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Guess it makes sense to the IRS………….. September 4, 2012

Posted by forwardfinancialplanning1 in Exchange Traded Funds (ETF), Federal Income Taxes, Income Taxes.
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As Wall Street “manufactures” more and more exotic investment products, it behooves the investor to not only understand the investment, but also to understand its tax treatment.  IRA holders can often get themselves in hot water by holding problematic investments within these tax protected accounts, but we recently came across one that often fares worse in a taxable account. 

Gold prices have seen an enormous run-up in the past decade and while they’ve retreated lately, they still attract a lot of attention from investors losing confidence in paper currencies.   Exchange traded funds (ETF’s) such as SPDR Gold Shares (GLD) have been promoted as a hassle free way to gain exposure to the shiny metal.  However, ETF’s that hold bullion as their primary asset are treated differently in each type of account.  In a traditional IRA, selling shares of GLD is treated the same as if the account holder had sold a share of stock. Thus, the eventual distribution of the funds will most likely be treated as ordinary income in the year of distribution (The possibility of “basis” in the IRA is being ignored in this example).  However, this same transaction is treated diffently in a taxable account.  Regardless of the length of the holding period of the ETF in a taxable account, the sale of shares of the ETF are treated as if the ETF had sold actual gold bullion.  Therefore, even if the holding period is longer than a year, any gain is taxed at the 28% “collectibles” tax rate and not at the preferential long term capital gains rates of either 0% or 15% depending on your tax bracket. 

This is probably not something an investor would want to learn after the sales transaction took place………………………….



There’s a lot in a name February 4, 2012

Posted by forwardfinancialplanning1 in Exchange Traded Funds (ETF).
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It’s been said that individual investors should view many Wall Street “innovations” with a healthy degree of skepticism.  Like most things in life, this statement is not always true, nor is it always false.  Exchange Traded Funds (EFT) fall into this class, being heralded as a better version of the common mutual fund.  This may be true in that properly structured ETF’s offer the possibility of intraday trading and can display extremely low expense ratios.  However, some observers, including the esteemed Vanguard Group founder John Bogle have dismissed ETF’s as “trading vehicles.”  As such, Bogle claims, they entice people to trade too frequently which can be hazardous to one’s financial health.

Regardless of where one stands on this issue, we recently came across an ETF with perhaps a “hint” embedded in its ticker symbol.  The Teucrium WTI (West Texas Intermediate) Crude Oil ETF allows investors to gain exposure to the spot market for oil and uses a tiered weighting scheme to invest in multiple months of crude oil futures contracts.  Sound like something of interest?  A little research indicates an enormously high expense ratio of 1.58%, but perhaps more revealing, a ticker symbol of “CRUD”.  At least in  our opinion, that’s a very apt description!!