and are taxed for most people at 15% should not be placed in an IRA. Those investments would typically be individual stocks held for more than a year and index mutual funds which hold their shares on average for four years. Those investments that should be held in an IRA are those on which you would owe tax at your regular ordinary rates and therefore you gain by the tax-deferral  of an IRA (or tax-free growth in the case of a Roth IRA).
So let’s take a look at the math so you can see the incredible difference by holding the right investments in the right places. For simplicity, let’s assume your IRA has one investment, shares of IBM.
Initial investment $50,000
Hypothetical growth rate of shares: 5% annually
Hypothetical Dividend: Â 3% annually
Investment made at age 40, liquidated at age 70
Taxpayer tax rate during holding period 30%
| Held inside an IRA | Held Outside an IRA | |
| Value at end of 30 years | 216,097 | 216,097 |
| Dividends Collected | 104,641 | 104,641 |
| Tax paid on Dividends | 0 | 31,392 |
| Tax Paid Upon sale (and withdrawal from IRA) at end of term | 81,221 | 24,915 |
| Total Tax Paid | 81,221 | 56,307 |
It is quite important to have the right securities inside and outside your IRA based on the way the security is taxed. Show this post to your financial advisor and if he scratches his head, find another advisor.
Bob Richards is a CPA(inactive) and publisher of the Retirement Blog
Money Mamba shared why if you’re Bad at Math? You’re Screwed. As JT offers, this may be stating the obvious, but a study recently was published showing that math skills correlate to sound financial decisions.
At Bargaineering, How Financially Literate are You? 5 simple questions, can you get a passing score or maybe all 5 correct?
Abigail asked if anyone else feels guilty using Groupons? She’s specifically referencing the local deals, restaurants or services that are available on Groupon deals. She has a kind heart to worry that she may be causing a loss for the seller of such deals. If I use a service and it’s a good experience, I’d plan to use that service again. For a restaurant, I’m careful to tip on the pre-Groupon cost. When you add drinks and maybe dessert, the restaurant made its money. A number of restaurants in my area seem to offer these deals again and again. I doubt they’d do this if they lose money on these deals.
At The Big Picture, Barry Ritholtz asked Is Gold Overdue for a Bounce? In one of the comments to this article, Barry quotes my gold article from last week. Honoured to be quoted by this financial author and frequent CNBC guest.
Next, The Main Reasons Why People Want To Quit Their Jobs. Sam explains, it’s not always about the money, and offers the real reasons people leave.
We’ll close this week with Darwin’s How Inflation Screws the Poor the Most a look at how inflation may help the well off, but the poor, not so much.
Have a great week.
This week, we celebrated Independence Day. The US declared its independence from England in 1776. This means our country has been independent for 237 years. I saw a few tweets saying “Happy 2013th birthday USA!” I found the sentiment kind, but the math, a bit disturbing.
Today I’d like to reprint my ’08 post from July 4th, as I love these two images.
Enjoy the holiday!
The image above is not the signing of the declaration of independence, but its presentation to congress. A beautiful painting, currently on the back of our two dollar bill. (You can click on it to view a much larger image)
Above is the “Spirit of 76”, originally known as “Yankee Doodle.”