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The Ins & Outs of Taxable Accounts Comments

  • By Katie Karlson
  • June 16, 2011

coins with plantYou need a retirement account (obviously), but another way to grow your money is to invest through a taxable account: a.k.a. an investment portfolio.

Unlike an employer-sponsored plan, you’re not restricted to pre-selected choices when you invest on your own. And unlike an IRA, taxable accounts don’t have annual contribution limits.

But they can incur… taxes!

While retirement accounts are tax-deferred, i.e. you pay taxes when you withdraw the money, investment accounts are taxable depending on when you sell your investments and whether you’ve made any profits.

The good news for many women, who generally lean toward a buy-and-hold strategy, is that a long-term approach can mean you pocket more and pay less in taxes. We talked to investment manager Cathy Pareto, who broke it down for us:

If you buy a security, hold it for more than a year, then sell it for a profit, that profit is subject to the long-term capital gains tax—a mere 15% for most people.
If you buy a security and sell it less than a year later, you’re taxed at your ordinary income-tax rate instead of at the capital gains rate. Depending on your adjusted gross income, that could be as high as 35%.
Dividends paid by individual stocks and mutual funds are taxed at your income-tax rate, unless they’re qualified dividends—then the capital gains rate applies. If you’re a shareholder in a mutual fund that pays annual capital gains distributions (based on profits realized from sales throughout the year), the distributions are taxed at the capital gains rate.

Go for broke. What’s your experience with taxable investment accounts?

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