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How your investing accounts are taxed and how to minimize your taxes

Discovering ways to make my hard-earned money work harder for me brings me immense satisfaction and I’m passionate about helping people do the same.

Which is why I encourage everyone to learn how to invest in multiple retirement accounts because you are building wealth over time through investing AND receiving significant tax savings now or in retirement.

Retirement accounts aren’t the only place to invest, and for many people a taxable brokerage account can make a ton of sense. It’s super flexible and you can pull your invested money out anytime you want.

That said, I strongly recommend you plan to invest for the long haul in a taxable brokerage account because of market fluctuations and short-term capital gains tax if you sell investments you’ve owned less than a year (more on this below.)

In this article we will cover:

  • Retirement accounts
  • Taxable brokerage account taxes
  • Tax loss harvesting
  • What you should expect during tax season

Retirement Accounts

1. If you contribute to retirement accounts like IRA’s or 401(k)’s, as long as you’re not retired and using your retirement funds, you don’t need to be concerned about taxes. 

These investment vehicles offer tax advantages where you’re not taxed on the growth in those accounts every year like you are with taxable accounts. This means that you can buy, sell, and earn dividends and interest inside these accounts without worrying about paying taxes annually on any gains. 

Essentially, if you only invest within retirement accounts, you don’t need to worry about investment taxes. 

2. How long do you have to contribute to an IRA? 

You can contribute to a Roth IRA for 2022, up until you file your taxes in 2023. You do not need to make your contribution to an IRA during the calendar year for it to count towards the year in which you are filing taxes for.

If you have a business or made side hustle income, you still have time to contribute to SEP IRA, which is a retirement account that will reduce your taxable business or side hustle income. 

Taxable Brokerage Accounts

If you have taxable brokerage accounts (basically any investing account that’s not a retirement account), it is, well, taxable. 

There are two main types of taxes. 

  1. Capital gains refer to the increase in an asset’s value over time. For example if you bought an investment for $5 and sold it at $10, you would have a capital gain of $5 and would be obligated to pay taxes on that gain. 
  2. Dividends are payments made by the company to shareholders for investing in their company. Some companies offer higher dividend yields than others. For instance, if you invest $20 in a company with a 5% dividend yield, you’ll earn $1 per share.

Capital gains and dividends are taxed differently from earned income. If you’re investing regularly in your account and not selling anything, you won’t have to pay taxes on capital gains. 

You only pay taxes on capital gains when you sell an asset at a profit. However, selling an asset triggers a tax event, even if you’re reinvesting the money within the confines of the brokerage account and not withdrawing any money.

How are capital gains calculated?

The tax rate on your capital gains is determined by how long you held the investment and your total income from all sources (this includes your salary, side hustles, and investment income.) 

If you sell your investment after holding it for fewer than one year, your marginal tax rate applies to the gain. This is not ideal because it will likely be higher than the capital gains tax rate. 

If you hold your investment for more than one year, you pay the capital gains tax rate on the gain, which is typically far more favorable than your marginal tax rate.

For example, if you’re single and have a total income of $41,675 or less in 2022, you don’t pay taxes on your long-term capital gains. For married couples filing jointly, the 0% bracket applies to total incomes of up to $83,350.

If your income is between $41,676 and $459,750 (yes, that’s correct) in 2022, you’ll pay 15%. For married couples filing jointly, the range is $83,351 to $517,200. If your income is $459,751 or more, you’ll pay 20%, and for married couples, the total income above $517,201 is taxed at 20%.

Most people fall into the 15% capital gains tax rate. 

How are dividends taxed?

Whether you reinvest them or withdraw them, your dividends are taxed annually, as they are considered income for the year you earned them. There are two types of dividends: ordinary and qualified. 

Ordinary dividends are taxed at your regular tax rate, whereas qualified dividends, which meet certain requirements, are taxed similarly to capital gains at more forgiving brackets. Your 1099-DIV statement from your brokerage firm will clearly outline both types of dividends.

