David Wattenbarger is the President at Drw Financial in Chattanooga, TN and has over 18 years of experience in the finance industry. He started DRW Financial as a fee-only financial advising and planning firm after working for twelve years “behind the scenes” in financial services, where he learned a great deal about how best to serve the needs of his clients.
David has found it valuable to continue learning, and earned his CFP® designation, as well as the Chartered Advisor in Philanthropy® designation, which aligns well with his desire to help clients align their financial lives with their own unique values. David's prior professional experience includes serving as a general principal, options principal, and municipal bond principal for an independent broker dealer, as well as extensive work with other financial professionals on a consultative basis.
David's personal values revolve around carving out quality time with his family and making the work he does worthwhile and valuable to his clients.
BA, College Scholars, University of Tennessee, Knoxville
Assets Under Management:
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES PRODUCT, SERVICE, OR INVESTMENT STRATEGY. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER, TAX PROFESSIONAL, OR ATTORNEY BEFORE IMPLEMENTING ANY STRATEGY OR RECOMMENDATION DISCUSSED HEREIN
The United States income tax generally operates at marginal brackets, with your income taxed at different rates as each bracket "fills up". Only the income in the last bracket is taxed at that highest marginal tax rate.
Contributing to a tax deferred retirement savings account, like a traditional 401(k), excludes the amount of the contributions from the calculation for total income in that year for tax purposes. So in the case of your question, increasing your 401(k) contribution, holding all else equal, would lower your taxable income for the year. Your bonus may be large enough to push some of your income into a higher marginal bracket, but whatever you are able to put into tax deferred accounts will lower the total amount of income subject to income tax in that year.
As always, each person's situation may differ from the typical or general, so it is advisable to seek out a professional tax opinion on your specific case.
This is an interesting question, and has a few separate parts.
In very general terms, your state income tax(es) depends on where you are when doing the work, so per your example you would likely owe tax in your "home" state for the portion of your income earned while working from home, and from the "different" state when you are working in the office. There is additional complexity here because each state has its own particular approach to how the accounting works, and depending on the two states involved in your own case, there may be specific rules around reciprocal agreements, credits to your "home" state tax return for taxes paid in the other state, etc.
The question about the tax deduction for your travel expenses has its own complexity, and depends on the details of your situation. This topic is addressed at length by the IRS here. You will see there that you must determine whether your home or the office in the other state is your "main place of business".
Good luck, and as in most cases where complexity creeps into the situation, consider seeking out a qualified tax professional in your area to consult on details like this and in accurately completing your income tax returns.
Does the ETF in question hold substantially more positions than just the five companies? If it is a hyper-specialized, "niche" focused fund, then the choice between holding the individual stocks or the fund hinges on one set of considerations. If it is a fund with a significantly broader portfolio, the decision framework looks different.
In the one case, where the fund is dominated by the same five companies you have identified as attractive -- does the fund hold them in approximately the same weighting you prefer? What is the fund expense ratio? How is the liquidity for the various stocks, and of the fund itself? Are your transaction expenses (to buy, hold, and eventually sell) the investments a material consideration to where the difference between five trades and one trade makes up an economically significant difference to your case?
If the ETF in question holds dozens or hundreds of stocks -- the overall expected risk and volatility of the fund is likely to be much lower than a situation where you hold just the five stocks. That also implies that your potential "upside" is far less in the ETF than in the smaller basked of stocks.
A consideration not addressed in your question is what percentage of your overall investment portfolio is appropriate to allocate to this one sector, and how much risk is appropriate to your current financial situation. Are your investments driven by "speculation", or by a longer term goal of asset growth based on a classic approach to diversified asset allocation? Being clear on your relevant goal, investment objectives, and risk tolerance can help to make the best decision in this case.
A ROTH IRA is one type of retirement investment account, and the ways is may grow are similar to many other types of investment accounts. There are three common ways for account balances to grow:
- Contributions: this is cash added to the account from other sources. ROTH and traditional IRAs have annual contribution limits that depend on age, income, and tax filing status, and up to the those limits the account holder can add funds they choose to commit specifically to their retirement goal
- Investment price gains: ROTH and traditional IRAs that are held with custodians that allow brokerage and market based investments may be exposed to the rising and falling market prices of the chosen investments. If a given investment rises in value, that portion of the IRA rises in value as well. Gains like these are considered "unrealized" until the investment is sold, at which time they are "realized" gains. In general terms, capital gains taxes on realized gains are deferred while the money is held in the IRA.
- Investment income distributions: some investments pay dividends, which are typically cash distributions from stocks held individually or within mutual funds in the portfolio; some investments, like bonds, pay interest. The distributions of cash may either accumulate in the IRA or be reinvested into purchases of existing or new positions in the IRA. As with the capital gains, the income tax on these distributions are generally deferred while the money is held in the IRA.
Some things that can slow the rate of growth in the account or even lower the balance would include: market losses, custodial fees related to holding the account at a particular custodian, internal expenses to a particular investment product (like with mutual funds, annuities, etc), transactional expenses to buy or sell investments (like commissions or ticket charges), and fees paid to an investment adviser.
Investing in common stock offers two primary ways to make money: realized capital gains and dividend payments.
- Capital gains come from buying a stock at one price and selling it at a higher price. In taxable investment accounts, these types of gains will typically result in a tax liability at potentially different state and federal rates depending on how long the stock was held before selling.
Choosing to buy and sell, or trade in and out of common stocks to realize capital gains may depend on a belief that the stock is "undervalued" at the time of the purchase and "fairly valued" or "over valued" at the time of the sale. This belief may require a thorough understanding of the company's place in the market and their management's execution on their business plan, among other factors.
- Dividends are payment made at the discretion of the company's management, and are generally paid out quarterly in the United States. Companies that consistently earn a profit have a choice between sharing some of that profit out with shareholders or "reinvesting" the profit back into the company's operations or plans for growth; many companies do a little of both.
When evaluating a stock investment based on the dividend, it may prove useful to research the following:
- How does the dividend yield compare to the overall market? If the dividend yield for a given company is much higher than that for other companies in the same line of business, or much higher than the dividend yield for a relevant index (like the S&P 500, for example), then the market may be treating the dividend of the one company as being at risk.
- Does the company routinely produce enough cash and net income for the dividend payment to look sustainable? Using the recent example of General Electric, who in November 2017 cut their dividend payment in half, one can see that dividends and dividend yields are subject to change.