Often times when people are discussing their stock investments, you tend to hear conversations regarding investment diversification, their allocation, or what their return goals are for. One topic that some investors fail to account for are taxes. The tax conversation doesn’t apply to your Roth 401k or Roth IRA because taxes have already been taken out and never will again due to the tax treatment on these types of retirement accounts. If you’re investing in a 401k or traditional IRA, you will worry about taxes later on in life when you go to withdraw from your accounts. The account type I am highlighting today is a traditional brokerage account.
You may be asking yourself what is a traditional brokerage account? Apps similar to Robinhood are making it more accessible to invest directly from your smartphone. Many of these brokerages currently only offer non-retirement investment accounts. What implications does that have? When you sell a stock for higher than you bought it, you are “locking in profit”. Simultaneously, you are creating capital gains. Depending how long you have been holding those shares, the gains will be classified as either long-term or short-term gains. Short-term games are taxed as regular income so they will fall within your standard tax bracket. Long term gains are only taxed at 0%, 15% or 20% depending on your income. Taxation is something to keep in mind because you don’t want to enjoy your profits and forget to fulfill your obligation with the IRS.
*I am not a tax advisor nor is this tax advice*