It's not about what you earn; it's about what you keep. Taxes can eat up a significant portion of your investment returns if you aren't careful.
Asset Location
Place tax-inefficient assets (like bonds or REITs that pay regular income) in tax-advantaged accounts like IRAs. Place tax-efficient assets (like ETFs that rarely sell holdings) in standard brokerage accounts.
Tax-Loss Harvesting
If you have an investment that has lost value, you can sell it to realize a loss. This loss can be used to offset capital gains from other investments, lowering your overall tax bill.
Understanding Capital Gains
How long you hold an asset matters.
- Short-term capital gains: Assets held for less than a year are taxed at your regular income tax rate (up to 37%).
- Long-term capital gains: Assets held for more than a year are taxed at preferential rates (0%, 15%, or 20%).
Roth Conversions
In years where your income is lower than usual, consider converting some Traditional IRA funds to a Roth IRA. You'll pay taxes on the conversion now at a lower rate, and the money will grow tax-free forever after.