When people hear the word “investment,” the usual investment options that most people think about are investments in stocks and real estate properties. However, because of technology and more awareness of the benefits of investment, a lot of new kinds of investment has appeared in the market for investors. In addition, recent years saw how investments in bitcoins or cryptocurrencies are possible.
Bitcoins are one of the most popular new investments right now, especially for people who have access to the internet. Trading is just like in the stocks but unlike stock trading, Bitcoins can be used immediately as a digital currency. Traders can also trade anytime and anywhere, as long as the internet connection is good. In addition to this, Bitcoin is one of the investments that are considered tax-free if the trader knows what to do.
What Is A Tax-Free Investment?
In trading stocks or flipping properties, there will always be gainers and losers. The IRS would want to have something to do with the taxpayer’s earnings. As long as there are gains in the trade, expect that the investor will be plagued with a certain amount of tax. And for investors, this would mean a reduced earning.
There are investments which are called tax-free investment, or investments in which the income or the gains are not subject to any law of taxation. If the IRS or any taxing body all over the world removed the tax from earnings, there will be happier investors. However, taxes from earnings are big parts of the government funds. Because of this, a lot of investors are looking for the best tax free investments where they can make their money grow.
Benefits of Tax-Free Investing
An example of investment taxes at work is when an investor earned $400 from his taxable investment of $10,000 with a 4% return. The investor’s earnings would be $400, but because of the taxes (assuming that the investor is on a 30% tax bracket), he will only have $280 worth of earnings because of the $120 paid in taxes.
However, if the same example has been a tax-free investment, there will be no need to pay the $120 worth of taxes. The investor will get his or her whole earning of $400, which he or she can use somewhere else. There is a saying that when an investor pays a tax, he or she earned money. However, choosing tax-free investments or minimizing taxes are still better.
Examples of Tax-Free Investments
1. Bitcoins
Bitcoins are not necessarily “tax-free,” but there are workarounds to make it a tax-free investment or with a lower tax rate. One of the best ways is to take a retirement account offshore with the help of an offshore IRA LLC. This account will be linked to your self-directed account. By making a US custodian invest into the LLC, you can then manage the account yourself.
2. Municipal Bonds
Municipal bonds are the most common and the most obvious way to earn a tax-free income because, in essence, these are tax-exempt from the federal tax. In addition to that, there are states who also exempt the income tax from municipal bonds. Municipal bonds also act as leverage when the investor is living in a high-income tax state.
Buying Municipal Bonds is a way to diversify a portfolio. These bonds are subjected to the Alternative Minimum Tax or AMT. But because of the 2018 tax bill, there are fewer taxpayers who are affected by the AMT.
3. Master Limited Partnerships or MLPs
Investing in a Master Limited Partnership is another tax-free investment. MLPs are publicly traded companies, and being a limited partner means that you are not responsible for running the company. Dividends from these stocks are usually tax-deferred.
4. Roth IRA and traditional IRA
Individual Retirement Account is also good for investors who want to have a tax-free growth in their funds. IRAs are good for investment because they can be invested tax-free and can be withdrawn with a lower rate at retirement. This investment, however, is not recommended for high-income earners.
5. 529 Education Fund
The 529 Education Fund allows an individual to set aside a fund for tuition to be used in higher education. What makes this a good choice for tax-conscious individuals is because the dividends, interest, and capital gains of this investment are tax-free. 529 Education Fund is a good fund for your child’s education.