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Taxation of Investments

Click here to learn more about the taxation of non-retirement accounts.

With tax season around the corner, many people have questions about how their investments impact their taxes.  We are not accountants, but we understand how different investments are taxed, how their taxes impact things like the taxation of social security benefits or Medicare premiums.

Earnings on retirement accounts like 401(k)’s, 403(b)’s, 457’s and IRA’s are not taxed until you take a distribution.  Distributions from these accounts are all taxed as ordinary income at the time you take the distribution.  Roth investments may be tax free as long as the investment was held for 5 years or more and you are older than 59 ½ at the time of distribution.

However, what about non-retirement investments like an individual brokerage account?  They are taxed differently.  This piece discusses the taxes on non-retirement investments.  A few important considerations are:

  • If you’ve held the investment for more than 12 months, the sale of the investment can be long-term capital gains which might be more favorable.
  • If you are in a high tax bracket and have investments in a non-retirement account that are creating a substantial amount of dividends and taxable interest, you may want to consider making changes to the account.  You should consider any capital gain taxes before making any changes
  • Retirement accounts cannot be put into trust, however non-retirement accounts can.  There are many considerations that need to be weighed and we should meet with an estate planning attorney before making a decision. 
  • And if you leave a non-retirement account as a legacy asset, your beneficiaries receive what’s called a set up in cost basis.  In other words, they receive the investment at it’s price on the date of your death and don’t owe taxes on the original appreciation.

We work with these kinds of investments on a daily basis.  If you have questions or need help with your investment planning, please give us a call at 860-430-1009.  We would be happy to help.

Neither Voya Financial Advisors nor its representatives offer tax or legal advice.  Please consult with your tax and legal advisors regarding your individual situation.