The Tax Implications of Investing

Curtis has earned the Life and Health Insurance licensure, has passed the Series 66 examination, and has earned a degree from the University of Nevada, Reno. He has over 20 years of experience in the financial industry, helping others protect, grow and manage their wealth. Curtis helps clients create customized strategies for their portfolios based on their unique financial goals.

 

THE TAX IMPLICATIONS OF INVESTING

I may sound like a broken record but one of my favorite sayings is “Nothing is guaranteed except for death and taxes.” Even though I have modernized this quote a bit, a big thanks goes out to Benjamin Franklin for initially stating it. So, what are the implications of investing as far as taxes go?  In this blog, we will briefly discuss the taxation of IRA-style accounts and how non-qualified accounts are taxed.  So, essentially another blog talking about everyone’s favorite financial subject: Taxes.

 

TAXATION ON YOUR TRADITIONAL IRA

First, let’s look at the IRA and the Roth IRA.  For the Traditional IRA account, you put money in, and it is tax-deferred or considered pre-tax money.  These types of accounts will include a 401k, 457, 403b, Traditional IRA, Simple IRA, SEP IRA, etc.  The way the money is taxed on these accounts is when you take money out, that money will be classified as income, and you will pay tax on that money as income.  Keep in mind that most accounts will charge a 10% early withdrawal tax penalty if you withdraw funds prior to age 59 ½.  Different accounts have rules that change this but please keep this in mind if you are looking at withdrawing money prior to 59 ½ from one of these accounts. 

TAXATION ON YOUR ROTH IRA

For the Roth IRA, this is simple.  This is considered after-tax money, so you have technically already paid tax on this money.  In a Roth IRA or Roth 401k, this money will grow tax-free.  When you take money out it will be tax-free, it will not show up as income on your tax return.  Let me just say that tax-free money is a very nice place to have some money, especially in retirement and a rising tax environment.  There is a small caveat called the 5-year rule where your earnings have to be in for five years, or the earnings become taxable, but your principal will be tax-free for withdrawal from the onset.   The five-year rule clock starts ticking on January 1st of the year you made your first contribution to the account.

 

TAXATION ON A NON-QUALIFIED ACCOUNT

Finally, for this article, we will talk about the taxation of a non-qualified account.  These accounts, whether they are individual, joint, or trust accounts, are taxable on their gains and losses.  For example, if you buy stock for $100,000 and sell it for $110,000 15 months later, the $10,000 can be taxable as a gain to you.  Right now, the bottom two tax brackets do not pay gains on capital gains, while the top tax bracket will pay 20% on the capital gains and the remainder of the tax brackets will pay 15%.  If you have losses, you are able to claim $3,000 a year as a loss, or possibly offset some other gains.  Also, don’t forget that dividends and interest are taxable to you as well!

WHERE TO GO FROM HERE

In conclusion, it is important to understand the basic tax implications for your accounts and what you hold in those accounts.  It is important to discuss this with your financial advisor and your CPA as you can see above in my fast and furious breakdown taxation is very different depending on the type of account you hold! To see how we help our clients with their tax planning in retirement, call our office at 775.853.9033.


Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.


This information should also not be considered tax or legal advice. Individuals should consult with a professional specializing in the fields of tax, legal, and accounting regarding the applicability of this information for their situation.