Tax Efficient Investments
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From a tax standpoint, when it comes to investments there are four types:
1. Taxable Investments
2. Tax-Free Investments
3. Tax Advantaged Investments and
4. Tax Deferred Investments
The purpose of this article is to provide an overview of the types of investments that are the most tax efficient.
FEDERAL AND STATE TAX-FREE INVESTMENTS
1. Municipal Bonds – Exempt from state tax of the state in which the obligations are issued
2. Municipal Bond Funds – Exempt from state tax of the state in which the obligations are issued
3. Municipal Bond Trusts – Exempt from state tax of the state in which the obligations are issued
4. Cash Surrender Value Loans
5. Roth IRA
6. Roth 401(k)
7. 529 Plan distributions used for qualified higher education expenses, including room and board
8. Series I or EE Bonds – Earnings exempt if used for qualified higher education expenses
9. Coverdell IRA (aka Education IRA) – Earnings exempt if used for qualified education expenses (tuition:
elementary school, high school, tutoring and college)
10. Earnings on investments held in Health Savings Arrangements used to pay for eligible medical expenses
STATE TAX-FREE INVESTMENTS
1. Treasury Bills
2. Treasury Notes
3. Treasury Bonds
4. Sallie Mae Mortgage Backed Securities
5. EE Bonds
6. I Bonds
TAX ADVANTAGED INVESTMENTS
1. Real Estate Investments
2. Rental Properties
3. Principal Residence – Up to $500,000 ($250,000 if single) of gain excluded
4. Single Premium Life Insurance Products
5. Traditional IRAs
6, Stocks held more than one year
7. Exchange Traded Funds held more than one year
8. Mutual Funds held more than one year
9. Vacation Homes
10. Precious Metals/Collectibles/Coins – 28% maximum long-term capital gains tax rate
11. Real Estate Investment Trusts
12. Qualified Small Business Stock – 50% gain exclusion. Balance subject to 15% long-term capital gains
tax
TAX DEFERRED INVESTMENTS
1. I Bonds
2. Fixed Annuities
3. Variable Annuities
4. EE Bonds
5. Traditional IRAs
6. 401(k) Plans
7. 403(b) Plans
8. 457 Plans
9. Qualified Small Business Stock – Proceeds used to purchase new Qualified Small Business Stock
10. 529 Plan Investment earnings are deferred until used for qualified higher education expenses.
Some of the above mentioned investments may be subject to state and local income taxes as well as the federal alternative minimum tax. For more information regarding this, please consult with a tax advisor or attorney.