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How to Minimize Investment Taxes

1.

Invest as much as you can in your company's 401k plan. The money you invest in a 401k is taken straight off your taxable income, reducing your taxes and helping you save for the future. The limits for 401k plans are quite high, with the 2010 limit set at $16,500. In addition to this generous limit, the IRS permits those 50 and older to invest another $5,500 under the catch-up provision.

2.

Put money aside in a traditional or Roth IRA. With a traditional IRA, you are entitled to an up-front tax deduction, and the money you put aside is only taxed when you take it out in retirement. With a Roth IRA the reverse is true--you do not get an immediate tax break, but you can withdraw the money tax-free in retirement.

3.

Place your high turnover and high income funds in your tax-deferred accounts. Examine the prospectus of each mutual fund you own and find the turnover ratio. This is an indication of how much trading the fund does, and a high turnover ratio generally means a high level of capital gains. By placing those funds in your 401k or IRA, you can defer any taxes all the way out to retirement.

4.

Use low-cost index funds for your personal accounts. Index funds are very tax efficient, because they do not constantly buy and sell stocks in an attempt to beat the market. Instead, those funds simply buy and hold all the stocks in a particular index, such as the Standard & Poor's 500.

5.

Hold your individual stocks for at least a year if possible. Securities held for more than a year are taxed at the lower long-term capital gains rate, while stocks held for shorter periods of time are taxed at your ordinary income rate.



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