Here is a list of our partners. Tax-Efficient Investing: Keep More of Your Money Making strategic investment decisions can help minimize your tax burden, keeping more money to invest and grow. Tiffany Lam-Balfour Jul 27, Many or all of the products featured here are from our partners who compensate us.
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No one enjoys forking money over to the IRS, but everyone is responsible for paying taxes. Taking advantage of tax-efficient investing options can help you reap the benefits of certain tax breaks, especially if you fall into a higher tax bracket. Here we explore some considerations you can keep in mind to potentially minimize your tax burden. These retirement accounts provide you with tax-deferred growth. Account contributions to k s and traditional IRAs are pre-tax, so you benefit from immediate tax deductions and tax-deferred growth but will be responsible for paying income taxes on distributions in the future.
Though contributions may not be deductible, earnings grow tax-free and withdrawals are tax-free when used for qualified educational expenses. Roth IRAs and Roth k s. Roths are tax-exempt accounts. However, the account grows tax-free and future distributions are free from tax as well. Health savings accounts, or HSAs. For those using a high-deductible health insurance plan, taking advantage of an HSA provides triple tax advantages — contributions are deductible, your account grows tax-deferred and withdrawals are tax-free when used for qualified medical expenses.
Irrevocable trusts. Removing assets from your personal estate by setting up an irrevocable trust can shield you from estate tax and gift tax consequences. Most retirement accounts have an annual contribution limit, but saving as much as you can or maxing out these accounts can provide a chunk of your investments with tax-deferred or tax-exempt benefits. What investments to put where Being deliberate about which types of investments you place within certain account types is important.
Housing your more active or less tax-efficient investments in retirement accounts shelters them from capital gains taxes. And placing your less actively traded or more tax-efficient investments in taxable brokerage accounts reduces your tax liability as these assets should generate less capital gains and help minimize the impact of taxes on that account.
Caveat: Your asset location strategy should work hand-in-hand with an appropriate asset allocation strategy. Identify tax-efficient investments Some investments are more tax-favorable than others. Again, thoughtful consideration about the investments used within each account plays a key role in tax-efficient investing. Mutual funds vs. However, active mutual funds frequently trade in and out of different positions.
While active trading can help a fund make money, the high turnover can also generate taxable capital gains that are passed through to you, the investor. Passively managed mutual funds, such as index funds, often mimic an underlying benchmark index and are generally more tax-efficient than active mutual funds because index funds usually buy and hold their positions and thus have lower turnover. An exchange-traded fund, or ETF , also offers access to a broad selection of securities in one investment.
Similar to passive or index mutual funds, most ETFs simulate an underlying benchmark index, but ETFs are structured differently from mutual funds, making them more tax-efficient due to lower turnover while also avoiding capital gains distributions on individual securities within the fund.
ETFs vs. Since other bonds may not be as tax-efficient as tax-free municipal bonds, it can make sense to hold municipal bonds in taxable brokerage accounts while placing other bonds in tax-advantaged accounts. Excludes TurboTax Business.
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