Dollar Cost Averaging vs Lump Sum Investing

You can find many articles and blog posts on dollar cost averaging vs lump sum investing. This discussion is only relevant when you have a large lump sum that you want to invest, which generally occurs either when you are starting investing, or you receive a windfall from say an inheritance.

Lump sum investing – You invest the entire lump sum according to your Investment Policy Statement (IPS).

Dollar cost averaging – You invest your lump sum over a period of time, typically 6-12 months.

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My April Vacation to Korea and Japan Booked with Miles!

I’m going to interrupt this stream of finance oriented posts with the details of my award ticket for my upcoming vacation to Japan and Korea in April. One of the major things I want to do when I’m financially independent is travel the world (and keep the costs down while doing it). So “travel hacking” is one of the things that I have been strategizing for the past couple months, and now I have finally booked a major flight using miles (I have booked a short domestic flight on United before, but that’s not that exciting).

“Travel hacking” is the act of substantially reducing the costs of a trip through various means. The most common way is to utilize credit card signup bonuses – typically you are required to spend $1000-$3000 in the first three months after approval of certain credit cards to get the bonus. For higher end cards, this bonus can be 50,000 miles (or sometimes, even more). Sometimes you can get miles from bank accounts (though this is somewhat rare, and not used as often). Using credit card signup bonuses for airline miles and hotel points is the common way that people engage in travel hacking.

So today I’m going to explain how I got the miles I used for the flight, how much that cost me in both money and time, and some technical difficulties I had in booking.

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How To Avoid Capital Gains Tax

[Edited 01/30/2017 to clarify how much can be deducted for donating securities to charity]

Recall that when you sell an asset, you owe capital gains taxes on the difference between your cost basis and the sale price. There are, however, at least three ways capital gains taxes can be avoided (I’m sure there may be more, but these are the ones I am aware of)

  • If the asset is a stock, mutual fund, or ETF, and you’ve held it for at least a year, and you are in the 0% long term capital gains bracket, you don’t owe any tax on the sale. Of course, this requires you to be in the 0% long term capital gains bracket, which you may not be.
  • Donate the stock, mutual fund, or ETF to charity. Of course, this is only really beneficial if you were going to donate anyway.
  • Leave the asset to your heirs in your will. Neither your estate nor the heirs will owe any capital gains taxes.

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Do Your Taxes Yourself

[I updated an earlier post on IRAs to mention one of the most important characteristics of Roth IRAs – early withdrawal of contributions without penalties or taxes].

Almost all Americans should do their taxes themselves. Many people just have wage income and some bank interest, which is incredibly simple to file. Some people all capital gains and qualified dividends to that, which isn’t that much harder. A couple of tax credits can get hairy, but for the most part, people should do their taxes themselves, by hand, without any software. Now I do recommend using software to check your work (so long as you can find free software that will handle your tax situation). But you should do it by yourself by hand first. I have two major reasons for this recommendation

  1. If you just mindless answer the questions asked by tax software, you don’t learn the tax code, which means you can’t plan ahead
  2. You can outsmart the tax software and get a better refund. I’ve done this before, and will continue to do this for every single year I am a graduate student.

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Target Date Funds and Tax Efficient Asset Placement

Back in my post on what funds I invest in, I said that you should not just blindly follow my fund selection, one of the reasons being you should take into consideration retirement accounts. Certain assets should, generally speaking, be held in a retirement account instead of a taxable account. I think I’ll motivate this with a discussion of target date funds.

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Obamacare, the Thorn in the Roth Pipeline Strategy

I’m going to keep this post short, because Harry Sit explains this quite well. Recall that a way to withdraw money before 59.5 from a Traditional 401k or IRA is to convert the funds to a Roth IRA. When you do this, the conversion amount gets reported as income for that tax year. The unfortunate problem with this approach in light of Obamacare is that if you buy health insurance from the marketplace and thereby could qualify to get a federal tax credit for health insurance, your, tax credit decreases with a rise in income. Hence, you could end up increasing your taxes more than you might initially expect. Check out Harry Sit’s post at The Finance Buff to read up on the details. Keep in mind he tends to use numbers for a married couple, not single people.