The “Tax Dodge” of which We Can All Take Advantage


 

There was somewhat of an odd article in Forbes Magazine this month entitled, “Social Media Tax Dodge.”  It is about the founder of Yelp, Facebook and others who own large amounts of their own company’s stock from pre-IPO days in Roth IRAs, and therefore will not need to pay taxes on their large gains.  The tagline for the story is: “If their IPO riches weren’t enough, insiders at Yelp and Facebook are skirting taxes with $100 million Roth IRA’s and $150 million tax-free gifts.”  The article then goes on to talk about the “future large revenue losses” that Congress has failed to address.

The article is not odd for Time or Newsweek, but it is odd for Forbes given that they normally are advocates of free enterprise and they often idolize billionaires.  Just look at their fawning list of the world’s richest people that comes out annually.

While it is true that taxes will not need to be paid on the gains unless the money is withdrawn before the owners of the IRAs reach 59 1/2, there is certainly nothing shady going on.  They are just following the rules of the Roth IRA, that require individuals to pay taxes on the money used for investing when originally earned and then lock it away in a Roth IRA until retirement.  To use terms like “tax dodge” and “skirting,” and to talk about “lost revenue” like the money belonged to Congress to begin with is extremely prejudicial.  Perhaps some of the writers for Forbes have jumped onto the class warfare bandwagon being sent on tour before the Presidential elections.

If you don’t want people to be putting money into IRAs and Roth IRAs to lower their tax bills, ditch the whole income tax system and go to a Fair Tax.  Don’t write laws to encourage people to put money away for their retirements and then complain when they are successful at doing so.  For every Facebook, there are thousands of other companies that disappear into dust.  Those individuals who hold shares of those stocks in their Roth IRAs don’t receive any sort of credit for their losses.  They can’t even write the losses off against gains in their regular accounts, not that they should be able to do so.

The article concludes by suggesting that everyone should put assets with a potential for large gains in tax sheltered accounts such as Roth IRAs.  While this makes sense if you do happen to start a company and have shares long before the IPO, this does not make sense for the majority of us who are buying post-IPO shares on the markets.  While you will hopefully get a big winner like a Microsoft or a Home Depot if you buy stocks while they are fairly young and hold them while they grow, there is tax deferment built into long-term holding of common stocks just by their nature.  So long as you hold the shares and don’t sell them, the gains can compound and grow.  Also, the tax rates when you do sell are fairly low (15% capital gains rate currently).  It makes more sense for many people to put things that pay regular dividends and distributions, such as active mutual funds, utilities, and REITs into IRAs to avoid or delay paying taxes on those recognized gains,

Realize, however, that you really aren’t getting off tax-free, even if you have money in a Roth IRA or hold your shares and never sell.  Each year the companies you hold are paying corporate taxes.  Because you are a part owner in these companies, this is money out of your pocket that the government would not have if not for your investment.  With corporate tax rates up to 35%, and many corporations paying taxes in the low 20% range, stock holders, large and small, are paying a greater percentage on their corporate earnings each year than most income earners.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Photo credits: T. Al Nakib, Website www.MyPhotography.net , downloaded from Stock.xchng.

Comments appreciated! What are your thoughts? Questions?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.