Want to Make More Money Investing? Try Maximizing Your After-Tax Return - Rodgers & Associates

Want to Make More Money Investing? Try Maximizing Your After-Tax Return

Saving money on taxes has the effect of compounding, giving you more to invest.
Benjamin Franklin famously said, “A Penny Saved is a Penny Earned” and we couldn’t agree more. Investors are always looking for ways to grow their account balances. Reducing their tax bill might be the simplest way.
Here are a few ways to get more out of your invest­ments by paying less in taxes:

  1. Long-Term Capital Gains – Hold invest­ments a year or longer and gains are given favorable tax treatment over short-term gains (less than 1 year) which are taxed as ordinary income.
  2. Qualified Dividends – Many investors like to hold dividend paying stocks or mutual funds but pay close attention to what type of income your investment generates. Qualified dividends are taxed at a lower rate than ordinary dividends. For example, many REITs and partner­ships pay ordinary dividends which are taxed at your marginal (highest) tax bracket.
  3. Asset Location – Consider buying high dividend/high yield invest­ments in a retirement account where the tax is deferred each year. On the other hand, be very careful what you buy in non-retirement accounts because the interest, dividends and capital gains make their way onto your tax return.
  4. Municipal Bonds – We have seen even well known money managers invest in bonds that pay taxable interest without any regard for taxes when there may be similar tax-free alter­na­tives.
  5. Index Funds and/or Exchange Traded Funds (ETFs) – Many index funds and ETFs have low turnover and as a result don’t typically pass on as many capital gains distri­b­u­tions to share­holders.
  6. Look Ahead at Your Income for Tax Bracket Changes – Low income years may be good for inten­tionally taking on more income (would you pay 15% now to avoid a 25% tax later?) and high income years should be planned around by taking losses, deduc­tions or deferring income to other years.
  7. Use Roth IRAs – You don’t get a tax deduction on the small amounts going into these accounts, but typically, whatever large amounts they grow to can be withdrawn tax-free.
    Learn to pay attention to what you will pay in taxes so you can keep more of what you earn!