Keeping more money in your pocket ought to be the goal of every investor. There are many ways to do it, but putting some of your assets into an individual retirement account (IRA) can give you several ways to reduce taxable income. You will need to have a traditional IRA to start, and by strategically placing the right assets into it, you can reduce your taxes.
When you put earned money into a traditional IRA, it is immediately tax deductible. In 2024, contributions are limited to $7,000 unless you are 50 or older, which enables you to contribute another $1,000. Contribution limits are the same for traditional or Roth IRAs.
Put Highly Taxable Assets Into the IRA
Other than contributing to a retirement account, you can minimize taxable income by moving some more highly taxable accounts into an IRA. It enables you to keep even more of your investment money and returns.Consider the Location of All Your Investments
Start by looking at your various investments and find out where they are located. Are they tax-sheltered or not? If not, decide which ones should be.Investments that provide fixed income, such as bonds with frequent payments, should go into a tax-sheltered account because they get taxed as ordinary income. Junk bonds and high-grade bonds should go into a tax-sheltered account.
High-dividend stocks will generally pay out in qualified dividends. It means you pay less in taxes than you would on ordinary stock. You can put them into a taxable account.
Capital Gains Taxes
Knowing your taxable income for the year can help you understand which capital gains bracket you are in. In 2024, singles can earn up to $47,025 and not owe any capital gains taxes, and people who are married filing jointly can earn up to $94,050. Singles with income ranging from $47,026 to $518,900, and married filing jointly earning from $94,051 to $583,750, are in the 15 percent capital gains tax rates. Investors earning more than this will owe 20 percent.Avoid a Wash Sale
If you sell a losing stock to balance your portfolio better, avoid making a wash sale, which would disallow your tax deduction. You must wait longer than 30 days before rebuying the same or a similar stock to get the deduction. Bankrate says that the wash-sale rule is not currently applicable to cryptocurrency.Transfer Some Assets to a Roth IRA
Putting some of your assets into a Roth IRA will enable you to save even more money. These retirement accounts allow your investments to grow without any tax complications, but you must pay taxes when you roll them over into it. By paying the taxes on the withdrawals from other accounts at the time of withdrawal, you save money by avoiding higher taxes later when they have grown in value.A Roth IRA or a Roth 401(k) has the advantage of not having any required minimum withdrawals (RMDs). Assets in these accounts prevent you from paying a large tax bill every time you withdraw an RMD from other retirement accounts.
Actively Managed Mutual Funds
You can decrease taxable income on your mutual funds if you buy them through your IRA or Roth IRA. NerdWallet says you can also avoid taxes on dividend-paying stocks by avoiding those funds that contain many of them. Index funds are usually not bought and sold so often.US Treasurys
You can hold U.S. Treasurys in a taxable account or a non-taxable account. AllenBurkeCPA says that it may depend on which state you live in where you put them. In states with an income tax, you would be better off putting them into a taxable account to reduce the tax impact.Balancing your investments between taxable and non-taxable accounts requires occasional evaluation because the laws on some investments change. If you can live in retirement on just your Social Security and RMDs from a 401(k) or a Roth IRA, you can leave the rest in those accounts and let it grow. You could also supplement your retirement income by taking some out of each account, which will also lower your taxes.
Remember to keep some money in taxable accounts because you will need it for living expenses. These accounts are usually easier to get money from when you need it than other types.
If you have trouble deciding which of your investments should go into a tax-sheltered account, such as an IRA and which ones would be better left out of it talk to a tax advisor or estate planner. They can help you find even more ways to reduce tax liabilities.
