About Teletype
Join
I
@invest4every1
June 9, 2021

Level-2 Course Plan

Main Topics

  • Three Fund Portfolio.
  • All-Wether Portfolio.
  • Bonds: government, long-term, corporate, long-term, junk, muni.
  • Yield curve, inverted yield curve.
  • Retirement plans: IRA, Roth, 401k, Roth Conversion, (Mega) Backdoor.
  • Business plans: SEP, solo-401k.
  • For kids: UTMA, 529, HSA.
  • Tax strategies: tax harvesting, tax-exempt bonds.
  • Gift/estate tax-exempt, step-up in basis.
  • Margin trading, margin call, short sale.
  • Hedge-funds, short squeeze, pump&dump.
  • Options: call, put.
  • Leveraged/Inverse ETFs.
  • Life Insurance: Term Life, WL, IUL, VUL.
  • Real estate: depreciation, 1031, step-up in basis, 250/500.
  • SDIRA vs. solo-401k, UBIT.
  • Crypto: taxes.
  • Inflation, CPI, M2, CAPE-ratio.
  • Factor model.

Day 1

Three Fund Portfolio

All-Weather Portfolio

Day 2

Bonds

Account Types

  • main accounts: taxable, IRA, Roth, 401k, HSA.
  • Taxable accounts: individual or joint.
  • Retirement accounts: IRA/Roth, Rollover IRA, 401k, Roth 401k.
  • Educational accounts (for kids): 529, ESA, kid IRA/Roth, UTMA.
  • Health account: HSA.
  • Business accounts (contractors, 1099): SEP, SIMPLE, solo-401k.

Tax rules in a taxable account

  • Taxable events on taxable account: realized gains (sale with profit), receiving dividends, DRIP.
  • Hold period <= 1 year => short-term capital gains, taxed as ordinary income.
  • Hold period > 1 year => long-term capital gains, taxed on lower tax brackets.
  • Qualified dividends => taxed as long-term capital gains.
  • Unqualified dividends => taxed as ordinary income.
  • Налоговый инвестиционный счет (taxable brokerage account)

Tax rules in tax-benefit accounts

  • Taxable events on retirement accounts: withdraw from IRA, 401k, SEP, SIMPLE, unqualified withdraw from Roth IRA, Roth 401k, HSA, 529, ESA.
  • Pre-tax contributions: IRA, Rollover, HSA, 401k, SEP, SIMPLE.
  • After-tax contributions: Roth, Roth 401k, 529, ESA.
  • Retirement accounts are subject to constraints and annual limits on contributions!

IRA vs. 401k

  • 401k allows loans up to 50% of the balance (not more than $50,000).
  • 401k contribution limits are much higher: $19,500 vs. $6,000.
  • Catch ups (50+ y.o) in 401k is much higher: $6,000 vs. $1,000.
  • 401k may offer matching, profit sharing, Mega Backdoor.
  • Overall limit for contributions in 401k: $57,000 + catch up!
  • 401k does not have limits on the income or MAGI (IRA and Roth have).
  • RMD: IRA, 401k, (inactive) Roth 401k.
  • Mega Backdoor in 401k vs. Backdoor in IRA.
  • Rollover: IRA -> IRA, 401k -> IRA, Roth 401k -> Roth.
  • Reverse Rollover: IRA -> 401k.
  • Not allowed: Roth -> Roth 401k.
  • Roth Conversion: IRA -> Roth, 401k -> Roth 401k, 401k -> Roth — taxable event!
  • 401k vs. IRA
  • IRA Rollover

Business Retirement Plans

  • SEP IRA, solo-401k, SIMPLE IRA
  • SEP IRA — pre-tax IRA for small businesses/self-employed, matching for most W-2 employees
    Contribution: 20-25% net-income/payroll but limited by $58,000 a year.
  • solo-401k — for family businesses (no W-2 employees allowed, except for spouses and partners).
    Contributions: company (20-25% net-income/payroll) + employee.
    The maximums, catch-ups, Roth, loans are the same as for regular 401k.

