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Tax Efficient Investing for Retirement

| December 15, 2015
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Whether retirement is just around the corner or decades away, the manner in which you invest your funds today can impact how much money you actually have when it comes time to hang up your business attire in favor of flip flops and Hawaiian shirts. The taxes you pay the federal government now are not always reflected simply by your income level, so invest wisely. Here are a few tips to help you invest in a tax-efficient manner for your retirement.

Invest in Tax-Deferred and Tax-Free Accounts

First and foremost, you should take advantage of tax-deferred accounts offered by your employer. Traditional 401(k) and 403(b) plans, traditional IRA accounts, and annuities offer you the ability to lower your taxable income now while you are working, let your investments grow without taxes until retirement, and make it possible to withdraw your funds during retirement when your tax bracket may be lower.

Investing in a Roth IRA is also a good idea. It will not lower your income bracket for tax purposes while you are working, but when you withdraw those funds in the future you can do so without having to pay any federal taxes. This puts more money in your pocket at a time when you are no longer working 40 hours each week.

Take a Look at Government and Municipal Bonds

The key to any investment strategy is diversity. US government bonds are subject to federal taxes over time, but they are exempt from state taxes. Similarly, most municipal bonds are exempt from federal taxes, and when issued in state, may even be free of state and local taxes.

Allocate Investments

The manner in which you allocate your funds in investment portfolios is just as important as the actual act of investing. Your funds should, ideally, be spread across a spectrum of taxable and nontaxable accounts to have a true impact on your after-tax returns. For example, funds that pay meaningful taxable distributions on dividends should be placed in a tax-deferred account, allowing you to reinvest distributions and avoid counting those payments as ordinary income.

Index funds are a good example of tax-efficient investments. Fund managers seek to replicate the returns of a designated index in index funds, and there are fewer transaction fees over time. Compared to managed mutual funds, index funds may provide a higher after-tax return over time.

Don't Ignore Your Tax Losses

US News & Money points out that your tax losses offer you a chance to turn lemons into lemonade. No one likes to lose money, but you can take advantage in the long run. Referred to as harvesting your losses, you can sell off an investment that is underperforming and losing value. The loss you incur in doing so can be used on your taxes to offset the gains you have received from other investments. Though you lose money in the sale, you can lower your taxable income and protect the gains from other investment accounts.

There are numerous ways to protect your hard-earned income through tax-efficient investments. These are but a few starting points to think about. Contact Richard L. Farrar, CFP®, CLU®, ChFC®, AEP, Private Wealth Advisor, to learn more techniques to invest wisely and efficiently.

These are the views of Social Advisors, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

 Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Richard L Farrar is a registered representative of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC). Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. CRN-1370513-120915

 

 

 

 

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