Investment Taxes: 10 Questions to Ask

Jonathan Clements  |  September 7, 2017

WANT TO BOOST your after-tax wealth? Grab copies of your latest tax return and investment statements—and ask yourself these 10 questions:

  1. What’s your marginal tax rate? That’s the tax rate on the last dollar of income you earn each year. It’s a crucial piece of information as you decide which retirement accounts to fund and how to invest your taxable account. You can get a quick estimate using Dinkytown’s calculator.
  2. Do you expect your marginal tax rate to be higher or lower once you’re retired? If you expect your marginal rate to fall, you should probably favor tax-deductible retirement accounts. If not, go for Roth accounts.
  3. Are you making the most of tax-sheltered accounts? You can get tax-free growth not only from Roth retirement accounts, but also from tax-deductible accounts—because the initial tax deduction often ends up paying the final tax bill. On top of that, you may get the big bonus: a matching employer contribution.
  4. If you don’t qualify for a tax-deductible or Roth IRA, have you considered making nondeductible contributions? You could then convert the account to a Roth—but you need to be careful or the tax bill could be far bigger than you hoped.
  5. Do you hold tax-inefficient investments in your taxable account? We’re talking about things like taxable bonds, real estate investment trusts and actively managed stock funds. You could trim your annual tax bill by confining these investments to your retirement account.
  6. Does it really make sense to own municipal bonds? Munis are often recommended for those taxed at a high marginal rate. But even if your tax bracket justifies owning munis, you might be better off owning taxable bonds in your retirement account—and using your taxable account to own stock-index funds instead.
  7. Got a year with relatively little taxable income? That might be the case if you’re out of work or just retired. To take advantage, look into converting part of your traditional IRA to a Roth. Alternatively, you might sell stocks in your taxable account with large unrealized capital gains that you’ve been looking to unload.
  8. Do you have losing investments in your taxable account? If you sell, you can use the losses to offset realized capital gains and up to $3,000 in ordinary income.
  9. Did you report short-term capital gains on your last tax return? Those gains would have been taxed at the higher ordinary income tax rate—a tax hit you could have avoided if you’d held the investments involved for more than a year or, better still, confined any short-term trading to your retirement accounts.
  10. Is your income taxed at a federal rate of 15% or less? You may be able to sell winning investments in your taxable account—and pay nothing in capital gains taxes.

This is the eighth blog in a series. Be sure to check out the earlier articles.  Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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