Building the right investment portfolio based on your financial situation, financial goals, and risk tolerance is tricky. Every type of investment comes with costs, and some investments come with higher tax implications than others. You can minimise your tax burden and maximise your bottom line with tax-efficient investing. Your investment selection and asset allocation are the determining factors affecting returns. The amount of taxes you pay also affects your returns.
Types of Investment Accounts
Tax-efficient investment means choosing the right investment type and the right investment account. Taxable accounts such as brokerage accounts don’t have any tax benefits, but they have fewer restrictions and more flexibility than tax-advantaged accounts. For example, a brokerage account allows an investor to withdraw funds on demand for any reason without the need to pay a tax or penalty. In addition, holding investments in a brokerage account for a year or longer results in a more favourable long-term capital gains rate.
Tax-advantaged accounts can either be tax-deferred or tax-exempt. Traditional IRAs and 401(k) plans offer investors an upfront tax break. Investors can make contribution deductions on tax-advantaged accounts and receive an immediate tax benefit. Taxes are only paid when funds are withdrawn in retirement. Roth IRA and Roth 401(k) contributions are made with after-tax dollars, meaning investors don’t get the same upfront tax break as traditional accounts. However, Roth investments grow tax-free, and certain qualified withdrawals are tax-free in retirement.
The best way to make an informed investment decision is to seek reliable investment advice. Your financial goals, investment time frame, desired risk factors, and goals for future returns all factor into your investment objectives. Working with a financial adviser or leveraging investment advice from a personal finance site can help you better visualise your financial future and build the right investment portfolio. Robo-advisers are great tools when it comes to making informed investment decisions. CI direct investing and Wealth-simple are two popular options for Canadians seeking financial advice before investing.
There aren’t many significant differences between CI Financial and Wealth-simple as they both function the same way. Simply open an investment account, choose a risk profile based on your financial goals, and the robo-adviser purchases Exchange Traded Funds (EFTs) on your behalf. In addition, both CI Direct and Wealth-simple offer Canadians popular investment types, including Registered Retirement Savings Plans, Tax-Free Savings Accounts, and Registered Education Savings Plans.
Both robo-advisers charge a management fee based on the value of your investment. Both CI Direct and Wealth-simple allow investors to open an account without a minimum deposit. Third-party custodians keep your assets safe and secure in the event a custodian becomes insolvent. Finally, investors will have access to financial advice from a Certified Financial Planner and portfolio performance review services.
Tax-Efficient Investment Strategies
Tax-advantaged accounts limit your annual contributions and have a lack of flexibility. IRAs allow you to contribute up to $6,000 annually, or $7,000 annually if you are older than age 50. 401(k)s allow a maximum contribution of $19,500, or $26,000 if you are older than age 50. Holding your investment in the correct type of account is the best way to maximize tax efficiency.
Depending on the complexity of your bank accounts, investment portfolio, and taxpayer financial situation, it’s a good idea to have a professional tax preparer handle your tax forms. An accountant can provide professional financial advice that helps keep more money in your pocket. The Mines Press carries all the accounting supplies, tax folders, envelopes, forms, and more needed for tax season. They help accountants project a professional image with a quality collection of tax return folders, envelopes, and tax documents at the lowest prices.
Many new investors don’t realise that any investment that distributes earnings as capital gains or dividends is taxable whether the investment is sold or held. In addition, particular investments are more tax-efficient than others, such as stock funds, while others are less tax-efficient, such as actively managed funds. Other types of tax-efficient investments include municipal bonds, treasury bonds, and Series I bonds.
Making tax-efficient investments is the smart way to ease your investment tax burden.