Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
Setting up a Roth individual retirement account is one of the least complicated ways to make a tax-free investment because it allows most clients to invest their annual contribution of $5,500 complete devoid of taxes, according to Motley Fool. College savings plans, also known as 529 plans, are also tax-free as long as the money is set aside for educational costs. -- Motley Fool
The average taxpayer refund for the 2014 filing season was $2,893, slightly higher than the amount recorded in the recent years. Tax refunds can be put into good use by paying down high-interest credit-card debt and making additional mortgage payments, according to Motley Fool. Taxpayers could also consider investing their refunds in the stock market or charitable organizations. -- Motley Fool
Clients looking to minimize taxes on their portfolio should devote their retirement accounts to tax-inefficient investments and their taxable accounts to diversified stock funds, according to The Wall Street Journal. Use tax-deferred retirement accounts to hold investments that spawn huge taxes such as actively managed stock funds or real-estate investment trusts. Meanwhile, place diversified low-cost stock funds that one would wish to keep for longer terms into taxable accounts. The key strategy is to stick to long-term tax-efficient investments and position tax-devouring funds to tax-deferred accounts. -- The Wall Street Journal
The wealthiest Americans take advantage of their superior understanding of U.S. tax laws in minimizing their tax bills, according to Fox Business. Most of the mega-rich invest in assets with long-term capital gains that generate lower taxes compared to short-term assets. They pay themselves modest salaries, and get the rest of their compensation as dividends or stock options, which are taxed less. The mega-rich also take the full advantage of tax-deferred retirement accounts and use strategic borrowing tactics where they appear to reduce capital gains and thus minimize taxable assets. -- Fox Business
Investors capitalizing on taxable accounts and who are content in matching market returns may want to favor index funds over actively managed funds, according to Morningstar. People who are focused on tax-efficiency and are primarily into tax-deferred accounts would benefit from moving their portfolio towards active funds. It is also advisable to build an active portfolio if risk control is a major consideration, and to prefer an index-centric portfolio if streamlining is a key goal. -- Morningstar
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