3 Tax-Free Investment Opportunities
Tax-Exempt Investments

Date

If you’re like most folks, you see investments as a means to secure your financial future and ultimately to build your personal wealth. Your aim could be to save for retirement, build a nest egg to pass on to your family after you’re gone, or get ahead and achieve greater financial freedom.

But the gains you earn on most investments count as taxable income. Which means a portion of every dollar you earn on wise (or lucky) investment is owned to the government. Meanwhile, the more you pay in taxes, the less you contribute to your financial holdings.

Certain investments, however, are tax-exempt. These options add to your wealth without increasing your taxable income.

And toward that end, here are three tax-free investments worth considering for your portfolio:

Municipal Bonds

Municipal bonds, often referred to as muni bonds, are issued by local governments to fund necessary community projects, including roads, schools, and other municipal infrastructure. A muni bond is essentially a loan to the government. Muni bonds offer guaranteed returns through interest payments. Best of all, these earnings don’t count as income on your federal taxes and are also sometimes exempt from state and local taxes.

On the down side, municipal bonds are not high yield, inflation can lower the value of the earned interest, and certain municipal bonds are subject to the Alternative Minimum Tax (AMT). But all of this said, muni bonds are very low risk, offer consistent returns, and are, for the most part, a tax-free source of investment income.

Tax-Exempt Mutual Funds

A mutual fund is essentially a pre-packaged investment portfolio with a mix of various stocks or bonds. Mutual funds are typically tied to an index or managed by a finance professional.

The general appeal of mutual funds is that you don’t have to concern yourself with the day-to-day management; either the index or the finance manager guides your investment. But certain mutual funds are designated tax-exempt, meaning all fund earnings are tax-free. These funds are usually a mix of municipal bonds and other government securities. In addition to the tax benefits, these funds offer an easy avenue to invest in a broad range of government-backed securities.

The benefits aside, it’s wise to consider the returns on such investments, as government-sponsored annuities are typically not high yield. Management fees can also be steep on some mutual funds, which impacts your overall earnings.

Tax-Exempt Exchange-Traded Funds (ETFs)

Like mutual funds, exchange-traded funds are collections of securities, but the fund is traded in total on an exchange, like an individual stock. The primary appeal of ETFs is they are generally left alone, with little turnover and minimal management. In many cases,  ETFs are tied to an index, completely eliminating a fund manager. All of which lowers fund-related costs.

Also similar to mutual funds, ETFs can be comprised entirely of tax-exempt government bonds. Some ETFs are managed by finance professionals, so it is crucial to confirm fund-related fees and weigh those costs against potential returns.

Have More Questions About Tax-Exempt Investments?

Whether you’re looking to invest for retirement or generally seeking financially prudent investment opportunities, tax-exempt investments are an excellent option.

If you want to find out more or you’re wondering how these investments will impact your taxes, get in touch for a FREE consultation!

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