The Simple 5-Step Guide To Paying Lower Taxes by Investing
Written by
David Nadelle
Edited by
Cory Dudak
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Brokerage accounts, taxable investment accounts or securities accounts — whatever you call them, you’ll need to open one if you want to invest in assets like stocks, bonds, mutual funds and exchange-traded funds (ETFs). Used to day trade in the short-term, brokerage accounts are also a tax-efficient way to invest in the long-term and minimize paying taxes.
Explore:
According to Delyanne Barros, aka Delyanne the Money Coach, as important as retirement accounts can be for reducing or deterring the amount of taxes you owe, using a brokerage account gives investors a golden opportunity to pay less tax on investment income by taking advantage of lower long-term capital gains rates.
Matthew Boersen, a certified financial planner in Jenison, Michigan, concurs: “For some people, the brokerage account may be equally as beneficial as some of the retirement accounts, if managed correctly from a tax standpoint.”
Taxes are inevitable, but there are a number of ways to lower the amount you pay the taxman each year. Here are five things to keep in mind when using a brokerage account to invest and how to lower your taxes using long-term capital gains rates.
1. Opening a Brokerage Account
Safely opening a brokerage account is easy. You’ll simply need your Social Security number, date of birth, a valid mailing and email addresses, your employment information and some general financial information, such as a checking account to sync to your brokerage investment account.
With that information at the ready, you’ll need to decide whether to open an account through a broker or work with a financial advisor, to let a robo-advisor automatically manage your investments or, if you are comfortable doing research and making choices, to set up an online self-directed account.
Per the Securities and Exchange Commission (SEC), you should also look into the pros and cons of the two main types of brokerage accounts: Cash accounts (you fund the account and buy assets and securities) and margin accounts (you borrow funds to invest from a brokerage firm and the assets you buy become collateral for the loan).
2. Buy-and-Hold, for at Least a Year
In general, buy-and-hold investing is a safe and smart way to make money passively. By holding onto investments indefinitely, you’re most likely to make more money in the long run while avoiding capital gains taxes.
Thanks!
Holding investments indefinitely isn’t always an option, though. When you invest in a brokerage account, you will need to pay capitals gains taxes as soon as you start making trades or selling your investments for a gain. As Barros stated in her Instagram post, because the government encourages holding stocks over day trading, they offer significantly lower rates on capital gains for investors who hold onto assets for more than a year.
3. Short-Term Capital Gains Taxed Like Ordinary Income
As most taxpayers are aware, there are tax brackets for most ordinary income for the tax year. Your taxable income and your filing status determines your taxable income.
Short-term capital gains — applied to profits from selling an asset you’ve held for less than a year — are taxable similar to the way your salary or income is taxed. The benefit of holding on to investments for more than 365 days is a much lower
4. Long-Term Capital Gains Tax
Luckily for brokerage account investors, the tax law makes an important distinction between short-term capital gains and long-term capital gains. Long-term capital gains — applied to assets held for more than a year — are taxed at much lower rates than your income. In fact, if you’re in the 10-15% income tax level, you won’t be taxed on long-term capital gains at all.
The long-term capital gains tax rates are 0%, 15% and 20%, depending on your income. For the 2023 tax year, individual filers won’t pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains if their income is $44,626 to $492,300. Above that income level the rate climbs to 20 percent.
5. “It’s Like a Giant Roth IRA!”
Using Barros’ example, a retired couple filing jointly with no ordinary taxable income would be able to claim a 0% rate on long-term capital gains up to $89,250 for 2023. Any incremental investment income above that level would then be taxed at the higher 15%, up to $553,850. Additional income above that level would be taxed at a 20% rate.
So, if you have stretches where your income is lower than normal, you can utilize that 0% investment tax rate and even step up the cost basis on your investment with no tax hit.
As Barros noted, “Remember you don’t get taxed on all the money you withdraw (because you were already taxed on the money you contributed), only on the profit! It’s like a giant Roth IRA!”
More From GOBankingRates
