what are the investment choices where I can avoid tax or atleast get least taxed on my investments ?

Question

I learned even mutual funds are taxed - so I'm seeking any investment opportunities or ways or chances where my money is save and yet can sort of avoid tax or at least get the most reduced tax on my investments.

w_danko - thank you , I'll wait for more views

Spock (rhp) and maximus 3ad - thank you , thank you so much !!! I got the picture very well now and I'll wait in case other answerers might jump in for a different perspective or point of views or suggestions.

Bryan K - wow , I guess I just became your ardent fan - nice ideas. Though I'll still wait for more investments on answers for this curiosity of mine !!

Answer 1

Well, if you are investing for retirement, there are tax-advantaged accounts in which you can hold mutual funds or individual securities and acheive a certain level of tax-deferment or tax-exemption. For example, a company-sponsored retirement account such as a 401(k) or 403(b) allows you to delay paying taxes until after you take money out of the account. Another example is a Roth IRA, in which the earnings can be withdrawn in retirement without paying any taxes, so long as you meet the requirements.

There are special insurance products called variable annuities which allow you to delay taxation until retirement. However, 99% of these are fraught with high costs. The only ones I recommend are from Vanguard and Fidelity.

Within a taxable account you have a few options. For bonds, you can purchase municipal bonds or bond funds, in whose interest is exempt from Federal taxes (but are still taxed from your state). They pay lower than regular bonds, so be sure to calculate your after-tax yield and compare. For stocks, there are index funds and tax-managed mutual funds. Index funds have very low turnover, which reduces capital gains taxes. Tax-managed funds are where the manager will enact clever tax-loss strategies to help offset some of the capital gains taxes. However, the dividends will still be taxed. http://www.vanguard.com has a few tax-managed funds.

The interest on savings bonds through http://www.treasurydirect.gov is tax-deferred until you cash them out. However, the interest is actually tax-exempt if used for college expenses.

There are also some tax-advantaged accounts for college, called 529 plans.

Don't purchase REITs or TIPS in a taxable account. REITS are high-dividend paying stocks and are taxed at your marginal tax rate (not considered "qualified dividends"). TIPS are Treasury Inflation Protected Securities and are bonds that are indexed to inflation to provide a real return regardless of what happens to inflation. However, you are taxed EVERY YEAR on TIPS, even if you do not receive the interest. It's called a "phantom tax". Regardless of what Maximus says, you are taxed each year on the interest from Treasury Bills, Treasury Notes, Treasury Bonds, and TIPS. Trust me ... I bought Treasury Bills in 2006 and I paid federal taxes on the interest. Only savings bonds from the Treasury have deferred interest. All the other bonds issued by the Treasury have taxable interest in the year the interest is paid.

Answer 2

There are several different types of government-issued bonds that are tax-advantaged; and, of course, mutual funds based on these.

Generally, though, the rate of return on these things is so poor, you'd be better off investing in a regular stock mutual fund and paying the taxes. Just my opinion there, there's risk involved in stock mutual funds and you could end up with less money than you started with, and have to pay a big capital gains distribution tax anyway (see the 2000-2002 tech stock meltdown).

Answer 3

if you're an American, only debt issued by the states and their political subdivisions is free of income tax and only their interest is free. [any capital gains or losses are taxable]

tax free funds all might have a taxable capital gain element. some years they won't and some they will.

***
Legally, trying to move your assets to a country that does not tax capital's income or capital gains does NOT let you escape the US taxing authorities. If you live here, you're subject to our taxes.

And if you move out, you're still subject for three years unless a particular treaty with a foreign nation says otherwise -- which usually means that their taxes apply.


This is the price of having orderly markets and a system that defends private ownership -- you get to pay taxes to help keep them orderly and defend that ownership.


Of course, you could move to somewhere like Cuba that 'doesn't have taxes'. On the other hand, I doubt you'd like being told what to do and you can't ever come back.


:-)

Answer 4

as likely as you can get paid at a job to avoid taxes! There's literally NO WAY you can avoid taxes if you have money on paper, every money transaction is recorded, therefore subject to taxes. BUT, you can chose to invest in non-paper investments (aka physical assets & commodities)

Silver, copper, gold are non-taxable, off the papers, and discreet. Can you think of anything else with the same properties?

Answer 5

You have couple of choices: goverment securities like saving bonds, T-Bills, Notes, Bonds & TIPS you can buy them directly at treasurydirect.gov - they are exempt for local and state tax you pay only federal tax when you cash them in.

In stocks, the best for tax would be ETFs especially growth orineted ETF's with low turnovers, the best I would sugest to look at vanguard.com, they have low expense ration ETF's and index funds. Make sure you invest for the long term as it is safer and you get low tax on capital gains.

Also you might consider a Roth IRA or traditional IRA which have all kind of tax benefits.

Answer 6

Unfortunately, you will sooner or late have to pay tax. Try to hold on to your investments for more than 1 year so that you could pay the long term capital gain