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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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Is a Roth 401(k) Better than Regular 401(k)? 

Your 401(k) is one of the best and most powerful tools at your disposal to help you to prepare for retirement.

The first step is to make sure you are making the most of this account is by understand the basics of how 401k contributions and matching works and ensuring that you are taking your employer match if your employer offers one.

The better option between a traditional 401(k) or a Roth 401(k) will depend on your financial goals and tax preferences.

Let’s clear up the confusion between these two 401(k)’s right here.

Both accounts have the same contribution limit. In 2023, you can invest up to $22,500 per year in your 401(k). The opportunity to invest that much is a huge perk of either type of 401(k), especially when compared to an IRA’s contribution limit of $6,500 per year.

There is one big advantage of the Roth 401(k).

A Roth 401(k) is that it allows you to contribute after-tax dollars to your retirement savings, and to withdraw your contributions and earnings tax-free in retirement.

I personally love the idea of getting taxes out of the way now so I don’t have to deal with them in retirement.

This can be beneficial if you expect your tax rate to be higher in retirement than it is currently, since it allows you to pay taxes on your contributions at your current rate and then withdraw them tax-free in the future.

There are some disadvantages to consider to a Roth 401(k).

Another potential disadvantage of a Roth 401(k) is that it may not be available through all employers. Some employers may only offer a traditional 401(k) plan, and may not offer the option to participate in a Roth 401(k) plan at all.

On the other hand, one potential disadvantage of a Roth 401(k) is that it does not provide an immediate tax benefit. With a traditional 401(k), you can contribute pre-tax dollars and reduce your taxable income in the current year. 

Overall, whether a Roth 401(k) is a better option than a traditional 401(k) will depend on your specific goals, tax situation, and investment horizon. It is important to carefully review the features and benefits of both types of 401(k) plans.

If you’re ready to learn more about how to make the most of your 401(k) plan, check out your free 401(k) checklist and learn how to make the most of this valuable account.

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Exactly How to Pick Investments in Your 401(k)

How to Pick 401k Investments

If you have no idea what your 401(k) is invested in without looking at it, you’re not alone. According to a NerdWallet study, well over 50% of professionals don’t know what investments they hold in their retirement accounts and 401(k)’s. 

If you do take a look at your 401k and you still don’t know what your investments actually mean, you’re also not alone. 63% of Americans don’t understand how their 401(k)’s work from an investment or a tax perspective.

You can easily learn exactly how to pick investment in your 401(k) that can help you retire years earlier.

Why Is It So Important To Learn How To Pick Investments for your 401(k)?

Learning how to choose and change your 401(k) investments overtime can help you make and save thousands of dollars over your lifetime.

Make no mistake, if you have a 401(k) you are an investor. 

When I first learned how to properly pick investments for my 401k rather than just selecting a default target date fund, I was honestly a bit embarrassed and I felt ashamed that I had thousands of dollars in an account and really had no idea what investments I held in my 401(k).

I also was really unclear of which option would be best for me. 

Once I learned how to pick investments in my 401k, I increased my returns and now will be able to retire years earlier. You can learn how to do this too!

Here’s How Your 401(k) Actually Works

Before we dive into choosing investments, let’s get on the same page about how your 401(k) account actually works. Your 401(k) is an investment account that your employer provides for you. There are two types of 401(k)’s your employer can offer. Both of these types of 401k’s allow you to contribute money but impact your taxes differently. 

A traditional 401(k) will allow you to reduce your taxable income but whatever amount of contributions you make to your 401k.

A Roth 401(k) which some employers offer, allows you to contribute after-tax money. So while you don’t get a tax break right now, your investments will grow tax free and you get tax free withdrawals in retirement.

At the end of the day, your 401k is an investment account. You contribute money and then you invest it in stocks or bonds.

For 2023, the 401k contribution limits have increased! An individual can contribute up to $22,500 in a 401(k), 403(b), and most 457 plans, up from $20,500 in 2022.

Choosing Your investments for Your 401(k)

Learning the basics of exactly how to pick investments for your 401k is something that should be at the top of your list for two main reasons:

  1. If you don’t learn how to choose your own investments you could be automatically invested in target date funds, which can carry very high fees. 
  2. Target date funds can often be too conservatively invested for young people, significantly reducing their returns, meaning they will have less money in retirement.

There are two main routes you can take for your 401(k) investment strategy. The first one is target date funds and the second one is to select a few of your own investments. 
Most people end up choosing the 401k default investment, which most of the time is going to be a Target Date Fund.

