Tax advantaged investments

by Troy Kestner ([email protected]) 580 views 

Benjamin Franklin is credited to stating “nothing in this world can be said to be certain, except death and taxes.” However, you only die once. You face taxes every day. Payroll tax, income tax, sales tax, use tax, self-employment tax, property tax, excise tax, alternative minimum tax, capital gains tax, etc.

Paying taxes isn’t all bad. The alternative would be not earning any money or going to jail soon for tax evasion. Neither is good. It’s good to know some options to help us diversify the tax laws within our investment strategies.

Personal Home Mortgage — Although there are limits on income and amounts, home mortgage interest is deductible. Over time the mortgage balance decreases, the interest provides a tax deduction and generally the value of the home appreciates. Great tax advantages but must be considered as part of an overall plan.

Retirement Accounts — IRAs, Roth IRAs, 401(k), SEP IRA, 403(b) or 457 plan, or a defined benefit plans. These plans allow tax advantages for the contributions to be deducted from income. The tax on the growth of the account is deferred until the money is used. In the case of the Roth 401(k) or IRA, the future withdrawal is tax free. Contributions, however, are not tax deductible. Contribution limits may apply and withdrawals prior to 59.5 years old could incur penalties or be subjected to income tax. Other restrictions may apply, so consult with your financial adviser.

Municipal Bonds — These allow investors to earn a yield or interest on their investment which generally isn’t income taxed at the federal and/or state level.

Insurance products — Life insurance and annuities have tax deferred growth advantages. Structured properly, withdrawals from life insurance cash values can be tax free. These products can be complex and have specific Internal Revenue Codes addressing their taxation. Seek a tax professional for advice.

Master Limited Partnerships and Real Estate — Also known as MLPs and REITs, own investments in depreciable assets such as buildings, oil rigs, pipelines, rental properties and machinery. These assets are leased with the goal of generating an income for the investor. Since the assets owned by the product are depreciating in value because of their anticipated maintenance cost, a portion of the income generated isn’t considered taxable. These are also complicated investment products with complex tax rules, which could cause additional taxation on the liquidation of the original investment.

Educational Savings Accounts — ESAs, also known as Coverdell Educational Savings Accounts and 529 Plans. The tax implications can vary significantly from state to state. In some states, these accounts hit the trifecta of tax advantages by allowing tax deductible contributions, tax deferred growth and tax free withdrawals for qualifying education expenses. In the case of 529 plans, it’s an effective estate planning tool because it allows the owner of the account to retain control of the assets and withdrawal timing while not being considered part of the owner’s estate.

Health Savings Accounts — HSAs are accounts that allow an income tax deduction for contributions and the use of the money to pay for qualifying medical expenses. Many providers of HSAs allow investment options. A high deductible health plan (HDHP) is required in order to qualify to contribute.

Understanding these as basic options will allow you to evaluate your current tax strategy when reviewing your investment portfolio. I do not encourage clients to make investment decisions solely based upon taxes. However, taxes should be one of the considerations used in evaluating, monitoring and tracking an effective financial plan to accumulate wealth. In doing so, it will help you attain your long term financial goals.

After all, the more taxes you save, the more money you have to use at your discretion later.

Troy A. Kestner is senior vice president of wealth management and a co-founder of SWK Financial Planning Advisors of Raymond James in Fayetteville. He can be reached at 479-435-9955 or The opinions expressed are those of the author.

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