Investors who do not manage investments in a tax sensitive manner unnecessarily give up between 1 and 2 % of their annual returns to taxes, according to Morningstar. Here are 9 ways to minimize taxes on your investments and kick your retirement savings into high gear. 1. Chose Bonds over Stocks for Tax Sheltered Accounts. You can save a significant amount by putting as much of your taxable bond investments as possible in the tax sheltered accounts (IRA’s and 401K’s). Income from bond funds is taxed at your ordinary rate of income which is almost always higher than the 15% federal capital gains tax rate that gains on stocks. (Keep in mind that tax free municipal bond funds would be an exception here as they are not taxable bond investments) 2. Use Specific identification of shares. If you are following a long term investment plan you are likely to continue to add money to your investments over time. When you go to sell part of the investment, unless otherwise specified, the shares you bought first will be the first ones sold. This is called the first in first out method, or FIFO. The Specific Identification of Shares Method allows you to choose the positions which you want to sell out of first. This can be a large advantage which allows you to significantly reduce, or even eliminate large tax bills. You can learn more about this here. 3. Tax Harvest While Avoiding the Wash Sale Rule. If you have a capital loss on one of the investments in your portfolio this can be used to offset a capital gain in another part of your portfolio, but only if the loss is realized by selling your shares. Unfortunately the IRS has something called the wash sale rule, which does not allow you to realize …
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