Stocks, IRAs and Other Investments

Owning stock or contributing to a retirement plan can change your personal taxes and add more forms. But there are also benefits and deductions involved. If you plan ahead and you’re smart about what’s taxable, as well as when to sell and how to report your investments, you can save money and hassle.

Take a look below at some general tips for minimizing the taxes on your investments. Then, scan the page for the types of investment activities you have along with their potential impacts to your situation.

General tips on minimizing your taxes

The first step to minimizing your taxes is to know what creates a taxable event. The following are some of the most common investment events and associated taxes.

Investment activity
Taxable event
Impact
Selling a security held for 12 months or less for a gain
Short-term capital gain

Gain may be subject to income tax at ordinary income tax rates.

Selling a security held more than 12 months for a gain
Long-term capital gain

Gain may be subject to favorable long-term capital gains rates.

Your security pays a dividend
You receive a cash or stock dividend

Qualified dividends are subject to favorable long-term capital gains rates. Non-qualified dividends are taxed at ordinary income tax rates.

Your mutual fund makes a capital gain distribution Long-term capital gain

Gain subject to favorable long-term capital gains rates.

Selling a tax-exempt bond before maturity
Sale of a capital asset

Report capital gains or losses, even though the bond may pay tax-exempt interest. Gain may be subject to favorable long-term capital gains rates.

Moving your investment holdings to a new brokerage account
None (assuming you moved assets without selling them)

No tax impact.

Selling a security at a loss and buying a substantially identical security within a specified period
Wash sale

The wash sale period includes 30 days before the sale, the sale date, and 30 days after the sale.

Withdrawing funds from a retirement account other than a Roth IRA or Roth 401(k)
Withdrawal

Withdrawals are subject to ordinary income tax rates. (Exception: non-deductible contributions are withdrawn on a pro-rata basis and this portion of the withdrawal is not subject to income tax.) With some exceptions, the tax law imposes a 10% early withdrawal penalty on distributions prior to age 59½.

What types of investments do you have?

With a traditional Individual Retirement Account (IRA) you may be able to enjoy the benefit of a tax deduction as well as tax-deferred growth on retirement savings. With a Roth IRA, you may be able to receive tax-free distributions after age 59 1/2.

Traditional and Roth IRAs

Individual Retirement Accounts (IRAs) are specially designed to help you save for retirement. There are two types of IRAs for individuals: Traditional and Roth.

Traditional IRAs may be a good choice if you are seeking a tax deduction, if your income is too high to be eligible for a Roth IRA, or if you believe you will be in a lower tax bracket in retirement.

Roth IRAs may be a good choice if you are seeking tax-free withdrawals in retirement, want to avoid required minimum distributions beginning at age 70½, or feel you will be in the same or a higher tax bracket in retirement.

What's important to you:
Traditional IRA
Roth IRA

Getting a tax deduction on my contribution (if certain conditions are met)

Yes

Tax-free withdrawals on my savings during retirement (if certain conditions are met)


Yes

Tax-deferred growth on my savings

Yes
Yes

Penalty-free access to my annual contributions before retirement


Yes

The ability to avoid required minimum distributions (RMDs) after age 70½


Yes

The ability to contribute to an IRA in addition to a retirement plan at work

Yes
Yes

The ability to contribute after age 70½


Yes

The ability to rollover my pre-tax 401(k) plan without paying taxes

Yes

The ability to get tax-deferred growth on my savings because my income is too high to make a Roth IRA contribution

Yes

Learn how to control your tax liability when investing in stocks.

Stocks

When investing in stocks, you may be able to control your tax liability by delaying or accelerating an anticipated sale, selecting stocks with certain characteristics (such as stocks that do or do not pay dividends), and choosing to trade stocks through a tax-advantaged account, such as an IRA or 401(k) plan.

The following are the most typical taxable events:

  • Dividend distribution – Periodically, corporations may pay dividends to shareholders. Regardless of whether you receive a dividend or have it automatically invested back into the stock, the distribution is reported as income. Qualified dividends are subject to favorable long-term capital gains rates. Non-qualified dividends are subject to ordinary tax rates.
  • Short-term capital gains – A short-term capital gain is the profit from the sale of shares you've owned for one year or less. Net short-term gains are subject to ordinary income tax rates.
  • Long-term capital gains – A long-term capital gain is the profit when you sell shares you've owned for more than one year. Long-term gains are subject to favorable long-term capital gains rates.

When you sell shares, generally you incur either a gain or loss. Your gain or loss is the difference between the amount realized on the sale (generally the security's selling price reduced by any costs of sale) and the security's adjusted basis (generally the purchase price plus any fees or commissions associated with the purchase).

You can offset capital loss against capital gain without limit, but the amount of capital loss you can deduct against other ordinary income is limited to $3,000 per year ($1,500 if you are married filing separately). Capital loss that remains unused because of this limitation can be carried over to future years.

Learn some specific tax considerations associated with investing in bonds.

Bonds

As with any other type of investment, tax liability from bonds may differ from individual to individual, depending on your own personal circumstances. The following are some specific tax considerations associated with investing in bonds.

