Tax

How to pay less in taxes by making smart investment decisions

taxescoins-5bfc323546e0fb002602ad04.jpg_thump

By this time of the year, you probably have already filed your income tax return or have the finish line in sight. And through it all, you probably have asked yourself: What else can I do to shave the tax bite on my investment portfolio?

Actually, there’s a lot that can be done, as several types of investments offer at least modest tax-shaving potential. And for the most part, these investment tax benefits weren’t undercut by tax reform.

These are some of the more popular choices:

IRAs: Plenty of versatility

Individual Retirement Accounts aren’t a type of investment but rather a type of account, into which you can place all sorts of stuff and receive tax benefits. All IRAs offer tax-deferred growth of your investment dollars. After that, things get more complex but also more beneficial.

With traditional IRAs, you essentially can deduct the money you put into an account. Then, as noted, it builds up tax-deferred until you withdraw it, when your contributions and gains are taxed as ordinary income.

If you withdraw money prematurely, generally before age 59½, you face a 10% penalty. You also need to start taking withdrawals by around age 70½ or an even bigger 50% penalty could apply.

One nice thing about IRAs: you typically can make a contribution as late as April 15 and apply the deduction to reduce your tax bill for the prior year. Fidelity Investments reports that 33% of all the 2018 IRA contributions made by its customers came in during the three weeks leading up to the April 15 deadline.

With Roth IRAs, the tax benefits are reversed: You don’t get a deduction up front but you also don’t pay taxes on withdrawals (assuming you meet minimum-holding period requirements). With Roths, there are also no required minimum distributions starting around 70½.

Matches boost 401(k) accounts

As good as IRAs can be, more contributions have been flowing into workplace 401(k)-style retirement accounts.

From a tax standpoint, 401(k) plans work like traditional IRAs, in that you get a deduction on contributions, your gains build up tax-free, then you face regular taxes on withdrawals. Many employers also offer a Roth 401(k) option, meaning you would forsake the deduction but your withdrawals would come out tax-free.

Several factors explain why 401(k)s are popular. Matching funds are a big one, as many employers will encourage you to save by pitching in perhaps 50 cents for every dollar you invest, up to certain limits. Also, the accounts are convenient in that the money is diverted automatically from each paycheck, without you having to think about each investment decision.

But while people are putting more new money into 401(k) plans, a lot of that cash will wind up in an IRA eventually. When leaving jobs, workers can choose to retain the tax deferral on their accounts by rolling the money into an IRA. In fact, IRA dollar volumes have been boosted much more by rollovers in recent years than by new contributions…..Read more>>

 

Source:-usatoday