Investing and Taxes: Two Strategies to Prepare for Higher Taxes
With recession spending on the rise since December 2007, in the name of economic stimulus, it is pretty much a given that taxes are going to have to rise. There really isn’t any way around it. Quite likely, taxes on investments will see a return to top rates of more than 20% and an increase in some other fees (investor transaction fees are already on the rise). This doesn’t mean that you need to stop investing. Far from it! Investing — even with higher taxes — still allows you to put your money to work for you. But there are two things you can do to prepare for higher taxes on investments.
1. Max out your retirement accounts
You can max out your tax advantaged retirements. Put what you can in IRAs and 401ks. Open accounts for your spouse, if he or she is eligible. This way you can increase the amount of money you are sheltering in terms of investments. Tax advantaged investment accounts can be a great way to reduce the tax you pay, while at the same time earning a decent return.
2. Buy and hold
Another thing you can do is buy and hold. A buy and hold strategy helps you more efficiently manage your taxes. During times when taxes on investment earnings are lower, short-term strategies are in vogue. But, as taxes increase, consider switching to a more long-term strategy.
The Motley Fool also points this out about fund investors and passive investing:
Similarly, for fund investors, one downside of actively managed mutual funds is their tendency to create a tax burden — sometimes even during losing years. If tax rates rise, fund investors may want to reconsider passive options like index funds or ETFs to cut their tax bills. Passive investing generally incurs less tax, and gives the investor more control in deciding when to pay the piper.
You can see that it is possible to plan an investing strategy that can minimize your tax liability from investment earnings. Professional help can also go a long way in aiding you to create a good plan.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
