A Guide To Tax-Efficient Investing


Tax-efficient investing is important for two reasons. Not only can these strategies help you keep more money, tax-efficient investing can enable you to keep more of your money invested in the market.

Investment types that are more tax efficient might be better suited for taxable accounts, where an investor must pay both capital gains tax  and income tax on interest earned.

1. Treasury bonds Investors will not pay state or local taxes on interest earned via Treasury bonds.

2. ETFs Most ETFs are passive and track an index, and thus tend to be more tax efficient than their actively managed counterparts.

3. Municipal bonds Interest is generally exempt from federal taxes, and state or local taxes if the investor lives within that municipality.

4. Stocks that do not pay dividends When you sell a non-dividend-paying stock at a profit, you’ll likely be taxed at the long-term capital gains rate, assuming you’ve held it longer than a year.

Once you understand the tax rules that govern  investment accounts, as well as the tax implications, you’ll be able to create a strategy that minimizes taxes on your investment income.