Tax-Advantaged Alternatives 

A strong savings program is essential for any sound financial strategy.

We take Benjamin Franklin’s saying to heart, “A penny saved is a penny earned,” and we save our spare cash in savings accounts and certificates of deposit.

Investors who’ve accumulated an adequate cash reserve are to be commended. But as strange as it sounds, it is possible to save too much. Although this may not sound like much of a problem, it can be if you save too much of what you should be investing.

You see, many investors simply put their savings into the most convenient and stable financial instrument they can find. Often, that turns out to be certificates of deposit (CDs). The benefits of CDs are that they are FDIC insured (up to $250,000 per depositor, per federal  institution) and generally provide a fixed rate of return. Unfortunately, placing all your savings in taxable instruments like certificates of deposit can create quite an income tax bill.

In an effort to help provide stability, some investors inadvertently produce a liability. It’s a bit like turning on all the taps in your house just to make certain the water’s still running. Sure, you’ll know that the water’s still running, but a lot of it will go down the drain. The solution is simply to turn off some of the taps.

A number of financial instruments can help you to defer or eliminate income taxes. By shifting part of your cash reserves to some of these instruments, you can keep more of your money working for you, and turn off the taps that hamper your money’s growth.

Another possibility is a fixed-annuity contract. A fixed annuity is a retirement vehicle that can help you meet the challenges of tax planning, retirement planning, and investment planning. Fixed-annuity contracts accumulate interest at a competitive rate. And the interest on an annuity contract is usually not taxable until it is withdrawn. 

Another tax-exempt investment vehicle is a municipal bond. Municipal bonds are issued by state and local governments and are generally free of federal income tax. In addition, they may be free of state and local taxes for investors who reside in the areas in which they are issued. You must select bonds carefully to ensure a worthwhile tax savings. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burdens. Bond mutual funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond mutual fund's performance.

A number of other tax-advantaged investments are available. 

Consult with a professional to determine which types of tax-advantaged investments may be appropriate for you and your needs and Goals.

If you are considering Retirement Planning, call for a free consultation today.