How to Factor Taxes Into Your Investments During Your Financial Planning
Sunday, December 27, 2020, 6:00 AM | Leave Comment
Taxes and investments go hand in hand. You’re making money, after all, so you must pay on your gains.
Unfortunately, too many investors forget about their tax responsibilities when making plans for the future.
Below are just a few of the ways you can factor taxes into your investments during your financial planning.
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Focus on Tax Planning
Tax planning is, in this case, a process by which an individual takes into account the tax consequences of investment and puts plans in place to minimize, defer, or pay off those taxes in a way that will help them get the most out of their investments. It’s often hard to make tax plans when you’re caught up in the ins and outs of investing, but doing so will allow you to leverage more of your investing dollars without getting caught with a nasty tax surprise. Financial planners are a great resource for estimating taxes and helping you plan for them.
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Understand When and How Taxes Are Assessed
One of the most important parts of your tax planning will be to understand when your taxes are assessed. Typically speaking, you won’t have to worry about taxation until your gains are actually realized—that is, when you sell the stock for a profit. While you’re not going to have to worry about paying taxes on your losses, it is vital to understand that the moment you decide to take your profits out of the market is the moment when you’ll get taxed.
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Look at Tax-Advantaged or Exempt Accounts
One good way to make sure that your investments won’t cost you is to look at investment accounts that get a favorable tax status. A Roth IRA, for example, can be especially useful because you won’t end up paying taxes on the gains that you make so long as you don’t withdraw money from the account before you are fifty-nine and a half years old. There are other types of tax accounts that will greatly reduce your capital gains taxes on sales, so look into them if your financial planning is geared towards retirement.
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Understand That Time Is a Factor
Finally, make sure that you understand when you’re going to sell stock and how that’s going to impact your quarterly taxes. Simply waiting a few weeks until you get into a new quarter might allow you to make better financial choices with the liquid cash you have available. Meanwhile, selling quickly right after the new financial year begins could give you more time to pay your tax debt. Timing really is a key factor to better financial planning.
Always factor taxes into your investments. Learn how taxes work, when you’ll have to pay them, and how they can impact your accounts. With a little research, you’ll be able to learn how to maximize your gains while minimizing your tax burden.
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