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Need to tap into your investments? Beware of tax traps

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Inflation has been putting a strain on just about every household budget. In some cases, it’s the increased cost of food. In other cases, it’s the higher cost of servicing debt as interest rates skyrocket.

If dipping into your retirement savings is the only alternative to make ends meet it’s important to know the tax consequences vary depending on where you draw the cash from.

Ideally, you will already have some cash in your retirement accounts, but your needs could require liquidating investments. Selling investments in a pinch can be tricky in a market where just about everything is in a slump. A qualified investment advisor can help trim profits, or separate the duds from those poised to realize their potential.

You might also want to consult a tax expert. Any tax pro will tell you to never make an investment decision based solely on tax implications, but the amount of tax you pay on withdrawals often depends on how the money is stored and your personal situation.

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NON-REGISTERED INVESTMENTS

There is no tax on cash transfers from a regular, non-registered investment account. If a stock or equity fund is sold to generate cash, however, half of the capital gains are taxed at your marginal rate (the rate you pay based on your overall income).

A capital gain is a profit from the original investment. There is a bright side if you are selling an equity that has gone down from its original value, however. Half of capital losses can be used to recoup taxes paid on capital gains over the previous three years, or can be used to offset future capital gains.

TFSA: PROBABLY THE BEST IDEA

There is no tax on capital gains, and therefore no tax break from capital losses on investments sold in a tax-free savings account (TFSA).

In fact, there is no tax on any gains or contributions in a tax-free savings account.

Cash withdrawals from a TFSA can be made at any time but for those who contribute the maximum amount it’s important to know that allowable contribution space will not be renewed until the following calendar year.

HELOC: NO PLACE LIKE HOME

Like a TFSA, money withdrawn from a home equity line of credit (HELOC) or reverse mortgage is never taxed.

Both are loans against the equity in your home and interest is charged on the balance owed. That interest compounds over time until the full loan is paid back; either at the homeowner’s choosing, when the house is sold, or the owner dies.

Tapping into home equity has been the most common solution for homeowners who need quick cash but rising interest rates have increased the costs dramatically.

The interest rate on a HELOC is tied to the lender’s prime lending rate, which is tied to the Bank of Canada benchmark rate. With more central bank rate increases on the horizon, the interest rate on a typical HELOC has risen to about five per cent from under two per cent in less than a year.

Reverse mortgage rates are tied to conventional fixed mortgage rates, which are also rising dramatically. The fixed rates on reverse mortgages are currently around seven per cent.

If you repay the balance on the line of credit quickly, the interest cost is capped. If financing is a chronic problem, the best course of action from a tax perspective could be to sell the house. There is no capital gains tax on the sale of a principal residence.

RRSP: THE LAST RESORT

Registered retirement savings plan (RRSP) withdraws are fully taxable according to your marginal income tax rate in the year of the withdrawal (unless borrowed for a fixed term for a down payment on a first home or continuing education).

If you are generating a full-time income from work, you will be taxed at a higher marginal rate than if your income is low.

If you have suffered a loss or drop in income, an RRSP withdrawal could make sense. If you are under 65 years old, a withholding tax will likely be imposed based on the size of the withdrawal. Any amount above the amount you actually owe will be refunded.

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Zacks Investment Ideas feature highlights: Alphabet, Tesla, Shopify, Amazon and Palo Alto

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For Immediate Release

Chicago, IL – February 2, 2023 – Today, Zacks Investment Ideas feature highlights Alphabet GOOGL, Tesla TSLA, Shopify SHOP, Amazon AMZN and Palo Alto Networks PANW.

Which of These Stocks Has Been the Best Buy, Post-Split?

Stock splits have been a regular occurrence in the market over the last several years, with many companies aiming to boost liquidity within shares and knock down barriers for potential investors.

Of course, it’s important to remember that a split doesn’t directly impact a company’s financial standing or performance.

In 2022, several companies performed splits, including Alphabet, Tesla, Shopify, Amazon and Palo Alto Networks. Below is a chart illustrating the performance of all five stocks over the last year, with the S&P 500 blended in as a benchmark.

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As we can see, PANW shares have been the best performers over the last year, the only to outperform the general market.

However, which has turned in a better performance post-split? Let’s take a closer look.

Tesla

We’re all familiar with Tesla, which has revolutionized the EV (electric vehicle) industry. It’s been one of the best-performing stocks over the last decade, quickly becoming a favorite among investors.

Earlier in June of 2022, the mega-popular EV manufacturer announced that its board approved a three-for-one stock split; shares began trading on a split-adjusted basis on August 25th, 2022.

Since the split, Tesla shares have lost roughly 40% in value, widely underperforming relative to the S&P 500.

Palo Alto Networks

Palo Alto Networks offers network security solutions to enterprises, service providers, and government entities worldwide.

PANW’s three-for-one stock split in mid-September seemingly flew under the radar. The company’s shares started trading on a split-adjusted basis on September 14th, 2022.

Following the split, PANW shares have struggled to gain traction, down roughly 15% compared to the S&P 500’s 3.3% gain.

Shopify

Shopify provides a multi-tenant, cloud-based, multi-channel e-commerce platform for small and medium-sized businesses.

SHOP shares started trading on a split-adjusted basis on June 29th, 2022; the company performed a 10-for-1 split.

Impressively, Shopify shares have soared for a 50% gain since the split, crushing the general market’s performance.

Alphabet

Alphabet has evolved from primarily being a search engine into a company with operations in cloud computing, ad-based video and music streaming, autonomous vehicles, and more.

