Investments

Taxable and Tax-Free Investments: How Do They Compare?

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Investment–such a big word that covers a wide range of assets and meaning. Choose yours appropriately, and you smile to the bank; however, if you rely on poor advice or just sheer bad luck, your fate is elsewhere. Where and how to invest in the most ambiguous question that people have. And what is the answer? Nobody knows. The tide might turn. All possible investment options are based on an analysis of market trends over a specified period that is agreeably termed as a perfect measure of what might happen in the future. Some might have great certainty but never fool-proof. Therefore, an element of risks arises. The more unpredictable and riskier an investment is, the higher the return.

Let’s get straight to it. Considering the inherent risk that people have when they are making their investments, it would be in good faith if you discover other avenues for increasing your return, as well as mitigating against possible risk. Since you are making some income from your investments, they are taxable, and what you get is net of tax when deducted at source or you must remit the tax. You know how it goes, the taxman always gets you. So be a law-abiding citizen and submit your taxes. However, there are certain groups of investments which are tax-free. What this basically means is that whatever you earn isn’t subject to tax. What are these taxable and non-taxable investments, and why would you go for one and leave the other?

Taxable Investments

When you make money from your investments, the IRS is bound to its share of the return. Keep this in mind the next time you invest. Different variables apply to the amount of tax that is supposed to be deducted, like the period that you have held the investment before you sold it at a profit. According to investment guidelines, all investments that have been held for more than one year are regarded as long-term investments. What does this mean for the investor? It’s hard to grasp all these taxing provisions, and that is why you need to procure the services of an experienced accountant in your field. However, long-term investments aren’t taxed as high as short-term investments. With a long-term taxable investment, you are going to pay tax at an average rate of 15% on your capital gains. For the short term investments, the taxing methodology is the same as ordinary income. However you put it, either short term or long term, you still have a tax liability.

 

Tax-Free Investments

As simple as it sounds, you get to keep all your investment return and don’t have to do complicated computations for arriving at your taxable amount. Who said that you have to pay tax all the time? Of course, it is a legal avenue of staying away from tax. Municipal bonds are some of the great tax-free investments that you can take advantage of instead of going to corporate bonds. Such bonds aren’t subject to tax at the federal level. When you purchase bonds that are offered by your state, you are going to be free of state and local tax. However, you need to know that it is only municipal bond interest payments that aren’t subject to tax. When you resell this municipal bond on the secondary market, you are going to be subject to capital gains tax at the prevalent rate.

 

What Is the Appropriate Investment For You?

It all comes down to your tax situation. If you have a higher marginal tax bracket, you are going to benefit from staying away from taxable investments massively. Also, what is the rate of return on either investment? Some taxable investments might possess a higher rate of return when you compare with non-taxable investments. An investment opportunity doesn’t need to rely on taxes solely but must take into consideration other opportunities to manage, reduce or defer tax. That is why, in some cases, taxable investments might have a better return.

Of course, your investment options need to be directed by your goals, financial capability and risk tolerance. However, when you factor in the tax element, you will get the proper assistance in building your wealth faster.

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