7 Tax Minimizing Strategies to Consider for Your Portfolio

Investing can potentially be one of the tools you use as you work to build your wealth, but it’s important to understand the impact that taxes have on your returns. While everyone has to pay taxes, certain strategies and investment choices can help you minimize what you owe Uncle Sam.

Understanding Capital Gains and Tax-Efficient Investing

Some investment profits, known as capital gains, are categorized as either short-term or long-term. Short-term capital gains come from the sale of assets held for less than a year and are taxed at normal income rates. Long-term capital gains are from investments held longer than a year. They can feature lower tax rates of 0%, 15%, or 20%, depending on your income.

Dividends and investment interest, meanwhile, are typically taxed as ordinary income. To help minimize your tax burden, you can aim for long-term investments and consider tax-efficient investment options.

Tax-Efficient Investment Options

Here’s how you can make your investment portfolio more tax-efficient:

Municipal Bonds: These are loans to local governments that fund public projects. The interest you earn is generally exempt from federal taxes and possibly state and local taxes.

Tax-Exempt Mutual Funds: These funds hold municipal bonds and other government securities, providing tax-free returns and simplified diversification.

Tax-Exempt ETFs: Similar to mutual funds, exchange-traded funds can offer tax-exempt benefits if they focus on municipal bonds.

Indexed Universal Life (IUL) Insurance: This insurance policy accumulates cash value that earns tax-free interest and can be accessed via a tax-free loan.

Roth IRAs and Roth 401(k)s: These retirement accounts allow for tax-free growth and withdrawals. Contributions are made with after-tax dollars, and there are no required minimum distributions (RMDs).

Health Savings Accounts (HSAs): HSAs offer a triple tax benefit for medical expenses: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified expenses.

529 College Savings Plans: These plans provide tax-free growth and withdrawals for qualifying education expenses, helping you save for college costs.

Other Tax-Deferred Options

Beyond these investments, tax-deferred annuities and traditional retirement accounts like 401(k)s and IRAs can also help you potentially save on taxes. While not tax-free, these options allow you to defer taxes until retirement, potentially reducing your tax bracket.

Are you concerned about taxes when it comes to investing? Reach out or schedule a meeting to discuss tax-smart investing.

All investing involves risk, including loss of principal.