When you sell an investment at a profit, you will owe capital gains taxes on the money you make. Fortunately, investors can take steps to minimize the capital gains taxes they pay and keep more of their money in their own pockets. Choosing the right kinds of investments, and choosing the right vehicles for those investments, are two ways to cut down on capital gains taxes without impacting the return on your investment.
Invest as much as you can into tax-deferred investments like 401k's or IRAs. When you buy and sell in a tax-deferred account you do not owe any capital gains tax. The money invested in these funds is only taxed when the money is withdrawn, and the money invested is allowed to accumulate on a tax-deferred basis.
Select index funds instead of managed mutual funds for your personal accounts. Index funds do not constantly buy and sell stocks like managed mutual funds do. Instead they simply buy and hold all the stocks in a given index. That means that index funds tend to have much lower rates of capital gains than managed funds do.
Check the turnover rate on each mutual fund you are considering. The turnover rate is an indication of how often stocks are bought and sold within the fund. The higher the turnover rate the higher the capital gains are likely to be. Hold your high turnover funds in your tax-deferred accounts, and stick to low-cost index funds for your taxable accounts.
Review your capital gain statements from the past several years to identify the funds that have generated the highest levels of capital gains. Consider moving those funds to your retirement accounts.
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- Pros & Cons of ETF Investing
- The Difference Between Mutual Funds & Separately Managed Accounts
- How to Diversify Mutual Funds
- Mutual Funds vs. Hedge Funds
- Unit Investment Trust Funds
- How to Start a Mutual Fund Investment