What is a Target Date Fund?

A target date fund is a mutual fund made up of other mutual funds and holds a mix of stocks and bonds. This investment will automatically rebalance investments for you and reduce your risk over time as you near retirement. The benefit of this investment is it truly is a “set it and forget it” strategy.

Target date funds are meant to carry more stocks and therefore more risk when you are younger, and then as you age the amount of stocks will decrease and the amount of bonds in the fund will increase to reduce your overall risk as you near retirement.  

For example, if you are looking at Fidelity’s target date funds, they are labeled Fidelity Freedom Fund 2030 or 2050 and that number refers to the date in which you are looking to retire. 

If you are looking to retire in 2030, your target date fund will have less stocks and more bonds to make sure the risk is lower since you are retiring earlier.

In contrast, if you are looking to retire in 2050, your target date fund will have more stocks and less bonds, a mix that will produce higher returns but carries more risk.

While these funds are great in theory, they can be very expensive and will eat into your returns over time.

Why Target Date Fund Fees Matter in Your 401K

Let’s pretend two different people invest $500 a month for 30 years.

Nancy invests this $500 into a target date fund with a fee (expense ratio) of .75%. Over 30 years, assuming an 8 % annualized return, she will have ~$649,000. 

Lisa on the other hand invests in index funds that have low fees of .03%. Assuming an 8% annualized return, her balance after 30 years will be worth ~$755,000. 

Lisa will have $106,000 MORE than Nancy just by selecting funds with low fees!

Warning, you may not always have the option to choose index funds with low fees in your 401(k) but more and more 401k plans are offering better investment options so it’s important that you at least check!

What’s An Index Fund and Why Is It A Good Pick For My 401(k)?

An index fund is an investment that tries to mirror the performance of a particular index.

An example of an index is the S&P 500. This is just a group of the top 500 largest US stocks. So an S&P index fund would hold all 500 of the top US stocks. 

Since these funds are just tracking an index, they don’t require active management which means they are way cheaper to own than traditional mutual funds and target date funds. 

So instead of investing in a target date fund, you can select a couple index funds and create your own diversified portfolio.

What Type of Index Funds Can I Pick For My 401(k)?

One really easy way to create an index fund portfolio for your 401k is to use 3 types of index funds: 

  1. A US or total market index fund
  2. An international index fund
  3. A bond fund

This portfolio will ensure you are invested in a diversified mix of US and international stocks and bonds. 

With this portfolio, you’ll have to make the choice of how much of your contribution should go to bonds versus stocks. Bonds typically have lower returns but help us reduce risk. Typically, you will want to invest heavier in stocks at a younger age and over time invest more in bonds.

A good rule of thumb to figure out how much you should invest in stocks is to subtract your age from 110. So if you are 30 years old, you could start by investing 80% of your contributions in stocks (in this example US and internationally) and 20% in bonds. 


This might seem complicated at first but it’s actually really easy to learn! If you want to learn more, check out my youtube video for more information on exactly how to pick investments in your 401(k). 

I am not a licensed financial advisor. Tessitory LLC, Wealth with Tess, and Tess Waresmith will never provide financial advice of any kind. This article and everything on the website is for educational purpose only. I offer education, not prescriptive advice. The information that is found here are my opinions and the opinions of other readers/contributors, and should be taken as such. Some content may contain affiliate links or sponsored content — I will never work with a brand or showcase a product that I don’t personally use or believe in.

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How To Protect Your 401(k) in a Recession

Understanding the basic cycles of the stock market can help make sure you don’t make big mistakes that could negatively impact your retirement savings long-term. In this article we will talk about why a stock market downturn can actually be beneficial to your 401k savings long-term and what to do with your 401(k) during recessions.

what to do with your 401k in a recession

What Happens to Your 401(k) in a Recession?

A recession or stock market crash can reduce that value of your 401(k) in the near-term. While impossible to predict, a recession could happen in 2023.

This happens because during any recessionary period, stock market correction, or bear market (when the market drops by 20% for a prolonged period of time), the overall value of the stock market will decrease. This means that no matter what you are invested in, the value of your account is likely to go down temporarily.

This is not a reason to panic.

If you have a 401(k), you are an investor. As investors, we need to expect to see 3 to 5 recessions during our lifetime. We also need to know that bear markets occur roughly every 3.5 years. Translation? Bear markets happen all the time. We should expect them to occur regularly and know that they will impact our investments in the short term. 

