5 Ways to Increase Your After-Tax Returns
Investing is an important step towards achieving your financial goals, but it's not always as simple as picking the best stocks or funds. One factor that is often overlooked is taxes, which can eat into investment returns if not properly managed. Here are five ways to increase your after-tax returns:
1) Invest in tax-efficient funds
Some funds are more tax-efficient than others, meaning they generate fewer capital gains distributions, which can trigger a higher tax bill. Tax-efficient funds include index funds and exchange-traded funds (ETFs), which tend to have lower turnover than actively-managed funds.
2) Use tax-loss selling
Tax-loss selling is a strategy where you sell losing investments to offset gains on winning investments, which can help reduce your overall tax bill. This strategy is most effective when done regularly and in coordination with your overall investment strategy.
3) Invest in tax-advantaged accounts
Tax-advantaged accounts in Canada include Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), which offer tax-deferred growth and tax-free withdrawals. RRSP contributions are tax-deductible, meaning you can claim them as a deduction on your income tax return, and any investment income earned within the plan is not taxed until you withdraw the money. TFSAs, on the other hand, are not tax-deductible, but any investment income earned within the plan and withdrawals are tax-free.
4) Diversify your investment portfolio
Diversifying your investment portfolio can help reduce your overall tax bill. For example, investing in a mix of stocks, bonds, and real estate can help spread out your gains and losses, which can make it easier to take advantage of tax-loss harvesting.
5) Stay up-to-date on tax laws
Tax laws are constantly changing and keeping track of these changes can help you minimize your tax bill. For example, in Canada, the Federal Government recently announced a new Tax-Free Savings Account (TFSA) contribution limit increase for 2023, allowing Canadians to contribute an additional $6,500 to their TFSA. By taking advantage of this change and maximizing contributions, individuals can potentially save on taxes and grow their savings.
Final thoughts
By considering taxes when investing and implementing these strategies, you can help increase your after-tax returns. To ensure that you're on the right track, it's always a wise move to consult with a tax professional and financial advisor. They can help you align your investment strategies with your overall financial goals and risk tolerance. While there are no guarantees in the world of finance, working with a professional and having a clear plan in place can set you on the path towards achieving your financial goals.
