Taxes. No one likes to pay them. Unfortunately, that old adage about death and taxes rings as true today as it ever has. There is no saving on investment income either, but there are ways to lower these taxes or prevent them from hampering the growth of your wealth over time.
1. Go long-term
The easiest way to lower your annual investment taxes is to keep them for more than a year. Taxes on short-term capital gains are taxed as ordinary income. The long-term capital gains tax creates an incentive for long-term investors. To qualify for these lower rates, you must keep your investment for more than a year.
The three rates for capital gains are 0%, 15%, and 20%. For a single filer, you can pay 0% in long-term capital gains if your income is less than $ 40,000. While most people pay 15%, filers who had incomes of more than $ 441,500 actually pay a capital gains tax of 20% on long-term earnings. The joint filing creates a 0% income tax of $ 80,000 or less. On top of that, there is a 15% tax up to $ 496,600. On top of that income, the 20% tax is applied.
Regardless of the level of income to which you belong, you still get a tax advantage by holding investments for more than a year.
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2. Take your losses
Sometimes you make a bad move. It happens to the best of us. If you have a stock that has drastically underperformed, you can sell it and use that capital loss to offset your capital gains. By doing so, you can balance that with the gains you could make from an investment that has performed excellently.
Obviously, this is not exactly the most ideal scenario. But if you’re sitting on a failure that you know won’t help you in the future, selling that position to make sure you don’t pay as much for your good investment is a strategy.
3. Use retirement accounts
Retirement accounts like IRAs and Roth IRAs offer the ability to invest tax-deferred. On the IRA side, you can invest up to $ 6,000 (if you’re over 50 you can contribute $ 7,000), and earnings are tax deferred until you start accessing them from the account. While in the end you will end up paying capital gains, the IRA is a means by which you can increase your investments in a rampant way by the capital gains tax.
A Roth IRA does the same, except in reverse. You pay taxes on the money you enter, but any winnings and withdrawals are tax-free. You can also use a traditional 401k for tax-deferred investments.
Again, you really are not running away from capital gains taxes. What you are doing is creating a way to invest without annual success. This creates the ability to build more wealth over time.
Taxes are part of life. Investors are rewarded for long-term plays through lower rates for long-term capital gains taxes. That, and prudent savings through retirement accounts, are the best ways to get the most out of your money.
