Photo of Eric Ebbert CFP®, MBA Eric Ebbert CFP®, MBA Jan 20, 2021

Many Americans invest to save for future goals and generate wealth. However, it is important to understand how much you may owe in taxes on your investments, so you can factor this into how you track your growth.

There are different types of investments that people can use to save and grow their wealth. What you may or may not owe in taxes depends on the types of investments you own.

Four examples of how taxes on investments work

Take a look below to understand how taxes on investments work for these three common types of investments:

  1. 401(k), IRA and other retirement plans — You do not pay taxes on money you contribute into a traditional 401(k) and other retirement plans, and these funds are allowed to grow overtime tax deferred. You only pay taxes on these funds when you make a withdrawal after you reach your eligible retirement age (59 ½ for most people or at least 55 if you retire at that age from a 401[k]).
  2. Capital gains — Selling an asset, such as a stock or property, is considered a capital gain. The rate at which your capital gain is taxed depends on how long you held the asset prior to the sale.

    A short-term capital gain refers to capital that was held for one year or less. The rate at which it is taxed is equal to your ordinary tax income bracket rate.

    A long-term capital gain refers to capital that was held for longer than a year. These are taxed at a rate of 0%, 15% or 20% depending on your taxable income and filing status.
  3. Dividends — Dividends are usually taxable as income during the year that they are earned. How they are taxed depends on whether they are categorized as qualified or nonqualified dividends.

    The tax rate of a nonqualified dividend is usually the same as your regular income tax bracket. A qualified dividend may be taxed at 0%, 15% or 20% depending on your taxable income and filing status.

Talk to a ProVise CFP® professional about your investments and taxes

Are you an investor wondering how taxes on investments will factor into your personal financial plan? Navigating the complicated fiduciary landscape on your own can be difficult. However, with a finance professional by your side, you can form a plan that works for you to help you reach your goals without worrying about the tiny details, such as how investment taxes work.

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about your investments and taxes? Contact ProVise today to schedule a complimentary consultation.