Answers to Common Questions from New Investors on Investor Apps, Accounts, and Tax Forms

Answers to your questions

To grow wealth, you need to invest. As a first-time investor, you may have a lot of questions about buying and selling stocks. Fortunately, easy-to-use investing platforms like Robinhood, Acorns, SoFi, and others provide an affordable alternative to picking stocks or mutual funds on your own or paying a wealth manager to invest your money for you.

There's a lot you may want to know about selecting investments, what to do with your Acorns or Robinhood tax forms, and how your investment gains and losses are taxed. Here are answers to common questions for people who are new to investing.

Which types of accounts are good for first-time investors?

As a beginning investor, you should consider investing in tax-favored retirement accounts.

Tax-favored accounts, such as an IRA or 401(k), allow you to invest without paying taxes on your investment earnings until you withdraw money from the account during retirement. By avoiding yearly taxes on your investment income, you can take advantage of greater compounded growth until you pull the money out.

If you have a 401(k) plan at work, that's a great place to start investing. Contributions to a 401(k) reduce your taxable income for the year, so you pay less in federal income tax. For 2022, you can contribute up to $20,500 to a 401(k) plan and another $6,500 if you are age 50 and over. If your employer offers matching contributions, that's like getting free money in your account.

You can also contribute to an IRA, whether or not you invest in a 401(k). For 2022, you can contribute up to $6,000 or up to $7,000 if you are age 50 or older to either a traditional IRA or, if you qualify, to a Roth IRA. Tax deductions for traditional IRA contributions con be reduced or eliminated at higher income levels. You can deduct qualified contributions to a traditional IRA, but you pay taxes on withdrawals of both your contributions and earnings. Contributions to a Roth IRA aren't tax deductible, but you can withdraw both contributions and earnings tax-free in retirement.

Starting with index funds

If you’ve gotten the hang of retirement accounts, index funds are typically an easy and low-cost way to invest in the stock market. An index fund is a portfolio of stocks designed to match or track a particular financial market index, such as the S&P 500 or the Dow Jones Industrial Average. Index funds are a popular choice among new investors because they offer immediate diversification — one share of an index fund can provide ownership in hundreds of different companies across several industries – and someone else – the fund manager – is making the decisions on which investments to make. There are two main categories of index funds – index mutual funds and index exchange-traded funds (ETFs). One main difference between the two is that ETFs can be traded throughout the day much in the same was as a stock while mutual funds trade at the end of each day at a price based on that day’s closing value of the fund.

You can purchase an index mutual fund or ETF directly from a fund provider such as Vanguard. ETFs can be purchased through investing apps such as Robinhood or Acorns. Investment companies such as Fidelity and Charles Schwab allow you to buy both ETF and mutual funds as well as many other investments such as individual stocks and bonds.

Should you manage your own portfolio, use an app?

Most investment companies help you create a portfolio based that is managed by a robo-advisor. Sounds easy enough to do it yourself, right? While you can build and manage your own portfolio, investment companies like Robinhood, Acorns, and Schwab offer new investors a few helpful features.

• Help in selecting investments. Robo-advisors, such as Betterment, typically have you complete a questionnaire to provide information on your investment goals, time horizon and risk tolerance. Based on that information, the app creates your portfolio.
• Automatic rebalancing. Over time, investment gains and losses can cause your portfolio to be out of balance. A robo-advisor will periodically buy or sell assets within your portfolio to ensure it's still in line with your financial goals.
• Low upfront investment minimums. Many mutual funds have hefty initial investment minimums — anywhere from $1,000 to $3,000 or more. Many beginning investors can't afford to invest thousands of dollars right out of the gate. Robinhood and some other investment companies have low or no account minimums; they may also require a more hands-on approach.

If you don't have a lot of money to invest right now or much time to spend researching investments and managing your portfolio, an app is a good place to start.

What type of tax forms will you receive?

Around the end of January, investors might receive several 1099 tax forms in their mailbox or email inbox. Here are a few of the most common forms you might receive and what to do with them.

