2022 BRN Discussion, page-2942

I'm not sure about retirement accounts in Australia, but in the United States, I have both a Simple IRA through my employer and a Roth IRA that I have opened up through my online broker. I also have an individual investment account, but a note on that later.

The Simple IRA is funded from pre-tax dollars and the tax is deferred until withdrawals are required to be made from the account. The Roth IRA, on the other hand, is funded from dollars that are already taxed (I set aside a small percentage of my income), and when those funds are withdrawn, no tax needs to be paid on the withdrawals. Both types of accounts have their pros and cons.

Now, in both of these accounts, I can invest the funds that have been contributed and no matter how much those investments make, one does not pay any capital gains tax as they are not reported as income. In the future, any earnings withdrawn from the Simple IRA are taxed as income. Any earnings withdrawn from the Roth IRA again, are not taxed. This is a huge benefit for people who do well with their investments in a Roth IRA.

That being said, if a person is trading from a fairly large pool of funds that they have accumulated in their retirement account over time, they can make earnings on their investment, sell when the stock price is high, and not pay any capital gains tax. Now, I have a T+3 settlement, so I take the chance that the stock may go up in price within the time that it takes for the settlement to complete and if that is the case, it does not make sense to reinvest the earnings into the same stock.

However, if the stock has gone down appreciably when the settlement period is over, I can reinvest those earnings back into the stock and receive more shares than I originally sold. If one lather, rinses and repeats, and times everything just right, they can considerably increase their holdings by the time they are ready to retire and reap the rewards --either through the tax-deferred (as income from the Simple IRA, not capitals gains) or not taxed at all (from the Roth IRA).

Now, I mentioned my individual investment account. Any earnings that I make from the sale of stock in that account are subject to capital gains tax. In the US, one can pay a different tax rate based on: a) their income and filing status; and b) how long the stock has been held. In my particular case, I will either pay 15% or 20% capital gains tax. If I hold the stock for long-term (considered 1 year + 1 day), then I am taxed at the lower rate. However, if I sell the stock before that time, I am subject to the higher 20% rate.

So I have my individual investment account if I need faster access to the funds. It's like long-term savings account for me that when wisely invested, has a much better rate of return than an account at the bank. However, as I do have to pay the capital gains on the sale (unlike in my retirement accounts), the strategy of selling the stock at a higher price and trying to buy back in a lower one is riskier and has a point diminishing returns.

By the way, this is not investment advice, this just answers your question as to a particular scenario when selling the stock at a higher price to buy it back at a lower one can be a profitable arrangement.