If you reinvest your dividends, you’re technically being taxed on income that you never withdrew as cash. This is different from how you’re taxed on the income you receive on your paycheck, as you’ll need money from another source to pay the tax bill associated with your dividends. 

Tax Loss Harvesting

If your stocks have lost value, you can use tax loss harvesting to offset gains from other investments. Here’s how it works: You sell a holding that has decreased in value and recognize a capital loss. You can use this loss to offset gains from other investments. 

The key is to reinvest your remaining money in something similar but not “substantially identical”. You want to avoid a wash sale, which is when you sell an investment at a loss and buy a substantially identical stock within 30 days before or after that sale. 

You can typically deduct up to $3,000 of losses per year, and if you have losses in excess of $3,000, you can carry them forward into the future to offset future gains. This is only a benefit in taxable accounts – it doesn’t apply to tax-deferred accounts like 401(k)s.

You must complete this by the end of the calendar year so if you have not done this yet it is too late for 2022, but something to consider for 2023.

What you should expect during tax season

Around mid-February, most investment firms will send you a 1099-DIV (or 1099 Composite) that lists your capital gains, ordinary dividends, and qualified dividends. You can then upload this form to your tax software or give it to your CPA. 

If you invest with a robo advisor, they may have automatic rebalancing and tax loss harvesting features that you can activate so that you don’t have to do everything manually.

Also, your 1099-DIV forms will provide you with an account summary, so familiarize yourself with them! While it’s relatively simple to input the numbers into tax software, it’s also okay to hire a CPA to take care of everything for you—they can answer questions and provide advice that could reduce your tax liability.

And don’t forget the best part: if you’re earning enough income from your investments to be taxed, that means you’re making money. Virtual high five. 

Ready to take control of your finances but not sure where to start? Grab my free financial independence checklist to figure out where to begin. 

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Financial progress is a mixed bag for women in 2023

Women’s History Month is full of stories about progress.

Yes, some progress has been made.

It was not that long ago when banks could refuse women a credit card. That is, until the Equal Credit Opportunity Act of 1974 was signed into law. 

Prior to that, a bank could refuse to issue a credit card to an unmarried woman, and if a woman was married, her husband was required to cosign.

Some progress doesn’t mean we can stop shedding light on the state of women’s financial health.

Because when it comes to things like investing, inflation, women in leadership, etc. — progress is more of a mixed bag. 

Here’s 5 things we need to be talking about:

1. Most Women Are Not Actively Investing

The GOBankingRates survey found that 57% of women are not actively investing. When asked why they are not investing, one-third of women (33%) cited a lack of money. This is unfortunately because you don’t need a lot of money to get started! 

The most popular investment vehicle among women are work sponsored retirement plans like a 401(k) or 403(b). Less than 10% utilize a brokerage account, IRA or investing app.

Getting starting investing doesn’t need to be complicated or take a ton of time. If you want to learn how to get started, but find the financial jargon overwhelming, check out my free guide 26 need to know investing terms right here.

2. Inflation Hit Women Particularly Hard

Over the past year, women had to face the challenge of dealing with inflation in addition to the “pink tax,” which refers to the extra costs that women bear for personal care items, clothing, and other products. As the ones who are usually responsible for household purchases, many women found it increasingly difficult to manage their budgets.

Considering these circumstances, it’s not surprising that women were more mentally affected by inflation than men. According to a recent survey by Stash, 60% of women reported that inflation was impacting their mental well-being, compared to 52% of men. 

3. Women Weren’t Able to Save Enough

According to a survey by Betterment conducted earlier this year, women did not save enough money in 2022. The survey revealed that 41% of women do not have any emergency savings, whereas only 28% of men reported the same.

Another survey conducted by GOBankingRates found that 40% of women have $100 or less in their savings accounts, compared to only 26% of men. Furthermore, women are more likely than men to report having less in their checking accounts, with 40% of women stating that they allow their minimum checking account balance to drop to $100 or less.