• 1099-INT. You should receive Form 1099-INT from your bank or investment accounts if you earn more than $10 in interest income from your account. If your total taxable interest and dividend income combined for the year is more than $1,500, you'll need to include Schedule B with your tax return to report the name of each payer and the amount of interest you received. Otherwise, you simply report your total interest income directly on Form 1040.
• 1099-DIV. You typically receive Form 1099-DIV if you earn more than $10 in dividend income or capital gains distributions during the year. You'll report those dividends on Form 1040 and also on Schedule B attached to your tax return if your dividends exceed a certain amount.
• 1099-B. You typically receive Form 1099-B if you sell stocks, bonds, or other investments during the year. This form usually includes information on what you sold, the date you bought and sold it, how much the investment cost, and how much you received when you sold it. You'll use this form to report capital gains and losses on Schedule D and Form 8949.

Whether you received a Robinhood tax form or a tax form from another investment institution, if you use TurboTax to prepare your tax return, you can import your investment information from hundreds of participating financial institutions.

What are capital gains and how are they taxed?

When you sell an investment, you often pay taxes on the profit you make from the sale. This profit is called a capital gain.

To calculate your capital gains and losses, you need four pieces of information:

1. The date you purchased the investment.
2. The amount you paid, including any fees, plus any additional investments, such as reinvested dividends.
3. The date you sold the investment.
4. The sales price you received, including any fees.

The amount of tax you'll pay on the capital gain typically depends on how much you made from the sale and how long you owned the asset.

• Short-term. If you owned the investment for one year or less, the sale is a short-term capital gain or loss. Short-term capital gains are taxed at the same rate as your ordinary income, such as wages from a job. Ordinary income tax rates for the 2022 tax year range from 10% to 37%. You can figure out which tax bracket you're in using our Tax Bracket Calculator.
• Long-term. If you owned the investment for longer than one year, the sale is a long-term capital gain or loss. Long-term capital gains are typically taxed at special long-term capital gains rates, ranging from 0% to 20%.

For most people, the long-term capital gains tax rate is lower than their ordinary income tax rate, so it can be advantageous to hold investments that have increased in value for longer than one year before selling them.

Is exercising an employee stock option taxable?

Employee stock options allow employees to buy their employer's stock at a discount. The option alone doesn't typically give the employee an ownership interest in the company, but exercising the option to buy the stock does.

There are two main types of stock options, each with its own tax results.

• Statutory stock options. Statutory stock options are granted under an employee stock purchase plan or an incentive stock option plan. Receiving a statutory stock option doesn't result in a taxable transaction, but exercising your option and selling the stock does. Simply exercising the option without a sale typically doesn't have any tax consequences either, although you'll have to use Form 6251 to determine whether you owe the Alternative Minimum Tax (AMT).
• Nonstatutory stock options. Nonstatutory stock options are granted without one of these plans. When you exercise a nonstatutory stock option, you owe tax on the difference between the price you paid for the stock and its fair market value on the date you exercise the option.

When you use TurboTax to prepare your tax return, you just need to answer some simple questions about your options. The software will do the calculations and fill in all of the right tax forms for you.

How can you manage your investment accounts so you can easily and accurately pay taxes on investment gains?

Investing can help you build wealth and grow your retirement nest egg, but there are tax implications when you make money on your investments.

The following investment tips can make it easier to file your tax returns.

• Invest in tax-favored retirement accounts. When you invest in a 401(k) or IRA, you don't need to worry about taxes — as long as you leave the money in the account. Any interest, dividends, and capital gains from your account can be reinvested and grow on a tax-deferred basis until you start taking withdrawals. This makes tax reporting easy because you don't have anything to report on your tax return except for tax-deductible contributions to your account.
• Keep good records. For investments outside of a tax-favored retirement account, you usually need to report details of any interest, dividends, and capital gains and losses. In most cases, you'll receive a 1099 with this information from your financial institution. However, whether or not you receive a 1099, you're responsible for reporting all of your income to the IRS when you file your tax return. So keep good records of any investment purchases, sales, and income. Having that information on hand will make filing your tax return (and paying the right amount) a lot easier.

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