Tax Strategies

  • Long-term capital gains, report capital losses.
  • Tax-Gains Harvesting
  • Tax-Loss Harvesting, wash-sale
  • Muni
  • UTMA: kiddie tax, Tax-Gains Harvesting
  • Roth IRA/401k, Roth Conversion, Roth Ladder
  • Backdoor Conversion to Roth, Mega Backdoor
  • Gift/estate-tax exempt, step-up in basis

Roth Conversion

  • traditional IRA, traditional 401k -> Roth IRA, Roth 401k
  • pre-tax money converted to Roth is taxable ordinary income.
  • When to convert:
    expecting a higher tax bracket in the future,
    higher income,
    higher taxes,
    moving to an expensive state (with high state income tax),
    when the market falls,
    expecting high RMDs.
  • Roth or not to Roth
  • IRA and Roth
  • IRA Rollover

Backdoor Conversion to Roth

  • Two-steps:
    1. Contribute after-tax to IRA
    2. Roth Conversion
  • Pitfalls:
    1. IRA Aggregation rule.
    2. Pro-rata rule.
  • File the form 8606:
    1. After-tax contributions to IRA (nondeductible).
    2. Roth Conversions.
    3. Roth Distributions.

Mega Backdoor

Day 3

Margin Account

  • Assets in your account are collateral
  • Take a loan from your brokerage firm to buy more assets
  • Leverage trades, but you pay commissions (margin rates)
  • Margin Call may happen if collateral assets declined in value!

Short Sale

  • Long position: buy security hoping it will increase in value
  • Short position: sell security borrowed from a broker, hoping it will decrease in value
  • If the security price goes up, the short-position starts losing
  • The risk of short-sale is unlimited!
  • The gains of short-sale are limited by the security price.
  • Short-sale is also used in hedging against security/market decline.
  • Hedge-Funds
  • Short Squeeze
  • Участники торгов. Часть 1. Биржи, Маркетмейкеры

Derivatives

  • Options-contracts: Call, Put
  • Futures-contracts

Options

  • Call-Options: Covered-Call or Uncovered (Naked)
  • Put-Options: Put or Protective-Put
  • Option contract:
    type (Put, Call),
    ticker (security symbol),
    expiration,
    strike price,
    option price,
    contract size: 100.
  • Опционы Call, Put, Covered-Call, Protective Put
  • a security may decline => buy Put (like a short sell, but the risk is limited)
  • protect a security against a decline in value => buy Protective-Put (insurance)
  • a security may increase in value => buy Call (use leverage)
  • willing to sell a security for a higher price or earn income => write a Covered-Call (strike price > current price)
  • willing to buy a security for a lower price or earn income => write a Put (strike price < current price)

Call-Option

  • premium = option-price ∙ contract-size
  • purchase-price = strike-price ∙ contract-size
  • purchase-cost-basis = purchase-price + premium + trading-commissions
  • trade-value = trade-price ∙ contract-size
  • realized-capital-gains = trade-value - purchase-cost-basis.

Call-Option Example

  • Call-Option Contract ticker: SPY.
    type: Call.
    expiration: 3 months.
    the option price: $1.
    the contract size: 100 shares.
    the strike price: $200.
  • the premium (contract cost): $1∙100 = $100
  • the purchase cost basis: $200∙100 + $100 = $20,100
  • assume share price: $210, which is greater than the strike price ($200)
  • exercise the option contract => buy 100 shares x $200/share
  • later the price increase to $220/share
  • sale 100 shares for $220/share
  • trade value: $220∙100 = $22,000
  • realized capital gains: $22,000 - $20,100 = $1,900

Protective Put-Option

  • premium = option-price ∙ contract-size
  • cost-basis = share-cost-basis ∙ contract-size
  • sale-cost-basis = share-cost-basis + premium + trading-commissions
  • trade-value = exercise-price ∙ contract-size
  • realized-capital-gains = trade-value - sale-cost-basis

