There are investing strategies that culminate in success. You want to make more money. That’s the point of investing. But how do you keep it?
Keep Records of Reinvested Dividends
You can limit capital gains on the sale of mutual fund shares. To do this, you must automatically reinvest dividends in the fund.By reinvesting dividends, you increase the investment in the fund and reduce your taxable gain. If needed, it can also increase your capital loss.
For example, let’s start with an initial investment in a mutual fund of $4,500. Over the years, rather than take any dividends out, reinvest those gains in purchasing additional shares. Down the road, the decision is made to sell your stake in the fund. At the time of sale, the total investment would be made up of $4,500 as the initial investment, plus $1,500 in dividends for a total sale value of $6,000.
The mistake many people make is paying tax on the total of $6,000. Because they reinvested the gain in the purchase of additional shares, the actual tax liability is only on the $1,500 of the reinvested dividends.
This may not seem like a lot of money, but by not taking advantage of this rule you’ll lose a lot in the long run. That’s because of the compounded growth those extra dollars wouldn’t have earned.
If you don’t consider reinvesting dividends every year, your tax-adjusted returns suffer.
Use the HSA to Its Fullest
Don’t forget a health savings account (HSA). It’s a convenient and effective form of tax reduction. However, it’s only available for those with a high-deductible healthcare plan.With the HSA, you have a tax advantage, times three. The contributions are all tax free; earnings are tax-deferred; and withdrawals for qualified medical expenses are tax free.
Losses and Profits Should Be Matched
It’s usually a good idea to match the sale of a profitable investment with the sale of a losing one. That way the capital losses can be used against capital gains. You can also deduct short-term losses from short-term gains.High-Income Investors Should Hold Stock
A short-term capital gain is defined as less than one year. It is taxed at ordinary income, which can be higher than the capital gain rate that applies to long-term gains.Avoid Wash Sales
Whether it be any stock sales or your home, you’ll want to claim losses on your return. But be aware of the wash-sale rule.Wash sales happen when an asset is sold at a loss and then re-purchased within 30 days of the sale.
For example, suppose you sold your stock for a loss and bought it back 15 days later. That initial loss cannot be claimed on your tax return.
If you try to claim a wash sale, the IRS will refigure the total on your return and hand you a bill. That might trigger them to look deeper at your return.