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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 long term 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 from the adjusted cost basis, even though the bond may pay tax-exempt interest. Gain may be subject to favorable long-term capital gains rates or short-term capital gains rates depending on the holding period. If any gain is due to market discount it will be taxed as taxable interest.

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 30 days
Wash sale

Loss is currently disallowed and added to the basis of the replacement security. The wash sale period includes 30 days before the sale, the sale date, and 30 days after the sale (a 61-day window).

Distributing funds from an IRA or qualified employer sponsored retirement plan (QRP) such as a 401(k) or 403b, or government 457b other than a distribution from a Roth IRA or designated Roth account

 

Distributions

Traditional, SEP & SIMPLE IRA and QRP distributions are taxed as ordinary income.  Qualified distributions from a Roth IRA and plan Roth account are federally tax-free provided the Roth IRA or designated Roth account has been open for at least five years and the owner or participant has reached age 59 ½  or meets other requirements.  All may be subject to a 10% IRS tax penalty if distributions are taken prior to age 59 ½ .  Qualified distributions from a Roth IRA or designated Roth account are not subject to state and local taxation in most states.

What types of accounts or investments do you have?

Retirement accounts - Traditional and Roth IRAs

Individual Retirement Accounts (IRAs) allow you to save for your retirement and take advantage of tax benefits. There are two types of IRAs for individuals: Traditional and Roth.

Summary

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

Roth IRAs may be a good choice if you are at or below the Modified Adjusted Gross Income (MAGI) limits to make a contribution, if you are seeking tax-free distributions in retirement, want to avoid required minimum distributions (RMDs) beginning at age 70 1/2 , or feel you will be in the same or a higher tax bracket in retirement.

To get started, choose your account or speak with a Wells Fargo retirement professional at 1-877-493-4727.

The retirement section of our website offers an informational page linking to tax-related retirement articles, from basic questions to discussions of special circumstances.

What's important to you:

Traditional IRA

          Roth IRA

Getting a tax deduction on your contribution (if certain conditions are met)
Yes
Deferring taxes on your potential investment earnings to help your savings grow for retirement
Yes
Yes

Having tax- and penalty-free access to your contributions before retirement
Yes
Making tax-free distributions during retirement (if certain conditions are met)
Yes
Avoiding Required Minimum Distributions (RMDs) after age 70 1/2
Yes
Contributing to an IRA in addition to your retirement plan at work, regardless of income
Yes
Consolidate before-tax retirement accounts without paying taxes
Yes
Consolidate after-tax retirement accounts without paying taxes
Yes

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

Stocks

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

The following are the most typical taxable events in a non-retirement taxable account:

  • 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.

When investing in an IRA or employer-sponsered retirement plan you will owe ordinary income tax on the taxable portion of a distribution.  You can distribute cash or in-kind assets such as stocks, bonds, or mutual funds.

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.

The following information regarding taxable events only refers to bonds that you own in non-retirement taxable accounts and not in tax-advantaged retirement accounts such as an IRA or 401(k) plan.

  • 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 or less than you paid for it. Generally, if sold for a profit, short- or long-term capital gains rates may apply.  Market discount is an exception.

If you own any kind of bond mutual fund, you may also receive long-term gains distributions taxable at the long-term gains rate. Dividends may be taxable or tax-exempt depending on the underlying bonds in the mutual fund.

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 non-retirement taxable accounts, and not in tax-deferred retirement 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 – Mutual fund portfolios may hold securities that pay dividends. A fund company passes these dividends, minus fund expenses, on to the fund's shareholders. These dividends may be qualified and taxed at favorable long-term capital gains rates or non-qualified and taxed as ordinary income. Dividends may also be categorized as exempt-interest dividends for funds that hold municipal bonds. 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.

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.

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). If you are reviewing your portfolio and determine it is time to take some profits or losses consider the following:

  • Securities held for more than a year before being sold are potentially taxed at long-term capital gains rates which are lower than short-term capital gains rates.
  • Selling a security for a loss can reduce and possibly eliminate your capital gains taxes. Netting rules apply as follows:1. Net short-term gains against short-term losses 2. Net long-term gains against long-term losses 3. Net excess loss in either category against net gain in the other category 4. Deduct up to $3,000 of excess losses against ordinary income per year 5. Carry over any remaining losses to future tax years. 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.

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.

Traditional IRA

Our IRA Eligibility Calculator can help determine if you are eligible for a tax deduction.

Investment earnings

Investment earnings, or returns, are the amount of money you make on the assets you’ve invested, or the investment’s overall increase in value.

Contributions

Your contributions are the amount of money you add or deposit into your account each year.

Required Minimum Distributions

IRS regulations require that owners of retirement accounts including IRAs and qualified employer-sponsored retirement plans (QRPs) like 401(k)s must begin taking distributions annually from these accounts. These distributions are referred to as required minimum distributions or RMDs. Once you reach your required beginning date (RBD), generally April 1 following the year you turn age 70 1/2, you will begin taking RMDs from any Traditional, SEP, and SIMPLE IRAs that you have, as well as from any QRPs left at former employers. The RMD rules can be complex and penalties for not complying with the rules can be significant.

Qualified employer-sponsored retirement plans

Certain employers help their employees save for retirement by offering qualified employer-sponsored retirement plans (QRPs). Common types include 401(k), 403(b), and governmental 457 plans.