Key Features:

  • Getting a financial plan with the least possible taxation
  • Opening a tax-deferring account, such as IRA or 401(k) plan
  • Buying tax-efficient mutual funds
  • Opt for municipal bonds

Understanding Tax Efficiency 

Tax efficiency is a method of spending money in such a way that you receive the least amount of taxes on your savings and investments. You can find an extensive range of options for tax efficiency when investing in the public market.

The most common and easiest way to do so is to have an income account and invest in an IRA, 401(k) plan or annual savings with the least tax-deference. You can even reinvest the earnings from these savings, which keeps on growing tax-free, until you withdraw the money.

If you plan to invest in a traditional retirement plan and stay tax efficient, then deduct the amount of invested funds from your current year’s income. This is an upfront tax benefit but once you withdraw the funds, you must pay tax on its distribution. However, if you choose IRA, it will not provide you upfront tax benefits but offers tax-free withdrawals at the time of retirement.

Tax Efficiency Changes in 2020

In 2019, the government made changes to the retirement plan rules through the SECURE Act, introduced by the US Congress. Changes that will take effect in 2020 are as follows:

Annuity Becomes Portable:

A retirement plan that carries annuity becomes portable, which mean if you switch jobs the annuity benefits of the previous plan automatically transfers to the new ones. It also removed the legal liabilities of the annuity plans thus limiting the power of account holders to sue providers, in case of payment issues.

Time Reduction on RMD:

The SECURE Act also limits the provision stretch of IRA benefits to non-spousal beneficiaries. Those who inherited an IRA plan must withdraw the funds within the first 10 years following the death of the account owner.

 No Age Limit for Investors:

Now there is no age limit for investors to contribute in traditional IRA plans with tax deductions. Moreover, the age to withdraw RMD is also reduced from 72 to 70 1⁄2 years, which means you need to consult a professional re-strategize your tax plans.

Other Tax-Efficient Options:

If you are looking for other avenues for tax-efficient investments, then consider:

  • Tax-efficient mutual funds
  • Long-term capital gains
  • Tax-free bonds
  • Irrevocable Trust

Those with higher tax liabilities are most interested in tax-efficient investments as it increases their savings amount. However, layman or first-time investors may find it difficult to find the right tax-efficient plan. It is best to work with financial professionals who have the required experience, knowledge and skills.

If you wish to hone your trade skills, then invest using virtual money. There are number of online sites that allow you to compete with skilled traders and practice strategies to stay atop of your game. This lets you master the skills before you enter the real market.

Any opinions are those of the author and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional​.