There are many aspects to creating an investment strategy, depending on one’s own specific situation and goals. However, whether you are a young person looking to make significant gains on a shorter time frame or a retiree looking to maintain wealth, tax liabilities are always an important factor you should consider. Of course, everybody wants to do whatever they can to pay as little taxes as possible. Luckily, there are various investment products and strategies that are tax-free investments which you may want to ask your financial planner or certified accountant about.
Employer-sponsored retirement plan
Retirement plans sponsored by your employer are generally geared towards those who are looking to invest for long periods of time. The two most common types of employer-sponsored retirement investment products are the 401(k) and 403(b). Many employers will match their employee contributions to the retirement account up to a specified amount. An employer may even have profit sharing plans available for employees. The best thing is that earnings will accrue tax-deferred. Earnings can then be withdrawn following retirement while you are earning less income. This means you will be taxed at a lower tax bracket. Instead of a 401(k), non-profit employers generally offer 403(b) plans.
Individual Retirement Account
Investors who are particularly conscious of tax liabilities will also want to consider an Individual Retirement Account (IRA) which offers growth without incurring tax liabilities. There are two different types of IRAs: traditional IRAs and Roth IRAs. Both of these types of IRAs allow contributions up to $5,500 every year if you are under the age of 50. If you are over that age, you can contribute up to $6,500 each year. However, it is important to note that limits on income and employer retirement plans may impact your eligibility and available deductions.
There are significant differences between traditional IRAs and Roth IRAs which you should be aware of when creating an investment plan. Traditional IRAs do have some disadvantages, such as mandatory disbursements once you reach a specified age, as well as various other issues. On the other hand, Roth IRAs utilize after-tax funds and are not taxed at retirement.
Roth IRAs do have requirements for income eligibility. Those with high income may not be allowed to directly invest in a Roth IRA. However, you can work around this by initially putting money into a traditional IRA. Afterward, you can convert it to a Roth IRA. However, there may be some tax considerations to be aware of with this particular method. Consulting with a financial planner or accountant would be a good idea.
Health Savings Account
A health savings account (HSA) is an account which holds invested funds which you can use to pay for qualified medical expenses without any federal tax liability. Another advantage of an HSA is that it is tax-deferred, which means you will not be charged the usual applicable taxes, capital gains, and income taxes, until a specified date in the future. Your funds in the HSA will continue to accumulate until you use them for a qualified medical expense.
Municipal bonds
One commonly overlooked strategy for tax-free investing is municipal bonds. These bonds are issued by the government of a state, city, or county in order to help pay for expenditures. Municipal bonds are generally thought of as a safer investment vehicle since the bonds are being backed by governmental entities. Municipal bonds are many times referred to as triple tax-free since some of them are exempt from taxes at the federal, state and city levels. However, this can depend on where you file your taxes. Since not every municipal bond is exempt from tax liability, you will need to make sure you research your options thoroughly. You may even require the assistance of a financial planner or accountant.
Personalize your financial planning
Everybody’s situation is different, which means everybody will have varying life goals. This means your financial planning should reflect your specific situation and goals. Not every investment vehicle or strategy is right for everybody, despite being tax-free. Therefore, it is ideal to do as much research as possible before formulating and implementing an investment plan. You may even want to consider advice from a financial professional.
No Comments