Tax-Efficient Investing Strategies For High-Net-Worth Individuals

Finance Tax

Maximizing after-tax returns requires investing in appropriate investments and using appropriate accounts. To learn more, order your free copy of Bankrate’s Tax Savings Guide today!

Investment selection and asset allocation are critical components of investment success; however, tax efficiency should also be prioritized when investing. Here are seven tax-efficient strategies for high net-worth individuals. 1. Municipal bonds.

1. Tax-deferred retirement accounts

One of the key strategies for high-net-worth individuals looking to reduce taxes is taking advantage of their deductible contribution limits for tax-deferred retirement accounts. Contributions reduce taxable income immediately while earnings in these accounts don’t become subject to taxes until withdrawal occurs.

Financial advisers frequently suggest channeling savings through tax-advantaged vehicles like IRAs and 401(k) plans to lower current income tax payments while simultaneously helping assets accumulate tax-free until needed for retirement.

Tax-deferred accounts provide many advantages, but early withdrawals may incur steep penalties and tax liability on the total withdrawal amount. When considering this strategy it’s vital that you consult with a professional advisor prior to moving forward.

2. Municipal bonds

Municipal bonds provide investors with a tax-free income stream to diversify their portfolio, as well as high credit ratings and tax savings benefits. But as with all investments, munis can carry risks. Your financial advisor can assist in selecting and managing munis for maximum returns while minimising risk exposure while aligning them with your overall investing strategy.

By investing in municipal bonds, you are lending the issuer money for a set period in exchange for regular interest payments that are typically tax exempt and may also be exempt from state and local income taxes. Your financial advisor can assist with selecting individual bonds or municipal ETFs that best suit your portfolio needs; perhaps building a ladder of different maturities to reduce interest rate risk and potentially limit the appeal of these investments as rising rates could devalue them over time.

3. Real estate

Your income taxes provide essential funding for government operations and economic progress; they’re necessary for progress. But there are ways you can minimize what you owe through tax-efficient investments that may help lower your liability.

Real estate investment typically involves purchasing and operating commercial or residential properties directly, while indirect real estate investing can involve mortgage-backed securities (MBS), which are bundles of loans purchased with mortgage proceeds.

One advantage of real property investment is depreciation’s use as an expense against taxable income. Depreciation recognizes how assets deteriorate over time, with different IRS timelines established for different assets.

Real estate investing provides another advantage to your heirs after your death: their basis can be increased, potentially eliminating recaptured depreciation and capital gains taxes.

4. Tax-loss harvesting

Tax-loss harvesting refers to selling investments with declining values in order to offset capital gains tax liabilities and help reduce your overall tax bill while positioning your portfolio for future expansion.

Investments that generate regular income may benefit from being held in tax-advantaged accounts such as an IRA, 401(k), or individual retirement account (IRA).

Holding investments in both taxable and tax-advantaged accounts allows you to take full advantage of each account’s tax advantages. For instance, investments that generate steady regular income might work better in taxable accounts while those producing short-term capital gains may be more tax efficient in an IRA.

5. Investing in tax-advantaged vehicles

Every investment has costs associated with it, but taxes tend to be the single largest expense–they can erode returns significantly if they’re not considered efficiently when investing. To get the most from your investments, making an effort towards tax efficiency should always be a goal of your investments.

Attaining financial security means not only increasing retirement account contributions, but also selecting the appropriate accounts for specific assets. Sometimes taxable accounts such as brokerage or mutual fund investments may provide better tax-deferred results than tax-deferred ones like IRAs and 401(k)s.

Periodically rebalancing your portfolio–selling some investments and buying others–may help minimize capital gains taxes, while tax-efficient strategies like buy-and-hold investing may further minimize their effect.

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