Investments at all levels can impact an individual’s tax bill. Optima Tax Relief informs of different tax-saving investments at different net worth levels.
The majority of investors are not necessarily those with a high net worth but can still take advantage of several strategies that can help save in taxes over time. Some of these strategies include:
- Contributing to a 401(k) Plan: 401(k) contributions are pre-tax and lower a taxpayer’s taxable income. This can lower your tax bill or even place you in a lower tax bracket. Additionally, when a taxpayer withdraws money from their account at retirement age, they will likely pay a lower tax rate.
- Using a Health Savings Account (HSA): With an HSA, a taxpayer can contribute to an untaxed account that earns interest and investment earnings. If a withdrawal is needed for qualified health expenses, no federal taxes are charged.
- Opening a 529 College Savings Plan: Similar to a 401(k) and HSA, contributions made to a 529 College Savings Plan grow tax-free and there is no cost to withdraw for qualified education expenses. Most states exclude 529 distributions from taxable income and some states even offer taxpayers additional credits for their contributions.
Investors who have higher net worths and are comfortable with greater risks have more options for investment strategies, including:
- Private Placement Life Insurance: Simply put, private placement life insurance allows taxpayers to hold several high-growth investments within a policy, all without paying federal or state taxes on the cash value of the policy. These investments require a hefty minimum investment, sometimes millions of dollars. This strategy can pay off greatly but requires a solid grasp of the market trends and accreditation.
- Private Real Estate Investment Trusts (REITs): REITs are groups of real estate assets in one industry or region. Some of the cash distributions for these assets are considered a return of capital and therefore are not taxed. Only accredited investors who meet minimum income or net worth standard qualify to access these trusts.
- Charitable Remainder Trust: This trust allows a taxpayer to place an asset within an irrevocable trust and then name a qualified charity as the beneficiary of the asset. This structures the trust to create revenue and when the taxpayer funds the trust, they are able to claim charitable contribution deductions for that tax year. Any unused deductions can carry over for up to 5 years. Additionally, the donor can defer any taxes owed on the asset until retirement.