5 Smart Tax Efficient Investments to Consider

Investing is a powerful way to consistently grow your savings and net worth over time. The downside is that you generally have to pay taxes on your investment gains. The more you pay in taxes, the less you get to keep. However, with the right strategy and some sound financial planning, it is possible to minimize the amount of tax you pay on your investments. There are certain investments that are not subject to taxation, and knowing which ones fall into this category will help you save a lot of money over a prolonged period.

As you build your portfolio, consider including these five tax-free investments for minimizing your taxes.

Tax Free Savings Accounts

Most countries around the world offer various types of tax-free savings accounts. These are usually a type of investment where current income earned on the investment amount is not taxed. There are two ways in which these types of investments can reduce your tax liability:

• Some savings accounts let you deposit pre-tax money, reducing your taxable income in the year that you contribute.
• Other savings accounts allow the money you put in to earn interest tax-free, reducing your future tax burden.

It is important to note that most savings accounts, and money market funds, require that you pay taxes on the interest that you earn. A few types of savings accounts and other financial instruments are exceptions to this rule. It is important to get advice from a financial advisor before opening any investing accounts to ensure they are really tax free and suitable for you.

Pensions

A well-known way to invest in a tax-efficient way is through pensions. Your pension amount is allowed to grow in a tax-free environment, which can provide a future income benefit. Any gain made from pensions will be free of capital gains.

If you have spent your entire working life outside SA and have now retired to SA or have spent some of your life working outside the country, the monthly pension payments you receive as a result of working outside SA may be exempt from tax in SA.

It is important to note, a pension received from a foreign source will be exempt from tax in SA, while a pension from a local source is subject to tax in SA. When you retire and receive monthly pension payments from a SA source, this amount received is subject to normal tax in SA in the same way your salary was subject to tax when you were working.

However, once you have reached the age of 65 years old, your annual tax liability is reduced owing to a tax rebate.

Municipal bonds

Municipal bonds are bonds sold by local governments to support public improvement projects, such as roads or building schools. When you invest in a municipal bond, you are effectively loaning money to the government. The benefit to you is that you earn a guaranteed rate of return in the form of interest payments from the bond. As a bonus, the interest paid on the bond is tax-deductible, and investing in your own city or town’s municipal bonds allows you to support projects in the community where you live. You receive improved public resources while earning tax-free interest on your savings.

Municipal bonds generally have a fixed rate of return as well as a fixed investment timeframe. There are short-term bonds, which usually mature within one to three years, and long-term bonds, which do not mature for more than a decade.

The ability to generate consistent income in your portfolio on a tax-free basis makes them a great addition to your portfolio and would fall into the asset class of fixed income.

Tax-Exempt Mutual Funds and Unit Trusts

A mutual fund is a fund that pools money from a group of investors to buy financial securities such as bonds and stocks to minimise costs, diversify investment risks, and maximise returns. It may consist entirely of stocks or bonds or include some combination of the two. The fund either tracks an index or is managed by a professional asset manager or investing specialist, offering the opportunity for hands-off investing.

Because of their diversification, affordability, and liquidity, mutual funds and unit trusts can maintain a desired level of returns, while minimizing the amount of risk involved.

Certain mutual funds are assigned a tax-exempt status, meaning you would not pay taxes on the returns these funds deliver. Be careful though, not all funds are created equal, so doing your due diligence is particularly important.

Investing in Residential Apartments

One of the many benefits of investing in apartments is the tax-advantages. The cornerstone of those tax benefits is called depreciation. Although not tax free, the tax savings can be beneficial.

Depreciation is a tax deduction that owners of a property get to take annually until the entire asset has been completely depreciated. The period you write off a building over is called the amortisation period.

So, while your properties are actually appreciating in value, SARS allows us to depreciate them. This paper loss creates incredible value in the form of tax-deferred income.

I am Giles Maynard. I provide individual investment and wealth management services for private clients and companies. I have been trusted by clients, large and small to manage, protect, and preserve their wealth. How can I help you with yours?