MONEY HACKS: Understanding the Tax Treatment of Your Investments

You work hard for your money. Your investments should work just as hard. There are also numerous tax strategies and incentives to consider (with your investments), to make sure you are maximizing your money!

Think about it… Are you paying taxes now or later? Do you really know how tax-efficient your brokerage account is? And could a small shift today save you thousands in retirement?

In this episode of Money Hacks, Alex unpacks the tax treatment of different investment accounts—401(k)s, Roth IRAs, and brokerage accounts, so you can make informed choices and keep more of what you earn. Here’s what he’s covering:

• Why some retirement accounts cut your tax bill today
• How long-term capital gains tax can impact you
• The power of tax diversification

Have any money questions you’d like answered? Our Money Hacks series is built on conversations we have with employees, investors, savers, and anyone planning for their financial future. What topics are on your mind for our next episode?

Video Transcript:

Hey! This is Alex Assaley, and it's episode #125 of Money Hacks.

Today, I want to talk about taxes, not necessarily filing your taxes (I’m not a CPA), but more about the tax treatment of your investments.

Most investors have heard that one of the biggest benefits of 401(k)s, 403(b)s, and even IRAs is their tax advantages. These accounts allow you to save and accumulate money for long-term financial goals and retirement in a tax-advantaged way.

The most traditional approach is a pre-tax 401(k) contribution. The money you put in is deducted before taxes, which lowers your taxable income today. That money then grows tax-deferred, and when you withdraw it in retirement, it’s taxed as ordinary income.

But over the past 10+ years, Roth 401(k)s have gained popularity. There’s a common myth that high earners can’t contribute to a Roth 401(k), but that’s not true. Anyone can contribute to a Roth 401(k) regardless of income. Roth IRAs do have income limits, but Roth 401(k)s do not.

With a Roth 401(k), you pay taxes upfront. There’s no immediate tax benefit, but your contributions and earnings grow tax-free, and as long as you’ve had the account for at least five years, you can withdraw the money tax-free in retirement.

So, these are two different tax “buckets” for retirement savings, and which one makes sense for you depends on your financial situation. Having money in both pre-tax and Roth accounts can be beneficial, giving you flexibility in managing your taxable income during retirement.

Now, let’s talk about brokerage accounts, which are taxable investment accounts outside of retirement plans. The money you invest in these accounts is after-tax income, meaning you’ve already paid taxes on it.

As your investments grow, you don’t pay taxes until you sell. If you hold an investment for more than a year, you qualify for the long-term capital gains tax rate, which is lower than ordinary income tax rates—0%, 15%, or 20%, depending on your income.

Brokerage accounts offer more flexibility than retirement accounts since you can access your money anytime. However, they don’t come with the same tax benefits as retirement accounts.

The key takeaway? Having a mix of tax treatments in your investments allows you to strategically withdraw money in retirement and manage your tax bill efficiently. This flexibility can help you optimize your tax bracket and keep more of your money working for you.

Hope this gives you a helpful primer on how different investment accounts are taxed! There’s much more to it, but this high-level overview should set you in the right direction when planning your retirement savings.