Tax efficient or tax free investments are there for almost decades. Currently, there are a number of retirement investments which help in saving tax and here we bring to you some of the most efficient methods.
Retirement
The most familiar and popular retirement accounts are probably the conventional workplace 401(k) and the IRAs, which have been in operation for a while. When money is put within a conventional IRA, it becomes non-taxable till withdrawal takes place during retirement.
Moreover, there are employer savings plans and Roth IRAs. Contrasting to conventional IRAs, money invested against these accounts do not fall under tax deductible investment. However, these accounts possess other benefits, which are more prominent at the retirement age.
Fixed Annuities
A fixed annuity generally constitutes a contract between an insurance company and you. A lump sum is paid to the insurance company in return for cyclic payments at a definite rate of interest for a particular period of time. Apart from guaranteed income and principal safety, fixed annuities bring in taxed-deferred, steady growth.
Municipal Bonds
Another renowned means to achieve tax advantages is through investment in municipal bonds. If you can lend money to your state or city, it would benefit you too. The interest you receive in case of municipal bonds is free from so far as the federal level is concerned. It can also be free from tax at the local municipality as well as state level.
Gifting
In case you intend to put aside a certain amount of money for your grandchild or child, you might know the UGMA or Uniform Gift to Minors Act. It helps you in the establishment of a custodial account with respect to a child. From the unearned income, the initial $1,000 is exempted from tax; the next $1,000 is taxable with a usual rate of 10% (child’s rate). Again, anything which is more than $2,000 is taxable with a rate equivalent to the parent’s or child’s rates, whichever is higher.
Death Benefits
Life insurance or death benefits usually come with tax advantages. In case of receipt of the amount from a life policy or an inheritance, the beneficiary can avail tax benefits. So far as life insurance is concerned, people availing the insurance usually receive a deduction in case the policy is used for business. So, all business owners would be capable of getting deductions in case of life insurance premiums.
Harvesting Tax Losses
Utilize any downturns within your investment portfolio with an aim to offset gains that have been realized. For instance, in case you sell A and B stocks by incurring a loss and C and D stocks by realizing a gain, the losses can be harvested in order to counterbalance a part of the income that you are required to pay on stocks C and D. Moreover, “passive losses” can also be made in case of non-stock investment such as a rental property an LLC or Limited Liability Company. While these cannot be offset through leveraging active income, deduction can be made against income with respect to any other kind of passive investments that you may be possessing.
