Investing your money can be a great way to help build for the future. Still, there are many factors to take into account when making investments, such as the specific tax treatment of each investment and savings vehicle. Here are some potential tax considerations to keep in mind when making your investment decisions.

Determine how long you’ll hold the investments: Current Federal tax rules provide preferential tax treatment for assets held long-term in taxable accounts. That’s why it may be beneficial to hold investments in capital assets for more than one year to be eligible for the long-term capital gain tax rates. Capital gain on assets held for one year or less, short-term capital gain, are taxed at ordinary income tax rates. Remember, depending on the type of investment you choose, you may have to pay taxes on any  income you receive while you hold it, such as dividends or interest. Otherwise you will pay taxes on your realized capital gain when you sell it - the difference between your adjusted cost basis and the sales amount of the investment.

Know how to handle losses: When investing, you have to accept the risk of losing value on your investments. If the unrealized loss can’t be recovered and the investment is held in a taxable account, investors who sell the investments may use the capital losses to offset capital gains and help reduce their tax bills. If your net capital losses exceed your net capital gains for the year, you are allowed to use up to $3,000 of capital losses to offset ordinary income and carryover any remaining losses to future years.

Understanding your choices: Traditional, SEP and SIMPLE IRAs, and before-tax salary deferral accounts in qualified employer-sponsored plans (QRPs), such as 401(k), 403(b), or governmental 457(b) plans, offer tax-deferred growth potential. You pay no taxes on any investment earnings until you withdraw, or "distribute," the money from your account.

Roth IRA and QRP designated Roth accounts offer tax-free growth potential. Investment earnings can be withdrawn tax-free in retirement if the account has been opened for more than five years and you are at least age 59½, you are disabled, or the payment is made to your beneficiary after your death. In addition, with a Roth IRA you may be able to take advantage of the first-time homebuyer exception. Contributions to a Roth IRA and designated Roth account are made with after-tax dollars, so there is no tax deduction.

Understanding the tax rules for different investments can help you be strategic in your choices and help you reap the potential benefits. As always, consult with a tax advisor for guidance specific to your situation.

Empower yourself with financial knowledge

We’re committed to helping with your financial success. Here you’ll find a wide range of helpful information, interactive tools, practical strategies, and more — all designed to help you increase your financial literacy and reach your financial goals.

My Financial Guide