TimingCube - Tax considerations - qualified retirement,401(k),iras,tax deferred,regular accounts

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Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQ

Note: QQQ returns are included for continuity sake.

Market Update

Investors were apparently disappointed by the latest batch of earnings reports. The economy also appears to be stronger than anticipated, which has increased fears that the Federal Reserve will have to raise interest rates sooner rather than later. Both facts caused the markets to move lower, with the Nasdaq taking the brunt of the selling. The Nasdaq 100 and the Russell 2000 finished the week 2.45% and 2.43% lower, respectively. As for the S&P 500, it did better and only lost 0.41%.

The week's action did not affect our Model and our Buy signal consequently remains active.

Trend Timing School

Tax considerations

We start with an apology to our non-U.S. subscribers because the timing and many of the specifics of this editorial apply to the United States. Alas, since most countries in the world have long ago discovered taxes, the majority of concepts and conclusions detailed here concern all of us.

Of course we would be remiss not to remind you that we are not tax advisors and that reading this editorial is no substitute for consultation with your professional tax expert or accountant.

Since the much dreaded tax day is behind us (in the U.S., April 15th is the deadline for filing tax returns for the prior year), we thought it was perfect timing to discuss the tax implications and strategies of our Trend Timing approach. We follow the same investment Model and discipline with regular (taxable) and qualified retirement accounts alike, but we need to review the tax particulars separately.

Qualified retirement accounts
Most qualified retirement plans, such as 401(k)s and most IRAs are so-called "tax deferred", which means that you do not pay any taxes on the capital gains and dividends until you retire and start withdrawals. Frequently, your contributions are also pre-tax dollars, i.e. you do not pay income tax on the money you contribute. Because surprisingly few fully leverage their retirement savings opportunities we feel compelled to issue a plea to all Trend Timers:
"Maximizing your contributions to qualified retirement plans can multiply your future wealth".

Many people feel that paying now or paying later makes little difference in the end. Let us beg to differ and, while we are at it, prove our point with a telling example. Let's consider $10,000 that we either invest in a regular taxable account or that we contribute to our employer's 401(k) retirement plan. In the table below we compare how much money each approach would yield at the time of retirement assuming a 30% average yearly gain - based on the TimingCube history we deem this an achievable goal - and a 25% tax bracket.

Even if we had only one year left until retirement (the first line of the table) we see that the tax deferred account is already ahead by over 5% ($562). Why? The primary reason in the short term is that all of our $10,000 is put to work with a retirement plan whereas only $7,500 will be available to invest after paying the 25% of income taxes otherwise. Note that the reason the tax deferred account is only worth $9,750 after year one (and not $13,000), is that to be fair we compare net, after tax results, assuming we retire and pay taxes on the entire amount withdrawn ($13,000 minus 25% equals $9,750).

Net return on an initial $10,000 sum
Years until retirement	Taxable account	Tax deferred account
1	$9,188	$9,750
2	$11,255	$12,675
3	$13,787	$16,478
4	$16,889	$21,421
5	$20,689	$27,847
6	$25,344	$36,201
7	$31,047	$47,061
8	$38,032	$61,180
9	$46,589	$79,534
10	$57,072	$103,394
11	$69,913	$134,412
12	$85,643	$174,736
13	$104,913	$227,156
14	$128,519	$295,303
15	$157,435	$383,894
16	$192,858	$499,062
17	$236,252	$648,781
18	$289,408	$843,416
19	$354,525	$1,096,440
20	$434,293	$1,425,372
21	$532,009	$1,852,984
22	$651,711	$2,408,879
23	$798,346	$3,131,543
24	$977,974	$4,071,006
25	$1,198,018	$5,292,308

However impressive, short term results are nothing compared to the longer term, when the effect of capital gains and distributions allowed to grow tax free start dwarfing the initial investment. Nothing shows the magnitude of the difference as well as a graph of the same data.

Regular non-retirement accounts
Since we mechanically follow the Model, there is not much we can do to lessen the burden of taxes in our regular accounts. With an average of 3 to 5 trades a year, most of our capital gains will be of the short-term variety and therefore taxed higher. Short-term gains are taxed at our respective marginal tax rate (25% in our example above), while long-term gains are taxed at a flat 15%. Every so often we get lucky and "win" the extra 10% thanks to a signal that lasts more than one year, as is the case right now.

This is one of the very rare instances where the Buy and Hold advocates shake a condemning finger at us Trend Timers and point out that all of their capital gains are long-term capital gains by definition. In view of the fact that for the very vast majority of time periods our strategies beat Buy and Hold by a lot more than 10%, we conclude that this is a small price to pay for consistently superior returns.

FAQ of the Week

Question: When should trades be executed following a new signal?

We should always be fully prepared for a signal, as described in some detail in the and knowing exactly what to do and when to do it after receiving the signal is certainly essential to reliably implementing our wealth building program. In times when the market retreats and the Model may be approaching a signal, we increasingly receive questions that go something like "Following the signal, are the trades to be executed at the beginning of the day, end of the day, the next day or what?"

To remove any confusion, let us review the Sell case step by step:

Quoting straight from the "Model" page "...Our Model is run daily after the New York stock market closes, and we update our Web site and Signal by Phone message accordingly by 7:00 pm ET that same day. If a new signal is triggered, in addition to posting it on the "Current Signal" page, TimingCube also automatically sends e-mail notifications to all active subscribers..."
Ideally, that same evening, right after receiving the Sell signal, we place our orders with our broker for execution the next day
The type of order and execution time varies with the type of investment vehicle used

Investment vehicle	Order details	Execution time
ETFs and stocks	First, a sell order to liquidate the current holding. Second, for those following a Long & Short strategy, an order to sell short the investment	At market open the next trading day
Mutual funds	An order to sell the current fund for Long Only strategies, or an exchange order from a bull fund to a bear fund for Long & Short strategies (most brokers allow the single exchange transaction to replace a sell and a buy within the same fund family)	At market close the next trading day. Some mutual fund families like Rydex also offer morning trading on selected funds