Making the right investments can be a powerful method of growing your savings over time. While you are required by law to pay taxes on your investment gains, there are many tax-free investment options available to you. Choosing the right investment, however, depends on your individual goals, values, and finances. While building your financial portfolio, familiarize yourself with the following tax-free investment options to help you minimize taxes. If you’d like to learn more, feel free to explore our wealth of articles catered to every financial question you may have on how to protect and grow your income today!
Traditional IRAs And Roth IRAs
One of the best tax-free investments are traditional and Roth IRAs. For 2022, an Individual Retirement Account (IRA) offers tax-free growth on annual contributions of up to $6,000 (if you’re below the age of 50) or $7,000 (if you’re age 50 or older). For 2023, these contribution limits have been increased to $6,500 and $7,500 respectively. Note, however, that company retirement plans and income limits may affect your eligibility and the deductions available.
Traditional IRAs allow you to invest pre-tax capital without taxes, and you will be able to withdraw at a lower tax rate once you retire. However, there are compulsory disbursements after a certain age.
A Roth IRA, on the other hand, uses after-tax money. It is not an investment but a retirement account for tax-free investment. Hence, it is tax-free upon retirement but has income eligibility guidelines. Earners with higher income may not be able to directly invest in a Roth IRA. They may however first invest in a traditional IRA and convert it into a Roth IRA.
Health Savings Accounts (HSAs)
HSAs are one of the best tax-free investments you can make, because they enable you to save for future medical costs and lower your taxable income. If you have a high deductible health insurance plan, you are eligible for one. Annual contribution limits are set at $3,650 for individuals and $7,300 for families, as of 2022. If you are 55 and older, you can further contribute $1,000 as a catch-up contribution. Furthermore, your employer may opt to make a contribution on your behalf.
Sometimes, HSAs offer a triple tax benefit. Your contributions deducted from your paycheck before tax are tax deductible. This reduces your annual tax bill. The money in your account can then grow without being taxed. Furthermore, when you withdraw money from your HSA for medical costs, the distribution is tax-free.
Municipal bonds are sometimes known as triple tax-free bonds because they may be exempt from federal, state, and city taxes. However, this depends on where you live. Not all municipal bonds are exempt from taxes, so do your research first! These bonds are generally safer because they are backed by government entities, but they do offer lower returns in general. These bonds may offer tax incentives for high tax-bracket earners depending again on where they live.
403(b) Employer-Sponsored Retirement Plan
If your plan is to invest for the long term, then an employer-sponsored retirement plan may be one of the best tax-free investments you could make. Pre-tax contributions will be deducted from your income, thereby lowering your adjusted gross income. Additionally, your employer may match your contributions and offer profit-sharing plans. The earnings from this are tax-exempt and may be withdrawn after retirement. However, there are limits on contribution amounts and penalties if you withdraw too early.
There are a myriad of tax-free investment options that are available to you, and making the decision can be overwhelming. Why not leave it to the professionals instead? Consult with us today to protect your income and maximize your growth!