Three Ways To Improve To Increase Your Wealth Improving Your Tax Situation
If you are searching for tax efficient ways to increase your wealth, there are a few possibilities you should explore. By utilizing the appropriate accounts, you can increase your overall net worth while decreasing both your present and future tax payments. Here are some basic wealth management tips to help you.
1. Invest in Municipal Bonds
When you purchase a municipal bond, you basically loan a local government that money it needs to complete needed projects. The government repays you the full amount of the bond, plus a specified rate of interest.
One of the advantages of municipal bonds is that you do not have to pay federal income taxes on the interest that you earn. Depending on the bond's terms and conditions, the interest may also be free from state and local taxes as well.
Overall, municipal bonds are considered a low-risk investment, as it is considered unlikely that a city or state would completely default on its debts.
2. Supplement Your Retirement Savings with an IRA
If you are maxing out your 401(k) and want to save even more for retirement, open an individual retirement account (IRA). There are two types of IRAs, and the best type depends on your personal goals for your tax situation.
Some savers like to take all possible tax breaks to decrease their current income tax obligation; if you fall in this category, a traditional IRA is right for you. When you open a traditional IRA, you can deduct your contributions on your taxes so that you have a lower taxable income. However, when you make withdrawals in the future, you have to pay income taxes at whatever your tax rate is at that time.
Other savers feel like they will be in a higher tax bracket during retirement and will benefit more from paying income tax on their savings now. For these individuals, a Roth IRA is a smart decision. Contributions to a Roth IRA are made with after-tax money (money that you have already paid income taxes on). When you make withdrawals in retirement, they are complete tax free.
3. Put Investments that are Tax Inefficient in Accounts that are Tax Efficient
There are some types of investments that are considered unfavorable when tax time rolls around. For example, taxable bonds and stocks that you hold for a short period of time can generate a large tax bill. To minimize the effects of these assets on your taxes, put them in an account with tax advantages, like your 401(k).
By holding certain investments in tax-efficient accounts, you can minimize your income tax bill while encouraging your wealth to grow.