Don’t Let Taxes Scare You Away From Investing

Have you ever heard someone say: “I don’t want to make more money because I’ll have to pay taxes on it.” It’s surprisingly common. And it’s usually backwards logic. Nobody enjoys paying taxes. We’re certainly not volunteering to pay more than necessary.

But sometimes investors become so focused on avoiding taxes that they forget the bigger goal: making money in the first place.

Paying taxes on money your investments make is usually better than not making any money at all.

The tax trap

Let’s imagine someone offers you two choices:

Make $1,000 and pay some taxes on it. Make nothing and pay no taxes. Which sounds better? Should be obvious, take the money and pay the taxes.

Yet investors sometimes avoid perfectly good opportunities because they’re worried about the taxes. That’s like refusing a raise because it might increase your tax bill.

Where investment taxes usually come from

There are three common ways investments can create taxes.

Interest

Interest is money paid to you for letting someone else use your money. You’ll often earn interest from bank accounts like savings, CDs, and money markets.

Bonds pay interest too.

Think of interest as the bank’s way of saying: “Thanks for letting us borrow your money for a while.”

Dividends

Dividends are payments made by certain investments to their owners. It’s a company’s way of sharing a portion of their profits with people that own their stock.

If you own that stock, you may receive a dividend payment. Not all dividends are taxed the same way, but don’t get too hung up on the details.

Most investors should spend more time earning dividends than worrying about how they’re taxed.

Capital gains

A capital gain happens when you sell an investment for more than you paid for it.

Let’s say you buy a stock for $200. A few years later, it’s worth $250 and you decide to sell it. You just made a $50 capital gain.

That’s all a capital gain is.

The retirement account exception

There is one area where taxes deserve a little extra attention: retirement accounts.

Accounts like 401(k)s and IRAs can provide significant tax benefits depending on your situation. That’s one reason they’re so popular.

And if your employer offers matching contributions in a retirement plan, that’s usually worth paying attention to when you’re on the traditional retirement path.

Keep the main thing the main thing

We’re not saying taxes don’t matter. They do. You should absolutely understand the basics and try to invest efficiently.

But don’t let taxes become the reason you never invest, never sell an investment, or never take action.

The goal isn’t to pay zero taxes. The goal is to build your investments over time.

Why it matters

A lot of investors spend years looking for ways to avoid taxes.

Meanwhile, successful investors are usually focused on something else: growing investments. Creating income. Staying consistent.

At Firreo, we’d rather see you earn investment income and pay a little tax than avoid investing altogether.

A tax bill usually means something good happened first.