Leveraged/Inverse ETFs

Day 4

Term Life

Cash-Value Life

  • Whole Life (WL), Index Universal Life (IUL), Variable Universal Life (VUL).
  • WL — least risky, VUL — most risky.
  • "Tax-free" growth and withdrawals.
  • It could be used for anything.
  • It does not have an impact on financial aid for college.
  • Like "Super Roth" or "Tax-Free Retirement Account" :-)
  • 1035 Exchange: if it is insured, one policy could be exchanged for another
  • Net Amount of Risk (NAR): Death Benefit (DB) - Cash Value.
  • Higher NAR => higher commissions.
  • Goal: NAR ≈ 0 or Cash Value ≈ DB.
  • "Plan B" policy: DB initially is very low and increases while Cash Value grows.
  • tax-free withdrawals: take loans against Cash Value
  • Loans may be repaid (or not).
  • On the death, the policy pays DB - Outstanding Loans - Commissions.
  • 90:10 — means: 90% of the first contribution goes to Cash Value, while only 10% goes to commissions.
  • Commissions and interest is paid from Cash Value.
  • Insured is older, higher cost of $1000 DB becomes.
  • The policy may lapse if Cash Value = 0.
  • Higher chances for policy lapsing: VUL and IUL.
  • Зоопарк накопительных страховок
  • The Super Roth

Whole Life

  • Что за продукт?
  • Урок арифметики с Whole Life
  • Cash Value is indexed by 2-3% / year.
  • Dividends paid: 1-2% / year.
  • Expected performance: 4-5% / year.
  • It could be used as an emergency fund or a conservative part of a portfolio.
  • Infinite Banking Concept: take loans for business/purchasing real-estate properties / implementing Fix and Flip.

IUL

  • Cash Value follows a stock market index (e.g., S&P-500)
  • The growth is caped: min-cap=0%, max-cap=13%.
  • Implemented with options and other derivatives.
  • Dividends are not paid.
  • Expected performance: 6% / year.
  • Less risky investment.

VUL

  • Cash Value invested in a portfolio of mutual funds.
  • The riskiest investment
  • It can be used as a tax shelter.

Real Estate

  • $250K/$500K sales tax-exempt: 2 years from 5 last years the property has been used as a primary residence.
  • Investment property: Depreciation + 1031 Exchange + Step-up in Basis = tax-free.
  • Estate-tax exempt: $11.7M.
  • Богатые тоже "плачут"!

Depreciation

  • rental property may be depreciated for 27.5 years
  • depreciation: 3.6%/y (= 100%/27.5y).
  • Example:
    home price: $1M;
    improvements: $100K;
    adjusted cost basis = home price + adjustment;
    adjusted cost basis: $1.1M;
    reported losses: $39.6K/y (= 3.6% ∙ adjusted cost basis).
    In 10 years, the depreciation: $39.6K/y ∙ 10y = $396K;
    cost basis = $1.1M - $396K = $704K;
    sale price = $1.5M;
    depreciation recapture: $396K;
    capital gains = sale price - cost basis - depreciation recapture;
    capital gains = $1.5M - $704K - $396K = $400K;
    depreciation recapture is taxed as ordinary income capped by 25%;
    capital gains usually taxed as long term capital gains.

1031 Exchange

  • Several properties could be replaced with some other properties (with a greater value).
  • No taxes on sale => the gains are added to the cost basis of the new objects.
  • 45 days to find candidates for replacement;
  • extra 135 days to complete the trade.

Step-up in Basis

  • On the estate transfer, the cost basis jumps to the market fair value
  • heirs may sell the assets (real estate/investments) immediately and will not owe capital gains tax!

SDIRA

  • Self-Directed Accounts: IRA, Roth, SEP, solo-401k, HSA, ESA.
  • SDIRA is allowed to invest in alternative assets: crypto, precious metals (gold), private equities, businesses, tax liens/deeds, notes (mortgage, promissory).
  • SDIRA is not allowed to invest in Life Insurance, collectibles.
  • UBIT (Unrelated Business Income Tax): 35%.
  • UDFI (Unrelated Business Income Tax) — part of UBIT.
  • SDIRA is subject to UBIT when invested in businesses
  • SDIRA is subject to UDFI when invested in real estate with leverage (loans).
  • SDIRA is allowed non-recursive loans only.
  • The collateral is only real estate (not IRA, no personal responsibilities).
  • solo-401k is not subject to UBIT (UDFI).

Day 5

  • Test X1 questions solutions
  • Roth strategies, Roth vs. IRA, Roth vs. taxable
  • Pum&Dump, Short-Sale, Short-Squeeze
  • Crypto, tax treatment: currency vs. property, crypto taxation

Day 6

Factor model

Extras

Tests

Recordings

Forms

Please, subscribe!

Thank you!

Slava Chernoy
June 9, 2021, 23:31
0 reactions
0 views