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Keeping investment taxes low

It shouldn't be the primary goal of investing, but minimizing the amount you pay in taxes can be a simple way to increase your net returns.

POINTS TO KNOW

  • Your account type, investment type, and trading behavior will all impact the amount you owe Uncle Sam.

Every investment decision is an opportunity to save

There are a lot of choices you'll need to make in investing, whether you're just getting started or you've been investing for decades. Many of these decisions will have a tax impact.

Taxes directly reduce your returns, so it's smart to familiarize yourself with the potential tax hits—or tax savings—you could be in for.

When choosing an account type

Use tax-advantaged accounts when saving for retirement or college

Roth and traditional IRAs, 401(k) plans, annuities, and 529 college savings plans all give you tax benefits on the money within these accounts.

When choosing investments

Choose investments that are tax-efficient

Some investments, like index mutual funds and ETFs (exchange-traded funds), are naturally tax-efficient. Others, including tax-managed funds and tax-exempt bonds, were created specifically for investors concerned about lowering their taxes.

When managing your portfolio

Manage different accounts in ways that minimize your taxes

If you own some accounts with tax advantages and some without, you have greater flexibility to lower your tax burden across all your accounts.

Consider selling at a loss

While you should never sell an investment for the sole reason of lowering your taxes, you should keep tax implications in mind when making trades.

Limit your trading

Every time you sell investments in a taxable account—especially if you're selling in order to lock in gains—you could be increasing your tax bill. Instead, stick to your investment plan and limit your trading activity.

Go in-depth ... Read our white paper on strategies for choosing investments and managing your portfolio that can increase after-tax returns.


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REFERENCE CONTENT

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Returns

The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.

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Roth IRA

A type of IRA that allows you to make after-tax contributions (so you don't get an immediate tax deduction) and then withdraw money in retirement tax-free as long as you meet the requirements.

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IRA (individual retirement account)

A type of account created by the IRS that offers tax benefits when you use it to save for retirement.

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Annuity

A type of investment account that can be used to save for retirement or to generate regular income payments in retirement. An annuity is an insurance contract, and the issuing insurance company provides some type of guarantee on your investment.

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529 savings plan

A type of investment account that offers federal and state tax benefits to people saving for higher education. These plans are sponsored by particular states but are usually open to anyone. The money in a 529 savings plan can be used for tuition and other qualified expenses at thousands of colleges, universities, graduate schools, and trade and technical schools in the United States and abroad.

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Mutual fund

A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

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ETF (exchange-traded fund)

A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.

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Taxable accounts

Accounts that don't receive special tax treatment, so all interest, dividends, and capital gains are subject to taxation in the year they're received.