Making money in today's volatile financial markets is
already challenging enough without having to
worry about taxes. Yet if you're not careful, you could
lose a big portion of whatever profits you do scrape together
to the IRS.
Fortunately, investors do have a number of options that
let them invest without having to deal with an immediate tax
impact. By using
IRAsand
401(k) retirement plans, you can save for retirement with
distinct tax advantages, including not having to pay tax on
any income from interest, dividends, or capital gains for as
long as you keep your money in the retirement account.
529 savings plansfulfill the same purpose for those
putting money aside for college, and a few other products,
such as
annuities, also give investors the opportunity for
tax-deferred growth.
But once you've allocated as much as you can afford to
tax-favored investments, you'll probably have some money that
you want to keep accessible. Given that the investments you
make will be fully taxable, what's the best way to minimize
your tax bill every year?
Picking the right stocks
Tax-favored accounts give you a lot of latitude. You
can invest in pretty much whatever you want, without worrying
about the tax consequences of frequent transactions or
receiving income.
When you invest in your regular taxable account,
considerations like the following become much more
important:
different tax rates may applydepending on what type of
investment it is.
Every time you trade, you may have a
capital gainthat incurs tax. If you've owned an
investment for a year or less, then the rate that may apply
could be a lot higher than if you've held the investment
for longer than a year.
On the other hand, as long as you hold onto a stock,
you don't have to pay tax on the paper gains you have. Only
once you sell do those gains become taxable.
So to minimize taxes, you'd ideally like to pick stocks
that you can buy and hold for a long time, saving ones you
intend to trade more frequently for tax-favored accounts.
Dividend-paying stocksmay generally be smart, but if you
want less taxable income, ideally you'd like stocks that
don't pay dividends, but will still have strong price
appreciation. Over the past five years, these stocks have
been good examples:
Stock
5-Year Avg Ann. Return
Intuitive Surgical (Nasdaq: ISRG)
57.6%
Titanium Metals (NYSE: TIE)
25.3%
Nasdaq OMX Group (Nasdaq: NDAQ)
21.4%
McAfee (NYSE: MFE)
16.2%
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