In This Article
Ready to get the lowdown on taxes and investments? In this episode, Tiffany breaks down different types of investments, explains the tax implications for each type, and offers strategies to manage or reduce your tax obligations.
You’ll learn about qualified and non-qualified investments, long-term capital gains tax vs. short-term taxes, and much more.
Tune in now to finally understand taxes on investments!
Every Tuesday, Tiffany answers one of your submitted questions. To submit a question for an upcoming episode, visit here: https://www.moneytalkwitht.com/asktiffany
Trusted tax professionals:
Camari Ellis EA, Philly Tax Team – https://www.phillytaxteam.com/
Ronnie Goode CPA, Rhythm Accounting – https://www.rhythmaccounting.com/
Amber Whitehead-Gabourel EA, Whitehead Tax & Financial Services – https://www.whiteheadtax.com/
Be sure to tell them Money Talk With Tiff sent you!
All resources we have on investing: https://moneytalkwitht.com/money/invest-money/
Capital Gains (article that explains capital gains)
Intro/Outro: You know what it is. That’s right. It’s time to talk money with your money nerd and financial coach. Now tighten those purse strings and open those ears. It’s the money talk with Tiff podcast.
Tiffany Grant: Hey, Hey, and welcome to another Tiffany’s take where I answer your money questions right here on the podcast. So if you would like your question answered, just go to www. moneytalkwitht. com forward slash x Tiffany, and I’ll make sure I have that link. In the show notes for you to click on as well. So check that out.
So for today’s episode, I was asked, what are the tax implications of investing? Oh, taxes. I know that I just heard a collective sigh, but I’ll try to make this as interesting as possible, because I really want to answer this question. For this listener, because it is something that is super important when you get into investing.
So first and foremost, let’s start off with what is investing. So in simple terms, investing is the act of allocating funds or resources with the expectation of generating an income or profit. So this could be anything from buying stocks, bonds, real estate, um, starting your own business as an investment, for instance, there’s so many different kinds.
When you look at what types of investments come under the umbrella of tax implications, which is what we’re kind of talking about today, that would be more like stocks and bonds, mutual funds, real estate investments, and retirement accounts. Now, each type of investment has its own unique set of tax rules.
So, for instance, the tax rate for regular income can be drastically different from the tax rate for investment income. So there’s a lot of nuances here, but I’m trying to give you a broad overview of what you could be looking at. So here’s where it gets interesting. Investment income can take various forms.
So that can look like capital gains on your, um, stocks for instance, or dividends from your stocks. I know if you’ve been following the podcast for a little while. Um, I started my dividend journey or my social media. Cause I’ve talked about it there. I started my dividend portfolio and dividends are where a stock pretty much provides extra money.
Um, so when they make a lot of money, they, um, cover their expenses, everything they need to do. And then whatever is left over, cause usually these for a while,
so they don’t. Technically need all of that capital, they’ll push it out to their shareholders. And so those are dividends. So dividends can be investment income. Interest can be investment income. So each of these things have different tax implications. The tax rate for long term capital gains, for instance, is significantly lower than your regular income tax rate, typically, or for short term capital gains, right?
And capital gains is how much you make on your investment when you pull it out. So for instance, if I had a stock and I bought it at 30, it’s now worth 60 and I decide, Oh, I’m gonna go ahead and take it out the market. Cause I need that 60. Well, I’m going to have to pay taxes on 30 and. So 60 minus 30, which is 30.
It went up 30 while it was in the market. That is capital gains. Now, long term capital gains is if you hold it for longer than a year, short term is anything less than that. So long term capital gains tax is less than short term capital gains tax, which is why I tell people. If you do invest, make sure you leave it in there, you know, for as long as possible, because if not, you could be hit with higher taxes.
Um, so anyway, dividends on the other hand can be taxed at the same rate as your regular income or a lower rate, depending on whether they’re qualified or non qualified. So let’s get into that nuance because you’re probably like, wait, so what? Is a qualified or non non qualified investment. So qualified investments are those that offer certain tax advantages like your 401k that you can get through your work, your traditional IRA, your non qualified investments, on the other hand, don’t offer these benefits, but can still be a valuable part of your overall investment strategy.
So. If you have the wherewithal, so if you have the money and you know, you’re already investing in your 401k, you’re already investing in your IRA, you can also open a taxable account. Those have different tax implications as your qualified investments, your retirement accounts. But when you get into retirement, it’s good to have two different pots to pull from.
Well, really three. Um, you know, you have your tax free, you have your tax deferred, and then you have your taxable. So you want to make sure that you have a variety by the time you retire, but don’t feel pressured now, you know, just do what you can and make sure you are getting those match dollars if it’s a 401k.
Or, um, and if you already doing that, maybe investing in an IRA outside of work, um, just tackle those first and then you can maybe open up a taxable. So for instance, I have a taxable account that I just play around with. Like that’s where my dividend I’m investing is. I have that in a tax, some of it in the taxable account.
Um, and I do that because I’m like, you know, this is just money that I want to see what happens. You know, I just want to play now. Never, ever, ever invest money that you can’t afford to lose. Okay, I know if you follow the podcast for a while, you’ve heard me say that before. Do not invest money that you cannot afford to lose.
So if this is money that you’re like, Ooh, this is my savings. No, no, no, no, no, you know, that’s not what investing is. Make sure you have savings. Make sure you are able to cover your bills and then you can worry about investing unless it’s in a 401k that has match because I make exceptions for those. But anywho, I’m going off topic.
