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The Best Tax-Free Investments for Your Portfolio

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Discover the top tax-free investments to maximize your returns.

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After maximizing contributions to tax-advantaged accounts like a Roth IRA or 401(k), most investors will begin contributing to a taxable brokerage account. However, taxes can quickly eat away at your returns. Luckily, there are several tax-free investments available that can help minimize your tax burden.

One often-overlooked aspect of retirement planning is the effect of taxes. Without proper planning, taxes can take a significant bite out of your retirement savings. By investing in tax-free options, you can keep more of your hard-earned money.

For a lot of people, a tax refund represents the largest influx of money they will receive all year long. Even if you don't fit into this category, it's important to make the most of your money by investing in tax-free options.

Money market funds are low-risk investments for parking your cash, earning interest while providing very good liquidity. These funds invest in short-term, high-quality debt securities and are considered one of the safest investments available. While money market funds are not entirely tax-free, they are tax-exempt at the state level and can be a great option for those in high-tax states.

Municipal bonds are another excellent option for tax-free investing. These bonds are issued by state and local governments and are exempt from federal taxes. Some municipal bonds are also exempt from state and local taxes, making them a great option for investors looking to minimize their tax burden.

Tax-free mutual funds and exchange-traded funds (ETFs) are another option for tax-free investing. These funds invest in municipal bonds, government bonds, and other tax-exempt securities. They offer a diversified portfolio that will never be taxed at either the corporate or individual levels.

The best robo-advisors charge low portfolio management fees and offer a range of services, including tax optimization. These services can include tax-loss harvesting, which involves selling losing investments to offset gains and reduce your tax liability. Robo-advisors can also help you choose tax-efficient investments based on your individual tax situation.

Another tax-free investment option is a health savings account (HSA). HSAs are available to those with high-deductible health plans and can be used to pay for qualified medical expenses tax-free. Any unused funds in an HSA roll over from year to year, making it a great option for long-term tax-free investing.

529 college savings plans are also an excellent tax-free investment option for parents and grandparents. These plans allow you to save for a child's education tax-free, and some states offer additional tax incentives for contributions.

Real estate investment trusts (REITs) are another tax-free investment option. These trusts invest in real estate and are required to distribute at least 90% of their taxable income to shareholders as dividends. REIT dividends are taxed at a lower rate than regular income and are also eligible for the qualified business income deduction.

In conclusion, taxes can significantly impact your investment returns. By investing in tax-free options, you can keep more of your hard-earned money. Municipal bonds, tax-free mutual funds and ETFs, money market funds, robo-advisors, HSAs, 529 college savings plans, and REITs are all great options for tax-free investing. Consult with a financial advisor to determine which options are best suited for your individual financial situation.

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