Cathie Wood and Jim Cramer - Improving Returns on Investment Taxes

How to improve your investment returns by 40% or more, information you won’t hear from Cathie Wood of Ark investments or Jim Cramer

For the year ended 2021 one of the top investment advisors was Cathie Wood of Ark Investments. Ark Investments funds focused disruptive innovation, and their funds like the Ark Innovation ETF had a return of over 150% for one year. This is a tremendous amount of money considering most people look to retire on about 4% of their assets.

One thing about this return is that if it is taxable as a short-term gain, you could lose close to 40%. Reducing your taxes and/or increasing your IRS deductible expenses is important to understand.

Other investment gurus such as Jim Cramer also had a good years in 2021.

The first thing you have to understand is what is the difference between an investor or a trader?

The trader is someone whose main source of income is derived from trading stocks and spends most of their working hours honing their craft. Everyone else is considered an investor.

Investors investments are treated as the following:

Some basic issues that you should understand.

Stocks held longer than one year are subject to what is called capital gains tax. This tax is currently 15%to 20% plus your state tax rate, if any. In New Jersey the rate can be as high as 10.75% and the Federal rate is up to 37%.

If you sell for profit and it is under 12 months you will be subject to your current tax rate; in New Jersey the highest is the combined rate of 10.75+37% or 47.75%.

For 2020 your net trading losses subtracted from net capital gains is what you will pay taxes on.

Annual net losses are limited to $3,000 which can offset earned income, any excess can be carried forward up to eight years.

The wash sale rule prohibits selling an investment for loss and replacing it with the same or substantially identical investment within 30 days before or after the sale. If you have a wash sale the IRS will not let allow you to write off the investment loss.

This information is typically reported on a 1099 B from the investment institution.

Crypto trading is reported on IRS Form 8949.

One broad strategy that not only will you not pay taxes, but your gains will all become tax-free in the future. That is the power of a Roth IRA. Image placing one of Cathie Woods’ funds in a Roth IRA, you could sell funds and not pay taxes ever.

For this reason, I recommend most young investors open a Roth IRA and trade within the Roth. The benefits of trading within the Roth are many.

Depending on your income and circumstances you can contribute up to $6,000 to discount annually under current tax law. There are some limitations that you need to check on with your tax advisor.

Your earnings could grow tax-free when in the account.

You can also take out the original contributions without any type of penalty, tax or other charges. However, any gains would be subject to tax. The reason for this is you already paid taxes when you put the money in.

The best thing about a Roth IRA is that once you hold the account for five years and are over 59½ years old you can take out all your contributions and earnings tax-free.

You can withdraw the earnings and the contributions tax-free. There are also other benefits such as passing this to your children. This should be discussed with your tax advisor.

There are some types of restrictions on Roth IRAs generally,  you can’t trade on margin, option contracts and shorting stock may also not be allowed.

Generally, you can buy and hold stocks long-term and perform limited trading within the Roth IRA account.