Posted in FI/RE, Stocks, Taxes 13 Comments Advertiser Disclosure
I love investing and an increasing number of readers have been requesting more information on my investments. I’m down. I will try to share all of my investment decisions moving forward and welcome feedback.
So here’s my most recent investing decision. This week I invested $20,000 more in AMZN in my SEP-IRA.
As you probably know I am huge believer in index funds and 80% of my Millennial Money portfolio is invested in funds that track the domestic and international stock indexes. But I also buy (and very rarely sell) individual stocks occasionally when I think they’re a good value.
If you’re new or have just started investing then I strongly recommend focusing on index funds, but as your portfolio grows, it can make sense to take 5-20% of your portfolio and invest in individual stocks. Even though I don’t recommend day-trading, I’ve recently started exploring the nuances of more sophisticated trading platforms like CMC Markets. I’m curious what all those crazy things that are going on on traders screens.
My new living room! Isn’t it pretty? j/k
But be careful – it’s easy to make money investing in individual stocks. But I’m confident AMZN will continue to dominate e-commerce, cloud storage, and it’s rapid expansion into shipping/logistics are super exciting. Even though the stock is trading above $800 and has increased in value significantly over the past year, this a hold it for the long term play in my IRA.
My Investing Tax Advantaged and non-Tax Advantages accounts
Here is a quick background on my multiple investing accounts:
401k at one of my companies (which I max out at $18K every year and also contribute via profit sharing depending on the year). Last year I was able to contribute $52,416 dollars to my 401k. The mix is mostly total market index funds with a little REIT thrown in.
Traditional IRA: This account is solely used for the purpose of doing a Roth conversion on the $5,500 I contribute every year. I do not hold a balance in my traditional IRA.
Roth IRA: I <3 my Roth. I luckily opened it when I was 25 and have maxed it out ever since. All index funds. And despite the fact that my income is higher than the max, I can use a backdoor conversion from my traditional IRA to continue to contribute each year. However I do have to pay a % of tax on the conversion due to the balance in my SEP-IRA.
Brokerage Account: I own APPL, FACE, AMZN, BAC, NFLX, CRM and a number of other stocks. I’ve made money in most of the stocks, but also once lost $3,000 in one hour trying to day-trade. I no longer try to do any day-trading and plan on keeping all of these stocks in my portfolio for the foreseeable future.
SEP IRA: Every year I put as much as I can into my SEP IRA from my personal projects. An SEP IRA is essentially an easy to administer self-employed or small company plan. The max contribution rates are 25% of net-profit or up to $53,000 (in 2016) or $54,000 (2017), whichever is lesser.
I had a good year in 2016 so was able to contribute 25% of my earnings to my SEP IRA account. It’s a no brainer if you have side income from consulting or a blog and you want to minimize your tax burden. All contributions are tax deductible.[easy-tweet tweet=”Minimizing your tax burden is essential to building wealth.” user=”millennialmoney” hashtags=”taxes investing”]
For me personally, one the keys to building wealth is finding any and every way to minimize my tax burden. So my SEP IRA is definitely my homie in that pursuit.
Benefits of Trading Stocks in an IRA
While I have traditionally always invested in index funds in my SEP IRA, over the past few months I have been considering using my SEP IRA to also trade stocks, with a focus on building a dividend growth portfolio, as well as testing my own individual strategies.
The primary and most attractive benefits of investing in stock in my IRA:
1. No reporting of capital gains (this is a really nice feature especially if you are going to be doing a lot of trading
2. No worry about taxes until you take out the money
3. Tax free growth on re-invested dividends
There is one complicating factor worth mentioning when you invest in individual stocks in and IRA. The total growth of your holdings in the SEP IRA will get taxed at your income tax rate (based on your tax bracket) when you withdrawal the money in the future.
Critics of investing in individual stocks in an IRA point to the fact that capital gains tax (currently 15%-20%) is likely lower than your income tax level (20-40%), so you lose that long term capital gains tax advantage in an IRA since you get taxed at your income rate.
But honestly, it’s tough to anticipate what my future tax rate will be, or what tax rates will be generally in the future so it’s advantageous for me to push the tax burden into the future on some of my stock investments. As I previously mentioned I do everything I can to reduce my current taxable income and gains.
There are many people who believe that capital gains taxes will inevitably increase in the future, so that advantage might erode as well. Who knows what capital gains taxes could be even next year. I’m not counting on it staying low.
Why I am Buying Amazon Stock
I first bought AMZN when it was $298 a share. I have bought AMZN a few times over the past 3 years, most recently in February 2016 at around $511. I think this stock has significant long term growth potential and I plan on continuing to invest in the company.
Not only have they continued to dominate the e-commerce game.
According to Forbes, “A recent report by the Institute for Local Self-Reliance (ISLR) claims that roughly half of all U.S. households are subscribed to Amazon Prime, half of all online shopping searches start directly on Amazon, and Amazon captures nearly one in every two dollars that Americans spend online.”
That’s crazy. I don’t see Amazon slowing down anytime soon and they have become such an institution they have become the definition of online shopping – which is still in in it’s infancy. Amazon are also continuing to diversify and growth their other lines of business – specifically their cloud storage and new logistics offerings. Eventually I am confident they will also give traditional shippers like UPS, FedEx, and the Post Office strong competition with their own shipping network – they have already leased 40 planes and plan to hire over 100,000 new employees in 2017.
And the drones, who can forget about the delivery drones! Amazon just made it’s first delivery by drone in the UK in December 2016. Although it’s not legal in the US yet, it’s an exciting development in the future of delivery. I mean, who doesn’t want to get their Bulletproof coffee delivered in 13 minutes? I’ll invest in that.
Join Millennial Money Crew of 50,000+
+ GET CHAPTER 1 of my Bestselling Book FINANCIAL FREEDOM!