Video: Taxes On Investments: What You Should Know

With tax season in full swing, I’m sure taxes are top of mind to many of you right now.

I’d like to explore some of the basics of taxes involved with investments as well as some general things to consider throughout the year.

There are two main types of accounts with regards to taxes: qualified and non-qualified.

Qualified accounts receive special tax treatment from the IRS and allow you to defer taxes or get tax-free gains in the account as long as you follow specific rules. Examples of qualified accounts are IRAs, Roth IRAs, 401(k)s, or 403(b)s. 

Non-qualified accounts are taxed on a transactional basis yearly. Some of the more common ways to incur taxes throughout the year are by selling securities that could result in a capital gain or loss, or by receiving income through dividends or interest payments. With capital gains or losses, they can be classified as either short term if a security is sold within a year or long term if a security is held for longer than a year before being sold. While there are exceptions, generally, dividends, interest and short term capital gains are taxed as ordinary income.  Long term capital gains are taxed at lower rates.

While everyone’s tax situation is going to be different, it is important that you and your advisor are paying attention. There’s not a way to avoid the taxes incurred from last year, but you can make the decision to be tax efficient going forward. Understanding how taxes are affected by your investment decisions can help lead to a stronger financial future.