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Taxes on Investments in 2025-2026, and How to Reduce Your Bill
Taxes on Investments in 2025-2026, and How to Reduce Your Bill
What you pay (and when) depends on the type of investment and a few other factors.
1. Tax on capital gains
What it is: Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income. What it is: How it works: The money you make on the sale of any of these items is your capital gain. For example, if you sold a stock for a $10,000 profit this year, you may have to pay capital gains tax on the gain. The rate you pay depends in part on how long you held the asset before selling. The tax rate on capital gains for most assets held for more than one year is 0%, 15% or 20%. Capital gains taxes on most assets held for less than a year correspond to ordinary income tax rates. How it works: How to minimize it: You can reduce capital gains taxes on investments by using losses to offset gains. This is called tax-loss harvesting. For example, if you sold a stock for a $10,000 profit this year and sold another at a $4,000 loss, your taxable capital gains can fall to $6,000. How to minimize it: » MORE: See our picks for the year's best financial advisors » MORE: See our picks for the year's best financial advisors2. Tax on dividends
What it is: Dividends usually are taxable income in the year they’re received. Even if you didn’t receive a dividend in cash — let’s say you automatically reinvested yours to buy more shares of the underlying stock, such as in a dividend reinvestment plan (DRIP) — it can still be taxable. What it is: How it works: There are generally two kinds of dividends: nonqualified and qualified. The tax rate on nonqualified dividends is the same as your regular income tax bracket. The tax rate on qualified dividends usually is lower: 0%, 15% or 20%, depending on your taxable income and filing status. After the end of the year, you’ll receive a Form 1099-DIV or a Schedule K-1 from your broker or any entity that sent you at least $10 in dividends and other distributions. The 1099-DIV indicates what you were paid and whether the dividends were qualified or nonqualified. How it works: How to minimize it: Holding investments for a certain period of time can qualify their dividends for a lower tax rate. Remembering to set cash aside for the taxes on dividend payments can help avoid a cash crunch when the tax bill arrives, but holding dividend-paying investments inside of a retirement account can be a way to defer taxes on investments. How to minimize it: » MORE: How taxes on stocks work » MORE: How taxes on stocks work3. Taxes on investments in a 401(k)
What it is: Generally, you don’t pay taxes on money you put into a traditional 401(k), and while the money is in the account you pay no taxes on investment gains, interest or dividends. Taxes hit only when you make a withdrawal. With a Roth 401(k), you pay the taxes upfront, but then your qualified distributions in retirement are not taxable. What it is: How it works: For traditional 401(k)s, the money you withdraw is taxable as regular income — like income from a job — in the year you take the distribution. If you withdraw money from a traditional 401(k) before age 59 ½, you may have to pay a 10% penalty on top of the taxes (unless you qualify for one of the exceptions). You may also have to pay a penalty if you wait too long to make withdrawals (after age 73). How it works: See more about how traditional 401(k)s and Roth 401(k)s compare Roth 401(k) Traditional 401(k) Contribution limits The 401(k) contribution limit applies to both accounts. You can contribute to both accounts in the same year, as long as you keep your total contributions under the cap. You can contribute $24,500 in 2026. People aged 50 and older can contribute an extra $8,000 as a catch-up contribution. Due to the Secure 2.0 Act, those aged 60, 61, 62 and 63 get a higher catch-up contribution of $11,250. $24,500 in 2026. People aged 50 and older can contribute an extra $8,000 as a catch-up contribution. Due to the Secure 2.0 Act, those aged 60, 61, 62 and 63 get a higher catch-up contribution of $11,250. $24,500 in 2026. People aged 50 and older can contribute an extra $8,000 as a catch-up contribution. Due to the Secure 2.0 Act, those aged 60, 61, 62 and 63 get a higher catch-up contribution of $11,250. Tax treatment of contributions Contributions are made after taxes, with no effect on current adjusted gross income. Employer matching dollars must go into a pretax account and are taxed when distributed. Contributions are made pretax, which reduces your current adjusted gross income. Tax treatment of withdrawals No taxes on qualified distributions in retirement. Distributions in retirement are taxed as ordinary income. Withdrawal rules Withdrawals of contributions and earnings are not taxed as long as the distribution is considered qualified by the IRS: The account has been held for five years or more and the distribution is: Due to disability or death. On or after age 59 ½. Unlike a Roth IRA, you cannot withdraw contributions any time you choose. Withdrawals of contributions and earnings are taxed. Distributions may be penalized if taken before age 59 ½, unless you meet one of the IRS exceptions. How to minimize it: If you have to take money out of the account before you’re 59 ½, see if you qualify for an exception to the penalty. Tax-loss harvesting, borrowing from the account rather than withdrawing, and rolling over the account may also be ways to minimize taxes on investments. How to minimize it: » MORE: How to benefit from the megabackdoor Roth » MORE: How to benefit from the megabackdoor RothThe more you earn, the more complex your taxes become. Learn the 10 traps to dodge.
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