Tax-Savvy Investing: 10 Ways to Minimize Your Tax Burden
2. Consider Roth Accounts
Roth IRAs and Roth 401(k)s offer the opposite tax benefit of their traditional counterparts: you pay taxes on contributions, but withdrawals in retirement are tax-free. This can be particularly beneficial if you expect to be in a higher tax bracket in retirement.
The advantage here is that you lock in your current tax rate on contributions and avoid the risk of higher rates in the future. Plus, Roth accounts offer more flexibility with fewer withdrawal restrictions compared to traditional accounts.
3. Hold Investments Longer
Short-term capital gains are taxed at a higher rate than long-term gains. In the U.S., investments held for less than a year are subject to short-term capital gains tax, which aligns with your ordinary income tax rate.
By holding investments for more than a year, you can benefit from the lower long-term capital gains tax rates. This strategy encourages a more disciplined, long-term approach to investing, which is generally beneficial for individual investors.