Whether you’ve yet to file your taxes this year or are just looking for ways to save on next year’s taxes your investing strategy can make a huge difference. Especially if you’re looking to offset taxes on your growing investments or lower the taxes owed on capital gains.
Here’s what you need to know about utilizing investing to save money on taxes.
The Top Tax Saving Strategies
Investing in tax advantaged accounts like 401(k)s, 403(b)s, and IRA’s are the most common method for saving on taxes. With tax advantaged accounts you can contribute up to the maximum allowable amount and not have to pay taxes on your investments until withdrawal.
Let’s say you make $50,000 this year but contribute $15,000 to your 401(k). Instead of paying taxes on the $50,000 you’d now be paying taxes on $35,000. You’d defer paying taxes until you withdraw your money during retirement. This is the most popular method of saving on taxes through investments.
In fact, a recent E*TRADE StreetWise survey concluded that nearly 45% of investors believe that investing in these types of accounts is the best way to save money on taxes owed on their investments.
The other popular methods for saving taxes on investments were as follows:
- Selling positions that have lost value to offset capital gains
- Holding investments for at least one year to lower taxes on gains
- Investing in Tax-Free Municipal Bonds
- Investing in tax-advantaged deferred annuities
To take advantage of these opportunities you should contribute as much money to your tax advantaged retirement accounts throughout the year. For 2015 that means you can contribute up to $18,000 in your 401(k) or $5,500 in your traditional IRA.
For investments outside of your retirement portfolio you can use strategies like investing in tax free municipal bonds and holding on to investments for longer than a year to lower capital gain taxes.
E*TRADE customers should also leverage the E*TRADE Tax Center, which provides tools and resources on important information such as cost basis reporting, tips on managing capital gains and losses, and frequently asked tax questions just to name a few.
How to Come Up With Your Own Tax Savings Strategies
Since we’re all at different stages of our life with different income levels, risk tolerance, and capital available to invest, there’s no one size fits all investment strategy.
Instead you need to be proactive about coming up with a strategy that suits your needs. The first thing you should do is take advantage of the tools that are already available to you. Including, but not limited to:
Employer Sponsored Retirement Plans – If your employer offers a 401(k) this is one of the easiest ways for you to get started investing in a tax-advantaged account. If your employer offers a match you should invest at least up to the employer match, but ideally more.
Free Investing Resources – Free investing resources, such as the E*TRADE Education Center can help you learn about tax saving investing strategies as well as frequently asked investing questions. This resource center is put together by experts and is completely free. You don’t even have to be an E*TRADE customer to take advantage of this feature.
Take Control of Your Financial Future
Investing is a huge part of creating a healthy financial future. The earlier you start investing and the more you learn about growing your investments in the most efficient ways possible, the better off you’ll be.
What are your strategies for saving on taxes through investments?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.