Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Realized vs. Unrealized Income
Old 04-07-2008, 03:55 PM   #1
Recycles dryer sheets
Join Date: Apr 2008
Posts: 223
Realized vs. Unrealized Income

So I've been listening to "The Millionaire Next Door" and it has really piqued by interest in millionaires, although I've had a plan for a while now, but on that program, the author mentions that one of the hallmarks of millionaires is to reduce the realized income and maximize the unrealized income as much as possible, to decrease the amount of taxes, and also mentions that Ross Perot is an expert at this. For the millionaires here, is that correct, and also, how exactly does one increase the unrealized income? For example, if I put a lot of money into the stock market and my stocks go up in price, eventually I'll have to sell it and buy other stocks, so doesn't that become realized income?

What does FIRE stand for? There is conspicuously no FAQ or sticky in both of the forums containing the word FIRE and I did a search and could not find the answer..


inquisitive is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-07-2008, 03:57 PM   #2
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 39,198

Numbers is hard.

Retired in 2005 at age 58, no pension

REWahoo is offline   Reply With Quote
Old 04-07-2008, 05:35 PM   #3
Thinks s/he gets paid by the post
SecondCor521's Avatar
Join Date: Jun 2006
Location: Boise
Posts: 1,943
I'm not a millionaire yet, but the author is correct.

The reason for this is that once you start earning any real amount of money, taxes will most likely be one of your top expenses. Although it's not required to be the case, in the US taxes on capital gains have historically been lower than taxes on income. Therefore, when you can do so legally, it is preferable to avoid paying taxes in the first place, pay capital gains taxes in the second place, pay income taxes third, and pay tax penalties fourth. It is from these rules and principles that most of the good financial advice follows.

To your specific questions:

One increases unrealized income, of course, by buying and rarely selling stocks. My father, for example, still owns some AT&T stock that he bought in the 1960s. Or by buying in tax deferred accounts, where the realized income isn't taxed. Or by buying index mutual funds, which can rebalance in tax-advantaged ways.

If you buy stock and it goes up, good for you. If rebalancing means you need to sell, then yes, it will be realized income at that point. Sometimes there are other factors that come to bear -- growing wealthy is eventually not the only consideration. For example, if you buy a stock that grows by 100x, most here would advise diversifying away at least some amount in order to reduce the risk of catastrophic loss. And yes, you will likely pay taxes in that situation.

"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 04-07-2008, 05:35 PM   #4
Recycles dryer sheets
Join Date: Feb 2008
Posts: 147
Originally Posted by inquisitive View Post
if I put a lot of money into the stock market and my stocks go up in price, eventually I'll have to sell it and buy other stocks
Not necessarily. The majority of seasoned investors that I've learned from rarely sell investments. Warren Buffet brags about being "slothful." To maximize your sleep and minimize realized income, research and find investments (whether they be stocks, mutual funds, or whatever) that you are comfortable holding for the very long term. If you play your cards right then during most of your working career you can rebalance towards your desired asset allocation by buying with new cash, not by selling (and paying capital gains taxes). Sure in the very long run you may have to sell some, but if you choose high-dividend investments you may even be able to just live off their income indefinitely.
headingout is offline   Reply With Quote
Old 04-07-2008, 07:15 PM   #5
Recycles dryer sheets
Join Date: Apr 2008
Posts: 223
Thanks for the very rapid responses, I think this is going to become a favorite forum! I will get a book from the library on taxes to read up further from your post.
inquisitive is offline   Reply With Quote
Old 04-07-2008, 08:47 PM   #6
Thinks s/he gets paid by the post
RunningBum's Avatar
Join Date: Jun 2007
Posts: 3,723
I agree with your basic premise. If you're eventually going to sell the stock, whether you did some selling yearly (holding long enough to get LT cap gains) or waited and sold it all at the end, you'll come out about the same. This assumes that the cap gains rate stays the same, and your rate of return is the same.

There are a few caveats. The best one was already hinted at, avoid paying taxes at all. When you die, your estate will be larger if you buy and hold forever and your heirs will get a new basis at the current price. So nobody pays taxes on that gain. Someone correct me if I'm wrong.

By selling more often, you'll have some additional transaction costs, but those should be small.

By holding a long time, if you ever do need to sell (perhaps due to an emergency, or a stock you want to get out of because of some news), you'll be able to sell with LT cap gains taxation. But if you are turning it over more rapidly, you might be caught at a time where you haven't held for a full year, and get stuck with ST cap gains. That could be significant if you are 8-10 months into a good year. There are ways around that (sell an equal number of shares short while holding your shares for the remainder of the 12 months) but there's some overhead expense to that.

I also think one of the messages is to buy quality and hold it rather than try to chase hot stocks.
RunningBum is offline   Reply With Quote
Old 04-08-2008, 08:07 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
Join Date: Feb 2006
Posts: 8,104
When DW and I hit 70, RMDs will be at or greater than our expenses. At that point it would seem there is little we can do to reduce taxes.
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 04-08-2008, 02:49 PM   #8
Thinks s/he gets paid by the post
Join Date: Apr 2007
Posts: 1,304
Originally Posted by donheff View Post
When DW and I hit 70, RMDs will be at or greater than our expenses. At that point it would seem there is little we can do to reduce taxes.
yep, Uncle Sam will eventually get his cut ...

Life is GREAT!
megacorp-firee is offline   Reply With Quote

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
Anyone familiar with income tax treatment of net unrealized appreciation (NUA) chinaco FIRE and Money 2 03-10-2007 06:33 PM
Unrealized gains risk? calmloki FIRE and Money 5 03-05-2007 04:09 PM
Just realized I have a VUL--what should I do? CompoundInterestFan FIRE and Money 10 01-21-2007 04:57 PM
Net unrealized appreciation: Reason to liquidate 401k instead of rollover? free4now FIRE and Money 2 06-20-2006 07:16 PM
Realized some thing yesterday brewer12345 Young Dreamers 34 09-04-2005 06:03 PM


All times are GMT -6. The time now is 10:23 AM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2016, vBulletin Solutions, Inc.