I just wanted to do that word to the wise real quick, but. Getting back to the taxes. Um, there’s so many different nuances there. Now, let’s not forget about the impact of specific market conditions that may affect your taxes. So for instance, in recessions, sometimes the government gives relief programs, um, for investors, such as like the deferment of tax payments or lower tax rates because of a recession.
Now, That’s on a case by case basis. Like we saw with COVID, anything can happen. But that’s why it’s so important to keep in tune with what’s going on in the financial world. So you know what you can and cannot do with your money or what new things are coming up. Now, how can you manage or reduce your tax obligation while still earning a substantial income from your investment portfolio?
This is a question that every investor wants to know the answer to. So, a few strategies that you can use include holding on to investments a little longer to benefit from the lower long term capital gains rates like we discussed before, making use of tax advantaged retirement accounts. Like we discussed before, the 401ks, IRAs, and offsetting your gains with losses.
So there’s something called tax loss harvesting. So if you make gains, for instance, um, in a stock and you needed to take them out, you can offset those with. Losses. So for instance, let’s say I, and I’m just going to do a cliff notes version. This is not all the intricacies, but I’m just trying to drive a point.
So let’s take that stock that we had before, bought it at 30. Now it’s 60. I decided I want to take it out. That’s 30 in, um, capital gains that I will have to pay taxes on. But if I had another stock that say, started at 70, I bought it at 70, now it’s at 40 and I go ahead and pull it out. Now that’s losses.
So I can take that loss and offset that gain. So I know this is an advanced strategies and it might not make too much sense, but I’m trying to give you a cliff notes version, get with a financial professional. This is not investing advice. This is just for entertainment information purposes only. So take it as such, but I’m just trying to put you up on game what some people do in order to lower their taxes.
So keep that in mind. Now, understanding how taxes work with all your investments is. Super important when you’re, when you want to make informed decisions about your investments. So, like I said, always consult with a tax professional or a financial advisor to make sure that you’re making the best decisions for your individual situation.
There are so many nuances here that you really want to. Have a sit down, talk to somebody and just see if you’re on track, see if you’re doing the right thing. Ask your tax professional if you get your taxes done. Is there anything that I can be doing throughout the year to lower my tax burden? These are just some things that you can do to ensure that you’re not overpaying Uncle Sam when you don’t have to.
So anyway, hopefully that answers your question. I know I gave you all a lot to ingest. Feel free to re listen to this episode if you need to. But if you have a question that you want answered on the money talk with Tiff podcast, just go to moneytalkwitht. com forward slash X Tiffany, and I will be more than happy to answer.
So I would love to hear from you. And there’s even a way for you to. Send me a voice memo. I would love to have some other voices on the podcast asking the questions, um, but it seems like everybody wants to do text. So, hey, however the spirit moves you, send me a carrier pigeon. It doesn’t matter. I just want to get your questions answered.
So thank you so much for joining the podcast today, and I hope you have a wonderful rest of your day. Bye.
Intro/Outro: Thank you for listening, joining, and being a part of the Money Talk with Tiff podcast this week. You can check Tiff out every Thursday for a new Money Talk podcast. But if you just can’t wait until next week, you can listen to previous podcast episodes at MoneyTalkWithT.
com or follow Tiff on all social media platforms at MoneyTalkWithT. Until next time, spend wise by spending less than you make. A word to the money wise is always sufficient.
Tiffany Grant: All right. Yeah.
From the Money Talk With Tiffany podcast episode
Investing can be a powerful way to grow your wealth, but it’s essential to understand the taxes that come with it. In this blog post, we will explore key takeaways from Tiffany Grant’s podcast episode on the tax implications of different investment types. We will cover capital gains, dividends, and the importance of consulting a tax professional for your unique financial situation.
Defining Investments and Their Categories
Tiffany Grant started by defining investing and describing different kinds of investments, such as:
- Starting a Business
She emphasized that each investment type has unique tax rules and that investment income could be capital gains, dividends, or interest, each with different tax implications.
Capital Gains and Dividends
- Long-term capital gains tax is typically lower than short-term capital gains tax.
- Dividends can be taxed at the same rate as regular income or a lower rate, depending on whether they’re qualified or non-qualified.
Qualified vs. Non-Qualified Investments
- Qualified investments offer tax advantages like 401Ks and traditional IRAs.
- Non-qualified investments don’t offer tax benefits but can still be valuable to an overall investment strategy.
Diversified Retirement Portfolio Tip: Tiffany recommended having a diversified retirement portfolio, which includes tax-free, tax-deferred, and taxable investments.
Risks and Market Conditions
- Only funds that could be risked should be invested, and one should ensure savings and bill coverage before considering investing, except for a 401K that offers a match.
- Specific market conditions could affect an individual’s taxes, such as during recessions when the government might provide relief programs for investors.
Tax Reduction Strategies
Tiffany proposed a few strategies to manage or reduce tax obligations while still earning a substantial income from investments:
- Tax-Loss Harvesting
- Investing in tax-efficient funds
- Long-term investing to benefit from lower capital gains tax rates
- Utilizing tax-advantaged accounts (e.g. 401Ks and IRAs)
Seeking Professional Advice
Lastly, Tiffany emphasized the importance of consulting a financial advisor or tax professional for individual investment scenarios. See our list at the top for who we recommend.
Continue the Conversation
Have more questions or want to dive deeper into investing and taxes? Subscribe to the Money Talk With Tiffany podcast for more advice and insights. You can also join our online community to connect with like-minded individuals and share ideas or experiences.
Remember, knowledge is power. Keep learning and paving the way toward your financial goals.