  • Interest paid from most bonds is taxed at your ordinary income tax rate.
  • The interest from U.S. Treasury bonds, bills, notes and certain federal agencies is exempt from state and local taxes.
  • The interest from most Municipal Bonds is exempt from federal taxes. Taxation of municipal bonds at the state and local levels varies according to the laws of the investor’s state of residence.
  • The interest from Municipal Bonds designated as private activity bonds may be taxable for Alternative Minimum Tax purposes.

Since bond prices fluctuate, you may sell your bond for more than you paid for it. If this is the case, any profit other than interest income is taxed as capital gain.

The short-term capital gains rate is the same as your ordinary income tax rate. Profits from bond investments bought and sold within 12 months or less are taxable as short-term gains. The long-term capital gains rate — 15% for most investors — is applied to bond investments sold for a profit after a holding period greater than 12 months. If you own any kind of bond mutual fund, you may also receive capital gains distributions taxable at the long-term capital gains rate.

Learn which events associated with your mutual funds are taxable.

Mutual funds

Mutual funds have many advantages including professional money management and portfolio diversification. Keep in mind though, when considering your own mutual funds, your investment may be subject to taxable events. The following information regarding taxable events only refers to mutual funds that you own in taxable accounts, and not in tax-deferred accounts such as an IRA or 401(k) plan.

A mutual fund generally does not pay taxes on your behalf, so it's important to monitor your account, and report all taxable distributions when you file your income taxes each year. A mutual fund will send you a Form 1099-DIV that summarizes the taxable distributions it made to you during the year (if any).

Taxable distributions include:

  • Dividend distributions – Fund portfolios may hold securities that pay dividends. A fund company passes these dividends, minus fund expenses, on to the fund's shareholders. A portion of these dividends may be qualified dividends taxed at favorable long-term capital gains rates. You may elect to have dividends reinvested to purchase more shares of the fund at the time of the distribution, but reinvesting dividends does not change your tax liability.
  • Capital gains distributions – Mutual funds purchase and sell investments on behalf of the fund's shareholders. When the fund sells investments for a long-term gain, it may treat a portion of its dividend as a capital gain distribution, taxable at favorable long-term capital gains rates. As with dividends, you may generally elect to have capital gains distributions reinvested. And, as with dividends, capital gains distributions you receive from a fund (whether or not you choose to reinvest them) may be taxable.

In addition to any capital gains distributions you may receive while you own a mutual fund, you may also sell shares of a fund for a capital gain or a capital loss. You will generally realize a capital gain if you sell your fund shares for more than what you paid for them, taking sales charges into account. This capital gain is taxable.

Short-term gains are subject to ordinary income tax rates, which could be as high as 39.6% at the federal level. Long-term capital gains are taxed at 0% in ordinary tax brackets below 25%, 15% in brackets up to 35%, and 20% in the 39.6% bracket.

If you automatically reinvest your dividends and capital gains distributions, you should keep all your statements and confirmations for accurate records when it comes time to sell. You have already paid taxes on your reinvested dividends. Your adjusted basis at the time of sale consists of your original investment plus the total amount of reinvested dividends.

This will help to accurately reflect your cost basis and thereby your capital gains tax liability. Investors who do not keep accurate records may end up paying taxes twice on their reinvested dividends — first in the year the dividend is paid and then again when they sell the mutual fund shares.

Find out how a variable annuity can help you augment your retirement savings by deferring taxation until you withdraw the funds.

Annuities

A variable annuity can help you accumulate tax-deferred earnings as part of your overall retirement plan. A variable annuity allows you to choose from a variety of sub-accounts that invest in stocks, bonds, and money market instruments. Your earnings and payments will fluctuate depending on the performance of the sub-accounts you select, and may be more or less than the original amount invested.

Here are some tax advantages of annuities:

  • Tax-deferred growth – You don’t pay taxes on the account earnings until you begin receiving payments.
  • Tax-free transfers – You may transfer your money from one sub-account to another in a variable annuity without paying taxes at the time of the transfer. (Subject to any limitations in the variable annuity prospectus.)
  • No annual tax reporting – There is no required annual IRS reporting for non-qualified annuities until you begin receiving payments.

Note that if you withdraw funds before age 59½ you may be subject to a 10% IRS penalty tax.

By holding onto your profitable securities for more than a year, and selling losing securities in less than a year, you may be able to significantly reduce your tax burden.

Capital gains and losses

A capital gain or loss is the difference between the amount you receive when you sell the security and what your adjusted basis is for the security (including sales charge or transaction fees). Consider these tips when considering selling securities:

  • Hold on to securities with a gain for more than a year - If you’re making a profit on one of your holdings, holding it more than one year may reduce the capital gains taxes you would pay if you sold it before a year was up.
  • Sell securities at a loss - Selling at a loss can reduce and possibly eliminate your capital gains taxes. Long-term losses must be used first against long-term gains, so short-term losses are sometimes more valuable than long-term losses, since short-term losses will first offset short-term gains which are taxed at your ordinary income tax rate.

Strategizing to leverage your short-term capital losses and have long-term capital gains can significantly lower your tax bill and add to your overall investment return. But remember, taxes should never be the sole reason for making an investment decision.

 Tip 

Contributions to Health Savings Accounts (HSAs) are tax deductible and withdrawals for qualified medical expenses are tax-free. Learn more

Tax rate for long-term capital gain and qualified dividend income is 0% in ordinary income tax brackets below 25%, 15% in brackets 25% through 35%, and 20% in the 36.9% bracket.