Changes in Capital Gains Tax in the US - Going to 20% in 2011?
The top long-term capital gains tax rate will rise to 20% effective 1 Jan, 2011, unless Congress decides to do something about it before then. (Will they? Who knows!! There's been talk about it, but, well, it's Congress. They don't even know what they're going to do.)  Anyway. The rules about when you can sell stock are mostly concerned with when you can realize a capital loss: if you sell a stock at a loss and then re-buy it for tax purposes within 30 days, it's a wash sale and not eligible for a deduction. However, I don't believe this applies to any stocks once you realize a gain - once you've realized the gain and paid your tax for it, it's all yours, locked in at whatever rate. Your replacement stock will be subject to short-term capital gains for the next year afterwards, and you might need to be careful with identifying the holding period on different lots of your stock, but I don't believe there will be any particular trouble. Please do not rely entirely on my advice and consult also with your tax preparer or lawyer. :) And the IRS documentation: Special Addendum for Nov/Dec 2012! Spoiler alert! Congress did indeed act:   they extended the rates, but only temporarily, so now we're looking at   tax hikes starting in 2013 instead, only the new top rate++ will be something   like 23.8% on account of an extra 3.8% medicare tax on passive earnings (brought to you via Obamacare   legislation). But the year and the rates' specifics aside, same thing   still applies. And the Republican house and Democratic senate/President are still duking it out. Have fun. ++ 3.8% surtax applies to the lesser of (a) net investment income (b) income over $200,000 ($250k if married). 20% tax rate applies to people in the 15% income tax bracket for ordinary income or higher. Additional tax discounts for property held over 5 years may be available. Consult tax law and your favorite tax professional and prepare to be confused. For the record, now that 2011 is here we know that the capital gains tax rate didn't change. Congress extended it for two more years. This shows the uncertainty in trying to maximize earnings based on future changes to the tax code. Consider doing things that will allow for tax deductions, such as short selling. The IRS has regulations on this as well. And consider that Futures are taxed more favorably than other kinds of investments. (60% taxed as long term, 40% taxed as short term)
In the US, if it's a large donation to a tax-exempt organization (401c3 or equivalent), you may want to consider giving appreciated equities (stocks, bonds, mutual fund shares which are now worth more than you paid for them).  You get to claim the deduction's value at the time you transfer it to their account, and you avoid capital gains tax.  They would pay the capital-gains tax when they redeem it for cash... but if exempt, they get the full value and the tax is completely avoided.  Effectively,  your donation costs you less for the same impact.  It does take a bit of work to coordinate this with the receiving organization, and there may be brokerage fees, so it probably isn't worth doing for small sums.)Transfers within the same brokerage house may avoid those feee.) So again, you should talk to the charity about what's best. But for larger donations, where larger probably starts at a few thou, it can save you a nice chunk of change. There is a process called a backdoor IRA.   You now have effectively made a Roth IRA contribution in a year where technically you aren't eligible.  You do not have to pay taxes on earnings with a Roth IRA.  You are limited to the normal annual contribution to the IRA (Roth or traditional).   If you don't convert your traditional IRA contribution to a Roth IRA, then you are right.  That gains nothing except enhanced protection in bankruptcy.  Only do this if you are taking advantage of the Roth rollover.   I'm ignoring rolling over a 401k into an IRA, as that doesn't increase the amount you can contribute.  This does.  You can contribute the full $18,000 to the 401k and still make a full contribution to the backdoor IRA.   This is the tax advantaged form of an IRA.  This avoids double taxation.  Let's assume that your investment can go into something with a 5% annual return and you pay a 25% tax rate (doesn't matter as it drops out).  You are going to invest for thirty years and then withdraw.  You initially have $1000 before taxes.   With a regular investment:   You now have $2867.74.   With a pre-tax IRA.   You now have $3241.45 (it is not an accident that this is almost the same as the amount before the capital gains tax in the example without an IRA).   You avoided the $373.72 capital gains tax.  Even though you paid a lot more tax, you paid it out of the gains from investing the original $250 that you would have paid in tax.   This helps you even more if the capital gains tax goes up in the future.  