Mon Jul 08 2024, by Tyler Gardner

5 Effective Strategies to Avoid Paying Taxes on Your Investment Gains

Here are five ways that you can avoid paying taxes on hundreds of thousands of dollars throughout your investing career.

1. Invest in Tax-Advantaged Accounts

Use a 401k or an IRA, where dividends, mutual fund distributions, and realized capital gains do not affect your annual taxes. You can buy and sell all you want in these accounts, and you will not trigger one dime of taxes owed that year.

2. Learn How to Tax Loss Harvest

When markets crash, the only good news is that you can sell your investments with unrealized losses to offset taxes on investments you want to sell with unrealized capital gains. You can offset unlimited gains this way, and excess losses can offset an additional $3,000 of your ordinary taxable income.

3. Understand the Power of Capital Gains Taxes

Gains on investments are usually taxed at a lower rate than gains on your ordinary income. Understanding this can help you strategize your selling points.

4. Choose Low-Cost Index Funds or ETFs

When investing in taxable brokerage accounts, opt for low-cost index funds or ETFs. These funds typically have lower fees and tend to generate fewer taxable distributions than actively managed mutual funds or REITs, once again, reducing your taxable income.

5. Invest in Tax-Advantaged Bonds

Interest from federal bonds is exempt from state and local taxes. It can be a great option for you in high-tax states. Additionally, municipal bonds are exempt from federal taxes, and if issued in your home state, could also be exempt from state taxes. This makes them ideal for investors in higher tax brackets.

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