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Minimizing Taxes

The first step towards minimizing your taxes is to be conscious of what creates a taxable event. If the benefits from your transaction outweigh the tax consequences, you may not always choose to act in a way that minimizes taxes. In some cases, you may decide the tax consequences are significant enough to delay making a certain transaction or deter you from making it at all. You should also consider consulting a tax professional.

The following chart list some of the most common investment events and associated taxes for previous years. Please consult with your tax advisor to determine the affects on your accounts for the current year.

Investment Activity Taxable Event Impact
Selling a security held for less than 12 months for a profit. Short-term capital gain. Gain subject to ordinary income tax.
Selling a security held more than 12 months for a profit. Long-term capital gain. Gain subject to 20% tax; 10% for investors in 15% tax bracket.
Your security pays a dividend. You receive a cash dividend or have it automatically invested back into the security. Distribution is subject to ordinary income tax rate.
Your mutual fund makes a capital gain distribution. Long-term capital gain. Gain subject to 20% tax; 10% for investors in 15% tax bracket.
Withdrawing money from a retirement account other than a Roth IRA. Distribution after age 59½ . Distribution is subject to ordinary income tax rate.

Important: If you withdraw money from your account prior to reaching age 591/2, you may incur a 10% early withdrawal penalty from the Internal Revenue Service.
Withdrawing money from a Roth IRA. None, as long as you are at least 59 ½ years old and have owned the account for at least 5 years. Earnings are tax-free

Important: If you withdraw money from your account prior to reaching age 591/2 or prior to owning the account 5 years you may incur a 10% early withdrawal penalty from the Internal Revenue Service.
Transferring your retirement account to an Individual Retirement Account when you change jobs. None, as long as the proceeds of the retirement account are moved to an Individual Retirement Account right away. No tax impact

Important: You must roll your proceeds into a new retirement account or you will owe early withdrawal penalties and taxes.
Moving your investment holdings to a new brokerage account. None. No tax impact.
High 12-month turnover ratio within a mutual fund. Short-term capital gain. Gain subject to ordinary income tax.
Selling a tax-exempt bond before maturity. Long or short-term capital gain, subject to time held. Subject to capital gains taxes; income exempt from state and/or federal income taxes.

 

 

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