You are probably not excited about having to share some of your investment gains with Uncle Sam. After all, who doesn’t want to keep as much of their money as possible?
Fortunately, there are ways to minimize the amount of taxes you pay on investment gains. Some options even offer tax-free investing.
Here is a look at tax-free investments that can help you keep more cash in your wallet and away from the government.
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1. Municipal bonds
Municipal bonds are issued by local governments and help fund roads, schools, and other community investments. That means you are loaning money to the government to help your neighbors.
There’s more good news: You earn a guaranteed rate of return with interest payments that are exempt from federal taxes, and possibly from state or local taxes as well. That can really help you get ahead financially .
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2. Roth IRAs and 401(k) plans
Don’t forget about your retirement options when looking at tax-free investments. Roth IRAs and 401(k) plans are both good choices to consider.
A Roth IRA is an individual retirement account that lets you invest after-tax dollars to make tax-free withdrawals as a retiree. A Roth 401(k) is a workplace retirement plan that works in a similar fashion.
3. Tax-exempt mutual funds and ETFs
You can also gain access to municipal bonds and other tax-free bonds through mutual funds and exchange-traded funds (ETFs).
These can be good choices if you want to diversify your portfolio, because instead of buying a single bond, you get a basket of bonds in the mutual fund or ETF.
Just remember to review the expense ratio and other fees to see how much you might lose in expenses.
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4. Indexed universal life insurance
An indexed universal life insurance (IUL) policy builds tax-free cash value while also providing a death benefit. You can also take out tax-free loans at any age without a penalty.
5. Health savings accounts
Health savings accounts can offer major tax benefits. Your contributions are deductible, the money grows tax-free, and withdrawals are tax-free if you use them to pay for qualified medical expenses.
However, to be eligible to contribute, you must have a high-deductible health insurance plan.
6. Donor-advised funds
You may not be familiar with donor-advised funds (DAFs), but they can be a tax-free way to help support causes close to your heart.
DAFs are accounts organized to manage donations of individuals, families, and organizations. Contributions are tax-deductible, and the money grows tax-free until you decide where you want it to go.
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7. Series I savings bonds
Series I savings bonds are exempt from state and local taxes, but subject to federal tax on interest income.
However, in some cases, if you use the money to pay for educational expenses, withdrawals are tax-free.
8. 529 college savings plans
A 529 college savings plan is another tax-free investment option to consider when it comes to paying for education.
You can open a 529 college savings plan when your child is young and take advantage of tax-free growth and withdrawals.
9. 1031 exchange
With a 1031 exchange, you can defer paying capital gains taxes if you sell an investment property and reinvest your gains in another such property.
This can be a complicated option, so it might be best to seek the guidance of a financial professional before taking this step.
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Bottom line
Tax-free investments such as municipal bonds and Roth IRAs can be great options as you try to build wealth .
So, look over the investments on this list and try to determine which options will give you the best bang for your buck. You can be a better investor by always taking taxes into account before you put your hard-earned money to work.
Money tips that can work for everyone
No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.
Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.
Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.
Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).
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