Tax-smart Investments When You Earn More

DEWITT, Mich. - March 2, 2021 - PRLog -- A comprehensive investment strategy can help you address multiple concerns – managing your wealth, saving for retirement, educating your children, creating a legacy and so on. But underlying many of these concerns is the issue of taxes. What steps can you take to become a more tax-efficient investor?

Here are a few suggestions:

• Maximize your 401(k). Unlike a Roth IRA, your 401(k) has no income "phase-out" limits, so you can typically contribute either the lesser of your income or the contribution limit, which, in 2020, is $19,500, or $26,000 if you're 50 or older. Your pre-tax contributions will reduce your taxable income and your earnings will grow tax deferred.
• Consider a Roth conversion. As mentioned above, a Roth IRA has income limits, and you may well be exceeding them – but that doesn't necessarily mean you can never take advantage of this investment vehicle, which, like a Roth 401(k), generally provides tax-free withdrawals as long as you meet the age and length of ownership requirements.
• Think about an annuity. With a high income, you may be in a position to "max out" on your 401(k) and your IRA. When you do, you might want to consider investing in a fixed annuity. Your earnings will accumulate tax deferred and generally won't be treated as taxable income until you start taking payments.
• Buy and hold. One of the best, and easiest, tax-efficient techniques you can employ is simply to avoid excessive trading of your investments. By following a "buy and hold" strategy, you should only have to pay the long-term capital gains tax rate – which is likely to be either 15% or 20% in your case – on the investment's appreciation when you sell individual stocks you've held for over a year.
• Seek tax-efficient mutual funds. You don't have to buy and sell a lot of mutual funds to generate taxable gains, because the fund managers themselves can make trades often, and these trades can produce capital gains, whose tax liability will generally be passed on to you. Also, some mutual funds pay out a lot of taxable dividends
• Look at municipal bonds. The interest from municipal bonds is generally exempt from federal income tax, and often from state and local income taxes, too. However, the income from some municipal bonds may be subject to the alternative minimum tax.

To learn more about these and other tax-efficient investing ideas, contact an Edward Jones financial advisor. You may also want to consult with your tax advisor on the tax consequences of specific investments. Becoming a "tax-smart" investor may help you get more mileage from your portfolio, which may pay off for you – now and during retirement.