Author Topic: Taxable investment accounts- how are they taxed? how do they work?  (Read 627 times)

twinklebell

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Context- My husband and I recently bought a new house for $285,000, and put 20% down, for a mortgage of $228,000 @ 15 years. We also put about $50,000 into the new house to rehab it. We sold our old house and walked away with $230,000. Our original plan was to put all that money into the new house, and pay our mortgage down to $48,000 after the rehab, and be debt free quickly. After doing some more research, we have decided to invest some of that cash instead of putting it all towards the house. Statistically, we know that with a 3.875% loan, we are most likely better off putting that money into a taxable account (we alrontext- My husband and I recently bought a new house for $285,000, and put 20% down, for a mortgage of $228,000 @ 15 years. We also put about $50,000 into the new house to rehab it. We sold our old house and walked away with $230,000. Our original plan was to put all that money into the new house, and pay our mortgage down to $48,000 after the rehab, and be debt free quickly. After doing some more research, we have decided to invest some of that cash instead of putting it all towards the house. Statistically, we know that with a 3.875% loan, we are most likely better off putting that money into a taxable account (we eady max out my husband's 401K, traditional IRAs for both, and HSA accounts). However, our risk tolerance is not high enough to go whole hog into a taxable account, so we have landed at putting about half of it towards the house, and half towards a taxable investment account. We are both in our early 30s, so we have some time to let it grow. But, we have never had a taxable investment account, and know nothing about it. We are currently in the 22% tax bracket.

1. When do you pay taxes? When you sell or when/if you make a profit at the end of the year?
2. Any way to not pay taxes until after retirement, when planned income is lower?
3. Suggestions for taxable investment accounts? Right now we moved our IRAs to Vanguard in VTSAX? Should we "diversify" index funds? Is that a thing, or is going in on the same index fund with our investment account fine?
4. Any alternatives out there that pay out some sort of bonus- never had this much cash to invest- so I like the idea of getting something for it?





RWD

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Re: Taxable investment accounts- how are they taxed? how do they work?
« Reply #1 on: June 16, 2019, 10:01:29 PM »
1) Generally you are taxed on dividends (periodic) and capital gains (when you sell)
2) Until you sell you will only be taxed on dividends. In retirement if your income is low enough you may not have to pay [Federal] taxes at all.
3) I use a brokerage account at Vanguard for my taxable investments. There isn't any reason to diversify index funds. Just follow your desired asset allocation and the same fund(s) are fine.
4) I have heard of bonuses at some brokerages, though I haven't really looked into it. What I have heard never sounded worth the hassle.

secondcor521

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Re: Taxable investment accounts- how are they taxed? how do they work?
« Reply #2 on: June 16, 2019, 10:11:36 PM »
1.  Only when you sell, and only on the increase in value.  If you hold it longer than a year, you get to pay capital gains tax rates instead of ordinary income tax rates.  Capital gains tax rates are lower than ordinary income tax rates.  I think the capital gains tax rate for the 22% bracket is 15%, but you can google that to make sure.

2.  Two I can think of offhand.  (a) Don't sell until retirement, or (b) put it in a tax-deferred vehicle, such as a 401(k) or IRA.

3.  I like and use Vanguard.  Fidelity and Schwab are also usually well-regarded.  VTSAX is already very-well diversified in terms of US stocks.  I would say you do not need to "diversify" across mutual fund companies - for example, you don't need to buy VTSAX and SWTSX.  People vary on how much you should diversify across different types of investments - such as stocks, bonds, real estate, and commodities.  Personally I diversify across stocks and bonds.  People also vary on whether you should diversify across locations - such as US investments and investments in other countries, like Germany and Brazil and China.  Personally I just buy US stocks and bonds.

4.  Not sure what you're looking for here.  Real investments grow in value over time, so your "bonus" is becoming wealthier.  Many US stocks do pay dividends, which are usually on a quarterly basis, so you might consider that a "bonus" for holding the investment.  Even with large amounts of money, lots of investments expect you to pay them some of your investment amount, which could be considered a "bonus" for them - I avoid these like the plague.  If there is an investment out there that promises a "bonus" up front for investing with them, they're probably such a lousy investment for you / profitable for the seller, that they are essentially giving you a tiny portion of your own initial investment back in order to get their hands on the rest of your money.  The example I'm thinking of here is those gold IRA investment companies which will give you a five ounce bar of silver for opening a new account with them.  I also avoid these.