While investing for the short or long term,
where a person decides to put their money matters a lot from a tax perspective.
Kavan Choksi says that having
tax-advantaged investments in the portfolio can be quite effective in reducing
the amount a person owes on the returns they earn. Tax-advantaged investments
might include securities, but it also implies to accounts that tend to receive
favorable tax treatment.
Kavan Choksi offers a general overview of
tax-advantaged investments
Tax-advantaged is a pretty general term that
can describe any investment account, plan or individual investment. But broadly
speaking, it usually implies to any type of investment or investment product
that helps investors to make use of preferential tax treatment. It includes
investments that are tax-free or tax-exempt, meaning no tax is owed on profits,
or it can include tax-deferred investments implying that investors may defer
payment of taxes owed on gains to a future date.
The more tax-advantaged investments a person
has working on their behalf, the greater share of the investment returns they
are actually able to keep. Over decades of investing, high tax rates can
considerably shrink the amount of wealth a person is able to enjoy. Therefore,
keeping taxes on a tight rein is important for investors to see to it that
their dollars are working at maximum efficiency.
Managing investment taxes especially becomes
critical as an investor portfolio grows. For instance, if higher returns from
an investment put a person in a higher tax bracket, it is vital that they
understand what it means from the perspective of capital gains. In a similar
manner, the more the investors earn, the more they are able to set funds aside
in tax-deferred accounts for the purpose of minimizing current taxation.
Kavan Choksi points out that
while talking about tax-advantaged investments, there are two major sides to
consider: tax-advantaged accounts and individual investments. Certain
investments are more tax friendly and efficient than others on an individual
level. The most tax efficient investments include Exchange-traded funds (ETFs),
municipal bonds and annuities. Municipal bonds are issued by the local and
state governments. If one invests in such a bond, they are basically loaning
money to the local or state government. As the bond matures, the investors
receive their initial investment back and are also able to earn interest on the
bond. The interest earned from municipal bonds is exempt from federal tax. This
interest might also be exempt at a local or state level, depending on where the
bond is issued.
While there are many other types of bonds to
make a choice from, like corporate bonds and treasury bonds, not all of them
enjoy the same tax treatment as municipal bonds. Being able to steer clear of
taxes at three different levels is rare, which makes municipal bonds quite a
popular choice for tax-advantaged investing.
Annuities can also be a good addition to the
portfolio as a tax-deferred investment option, as it allows investments to grow
tax-free until the investor starts to withdraw funds. Exchange-traded funds or
ETFs are also a great option for saving money on investment taxes. These mutual
funds are traded on the exchange like stocks.
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