Tax-Saving Investment Strategies for Individuals
Taxes may be one of the largest expenses reducing your after-tax returns, but proper planning can help mitigate their effect.
Take tax considerations into account when making investment decisions to save money and achieve long-term goals. Learn about tax-efficient investing strategies tailored specifically for individual investors.
Tax-Deferred Annuities
As tax season draws near, investors are looking for ways to minimize what they owe the IRS. Possible strategies could include maxing out their 401(k) contributions, setting up health-care savings accounts or opening 529 college savings plans for children or grandchildren.
One option worth exploring is deferred annuities, insurance contracts that allow people to save tax-deferred until receiving income payments in retirement. These contracts could prove particularly useful for those worried about not having enough income in their golden years or wanting to supplement Social Security and pension income by accruing compounded interest on principal and interest over time.
Tax-Free Bonds
Tax-free municipal bonds, sold by state and local governments to fund public projects like roads and schools, pay an interest that is exempt from federal income taxes as well as any applicable state and local taxes, making these investments popular with investors seeking to reduce the amount of taxes owed.
An important step toward improving tax efficiency is selecting an account appropriate for each investment. Taxable accounts such as brokerage accounts may provide suitable housing for investments that lose relatively minimal returns to taxes, while tax-advantaged IRAs or 401(k)s might provide better solutions when returns suffer greater tax losses.
Tax-Free Stocks
tax-free stocks can be an underrated addition to any investment portfolio; however, their effectiveness will depend on your unique situation and financial goals.
Typically, investments that produce significant ordinary income (like bonds and bond funds) should be held in tax-deferred accounts such as 401(k) plans, 529 college savings plans for yourself or your children, and municipal bond exchange-traded funds (ETFs).
Minimizing capital gains taxes when selling appreciated assets is also crucial, and can be achieved through careful evaluation of various investment strategies and diversifying account types. A qualified financial advisor can assist in exploring these avenues.
Tax-Free Municipal Bonds
Municipal bonds offer investors looking to reduce their tax burden an option. While exempt from both federal and state income tax, investing in municipals does carry some degree of credit risk as well as interest rate volatility.
Investors in municipal bonds lend money directly to local and state governments, helping finance public projects like building schools and roads in exchange for regular interest payments. Investors in higher tax brackets can see particular benefit; income generated from municipal bonds often doesn’t require federal income taxation or state income taxes to be filed on it – although their minimum investments tend to be higher than with other fixed-income investments – an advisor will help you evaluate all your options.
Tax-Free Mutual Funds
Tax-free mutual funds offer another means of mitigating income tax burden. They typically offer lock-in periods of three years and tax exemptions on both the investment amount as well as its returns earned.
Tax-free mutual funds invest in securities exempt from taxes, such as municipal bonds or government securities. They provide diversification while simultaneously offering reduced management fees.
While every investment entails expenses, taxes can take the biggest bite out of your returns. By selecting appropriate investment strategies to minimize taxes and maximize bottom line returns, your financial representative can explain all available options to you.
Tax-Free 529 Savings Plan
A 529 savings plan can be an ideal way to fund education expenses. It offers flexibility that other savings vehicles cannot, such as tax-free distributions for qualified expenses like tuition, fees, books and room and board; some expenses do not qualify such as insurance payments, travel or smartphones.
Your options for investing in 529 accounts include state-sponsored and private brokerage accounts. When selecting an account, look for plans with proven growth potential and low fees; compare accounts online to find the one best suited to your needs – some plans even allow you to prepay tuition at public colleges within your home state!