4. Women are Missing Out On and Leaving Leadership Positions

Despite modest gains in representation in leadership, only 1 in 4 C-Suite leaders is a woman (Women in the Workplace Report, 2022). Far fewer women than men are being promoted to managerial roles: For every 100 men who are promoted from an entry-level to a manager position, only 87 women and 82 women of color are promoted. 

What’s more, women leaders are twice as likely as men leaders to be mistaken for someone more junior — and 37% of women leaders have had a co-worker receive credit for their idea, compared to 27% of men leaders.

5. Roe v. Wade 

The U.S. became one of just four countries to roll back abortion rights in the past 25 years. U.S. girls and women now have fewer rights than their mothers and grandmothers did in some US states. 

It’s not just a reproductive rights issue. One study found that abortion restrictions led to a drop of between 5 percent and 6.5 percent in average monthly salaries of women of childbearing age compared with the rest of the population. This is an economic issue too. 

For these reasons and many more, I’m committed to help everyone, regardless of how they identify, build knowledge that will help people make, keep, and grow their money. 

Feeling like you need some next steps but you aren’t sure where to start? 

Grab your free financial independence checklist right here to figure out your next steps.

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7 reasons to start investing in your 30’s and 40’s that have nothing to do with retirement

Investing is often viewed as a tool to prepare for retirement, but there are many important reasons to start building investing knowledge in your 30s and 40s that have nothing to do with retirement. Here are seven reasons why investing should be an essential part of your financial strategy.

#1 Staying Ahead of Inflation

Inflation is the rate at which the cost of goods and services increases over time. If you keep your cash in a regular savings account, it’s probably not going to keep up with inflation. This means that your hard-earned money won’t get you as far as when you originally earned it. Investing can help you beat inflation over time by earning returns that exceed the rate of inflation.

#2 Passive Income

Your job or business likely requires you to trade your time and energy for money. Investing can help you generate income passively, putting your hard-earned money to work for you without much additional effort.

Dividend-paying stocks, rental properties, or even certain types of bonds can generate passive income that can supplement your salary or other sources of income.

#3 Achieving Goals

While it’s not recommended to invest any money you need in the next 3 to 5 years due to normal fluctuations in the stock market, investing can help you reach important life goals.

If in the future you have the goal of buying a house someday, going on your dream trip in the future, or supporting your kids you’ll want to start investing now. Investing can help you get there much faster than just saving.

#4 Building Generational Wealth

Contributing to an investment account like a 529 or Custodial Roth for your kids is a great way to help them get started building wealth. It can also be an opportunity to teach them the basics of investing at an early age.

Getting your children involved in the process early on can be life-changing for them and set them on a path to financial independence and success.

#5 Confidence

When you take control of your finances and start investing for your future, you’ll not only trade your financial anxiety for confidence, but it will also create more security, safety, and optionality in your life.

By taking ownership of your financial future, you’ll feel more empowered to pursue your goals and dreams.

#6 Impact

A donor-advised fund, or DAF, is a charitable investment account for the sole purpose of supporting charitable organizations you care about. This account allows you to allocate and grow a portion of your wealth with the goal of supporting causes you care about most.

By investing in a DAF, you can create a lasting impact on the world and make a difference in the lives of others.

#7 Reducing the Gender Wealth Gap

Women not only make less than men, but as a group, we invest less as well contributing to a significant gender wealth gap. By investing more in our financial futures, we can reduce the wealth gap and have a bigger impact on the issues we care about most.

Investing can be a powerful tool for women to take control of their financial futures and pave the way for future generations.

In conclusion, investing is not just for retirement planning. It can be a crucial part of your financial strategy at any stage of life. By investing in stocks, bonds, real estate, or other assets, you can achieve your financial goals, build generational wealth, create a lasting impact on the world, and reduce the gender wealth gap.

Take control of your financial future and start building your investing knowledge today.

Ready to get started? Check out my signature beginner investing program for busy professionals and entrepreneurs, right here.

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