Or if your tax bracket changes.  If you currently are in the 25% bracket but retire in the 15% bracket, these numbers will get even better in your favor.   If you currently are in the 15% bracket and worry that you might retire in the 25% bracket, consider a Roth instead.  It also avoids double taxation but its single taxation is at your current rate rather than your future rate. Your analysis is not comparing apples to apples which is why it looks like investing money in a non-qualified account is better than a 401k (traditional or Roth).  For the non-qual you are using post tax dollars (money that has already been taxed). Now on top of that original tax you are also going to pay capital gains tax for any growth plus dividend rates for any dividends it throws off.  For the 401k, let's assume for the moment that $10,000 is invested in a traditional and that the marginal tax rate is always 20%. And for growth let's assume 10x. With a traditional your money will grow to $100,000 and then the IRS gets $20,000 as you pull the money out. The result is a net 80,000 for you.  For a Roth 401k, it is taxed first so only $8,000 gets invested. This then grows by the same multiplier to $80,000. (Until you consider changing tax rates the Roth and traditional give the same growth of money). Considering the non-qual option, like with the Roth we only have $8,000 to invest. However in this case you will not realize the full 10x growth as you will have to pay taxes on $72,000. These are taxes that the 401ks (and also IRAs) do not pay. There are other reasons to consider non-qual over maxing out your 401k. Liquidity, quality of investments, and fees being some of those. But the capital gains rate vs. ordinary income rate is not one, as the money in the non-qual still has to go through that ordinary income tax first before it is available to even invest. "While nothing is guaranteed - any stock market or country could collapse tomorrow - if you have a fairly long window (15+ years is certainly long), ETFs are likely to earn you well above inflation.  Looking at long term ETFs, you typically see close to 10% annual growth over almost any ten year period in the US, and while I don't know European indexes, they're probably well above inflation at least. The downside of ETFs is that your money is somewhat less liquid than in a savings account, and any given year you might not earn anything - you easily could lose money in a particular year.  As such, you shouldn't have money in ETFs that you expect to use in the next few months or year or even a few years, perhaps. But as long as you're willing to play the long game - ie, invest in ETF, don't touch it for 15 years except to reinvest the dividends - as long as you go with someone like Vanguard, and use a very low expense ratio fund (mine are 0.06% and 0.10%, I believe), you are likely in the long term to come out ahead.  You can diversify your holdings - hold 10% to 20% in bond funds, for example - if you're concerned about risk; look at how some of the ""Target"" retirement funds allocate their investments to see how diversification can work [Target retirement funds assume high risk tolerance far out and then as the age grows the risk tolerance drops; don't invest in them, but it can be a good example of how to do it.]   All of this does require a tolerance of risk, though, and you have to be able to not touch your funds even if they go down - studies have repeatedly shown that trying to time the market is a net loss for most people, and the best thing you can do when your (diverse) investments go down is stay neutral (talking about large funds here and not individual stocks). I think this answers 3 and 4.   For 1, share price AND quantity matter (assuming no splits).  This depends somewhat on the fund; but at minimum, funds must dividend to you what they receive as dividends.  There are Dividend focused ETFs, which are an interesting topic in themselves; but a regular ETF doesn't usually have all that large of dividends.  For more information, investopedia has an article on the subject.  Note that there are also capital gains distributions, which are typically distributed to help offset capital gains taxes that may occur from time to time with an ETF.  Those aren't really returns - you may have to hand most or all over to the IRS - so don't consider distributions the same way. The share price tracks the total net asset value of the fund divided by the number of shares (roughly, assuming no supply/demand split).  This should go up as the stocks the ETF owns go up; overall, this is (for non-dividend ETFs) more often the larger volatility both up and down. For Vanguard's S&P500 ETF which you can see here, there were about $3.50 in dividends over 2014, which works out to about a 2% return ($185-$190 share price).  On the other hand, the share price went from around $168 at the beginning of 2014 to $190 at the end of 2014, for a return of 13%.   