Taxes
One of the things you'll want to keep in mind when investing is the tax implications of your investments. Retirement Plans
IRAs, 401(k) retirement savings plans, and similar accounts offer significant tax breaks. Qualified retirement plans fall into two broad tax categories:
When you put income into a tax-deferred account, like a 401(k), you postpone the year in which you pay taxes on that income until you begin making withdrawals from the account. For example, if you put $3,000 in a 401(k) account this year, your taxable income for this year is reduced by $3,000. However, when you reach retirement age and begin making withdrawals from the account, the amount you withdraw each year will be added to that year’s taxable income.
Tax-free accounts, like Roth IRAs, offer no immediate tax advantage, but withdrawals from the account may be tax-free if specified conditions are met. For example, if you put $3,000 in a Roth IRA, your taxable income for the year will not be affected. However, when you begin making qualified withdrawals from the account, you will not have to pay taxes on them.
Dividends & Long-Term Capital Gains
For investments outside a retirement account, there are two tax breaks you should know about:
- Dividends are taxed at a maximum rate of 15 percent, even if your tax bracket is higher. For most students and others who don’t earn a lot of money, the tax may even be as low as 5%. Keep in mind, though, these special tax rates are only for dividends, not for interest income.
- Long-term capital gains also receive preferential tax treatment with a maximum tax rate of 15 percent. For those with lower incomes, the tax on capital gains can be as low as 5%.
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