Be efficient when you invest in a brokerage account
If you still have something left to save after you have taken the steps above, you should consider investing in a traditional brokerage account. Income that’s generated in these accounts is usually taxable, but there are a couple of strategies you might try to improve their tax efficiency, like:
- holding some of the investments that are appreciated for over a year, in order to take advantage of long-term capital gains rates, which might range from 0% to 20%, depending on your income.
- limiting investment trades. This way, you will avoid unnecessary taxes on your returns. Each trade can make a “tax drag” that will reduce your after-tax returns by 1% to 3% annually, but it solely depends on your tax bracket and how much you trade. But if you add everything over the course of 30 years, overtrading might actually prove to have more returns lost to taxes.
- Consider a couple of tax-efficient investments, like exchange-traded funds, and index mutual funds, but also tax-managed funds, which won’t creat as many taxable distributions as other actively managed funds.
- Opting for tax-advantaged municipal bonds, especially if you can check a high tax bracket. The interest that’s paid on these bonds is most of the time free from federal taxes, and if it’s issued in your home state, is usually free from state and local taxes, too.
If you enjoyed reading this article, we also recommend reading: 7 Ways Social Security Affects Women
Leave a Reply