Ask the Fool

Splits, Sales and Taxes

Q: A stock I own split 3-for-1. How do I figure my taxable gain when I sell the shares? — L.L., Syracuse, New York

A: Imagine that you bought 100 shares for $24 (initial cost: $2,400) and they were trading at $30 before the split, for a total value of $3,000. The split gives you three shares for each one you own, so post-split, you’ll own 300 shares, worth a third as much ($10 each), for a total of… $3,000. Not much has really changed.

For tax purposes, the “cost basis” of your purchase, which was $24 per share pre-split, is now a third of what it was: $8. But if you sell, your capital gain will be the same as it was pre-split. For example, selling now, your gain would be around $600 — your $3,000 in sale proceeds (less your brokerage commission cost) minus your $2,400 purchase price (plus your commission cost).

When a stock is split, dividends per share, earnings per share and other figures based on share count all get adjusted accordingly.

Q: Is “buy and hold” the best way to invest? — H.M., online

A: We prefer to think of it as buying to hold, because while you might aim to hang on forever, you should keep up with your holdings regularly — hanging on as long as they remain healthy and growing, or selling if their prospects change.

Many investors have gotten rich holding shares of great companies for decades, through ups and downs, but you should never just buy a stock and then blindly hold it for years. Superinvestor Warren Buffett has said that his favorite time to sell is “never” — but that doesn’t mean he hasn’t sold stocks.

Fool’s School

The Beauty of Roth IRAs and 401(k)s

When saving for retirement, you can choose between traditional and Roth IRAs; your employer may even offer both traditional and Roth 401(k)s. You might consider the Roth options for their potentially massive tax breaks.

Like other IRAs and 401(k)s, Roth varieties let you accumulate money for retirement and enjoy some tax advantages at the same time. While traditional IRAs and 401(k)s are tax-deferred, permitting you to contribute pre-tax dollars, Roth accounts are designed to be tax-exempt and accept only already-taxed dollars.

Imagine that beginning at age 40, you invest $5,000 of your post-tax income into a Roth IRA each year, and earn an 8 percent annual return for 25 years until you retire at 65. Your account would then contain almost $400,000 — which you could withdraw in retirement tax-free.

If those investments had been made in a regular IRA, you’d owe taxes on any withdrawals, paying around $48,000 or so, assuming a 12 percent tax bracket during retirement, or $96,000 if you’re in a 24 percent bracket. So far, this makes a great case for the Roth.

But remember that if the $5,000 had gone directly into a traditional IRA, you would have reaped about $1,200 in tax savings each year at a 24 percent tax rate (more, with a higher tax rate). If that sum were also invested, the total difference between the Roth and the regular IRA would become slimmer. Still, the Roth is a compelling proposition for many investors.

You may be able to roll over, or convert, your traditional IRA into a Roth by paying taxes on it — you can generally roll over a 401(k) account into a traditional or Roth IRA when you change jobs, too. The 2018 contribution limit for both Roth and traditional IRAs is $5,500 ($6,500 for those 50 and older). For 401(k)s, it’s $18,500 ($24,500 if 50 or older).

Learn more about Roth account benefits and limitations at irs.gov or fool.com/retirement, or from a tax professional. For clear and concise retirement advice, along with stock and fund recommendations, try our “Rule Your Retirement” service at fool.com/services.

My Dumbest

Investment

Straightening Out

an Investment

One of my dumbest investments was buying shares of Align Technology, the maker of Invisalign clear dental aligners and other products — and then selling the shares too soon.

I bought more than a decade ago, when the shares were trading for around $7, and held for a few months. After talking to several dentists (including one who was a close friend), I decided to sell when the shares were trading for about $8, moving that money into another dental-related investment that went nowhere.

The first dentist to recommend selling the stock was also the one who introduced me to Align, as he had a video ad playing nonstop on a TV in his waiting room. — R., online

The Fool responds: Ouch. As you’ve probably noticed, those shares that once traded for $7 have recently been priced above $365 per share. If you’d bought $3,000 worth of shares, they would be worth more than $156,000. No one makes all the right investment moves, though our regrettable ones do sting.

Align Technology has posted many quarters’ worth of record sales, and there’s still plenty of room for further growth, from international opportunities and from the company’s potential to treat more severe kinds of teeth misalignment. You might jump back in if you believe in its future growth — but, of course, do your own research first. (The Motley Fool owns shares of and has recommended Align Technology.)

The Motley

Fool Take

Made-to-Order Growth

McDonald’s (NYSE: MCD) is much more than a burger chain. Its all-day breakfast menu has threatened pancake-slinging chains, and the company is moving aggressively into the future with kiosk ordering, a revamped value menu, a delivery partnership with Uber and renovated stores; all suggest the company’s recent growth may continue.

EDITOR’S NOTE: The Motley Fool is an investment column created by brothers David and Tom Gardner and distributed by Andrews McMeel Syndication.