When it comes to taxes and investments, we have all heard the old saying: “It’s not what you make, it’s what you keep.” Since the founding of the United States, if not before, investors have searched for ways to keep as much after-tax money as possible.
Tax-free and tax-efficient investments have been around for decades. Some of us remember getting a savings bond as a childhood birthday present, with the explanation its value would appreciate and be relatively tax-free by the time we were grownups. The market for U.S. municipal bonds, which are usually tax-exempt at the federal level and sometimes tax-free at state and local levels, is currently worth around $3.7 trillion, and it has long been dominated by household investors. In fact, according to the Federal Reserve Bank of New York, more than half of that U.S. municipal debt is in the hands of individuals.
Tax-deferred retirement accounts such individual retirement accounts (IRAs) and 401(k)s are also part of our daily financial landscape, and they are growing more common in the American workplace. Similarly, strategies such as 529 plans or UGMA — the Uniform Gift to Minors Act — are low-maintenance and often tax-free ways to create and grow a nest egg for a young person’s future college tuition payments.
There are also less well-known instruments out there that can make a huge difference when planning for a child’s education, preparing for retirement or simply trying to pay the least taxes on your investment returns.
Gonzalo Freixes, a senior lecturer who teaches taxation at the UCLA Anderson School of Management, thinks people do not make use of most of the available tax-saving methods. There are several options, he said, “that have either immediate or future tax benefits [people] should think about.”
With the help of Professor Freixes, 24/7 Wall St. has compiled a list of seven tax-free or tax-efficient investment methods that can help you keep more of what you make.