Tips For Tax-Advantaged Investing For A Lifetime

Thursday, November 15, 2012, 2:00 AM | 2 Comments

Whether planning for retirement, making an effort to reduce income taxes or maximizing current income, there are many excellent Tax-Deferred (or Tax-Deductible Investment Options) to consider. There are also many Tax-Advantaged Accounts from which your financial adviser can choose, based on your goals.

A good financial adviser will work with you to develop a detailed strategy that will help you achieve your long-term financial goals, while minimizing your current tax liabilities.

Tax-Deferred or Tax-Deductible Investment Options

This is the kind of investment where taxes can be deferred to a later date, preferably at retirement when your income may be a lot lower than what it is currently.

The earnings such as interest, dividends or capital gains will accumulate tax free until you withdraw and take possession of your investment.

  • IRA

    An Individual Retirement Account (IRA) is a personal retirement fund. The earnings in a traditional IRA are not taxed until distribution and contributions may be tax-deductible under certain circumstances.

  • Rollover IRA

    This is an individual retirement account that allows you to move, or roll over, assets from a qualified retirement plan. Whether you are changing jobs, retiring, or receiving a distribution from your employer’s retirement plan, you can benefit from the tax-deferred growth potential of a Rollover IRA.

  • SEP IRAs

    With A Simplified Employee Pension IRA (SEP-IRA), the employer, not the employee, makes the contributions. Generally, the SEP-IRA is designed for self-employed persons operating as sole proprietor, as a partner or a corporation.

  • 401(k)

    With a 401(k) plan sponsored by an employer, employees can elect to invest a portion of their wages in a tax-deferred account. In addition, employers may contribute to a 401(k) plan through employer matching contributions or a profit sharing program.

  • Qualified Retirement Plans

    A qualified retirement plan is one that has been approved by the Internal Revenue Service and meets the requirements of the Internal Revenue Code. These plans receive tax advantages.

Tax-Advantaged Accounts

The second way to invest for retirement is to establish accounts where your money grows each year without generating a tax bill. This is very similar to the first way of investment but many investors are either unaware or miss the opportunity to invest in these tax-advantage accounts.

  • Tax-deferred Fixed Annuity

    A tax-deferred annuity is an investment product issued by an insurance company. Because annuities are accorded “tax-deferred” status, you do not pay taxes on the earnings credited until the earnings are withdrawn.

    With an annuity you can accumulate interest in three different ways: interest on the principal, interest on your earnings and interest on the money you would otherwise have paid in taxes.

  • Tax-Managed Mutual Funds

    Tax-managed funds carefully consider how an investment will impact the shareholder’s tax bill. A mutual fund’s turnover rate, for example, can have a significant impact on an investor’s after-tax return.

  • Municipal Bonds

    Municipal bonds generally are tax-exempt debt obligations of states, cities, towns, municipalities, municipal authorities and governmental entities.

    The interest earned is free of federal income taxes and also may be free of state or local income taxes if purchased by residents of the issuing state.

In a Nutshell
Always do your homework. This time around you can take a top-down approach when investing.

Whether you are planning for retirement, funding a college education or protecting your assets, a financial adviser can help. Always be on the lookout for some schmucks on the way to your financial happiness.

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