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Many investment accounts offer tax benefits as long as they serve a specific purpose. For retirement, there are 401(k)s and IRAs. For education, there are 529s. For health care, there are Health Savings Accounts (HSAs). All of these plans offer benefits at the point of contribution, growth, or payout, or
But what about straight old-fashioned investing? Some people simply buy stocks or funds without any specific life goals in mind. Are there any tax benefits to this kind of open-ended investing?
The short answer is no. Any investment that isn’t protected in some sort of long-term account is subject to capital gains taxes that vary depending on the investor’s income. For example, in 2024, a single person earning between $44,626 and $492,300 would pay:
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Is there a way around this? That’s the question plaguing a young engineer in Providence, Rhode Island. At 26, he’s just starting to invest some of his savings, not all of it from retirement accounts. How can he avoid one day having to pay 15% or even 20% of his profits to the tax office?
Here’s what he wrote:
Dear Advisors,
I invest directly in exchange traded funds. Is there a way to avoid large amounts of tax?
A little bit about me: I’m a 26 year old single engineer living in Providence, RI. I have about $7,000 invested in the Invesco S&P 500 GARP ETF (SPGP) through my Fidelity account. My salary is $73,000, which I expect (and hope) will grow by the time I sell my holdings.
As far as I know, Fidelity accounts are not tax protected in any way. If I cash it out after 20 or 30 years, how much will I lose in capital gains tax? And is there a way to avoid this, or at least minimize it?
Sincerely,
Problem Solving in Providence
Here is the reply from the financial advisor:
