The Benefits of Tax-Advantaged Savings Vehicles


They say you can’t take it with you…but they certainly can take it from you. In my years as a financial advisor, I was amazed with how often clients and friends wanted to talk about the “hot stock tip” or the newest funds. Never once in the decade I spent in financial services did anyone ever brag about the structure of their investments that was helping them reduce or defer the tax burden on their gains…otherwise known as tax-advantaged strategies. Our guest contributor will arm you with some excellent strategies to help defer one of the largest re-orders of investment gains, taxes.

Taxes can take a big bite out of your investment returns, so it’s helpful to look for tax-advantaged strategies when building a portfolio. But keep in mind that investment decisions shouldn’t be driven solely by tax considerations. Other considerations include potential risk, expected rate of return, and the quality of investment.

Tax-deferred and Tax-Free Investments

Tax deferral is the process of delaying the payment of income taxes on income you earn in the current year. For example, the money you put into your 401(k) retirement account isn’t taxed until you withdraw it, which might be 30 or 40 years down the road! Tax deferral can be beneficial because:

  • *  The money you would have spent on taxes remains invested.
  • *  You may be in a lower tax bracket when you make with drawals from your accounts (for example, when you’re retired).
  • *  You can accumulate more dollars in your accounts because of compounding, which is where your earnings become part of your underlying investment and earn interest.Taxes make a Big differenceLet’s assume each of two partners has $5,000 to invest every year for a period of 30 years. One partner invests in a tax-free account (such as a Roth IRA) that earns 6% yearly, and the other partner invests in a taxable account that also earns 6% each year. Assuming a tax rate of 28%, in 30 years the tax-free account will be worth $395,291, while the taxable account will be worth $295,896. That’s a difference of $99,395.Tax-advanTaged savings vehicles for reTiremenT

    One of the best ways to accumulate funds for retirement or any other investment objective is to use tax-advantaged savings ve- hicles when appropriate.


    There are restrictions as to who can contribute to a traditional IRA, such as age, income, marital status, and more. Further, you may or may not be able to deduct your contributions to a tra- ditional IRA, but your contributions always grow tax deferred. However, you’ll owe income taxes when you make a withdrawal (and a 10% additional penalty tax if you’re under age 591⁄2, un- less an exception applies). In 2011, you can contribute up to $5,000 to an IRA, and individuals age 50 and older can contrib- ute an additional $1,000.


Roth IRAs are open only to individuals with incomes below certain limits. Your contributions are made with after-tax dol- lars, but they will grow tax deferred and qualified distributions will be tax free when you withdraw them. The amount you can contribute is the same as for traditional IRAs. Total combined contributions to Roth and traditional IRAs can’t exceed $5,000 each year for individuals under age 50.


Contributions to these types of plans grow tax deferred, but you’ll owe income taxes when you make a withdrawal. For 2011, you can contribute up to $16,500 to one of these plans; in- dividuals age 50 and older can contribute an additional $5,500. Employers can generally allow employees to make after-tax Roth contributions, in which case qualifying distributions will be tax free. Small businesses can start SIMPLE IRA’s or SIM- PLE 401(k)s.


Annuities generally allow you to elect to receive an income stream for life. There’s no limit to how much you can invest, and your contributions grow tax deferred. However, you’ll owe income taxes on the earnings when you start receiving distribu- tions.

Tax-advanTaged savings vehicles for college

For college, there are numerous tax-advantaged savings vehi- cles, the most popular of which are 529 plans, college savings plans and prepaid tuition plans. Much like retirement accounts, these plans let you set aside money for college that will grow tax deferred. The bonus, however, is that they can also be federal tax free if the funds are used for qualified education expenses. These plans are open to anyone regardless of income level and contribution limits are high–typically more than $300,000–but vary by plan. Other tax-advantaged savings vehicles include Coverdell education savings accounts and Series EE bonds.

In summary, remember to do as much planning in how you are investing as you do in the investments themselves. We can’t control the markets or our returns, but we can certainly control the structure in which they are invested. Knowledge is power… and profitable!


Material discussed is meant for general illustration/informational purposes only and is not meant as tax, legal or investment advice. Although the information has been gathered from sources believed to be reliable, note that individual situations vary. Therefore, the information should be relied upon when coordinated with individual professional advice.



Story by Lynn Yeldell
Photos by Lynn Yeldell
L Style G Style – Storyteller of the Austin LBGT Community.