There are few sights more satisfying than seeing the balance in your investment accounts swell over the years. But as soon as mid-April rolls around, those good vibes may come to an end. Uncle Sam isn’t afraid to take a big bite out of your investments’ capital gains and dividends. So, knowing the basics of taxes should help you find a way to start learning about how to invest and still save.
Tax Bracket Basics
It’s hard to be “basic” when it comes to tax brackets, but here’s the gist of what you’ll pay under the current tax code:
Up to $9,325: 10%
$418,401 and over: 39.60%
Up to $18,650: 10%
$470,701 and over: 39.60%
Of course, there are different tables for head of household, etc, but for the many Americans, they’ll fall into one of these two categories. With this in mind, you can make decisions about what kinds of investment vehicles you want to use to achieve your goals.
Taxes for Investors
As an investor, you have an important question to ask yourself: do you want more money to work with now, or a safer tax situation later? Let’s use IRAs as an example, which are a fairly common, simple investment vehicle.
If you currently make $50,000 as a 20-year-old single filer, you’ll pay $12,500 in taxes. However, if you’ve contributed to your traditional IRA account, then you’ll be able to contribute $5,500 to your IRA and deduct that amount from your taxes. This means you really only pay $7,000 in taxes, and put away money towards your retirement.
However, in this same scenario with a Roth IRA, you’d pay the same amount in taxes, on top of your $5,500 contribution. The good news is that now your investment is tax-free when you make withdrawals.
Decide which is best for you: more money upfront to invest, or playing it safe and keeping taxes low.
Taxes for Retirees
Unfortunately, the time when you have the least means to pay taxes could be the time when you pay the most: retirement. You should be looking forward to enjoying your golden years, and planning sooner than later will help ensure that happens.
With the exception of a few investment vehicles, like Roth IRAs, your income and distributions will be taxed. Now, if you have enough in your savings to put off taking distributions, you might be okay for awhile, but at 70 ½-years-old, you’ll become required to take RMDs, or required minimum distributions, and may face taxes on those.
If at any point you feel unsure of what you’re doing, don’t hesitate to call a tax or financial professional who can help assure you that you’re on the right track.