5 Steps To Minimize Taxes On Your Investments
April 07, 2011, By Tyler Newton 0 comments
Slow and steady wins the race when it comes to investing. Take a long view, diversify your assets, manage risk and your investment returns will compound over the long haul. One way to maximize compounded investment returns is to minimize the tax burden on those investments. Here are five steps to minimize taxes on your investment portfolio:
- Max out your 401(k). I can’t stress this one enough. 401(k) plans allow you to deposit pre-tax dollars into an investment account that then can grow tax-free until you withdraw funds for retirement. Unless you face true hardship, contribute the maximum every year and thank me later. If you desperately need access to your 401(k) funds, you can borrow against the balance.
- IRAs, Roth IRAs, 529s, etc. There are a variety of tax-deferred vehicles into which you can deposit extra savings and have the returns compound tax-free. While you can’t withdraw money from these accounts early without paying a penalty, you can gain in tax deferral and enforced savings discipline what you lose in liquidity.
- Municipal bonds. The interest received from municipal bonds is tax-free from a federal standpoint, and bonds issued from your home state are generally free from state and local taxes as well. Good vehicles for the layman to invest in municipal bonds are Vanguard Funds’ municipal bond mutual funds: Long Term Tax-exempt (VWLTX), Intermediate Term Tax-exempt (VWITX) and Short Term Tax-exempt (VWSTX). Municipal bonds are only appropriate for taxable accounts.
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