Tax-Deferred Accounts

• One of the main advantages of having money in a tax-deferred account is that there are no tax consequences to trading stocks and mutual funds within those accounts. If you hold your stocks and mutual funds within a 401k, 403b, IRA or other tax-deferred account, you can buy and sell those securities without worrying about capital gains taxes.
  
  

Figuring Your Gain

• When you sell a stock or mutual fund, you do not pay taxes on the entire proceeds of the sale. Instead, you pay taxes only on the profit you made. So if you bought a stock for $5,000 and sold it for $7,500, you pay taxes only on the $2,500 profit. When planning your taxes, review the original purchase confirmation you received when you bought the stock and compare it to the amount you realized when you made the sale.
  
  

Short-Term Gains

• A short-term capital gain is defined by the Internal Revenue Service as a gain on an asset held for a year or less. It is important to look at your original purchase and sales confirmations, since the dates on those documents determine whether your gain is short- or long-term. If you have a short-term gain, you must pay taxes at your regular tax rate. If you are in the highest tax bracket, that means a 35 percent tax on the money you made.
  
  

Long-Term Gains

• The tax code discourages short-term trading by providing a much lower tax rate on sales of assets held for longer periods. If you make a short-term trade in your taxable brokerage or mutual fund account, you pay taxes at your ordinary income tax rate, which could be up to 35 percent. But if you can hold on to that stock for at least a year and a day before you sell, you drop your tax rate to a maximum of 15 percent. That can be a big savings, and an incentive for investors to think longer-term.