None of us want to spend a lot of time saving and investing their hard-earned money only to see a large chunk of it disappear to the tax man. In an ideal world we would keep all the returns on our money, but unfortunately this is rarely the case and very often when you use a tax-free investment scheme there are high penalties for paying taxes if you cash in early. A tax-free investment is not always a tax-efficient investment.
You may consider investing in a tax-free municipal bond. These are safe and your return is guaranteed at the end of the investment period, plus your tax-free interest sum at the end of each year. However, the return on your investment is not going to be particularly good. It would be wise to consult a specialized advisor, or at least use an investment calculator, to see what your return, minus taxes, would be in a low-tax investment plan. The interest earned may be greater than the tax lost and this could be a good tax efficient investment.
Retirement investment accounts can vary when it comes to taxes. Some are tax deductible and others are tax deferred. If you’re smart and do some shopping, you may be able to come up with a retirement plan that fits both categories and turns out to be a very tax-efficient investment. There are a number of options, whether you’re self-employed or part of an employer-sponsored plan. In some of these latter plans, you can have the benefit of combined tax-deferred and tax-deductible plans and some of these even have the added bonus of an employer contribution scheme where they contribute to the plan for you. Some companies go as far as matching their employees’ contributions. These are great for employees and can result in a very happy retirement!
Another tax-efficient investment is a tax-managed fund. They are very low turnover funds and are long-term investment plans. These funds are often categorized by their turnover rate and the lower the rate, the lower the tax. This turnover rate is usually included in fund reports and if you are looking out for a turnover rate of less than 80 then you can be assured of a low tax investment. Index funds are similar in that they have a low turnover and therefore capital gains and taxes are commensurately low.
There are many specialists who are dedicated to finding tax efficient investment schemes and with the popularity of the internet increasing daily it is easy to use a search engine to locate some of these companies and individuals. Investing is a very complex subject and it is easy to invest in the wrong scheme that will not bring you the best returns for your particular circumstances. Make sure you are fully aware of all the possibilities before you put your hard-earned money into a plan. Then all you have to do is be patient!