Saving Investment

Kavan Choksi Discusses Tax-Saving Investment Strategies That Investors Must Consider


Even though taxes should not always drive the investment decisions, properly evaluating the asset classes chosen by investors and the accounts they hold them in can considerably lower their tax bill. Kavan Choksi discusses says that even though tax rates and rules may change over time, the value of taking taxes into consideration while making investment decisions does not. Taxes can cut down the investment returns of a person year to year, and potentially jeopardize their long-term goals. Hence, it is prudent to save on taxes as much as possible.

Kavan Choksi highlights certain tax-saving investment strategies

The higher the current income tax rate of a person, the more beneficial it shall be for them to consider the impact of taxes while making changes to their investment. Contributing to tax-efficient accounts can be a pretty prudent decision for such investors. They can take advantage of tax-efficient retirement accounts for which they are eligible in order to cut down current and/or future taxes. Traditional IRA contributions can be federally tax deductible. Moreover, the total annual contribution to traditional IRAs and Roth IRAs shall be subject to a dollar limit.

Investors can choose a combination of investment account types in order to mix and match distinctive income sources in retirement that can potentially aid in reducing taxes. By spreading their contributions among varied account types, investors can minimalize their taxes in retirement. No matter whether their future tax rates are higher or lower than the current time, investors must take steps ahead of time in order to establish different account types for tax diversification. It is smart to leave as much as possible on the retirement accounts, as these investments can continue to grow on a tax-free or tax-deferred basis.

Investors need to proactively choose investments that carry tax benefits for improved savings. For example, income that is earned from municipal bonds is tax-free at the federal level, and can be tax-free at the federal level as well in certain cases. The investors must be aware that tax-exempt bond income is typically tax-exempt when it is held directly. However, if it is distributed from a retirement account, then it shall be treated as ordinary income and is taxable. Other investments with tax advantages include tax-managed mutual funds. The managers of these mutual funds work deliberately and actively for tax efficiency. Exchange traded funds and index funds that passively track long-term investments in a target index are also ideal investment vehicles for enjoying tax advantages.

As per Kavan Choksi, it is critical that investors take full advantage of tax-efficient investments by choosing to hold them in the account that has the most advantageous tax treatment. Investing in such a manner would allow investors to realize all potential tax benefits from their investments without increasing their tax liability. Taxable bonds, stuck funds with high turnover and other investments that generate taxable income regularly, for example, should be held in tax-deferred accounts. On the other hand, tax-managed mutual funds and municipal bonds are a better choice for a non-tax-deferred account.

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