Tax Buckets – Capital Gains

See the buckets overview here.

Full Transcript:

How do I get a lower tax rate on my investments?

Let’s continue talking about the retirement income tax buckets and talk about the capital gains bucket. Now, as you may recall from the previous videos, the top two buckets were taxed at your highest tax rate, your income tax rates. Now, with the capital gains bucket, this is on the lower row. And it is taxed at a more favorable rate for capital gains.

They are taxed at 0, 15, or 20 percent, depending on your income. Higher earners will also get a 3.8% surcharge. But even then, this is much better than the top income rate, which can get over 37%. Now, in order to qualify for these favorable rates with capital gains, these need to be long-term capital gains, which means you have to hold the investment for greater than one year before you sell it.

Now, let’s talk about what goes in this bucket. For most people, this would be your taxable brokerage account. So, this can be an individual account or a joint account. Now, a lot of times, you will hold stocks within this brokerage account. Specifically, if you get PSP or GESPP from Shell, you will have Shell stock in there. Additionally, a lot of people will buy a basket of stocks, either in a mutual fund or in an ETF. For many people, they buy index funds, which can be in either one of these wrappers. Now, the difference between them gets pretty technical, but in terms of the taxable brokerage account, my preferred vehicle is the ETF because of its structure.

Now, one thing to notice when you’re looking at your capital gains within your bucket on a given year, is how much you’ve realized throughout that year. A lot of times, you can look at tax loss harvesting, the strategy of selling investments that are at a loss to offset other gains, and even some income.

Lastly, let’s talk about dividends. These investments, in general, will kick off dividends. When you receive that dividend, that is a taxable event and must be reported on your income tax return.

Now, many times, especially with stocks, these would be qualified dividends, assuming you’ve held them long enough. Now, I encourage you to check your tax return to ensure that these are getting marked correctly in your tax return, and you’re not overpaying the IRS.

Stay tuned for my next video, where I’ll talk about my favorite bucket, the tax-free bucket. And also, please continue to like these videos on social media and share them with your colleagues.