How Investing Affects Your Taxes

Here’s a simple rundown of how taxes work when you invest money.

Tax-Deferred Growth

When you save money for retirement, sometimes the money you save is tax-deferred.

401k and Traditional IRAs both offer tax-deferred growth.

Not all retirement accounts are tax-deferred.

That’s one advantage.

And the Roth IRA has another tax advantage: tax-free growth.

For that reason, a lot of experts recommend Roth over Traditional IRAs.

We talk about the differences between Traditional and Roth IRAs in more detailhere.

But they both have different tax advantages.

Basically:

Traditional= Tax deferred, so you’re able to deduct contributions from your income now.

What happens with your taxes then?

We’ll get into a bit more in the following section.

Here’s how it works.

A while later, you decide to sell your investment for a profit.

(That’s the whole idea of investing, right?)

That profit is called a capital gain.

And yes, you have to pay taxes on it.

Your brokerage company (E-Trade, Fidelity, Scottrade, etc.)

will send you a 1099-B form that includes your capital gain amount for the year.

Of course, you have to include this info when you do your taxes.

But what if youlosemoney on an investment?

So it’s important to remember not to write off your capital losses completely.

These are called dividends.The Law Dictionarycalls them “periodic bonus payments.”

Whatever you call them, they’re considered regular, taxable incomeeven if you don’t sell your shares.

They are free of state, federal and local taxes called “triple free.”

Corporate Bonds: You pay taxes on interest.

This might include a 1099-DIV and a 1099-B.

These documents should make it pretty straightforward to enter in your information come tax time.

Sure, investing can be intimidating and confusing.

There are a lot of numbers and rules and unfamiliar words.

Taxes can be another hurdle.