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The Taxing Side of Investing: Why It Matters More Than You Think

Unlike retirement accounts like 401(k)s that defer taxes until withdrawal, non-retirement investment accounts face taxes annually on dividends, interest and investments held for less than a year. The capital gains tax rate you pay can range from 0% to over 23% federally based on your tax bracket and type of asset sold. State taxes add further complexity.

That means even a well-performing stock or fund that is bought and sold within a year could realize very different after-tax returns for investors in different tax situations. Two investors with identical 8% gross returns could net 6% or 4% respectively based solely on taxes owed.

The decision of how and when to realize gains also warrants consideration beyond chasing performance. Tactics like tax-loss harvesting, choosing tax-efficient funds, donating shares directly, and holding assets for longer periods could save hundreds or thousands of dollars annually. 

Working with a tax-savvy financial advisor can further amplify after-tax returns through customized strategies aligned with an investor’s total financial picture. For example, placing assets optimized for taxes, risk levels or time horizons into different accounts can maximize overall efficiency.

While many investors downplay taxes or treat them as an afterthought, don’t underestimate their bite. Paying attention to taxes from the start when investing allows your money to work smarter towards funding your goals rather than Uncle Sam’s. A little extra planning goes a long way.