On the positive side, we can also expect that bear markets will end and that the stock market will return. Bull markets are when the market sees a 20% increase over a two month period. Bull markets tend to last longer than bear markets. After every bear market or recession in history, the stock market has returned to record highs. 

What You Shouldn’t Do With Your 401(k) When the Market is Down

Whenever the stock market takes a downturn, many people will start to pull back on contributions. When you stop contributing you not only lose the tax advantages of reducing your taxable income, you also miss an opportunity to grow your retirement savings further. Keep reading to learn why this is actually a huge opportunity to grow your wealth.

Some people will also cash out old 401(k)’s from previous employers to avoid further losses. 

As long as you don’t sell your stocks or cash out your 401(k), you haven’t actually lost any money. Cashing out your old 401(k)’s will subject you to a 10% penalty and you will miss out on the opportunity to benefit from a stock market return. 

What You Should Do With Your 401(k) in Recession or Bear Market

Continue to Contribute to Your 401(k) Even When the Market is Down 

If we continue to have a down market in 2023, you have the opportunity to buy into the stock market at lower prices. When the stock market returns (which historically it always has), your money will grow along with the increasing value of the stock market. 

Getting educated on the basic cycles of the stock market is one of the best ways to continue to invest through a recession with confidence. 

Stock market history clearly shows that we should expect that the stock market is going to drop significantly at least every few years. Knowing that this is a common occurrence can help us feel less panic during market downturns.

The history of the stock market also shows that bear markets usually recover and the value of the stock market increases to higher levels. This offers bigger returns to investors that stay invested and continue to contribute during a down market. 

Reduce 401(k) Fees To Keep More of Your Money

Most Americans don’t realize that their 401(k) has fees. Understanding what these fees are can help you save thousands of dollars. Did you know the average American will spend over $138,000 in fees? This can add up to a few additional years that we have to work in order to retire! 

There are two typical types of fees: investment fees called expense ratios and administrative fees.

Each investment that you have in your 401(k) has a fee called an expense ratio. This ratio is just an annual percentage of fees you have to pay for each fund in which you invest. You can think of this as the operating cost of a fund.

If you don’t know what fund you are invested in currently, you are probably invested in something called a target date fund, and these funds often have high fees. Learning exactly how to pick your own investments in your 401(k), such as index funds, can help you keep more of your money and earn higher returns in your 401(k).

When you invest in funds with high fees (high expense ratios), you are decreasing the amount of money you will keep in your account. This means you have less money that can benefit from the power of compounding.

Your 401(k) also has administrative fees. This fee is charged to pay for things like the platform and the maintenance of that platform that is being used to manage your 401(k). These fees are usually unavoidable until you leave a company. Finding this number can be challenging but you can always email your 401(k) provider or ask HR. Expect these fees to run around .4% and 1.4%.

Roll over old 401(k)’s into a Traditional or Roth IRA (taxes may apply)

Now that you know that your old 401(k)’s sitting with your former employer have administrative fees, you’ll want to get rid of those fee asap.

The best way to do this is to rollover old 401(k) into an IRA (individual retirement account). This will give you more options of what to invest in and will reduce the overall fees you are paying. 

You may decide to roll over your old 401(k) into a Roth IRA, which is an individual retirement account that uses after tax money. This means that you contribute with after tax dollars now, but that the account will grow tax free and you will get tax free withdrawals in retirement. 

Depending on how you are currently contributing to your 401k, you will likely have to pay taxes when you roll your money over to a Roth IRA, but you will then be able to have that money grow tax free and get tax withdrawals in retirement. For many, it’s worth paying the taxes now to get them out of the way.

The other benefit of rolling over your 401(k) during a bear market is that the value of your 401k is lower than it has been because the stock market is down. This means that the amount you will have to pay taxes on is lower than it has been! 

You’ll also likely have a wider selection of investment options once you roll over your 401k into an IRA. You’ll be able to find investments that best fit your needs and goals and a bigger option of funds with lower or even zero fees.

Rolling over your 401(k) does require some paperwork but Capitalize can help you do a lot of the work for free! If you’re ready to get started head on over to capitalize to learn more.

Final Thoughts On Managing Your 401(k) in a Recession

Don’t wait to take control of your finances and your 401(k). Continuing to contribute, lowering your fees, and rolling over old 401(k) accounts to IRA’s can help you continue to build wealth even in an uncertain economy.

If you’re ready to make the most of your 401(k), check out your free 401(k) checklist to learn more.

*I may receive commission for some links. I do not endorse or promote any products I don’t personally use or support.

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