When it comes to taxes and investments, we have all heard the old
saying: “It’s not what you make, it’s what you keep.” Since the founding
of the United States, if not before, investors have searched for ways
to keep as much after-tax money as possible.
1. Retirement
Probably the most popular and familiar retirement accounts are the traditional IRAs and the workplace 401(k), which have been around for some time. Money put into a traditional IRA is not taxed until it is withdrawn at your retirement.There are also Roth IRAs and employer savings plans. Unlike traditional IRAs, money set for investments in these accounts is not tax deductible. But such accounts have other advantages, most notably at retirement age.
2. Fixed Annuities
A fixed annuity is essentially a contract between you and an insurance company. You pay the insurance company a lump sum in exchange for periodic payments at a guaranteed interest rate and for a certain time. On top of principal safety and guaranteed income, fixed annuities offer steady, taxed-deferred growth, according to Prudential.
3. Death Benefits for the Living
Death benefits or life insurance can have tax advantages. If you receive an inheritance or if you receive money from a life insurance policy as the beneficiary of that policy, it is entirely tax-free.When it comes to life insurance, people paying for that insurance may get a deduction if they use the policy in their business. So if you own a business, you may be able to deduct life insurance premiums.
4. Municipal Bonds
Another well-known way to gain tax advantages is by investing in municipal bonds. Lending money to your city or state can benefit you as well. Interest from municipal bonds is tax-free at the federal level and may be tax-free as well in your state and local municipality. There are some downsides to bonds: as an investment vehicle, their return isn’t all that high. They are also coming under increasing federal scrutiny as the government considers ways to limit their tax exemption.
5. Harvesting Tax Losses
6. Gifting
If you are trying to put some money aside for your child or grandchild, you are probably familiar with the Uniform Gift to Minors Act. UGMA lets you establish a custodial account for a child. The first $1,000 of unearned income in a UGMA is tax-exempt; the second $1,000 is taxed at the child’s rate (of about 10% for most kids) and anything above $2,000 of unearned income is reportedly taxed at the higher of the child’s or parent’s rates.Then there is the so-called kiddie tax, imposed on minors under 18 (or full-time students age 24 and under) who receive more than $2,000 in investment income. It is meant to keep parents and others from sheltering their money in a child’s account at a lower tax rate.
7. College Investing
Contributions to a Coverdell Education Savings Account (ESA) are not deductible, but they can grow tax-free until withdrawn, according to the Internal Revenue Service. Similarly, a 529 plan, set up by a state or educational institution, allows a family to set aside funds for a child’s college costs. The IRS says 529 earnings are not subject to federal tax, and they are generally not subject to state tax, either, if used for qualified education expenses. Contributions to a 529 plan, however, are not deductible.
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