Clever Girl Finance

CHAPTER 11The Deal with Taxes

Be prepared for taxes.

#CLEVERGIRLSKNOW

“You don't pay taxes. They take taxes.” The first time I heard that Chris Rock quote, it made me laugh out loud #lol. Ever heard the saying that only two things in life are certain, death and taxes? Well, his quote is kind of along the same lines. When it comes to your investments, an important fact you need to know is that when you start to make withdrawals, you'll need to pay taxes, so you want to be prepared for this. This means making sure you build your potential tax obligations into your long-term plans. While the specific details around taxes (especially given constant tax law changes) are best suited for your accountant or investment advisor, I'll be sharing some general things that you can keep in mind.

INCOME TAX AND CAPITAL GAINS TAX

When you start to make withdrawals from a tax-deferred account like a 401(k), 457(b), 403(b), or traditional IRAs, you'll be subject to income tax at whatever your future tax rate is at the time of your withdrawals. If you make withdrawals from a taxable account like a regular brokerage account, then you'd be subject to capital gains tax on any earnings your investments made. To clearly define the two, income tax is the tax you pay on earnings from being employed, interest, dividends, royalties, or self-employment while capital gains tax is the tax you pay on income derived directly from the sale of an asset, such as a stock.¹ In the United States, capital gains ...