Tags: highly compensated employees | high-yield ETFs | dividend stocks | capital gains

George Mentz: For High-Income Earners, How High-Yield ETFs, Dividends Can Offset Capital Gains

capital gains

George Mentz By Monday, 31 January 2022 07:26 AM EST Current | Bio | Archive

After many years of tax research, sometimes an  obvious tax strategy is staring you in the face. Many families have two income earners who contribute to 401(k)s and also save money in taxable accounts.

Over the years, many people are reluctant to sell stocks or exchange-traded funds (ETFs) for fear of paying taxes upwards of 40% on the “long-term capital gains.” Also, there are many investors who want income but also want growth.

Generally speaking, most people know these rules:

  1. “LTCG long term capital gains” offset “LTCL long-term capital losses”.
  2. Qualified dividend stocks are taxed much lower than ordinary income.
  3. High-yield stocks, funds, ETFs or real estate investment trusts (REITS) may decrease in value because they actually pay out such a high dividend yield amounts each month or quarter.
  4. Most people at retirement age want to maximize income using relatively safe Blue Chip investments.

With these rules at play, you could invest 1 million dollars in a taxable account using this strategy:

  1. Put $500,000 into the highest-yielding dividend: Stocks, Closed End Funds, REITS, ETFs, or business development companies (BDCs). Some of these investment types pay out 8%-15% per year. If they pay over 9%-10%, these investments typically lose a little bit of value each year.

    This lower-taxed dividend income on the $500,000 invested would be more than $50,000 dollars per year at 10%. However, it typically generates unrealized losses each year that you can capture or recognize later in time.
  2. Put the other $500,000 into pure growth stocks that do not pay dividends or taxes until you sell them. You hopefully will create “long term capital gains” with these Blue Chip Growth positions each year.
  3. After 3-5 years, you can sell growth stocks with gains that match the “LTCL long term capital losses” of the “High Yield Dividend” positions. By doing this, you eliminate the tax on the gains from the Growth stocks and capture “tax free” “capital gains” income while receiving the lower taxed high yield qualifying dividends on the income producing portfolio of 500,000 dollars.
  4. The key here is to offset the gains with losses while getting big income that is taxed at dividend rates.
  5. Let’s say your dividend income portfolio is down  in value $100,000 after 3 years.  You then can capture $100,000 of gains in the growth portfolio and engage some tax-free asset allocation.
  6. The goal is to capture great dividends from ETFs, Funds, REITS, BDCs, closed-end funds (CEFs) and stocks while also capturing long term losses at a later date which reduce your federal and state tax liabilities.

As a note, you do not need to buy a specific REIT or specific CEF because you can actually buy an ETF that holds various High Yield REITS or CEFs. Thus, more ETF diversity and better asset allocation can be implemented using this strategy. Be sure to check the historical dividend yield and whether the investment provides monthly or quarterly dividends for your preference.

In this example, you may have a family with 401(k)s or individual retirement accounts (IRAs) that can also benefit from this strategy. As a note, your 401K would generally not be required to pay annual taxes on high yield dividends from:  a REIT, CEF, ETF or stock.

This high-yield income within a 401(k) could create a compounding income growth effect within the tax-deferred account. This strategy can facilitate annual retirement account growth and income via high yield dividends or payouts. This may also be effective within ROTHs IRAs. 

As for suitability, blue-chip, high-yieldsecurities are ethically preferred for this strategy.  For growth, blue-chip growth ETFs, funds, or stocks could generate the tax deferred growth until sold.

As a note, some brokerage firms such as interactive brokers may allow you to loan out your stock, adding  another 3%-4% per year of income to your portfolio.

Disclaimer: Always consult with your locally licensed professional before making any tax, retirement, or investment decision.

George Mentz JD MBA CILS is a CWM Chartered Wealth Manager ®, global speaker - educator, tax-economist, international lawyer and CEO of the GAFM Global Academy of Finance & Management ®. The GAFM is a TUV accredited graduate body that trains and certifies professionals in 150+ nations under ISO 29990 standards. Mentz is also an award winning author and graduate law professor of wealth management in the USA.

Mentz is 1st in the world to be credentialed as a: Doctor of Jurisprudence, MBA, investment advisor, financial planner, US federal courts attorney, international law certification, & management consultant, and he is a two-time award winning professor teaching 250+ law, business, and ethics courses. Mentz was an economic advisor for the Trump Campaign CO, has published 40+ books and audio books who has written for the US Dept of Labor, O-Books UK, eFinancialCareers, & National Underwriter.

Mentz has served boards or advised The Global Finance Forum, World eCommerce Forum, top banks such as HSBC and Bank of China, UN, Arab Academy of Banking, African Economists Association & has even been accepted as an expert in securities arbitration & mediation. Mentz and his companies have been featured or quoted in Forbes, Reuters, Wall St. Journal, The Hindu National, El Norte Latin America, the Financial Times, NYSSA, The China Daily, & The Arab Times. Mentz enjoys tennis, travel, raising 3 children, and serving as the titular Seigneur of the Fief Blondel which is one of the oldest legally recognized fiefdoms in the UK Crown Dependencies.

Mentz can be contacted at www.GMENTZ.com or at his global certification training company www.GAFM.com

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After many years of tax research, sometimes an obvious tax strategy is staring you in the face. Many families have two income earners who contribute to 401(k)s and also save money in taxable accounts.
highly compensated employees, high-yield ETFs, dividend stocks, capital gains
Monday, 31 January 2022 07:26 AM
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