February 28, 2024

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Tax Efficient Investment

None of us want to spend a long time saving and investing our hard earned dollars only to see large chunks of it disappear towards the tax man. In an ideal world we would get to keep all of our returns on our money, but unfortunately this is rarely the case and very often, when you do use a tax free investment scheme, there are high penalties to pay in tax 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 you are guaranteed your return 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 particularly good. You would be wise to consult a specialist advisor, or at least use an investment calculator, to see just what your return would be, less the tax, on a low taxed investment plan. The interest gained may be more than the tax lost and this could be a good tax efficient investment.

Retirement investment accounts can vary when it comes to tax. Some are tax deductible and some are tax deferred. If you are wise and do some shopping around you may well be able to come up with a retirement plan which fits into both categories and becomes a very tax efficient investment. There are a number of options whether you are self employed or part of an employer sponsored scheme. In some of these latter plans you may have the benefit of combined tax deductible and tax deferred 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 employee’s contributions. These are great for the employees and can result in a very happy retirement!

Another tax efficient investment is a tax managed fund. These are very low turnover funds and are long term investment plans. These funds are often rated by their turnover rate and the lower the rate the lower the tax. This turnover rate is usually included on fund reports and if you keep you eyes open for a turnover rate of under 80, then you can be sure of a low tax investment. Index funds are similar in that they have low turnover and therefore capital gains and taxes are proportionately low.

There are many specialists who make it their job to hunt out 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. Investment is a very complex subject and it is easy to invest in an unsuitable scheme that will not bring you the best returns for your particular circumstances. Make sure that you are fully aware of all the possibilities before putting your hard earned cash into a scheme. Then all you have to do is be patient!