Don’t pay more than you have to! You may be overlooking a number of tax-deferred or tax-advantaged investment options that can help your assets build in value.
Many people are surprised to learn that you can save a lot of money in taxes through your investments. Some retirement accounts allow you to defer taxes for many years and offer you immediate tax deductions. You can also utilize strategic buying and selling strategies for individual stocks to better control your tax exposure.
Tax-deferred accounts
You’re probably familiar with a 401(k) account, which is the most common tax-deferred account, but there are other account types that offer a great tax benefit. If, for example, you put $5,000 into a traditional IRA, you get a tax deduction of the same amount. Open a second IRA account for your spouse and you double your savings. If you are a self-employed individual such as a small business owner, you might qualify for a SEP IRA plan. This type of account allows you to invest up to $49,000 per year, permitting a much larger tax deduction.
While you still have to pay taxes later on most retirement accounts, when you retire your tax rate may be much lower than it was during your peak earning years. You can also compound the growth of your portfolio, using the cash that you would have otherwise paid to the IRS.
Strategic buying and selling
When you invest in individual stocks or ETFs (exchange traded funds), you get more control over your profits and losses, which will impact your tax situation. For example, if you were to sell Stock ABC in your portfolio that has a gain of $1,000, you could also sell Stock XYZ that has a loss of $600. This would reduce your total taxable gain to $400.