Tax Deferred Investments
No Tax on Stock Capital gains?
Let me put my question with an example.
I buy citibank stock for say $48 today. At the end of the year, I have say $3 in capital gains and $2 of dividends (hypothetical numbers).
If I understand correctly, I will pay a tax at 15% on my $2 divident. But I will pay no tax on the capital gains. If I have not sold the stock.
To put it in simple words. If i buy and hold a stock for 10 years, I pay no tax on capital gains until I sell it? Is that true? If that is true, then this is a great option for tax deferred investment. Am I right?
I am already maxing out on my 401k and IRA. So, am looking for an alternate tax deferred investment for additional savings.
Please advice guys. Thanks a zillion
Retirement accounts: 401(K)’s, Traditional IRA’s, Roth IRA’s, and Simple IRA’s do not tax capital gains within the account. You are only taxed if you don’t obey the distribution rules (each is different). There is also a tax sheltered account for childreen to save for college/ other education, but it varies from state to state, so check with your broker/ accountant. Hence they’re called “Tax Sheltered Accounts”
Individual, Joint Tennant with Rights of Survivorship (JTWROS), Unified gift/trust to minnors (UGMA),Trust, corportate account set up’s get taxed when there is a “SALE” or “EXCHANGE OUT”; hence they’re called “Taxable Accounts”.
This produces a 1099 -B which shows the sale proceeds. It is up to you, the owner to give the IRS the “Cost Basis” (the price you bought at). However, If you are a “Day – Trader” then there are higher taxes (sales within 90 days after buying).
The 1099-DIV/ Int form reports all dividends and interest paid out from Investments (again to all taxable accounts – Tax sheltered accounts do not get taxed on these). There is no sure way to avoid this when holding investments. You can ask your broker to find investments like “Aggressive Growth” stocks which re-invest instead of pay dividends … however, a company may need to pay dividends eventhough they’d rather re-invest $.
Please don’t set up your portfolio to only consider the “Tax Shelter” accounts (retirement and education savings). These are nice and build a wonderful nest egg; they should definanlty be a part of your savings … however, you need to save in other investment vehicals too (Individual, JTWROS, Trust accouts) because life happens between here and 59 1/2 years old. Stuff in life like: Vacations, Weddings, Health Emergencies, Home up-grades, a corvett for your mid-life crisis, hot-tubs, etc- etc- etc. Sure you get that moderate tax from selling the stocks/ mutual funds (capital gains tax), but you don’t have to worry about silly distribution rules.
Taxed as Earned, Tax Deferred, TAX FREE