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Do you pay tax for simply having investment portfolios?

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Do you pay tax for simply having investment portfolios?

If I'm not selling anything from my investment portfoilios, do I pay taxes when I do my income tax? Let's say planned to invest for 20+ years, during this time the investment portfolio has grown. Do I pay tax on it even if I'm not selling anything?

Message 1 of 11
10 REPLIES 10
Senior Contributor

Re: Do you pay tax for simply having investment portfolios?

No, you don't pay taxes on unrealized gains.





Message 2 of 11
Frequent Contributor

Re: Do you pay tax for simply having investment portfolios?

If you get dividends or intest on ghe acount, you oay taxes on thise, even if they are reinvested. If you need to oay taxes you will be sent the appropriate 1099 by February.

Message 3 of 11
Senior Contributor

Re: Do you pay tax for simply having investment portfolios?


@ljtxoov wrote:

If I'm not selling anything from my investment portfoilios, do I pay taxes when I do my income tax? Let's say planned to invest for 20+ years, during this time the investment portfolio has grown. Do I pay tax on it even if I'm not selling anything?


In addition to dividends and interest, it's also possible that a company you invest in gets purchased by another company. In some such cases (details and examples being well beyond the scope of this thread) there may be some income tax due after the deal closes.

 

There are also certain investments that are pass-through entities. They often have "LP" or "LLC" in the company's name...but not always. They typically are in industries like oil and gas drilling, pipelines, or real estate...but not always. These companies pay little or no income tax themselves, but rather tell shareholders how much income to declare to the IRS each year via a tax form called a K-1.

 

Most of these companies pay cash distributions to owners that are more than adequate to cover the income tax. But it is technically possible to owe tax on a pass-through investment that has not yet made a cash distribution to you.

 

I suggest you keep it simple early on. Index funds and ETFs are a good start. Fortunately a pricing war among major borkerages makes it easier than every to invest with very low expenses.

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Message 4 of 11
New Member

Re: Do you pay tax for simply having investment portfolios?

Thank you so much for all the help, much appreciated!

Message 5 of 11
Regular Contributor

Re: Do you pay tax for simply having investment portfolios?

If your investing for 20+ years, you might wanna consider an IRA as well (Roth or traditional)

I personally started investing in a Roth IRA since it simplifies my taxes and I don't invest that much rn either way

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Message 6 of 11
New Member

Re: Do you pay tax for simply having investment portfolios?

Thanks for the input. I planned to invest this for a really long time, like, for my grand kids or perhaps their grand kids' kids, long before I'm gone. This will be a lump sum investment and just keep it for the long haul but I don't want to keep paying for taxes if I'm not taking anything out.

Message 7 of 11
Senior Contributor

Re: Do you pay tax for simply having investment portfolios?


@ljtxoov wrote:

Thanks for the input. I planned to invest this for a really long time, like, for my grand kids or perhaps their grand kids' kids, long before I'm gone. This will be a lump sum investment and just keep it for the long haul but I don't want to keep paying for taxes if I'm not taking anything out.


If you're earning dividends or other income in a taxable account, taxes will be due even if you don't take funds out of the account.

 

A few companies have an informal policy to retain all their earnings (rather than pay a dividend) to grow in a generally tax-efficient manner. Returns can be high (you've likely heard of Warren Buffett and Berkshire Hathaway) but it requires a company's management to have a lot of discipline. But such practices can always change.

 

Another thing to avoid would be traditional mutual funds. They can sometimes have weird tax consequences (phantom gains).

 

Another general observation...very few companies last for decades without undergoing major changes. If you go with a small number of individual companies there is no guarantee one or more of the companies won't fail in 30 years. Do you intend to do continual research on the companies you own, or just make a few investments and "let it run" with little or no further attention until you're dead and your heirs take over?

 


@MrCreditInternational wrote:

If your investing for 20+ years, you might wanna consider an IRA as well (Roth or traditional)

I personally started investing in a Roth IRA since it simplifies my taxes and I don't invest that much rn either way


Using an IRA (potentially Roth, if you're eligible and expect your future marginal tax rate to be higher) can certainly help with the taxes.

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Message 8 of 11
New Member

Re: Do you pay tax for simply having investment portfolios?

The plan is to put towards index funds or ETF and "let it run".

Message 9 of 11
New Contributor

Re: Do you pay tax for simply having investment portfolios?

If you have dividends you do.  Qualified dividends incur lower taxes.  Make sure you don't over pay.  

Message 10 of 11
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