Strategies That Defer or Reduce Taxes

Tax-deferred retirement plans give investors the opportunity to defer taxes on investment earnings until retirement (usually age 59½). Pre-tax earnings can be reinvested, greatly compounding the amount of interest you earn from your investments. Some of the most common types of tax-deferred retirement plans include the following:

Another strategy investors use to shelter themselves from taxes is tax swapping. A tax swap consists of two parts. First, the investor sells a security that incurred a capital loss. Second, the investor buys a similar security, which the investor believes to be a better investment, to replace it. By swapping securities, the investor offsets his or her portfolio gains with a loss while leaving the portfolio essentially unchanged. Repurchasing the same security within 30 days of its sale is called a wash sale and eliminates any tax deductions from the security’s capital loss.

Tax planning can be very much worth the effort, but a word of caution is in order: the proper use of any strategy can be more complex than it appears. You may want to consult a tax advisor before implementing any specific investment strategies to discuss their tax implications.

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