The return on any investment is influenced by your federal, state, and local tax situation. Investment earnings may be:
- Taxable – Taxes paid yearly on interest, dividends and annual capital gain distributions from investments.
- Tax-deferred – Taxes on earnings are deferred until withdrawal. Tax-deferred earnings include contributions and returns associated with IRAs, 401(k)s, and other retirement saving plans (see Unit 7 of Investing for Your Future Learning Lesson).
- Tax-exempt – Earnings are wholly or partly free from taxes. Roth IRAs and most municipal bonds are common examples. (Tax-exempt status may be different at the state and federal levels.)
Before selecting an investment, learn its tax consequences for you. Remember, what counts is not what you make on an investment, but what you get to keep both now and in the long run.