Whether you've been investing for years or just made your first stock purchase, you may find that the more you learn, the more you realize you don't know. From capital gains taxes to dividends, how well do you know investing? Test your investment IQ with our five-question quiz.
1. True or False: Dividends are taxed differently from capital gains.
True! Dividends are subject to a maximum 20 percent tax rate, while capital gains are taxed at zero percent, 15 percent, or 20 percent.1 Though you may not be worried about taxes while you're still in asset accumulation mode, understanding how your dividends are treated relative to your gains can give you an advantage when it comes time to sell.
2. True or False: If you sell a stock in your Roth IRA before you've held it for a year, you'll owe short-term capital gains taxes on any profits.
False! This is one of the many advantages of a Roth account—since the money is taxed when it goes into the account, it is never taxed again—as long as you wait until age 59.5 to begin withdrawing gains.2 You can do anything from day trading to investing in stocks with healthy dividends without having to worry about paying taxes on these gains in retirement. As a caveat, if you suffer major losses in your Roth, you aren't able to deduct these losses or use them to offset gains the way you can in tax-deferred accounts.3
3. True or False: You can withdraw some retirement funds before age 59.5, penalty-free.
True! You can withdraw contributions from a Roth IRA at any time.4 And those with 457 plans, including many government employees, can also take penalty-free withdrawals from these accounts after age 55, as long as they retire first.5
4. True or False: All publicly traded companies pay dividends.
False! Many tech companies and other growth companies don't pay dividends but instead reinvest their profits back into the business. And some blue-chip companies like Ford and Boeing recently suspended dividends in the face of the COVID-19 pandemic.6 Lack of dividends doesn't need to be a deal-breaker when choosing investments, but it is one factor to consider.
5. True or False: It's always best to dollar-cost average your investments.
Dollar-cost averaging—or spreading out your investments over equal periods—has long been touted as the best way to avoid market timing. But one study suggests that lump sum investing, or putting in investment funds as soon as you get them, can actually yield higher returns.7
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.