Shape Charge | E+ | Getty Images
If you're investing in a brokerage account, it's important to know how your assets may affect your taxes, especially considering the possibility of interest rate hikes.
Without action from Congress, trillions of tax cuts enacted by former President Donald Trump will expire after 2025, including provisions such as lower federal income taxes.
Experts say rising interest rates after 2025 could affect some brokerage accounts because investors pay annual taxes on their earnings.
If you sell an investment you've owned for less than a year, the gain is subject to “short-term capital gains,” or ordinary income taxes. The same rules apply to mutual fund distributions, depending on how long the fund manager has owned the underlying assets.
“Generally speaking, people are looking for short-term gains,” said Samantha Parow, wealth management chairman at Ferguson Wellman Capital Management (Portland, Ore.), ranked No. 10 on CNBC's 2024 2024 FA100 list. It's best to avoid it as much as possible.”
Generally speaking, it's a good idea to avoid short-term gains as much as possible.
samantha parlow
Wellman Management Chairman of Ferguson Wellman Capital Management
Short-term gains on brokerage accounts could be even higher after 2025, with brackets set to return to 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, experts say It is said that
But it is unclear whether Congress will allow the lower ranks to sink, especially as control of the Senate, House and White House remains unclear.
Exchange-traded funds are 'more efficient' when it comes to taxes
Regardless of future tax law changes, investors should consider the types of assets they use in brokerage accounts and the possible tax consequences, experts say.
Actively managed mutual funds often trigger capital gain payments even if investors haven't sold their shares, which can result in large unexpected costs at the end of the year.
However, funds with minimal trading volumes, such as ETFs and index funds, typically offer better annual tax savings, said Salem Investment Counselors, chief compliance officer, which ranked No. 8 on the FA100 list. said Mr. Abernethy, who is also a .
When it comes to tax efficiency, “mutual funds are kind of the dinosaurs of the past,” added Tommy Lucas, a certified financial planner and registered agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
But experts say it's important to consider more than just taxes before making investment decisions. Ultimately, your assets should reflect your risk tolerance, goals, and schedule.
