Without proper planning, investment earnings can make your tax burden even heavier. For investors in the top marginal tax bracket, taxes can reduce an 8% annual return to as low as 4.5%. Over time, the lower return may lower the chance of achieving your financial goals
Investment earnings within IRAs, Roth IRAs, 401(k)s, annuities and 529 education accounts are not subject to current year taxes. Depending on the account, taxes are either deferred until qualified withdrawals begin or eliminated altogether.
Strategies for cutting taxes
Offset taxable gains with losses
Consider realizing investment losses before year-end to reduce capital gains taxes.
Donate and deduct
When donating an investment to charity, you can generally take a tax deduction for the full market value, meaning you avoid capital gains taxes on any appreciation.
Consider tax-free municipal bond funds
Interest income from municipal bonds is not typically taxed by the federal government or state in which a bond is issued.
Invest for dividends
While interest income is taxed at rates as high as 40.8% (37% tax rate plus 3.8% Medicare surtax), taxes on qualified dividends top out at just 23.8% (20% maximum rate plus 3.8% surtax).
Maximize tax-advantaged accounts
Contribute as much as possible to tax-advantaged accounts for retirement or education. If you're 50 or older, you can make additional catch-up contributions to IRAs.
Invest for the long term
Investments sold at a profit after more than one year qualify for favorable tax rates as long-term capital gains.
Consult a CFP professional
A CFP professional will create a financial plan and show you how tax planning can make a difference.