You can postpone the tax you owe on income-producing
investments by investing through tax-deferred accounts. With a
tax-deferred account, you don’t owe income tax until you
begin to withdraw from your account, presumably after you retire.
And, since many investors are in a lower tax bracket when they
retire, they may end up paying less income tax on withdrawals
from their tax-deferred accounts than they might have paid on
investment income while they were working.
Recent changes to the tax laws reduce the
long-term capital gains rates and apply those rates to qualifying
dividends. Because of these changes, it may be a good time to
review your long-term investment strategy with a financial adviser
and reconsider the benefits of both taxable and tax-deferred accounts.
You may decide that you’d be better
off paying lower long-term capital gains tax in a taxable account
now rather than higher income tax rates on withdrawals from a
tax-deferred retirement account in the future. Or you may decide
that the current tax savings and long-term
compounding
provided by a tax-deferred account are a better choice for your
particular financial situation.
