Staying Fit
The S&P 500 stock index, a broad measure of the U.S. stock market and a core holding in many brokerage accounts and 401(k) plans, has risen about 9 percent this year. Many individual stocks, such as chipmaker NVIDIA (+240 percent) and social network Meta (+180 percent) posted even bigger gains. Homeowners saw the equity in their homes spike, with the median price of a home — meaning half were higher and half were lower — jumping 13.9 percent to $394,300 in 2023 through September.
The upshot? All that asset appreciation means retirees who sold assets with big gains to pay the monthly bills or lock in profits could be looking at a sizable 2023 capital gains bill from the Internal Revenue Service (IRS). Simply put, a capital gain is a tax on the profits (minus your cost basis) you make when you sell a financial asset.
If you made money this year, good for you. But taxes are a big part of the game. It’s not what you make, it’s what you keep. To give you an idea of how big a bite the IRS will take from last year’s investment gains, here’s a primer on 2023 capital gains tax rates for assets ranging from stocks to silver.
Retirement distributions
If you’re 59½ or older and withdrew money from traditional retirement accounts — such as a 401(k) or IRA that is funded with dollars you didn’t pay income tax on — you’ll be taxed at your ordinary income tax rate. So any retirement fund distributions you took in 2023 will be part of your taxable income, no different from a paycheck or interest you earn on a savings account or certificate of deposit. The IRS tax brackets for 2021 (which are based on income ranges) are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. The income tax system is graduated: Individual taxpayers would pay the top rate only on taxable income greater than $578,125, and married couples filing jointly would pay the top rate on income above $693,750.
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One thing to watch out for: When you take a large distribution to pay for things such as your grandkids’ college tuition or a down payment on a retirement home, you run the risk of paying more in taxes due to the withdrawal. “You can bump up to a higher tax bracket,” says Daniel Milan, managing partner at Cornerstone Financial Services. That could mean more of your income gets taxed at a higher rate.
Withdrawals from Roth IRAs and Roth 401(k)s aren’t subject to any taxes, since these retirement savings accounts are funded with after-tax dollars. So if you withdrew $100,000 from a Roth IRA to buy a beach house, for example, you’ll owe zero taxes on the distribution.
Stocks
When you sell a stock for a profit, that profit is subject to capital gains tax. (That assumes that the sale didn’t occur in a tax-protected account such as a 401(k) plan.) And if you made a killing in cryptocurrencies, such as bitcoin, you’re also subject to capital gains tax. The amount of tax you’ll have to fork over will depend on how long you held the asset before selling it and what your taxable income is. Profits on assets held for one year or less are subject to short-term capital gains, which are taxed at ordinary income tax rates ranging from 10 percent to 37 percent.
Profits from selling assets you own for more than a year are long-term capital gains. Those held for more than a year get more favorable tax treatment, and the lower your taxable income, the lower your long-term capital gains rate will be. The IRS says the net capital gains tax for most individuals is no higher than 15 percent. Here are the capital gains tax rates for the 2023 tax year.
- 0 percent capital gains rate: If your taxable income is less than or equal to $44,625 (single) or $89,250 (married filing jointly), you’ll pay 0 percent in capital gains tax.
- 15 percent capital gains rate: The 15 percent capital gains tax kicks in for moderate to high earners with taxable income of more than $44,625 but less than or equal to $492,300 for single filers; more than $89,250 but less than or equal to $553,850 for married couples filing jointly; more than $59,750 but less than or equal to $523,050 for head of household; or more than $44,625 but less than or equal to $276,900 for married people filing separately.
- 20 percent capital gains rate: The higher 20 percent capital gains rate is levied when your taxable income exceeds the thresholds set for the 15 percent capital gains rate.
Here’s a simple example to illustrate the benefit of holding shares longer than a year. Let’s say you’re a married couple with $150,000 in taxable income. Your marginal tax rate is 24 percent, which means that if you sell a stock you’ve owned for less than a year that nets you a $10,000 gain, you’ll pay $2,400 in taxes. In contrast, if you held that same stock for at least a year before selling it, you’d pay $1,500 because you now pay at the lower long-term capital gains tax rate. So your after-tax profit is $900 better by simply holding for more than a year.
“If you hold for one year and one day, you get a completely different tax bill than if you held it for one less day,” says Hayden Adams, director of tax and financial planning for the Schwab Center for Financial Research.
