Out of all of the inevitable events in life, the payment taxes come on top of the very list. But you know what? Choosing the correct investment options can enable us with an opportunity to actually save ourselves from some of these taxes. It would also be a way of legally taking off some of the burden, when you just work with some tax-saving plans, as much as possible at least.
You can go on a holiday, find a cheap stay-in, but paying the bill always ends up with a lump-sum tax, added that the stay was not cheap at all in the end. Tax co-exists, and as mentioned before, it is quite inevitable.
Even Investing can Cost You
Even investing has costs, you know that. Of all the expenses that come along with investing, taxes can sting like a bee. It can take a big bite out of the return you were supposed to receive before you calculated the taxes. Now, your returns just become returns on an investment minus the taxes and other expenses.
Do you know what the Good news is?
Tax-efficient investing can minimize your tax burden. So let us take a look ahead, what is tax-efficient investing, and how it works.
Tax Efficient Investments
Investment selection and asset allocation are two of the most important factors when it comes to affecting returns. Minimizing taxes does have a significant effect. There are two reasons why this happens. Firstly, you lose the money you pay in taxes. Secondly, you will lose the growth the money could have generated if it were still invested. The after-tax returns, without a doubt, do matter more than your pre-tax returns. In order for you to minimize your returns, you need to keep more of your money, and tax-efficient investing it is.
Can Accounts make a Change to your Investments and Saving Tax?
Tax-efficient investing involves choosing the right investment and the right accounts that will be holding your money. In that case, there are two main accounts:
- Taxable Accounts
- Tax-Advantaged Accounts
What is a Taxable Account?
Are you familiar with a brokerage account? Well, I am pretty sure you are. As an investor, you would have most probably used it. A brokerage account is a pretty good example of a Taxable account. These accounts do not have any tax benefits but they do offer fewer restrictions and more flexibility than tax-advantaged accounts like IRAs. With a brokerage account, you can withdraw your money at any preferred time and for any reason, and most importantly, for this, you do not have a tax penalty or such.
If you are an investor holding investments in the account for a minimum of a year, you would pay more than a favorable part of your long-term capital gain, which depends on your tax bracket. If you are an investor who holds an investment of less than a year, then you will be subject to short-term capital gains, which would eventually equate to your ordinary income tax bracket.
What is a Tax-Advantaged Account?
A tax-advantaged account is generally an account that is either tax-deferred or tax-exempt. Tax-deferred accounts like traditional IRAs give an upfront tax break. You would also be able to deduct your contributions to these plans. It will provide you with an immediate tax benefit. You pay taxes when you withdraw money in retirement, which means the tax is deferred.
Tax-exempt accounts work differently, and the contributions to these plans are made with an after-tax, which means you will not be receiving the same upfront tax break that you do with the traditional IRAs and more. Your investments would grow tax-free and qualified withdrawal in retirement would be tax-free as well. That is exactly why these accounts are considered tax-exempt.
Apart from these two accounts being the best tax-saving investment accounts, there are also some investment strategies you can get hold of to make returns better on your investments, and save up on taxes.
Are you a Tax Conscious Investor?
Here are some other places where you can put your money:
Unit Linked Insurance Plans – Unit Linked Insurance Plans are a great tax-saving investment. They have multiple fund options, which range from high risk to safe liquid funds. You can switch between funds. The wealth boosters will, without a doubt, add to your portfolio growth and long-term investments.
The Public Provident Fund – This is another popular way to save up on tax and makeup for long-term investments. The primary focus of this is to help employed and unorganized sector employees. But, the debt market-linked rate of return and EEE tax status has made it quite a popular investment option.
Equity Linked Saving Schemes – This has been a popular saving scheme for the aggressive investors out there. They are schemes that are also tax-saving funds from the Indian mutual fund houses, and they passively managed equity funds.
New Pension Scheme – The national pension scheme is also one of the best ways to go ahead with retirement savings and one plan that best suits India. It offers great investment sided with tax benefits for employees and self-employed professionals. It also has an additional saving opportunity of up to fifty thousand rupees under section 80CCD (1b). It can, without a doubt, help you reduce your taxable income by 2 lakhs in one financial year.
These are just some of the many ways you can invest tax consciously. You can start off with your tax-saving investment accounts and carry on with newer strategies that can improvise the returns you will be taking home over your investments.
Do you know what one of the core principles of investing with Saving for retirement and generating cash? It is minimizing the taxes. A good strategy for minimizing taxes can take you further closer to your investment goal. One of the best ways you could minimize taxes is, of course, tax-advantaged investment accounts. It will give your account the best opportunity to grow over time.