That was during a 'good' year for the market, of course; there will be years where you get 2-3% in dividends and lose money; in 2011 it opened at 116 and closed the year at 115 (I don't have the dividend for that year; certainly lower than 3.5% I'd think, but likely nonzero.) The one caveat here is that you do have stock splits, where they cut the price (say) in half and give you double the shares.  That of course is revenue neutral - you have the same value the day after the split as before, net of market movements. All of this is good from a tax point of view, by the way; changes in price don't hit you until you sell the stock/fund (unless the fund has some capital gains), while dividends and distributions do.  ETFs are seen as 'tax-friendly' for this reason. For 2, Vanguard is pretty good about this (in the US); I wouldn't necessarily invest monthly, but quarterly shouldn't be a problem.  Just pay attention to the fees and figure out what the optimal frequency is (ie, assuming 10% return, what is your break even point).  You would want to have some liquid assets anyway, so allow that liquid amount to rise over the quarter, then invest what you don't immediately see a need to use. You can see here Vanguard in the US has no fees for buying shares, but has a minimum of one share; so if you're buying their S&P500 (VOO), you'd need to wait until you had $200 or so to invest in order to invest additional funds." Based upon what little is publicly known at this time, it doesn't look good for CAT, PWC or outside counsel. The economic substance they offered up sounds like *post hoc* reasoning. The tax court buying their current explanations would have to accept some exceptionally astute, long-range planning took place that accepted the initial costs exceeding the nascent parts revenue, as well as the risks of over-optimizing tax operations if the necessary revenue didn't materialize; and it doesn't seem they are yet offering any evidence to show that kind of foresight. It will be fascinating to follow, for sure. Credit card interest was deductible prior to 1986. Just because it's an expense doesn't mean it needs to be deductible.   We need to move toward elimination of the income tax, we're also $20T in debt, there's gonna be cuts that people aren't gonna like but we have to move forward. You also may want to consider how this interacts with the stepped up basis of estates.  If you never sell the stock and it passes to your heirs with your estate, under current tax law the basis will increase from the purchase price to the market price at the time of transfer.   In a comment, you proposed:   Thinking more deeply though, I am a little skeptical that it's a free lunch: Say I buy stock A (a computer manufacturer) at $100 which I intend to hold long term. It ends up falling to $80 and the robo-advisor sells it for tax loss harvesting, buying stock B (a similar computer manufacturer) as a replacement. So I benefit from realizing those losses. HOWEVER, say both stocks then rise by 50% over 3 years. At this point, selling B gives me more capital gains tax than if I had held A through the losses, since A's rise from 80 back to 100 would have been free for me since I purchased at 100. And then later thought  Although thinking even more (sorry, thinking out loud here), I guess I still come out ahead on taxes since I was able to deduct the $20 loss on A against ordinary income, and while I pay extra capital gains on B, that's a lower tax rate. So the free lunch is $20*[number of shares]*([my tax bracket] - [capital gains rates]) That's true.  And in addition to that, if you never sell B, which continues to rise to $200 (was last at $120 after a 50% increase from $80), the basis steps up to $200 on transfer to your heirs.   Of course, your estate may have to pay a 40% tax on the $200 before transferring the shares to your heirs.  So this isn't exactly a free lunch either.  But you have to pay that 40% tax regardless of the form in which the money is held.  Cash, real estate, stocks, whatever.  Whether you have a large or small capital gain on the stock is irrelevant to the estate tax.   This type of planning may not matter to you personally, but it is another aspect of what wealth management can impact. Very interesting article, thanks for posting. It's going to get really interesting really fast if investors force governments to raise taxes to pay investors, regardless of who's 'right' in the situation.   On a related note, I read awhile back that many US cities have sold the rights to various public areas to foreigners. For example, I believe Chicago sold the rights to collect parking fees along certain streets for 75 years to a company in the Middle East. Some cities then found that if they wanted to have a parade down that street, they had to compensate the company that owned the parking rights because they wouldn't collect any revenue the day of the parade.   I can't see how this ends well for the US economy.