Last February, the tech titan announced a 20-for-1 split, and investors cheered on the news – GOOGL shares climbed 7% the day following the announcement. Shares started trading on a split-adjusted basis on July 18th, 2022.

Alphabet shares have sailed through challenging waters since the split, down 10% and lagging behind the S&P 500.

Amazon

Amazon has evolved into an e-commerce giant with global operations. The company also enjoys a dominant position within the cloud computing space with its Amazon Web Services (AWS) operations.

AMZN’s 20-for-1 split was a bit of a surprise, as it was the company’s first split since 1999. Shares started trading on a split-adjusted basis on June 6th, 2022.

Following the split, Amazon shares have lost roughly 18% in value, well off the general market’s performance.

Bottom Line

Stock splits are typically exciting announcements that investors can receive, with companies aiming to boost liquidity within shares.

Interestingly enough, only Shopify shares reside in the green post-split of the five listed.

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Media Contact

Zacks Investment Research

800-767-3771 ext. 9339

support@zacks.com

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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$13 million investment in Campbellford Memorial Hospital

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The Campbellford Memorial Hospital will be receiving a $13 million investment from the Ontario Government to address infrastructure concerns.

The announcement was made at the hospital by Northumberland—Peterborough South MPP David Piccini.

The $13 million is broken down as follows:

  • $9,639,900 will be going to CMH as one-time capital funding to address the HVAC and generator
  • $1,874,929 for reimbursement of CMH’s COVID-19-related capital expenses
  • $771,797 in COVID-19 incremental operating funding
  • up to $600,000 in one-time funding to support the hospital’s in-year financial and operating pressures
  • $163,600 in pandemic prevention and containment funding
  • $81,132 through the Health Infrastructure Renewal Fund
  • $46,884 in health human resources funding.

Interim President and CEO Eric Hanna welcomed the news, saying much needs to be done about the HVAC and generator.

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At the announcement, Hanna spoke of the issues with the generator.

“I’ve got the wee little generator up at the lake and then I’m thinking well, everything should be going well at the hospital,” Hanna told the audience in attendance.

“You get a call from the person in charge who says, ‘Guess what Eric? Generator didn’t start. Oh, so what does that mean? There’s no power in the hospital.’  That’s happened a couple of times in the past year and the generator is over 30 years old.”

Hanna says the solution was not as easy as replacing the generator.

“You can go buy the generator and that may be about a million dollars. But then when we found out afterwards, we came to hook up the new generator to the electrical distribution system and said it won’t work with that because your electrical distribution system is 1956. You can’t plug this generator into that. So now we’re putting close to $5 million into a whole electrical distribution system so the generator will work. It’s part of that ongoing thing and that’s why these costs continue to go up.”

The HVAC system was also something addressed by Hanna.

“It’s a contract close to $7 million to replace that. This wing, for example. There’s no fresh air in this wing. It hasn’t worked in here for 15 years. So now this is administrative areas and the concern was that in some of the patient carriers, it wasn’t working either.  So – having those discussions with David (Piccini) and saying what we have to do to correct this.”

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Chile’s Enap Set to Slash Debt Burden That Weighed on Investment

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(Bloomberg) — Enap, Chile’s state oil and gas company, plans to use near-record earnings to slash its debt burden, while increasing investment in its refineries and in exploration and production.

The company aims to reduce its debt load to about $3 billion “medium term” from the current $4.3 billion, Chief Executive Officer Julio Friedmann said in an interview. Plans include a bond sale in the first half of this year to refinance some securities.

The improved financial position — with 2022 profit surging to $575 million — comes after Enap’s oil and gas operations in Egypt, Ecuador and Argentina got a boost from high crude prices, while healthy international refining margins benefited plants in Chile. Those trends are expected to extend into this year and next, enabling the company to pre-pay some short-term obligations. About half of the current debt burden matures in the next three years.

“We are going to issue bonds,” the MIT-trained executive said Wednesday from the Aconcagua refinery in central Chile. “We are closely evaluating the local and international markets.”

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At the same time, Friedmann, who took the reins at Enap in November, plans to increase capital expenditure to about $700 million this year from $550 million last year.

The increase comes after underinvestment in the past few years because of Covid restrictions and the heavy debt load. Spending will focus on making treatment processes cleaner and upgrading infrastructure, as well as a more aggressive approach to increasing gas reserves in the far south of the country, he said.

Gas Markets

Enap plans to expand in both liquefied petroleum gas and natural gas markets in Chile, focusing on the wholesale business and eventually selling directly to large-scale consumers such as mines. Organizational changes to enable the expansion will be announced soon. There are no plans to enter the final distribution business, Friedmann said. The company wants to supply more gas to southern cities as a way of replacing dirtier fuels such as wood and diesel.

Enap and its partners are also preparing pipelines and a refinery near Concepcion to start receiving crude from Argentina’s Neuquen basin sometime this year in an arrangement that could supply as much as 30% of its needs.

While there’s plenty of potential do collaborate more with energy-rich Argentina, particularly in the Magallanes area, that would require greater long-term visibility on supplies from the neighboring country, Friedmann said.

He sees a role for Enap in the development of green hydrogen in Chile. It’s in talks with three companies to enable its facilities in Magallanes to be used to receive all the wind turbines, electrolyzers and other equipment that will be needed to make the clean fuel. Enap is also evaluating its own small pilot plants and will consider whether to take up options to enter other green hydrogen projects as an equity partner.

While the company will maintain its focus on meeting rising demand for traditional fuels, it anticipates new regulation that will require lower emissions. It’s also looking closely at clean-fuel options for aviation, Friedmann said.

(Adds clean fuel plans in last paragraph. I previous version corrected spelling of CEO’s surname.)

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