Investing in mutual funds is a smart way to generate more
income. However, it’s important to keep in mind that you are required to pay
taxes on most mutual fund income. While, sometimes, these taxes aren’t that
bad, there are certain cases in which the taxes can outweigh the overall
benefit of the investment. To help you determine whether or not an investment
is worth it, tax-wise, your best bet is to speak with an investment advisor.
However, you can also make use of a few simple tips.
Tip #1: Reduce Turnover Ratio
A mutual fund will automatically become more tax efficient
if its turnover ratio is reduced. What that means, in simple terms, is that
when a mutual fund executes a lot of trades, it will have high turnover, thus
causing you to have to pay regular, full-price tax rates on the fund’s gains.
By buying and selling fewer securities throughout the tax year- you should buy
and sell only when it’s absolutely necessary and will ultimately be financially
beneficial-you can thus reduce the amount and type of taxes you’ll have to pay.
Tip #2: Don’t Invest in (As Many) Dividend Paying Stocks
and Bonds
Dividend-paying stocks and bonds are not always a bad thing.
Indeed, they can be quite beneficial since you’ll enjoy regular interest
payments. However, you do want to keep in mind that the more of these
investments you have and thus the more funds you get from them, the higher your
taxes are going to be, and this income is generally taxed at the regular rate.
Your best bet is to steer clear of dividend paying
investments or to only choose those that are going to ultimately benefit you
more than they’re going to hurt you. Again, an investment advisor can really
come in handy for helping you to figure out whether a particular investment of
this type is really going to be worth it.
Tip #3: Invest in Tax Free Funds
One final smart thing you can do is to choose to invest in
tax free funds, such as government or municipal bonds. These investments will
gain interest for you, and the good news is that the interested gained will not
be taxed! You can go for a completely tax-free mutual fund or just include tax
free funds in your mutual fund; either way, you’ll benefit by getting money you
can enjoy without paying taxes.
For more tips and personalized, one-on-one advice, make sure
you secure a skilled investment advisor to help you make all the right
decisions and to put these tips into practice!
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