How Taxes Work with Investing for Beginners | SIMPLE Explanation!

TL;DR

Learn how different investment accounts are taxed to optimize your investments and reduce taxes.

Transcript

okay so you know the importance of investing but do you know how all of your investment accounts are taxed i recently received this comment on youtube from colleen beatty bd that says can you do another video discussing how taxes work with investing i think the uncertainty about how that works has kept me from doing anything beyond my 401k now if y... Read More

Key Insights

• 🚕 Contributions to 401ks and traditional IRAs are made with pre-tax dollars, taxed upon withdrawal as ordinary income.
• 🚕 Roth IRAs use after-tax dollars, allowing tax-free withdrawals and growth.
• 🚕 Brokerage accounts offer flexibility but come with capital gains tax implications.
• 🥹 Long-term capital gains tax applies to investments held for over a year.
• 🥹 Short-term capital gains tax applies to investments held for less than a year.
• 🚕 Dividends from investments can incur tax liability in brokerage accounts.
• 😀 Investing apps like Robinhood are subject to capital gains tax upon asset sale.

Questions & Answers

Q: How are contributions and withdrawals from a 401k taxed?

Contributions to a 401k are made with pre-tax dollars, and withdrawals during retirement are taxed as ordinary income according to your tax bracket rate.

Q: What are the tax advantages of a Roth IRA?

Roth IRAs use after-tax dollars, allowing tax-free withdrawals and growth for qualified distributions during retirement.

Q: How do brokerage accounts differ from retirement accounts in terms of taxes?

Brokerage accounts offer flexibility but may have long-term or short-term capital gains tax implications based on the duration of the investment.

Q: Are investing apps like Robinhood subject to capital gains tax?

Yes, investing apps like Robinhood are taxed similarly to brokerage accounts when selling assets like stocks and bonds, subject to capital gains tax.

Summary & Key Takeaways

• Contributions to a 401k and traditional IRA are made with pre-tax dollars, and withdrawals are taxed as ordinary income during retirement.

• Roth IRAs use after-tax dollars, allowing tax-free withdrawals and tax-free growth.

• Brokerage accounts offer flexibility but come with long-term or short-term capital gains tax implications.