Five strategies for tax-efficient investing

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Authored by DST Systems, Inc.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Find out five ways to potentially lower your tax liability through tax-efficient investing strategies.
After factoring in federal income and capital gains taxes, the alternative minimum tax, and potential state and local taxes, your investments' returns in any given year may be reduced by 40% or more. Here are five ways to potentially lower your tax laibility.Footnote 1

Invest in tax-deferred and tax-free accounts

Tax-deferred accounts include employer-sponsored retirement accounts such as traditional 401(k)s and 403(b) plans, individual retirement accounts (IRAs) and annuities. In some cases, contributions may be made on a pretax basis or may be tax deductible. Also, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to nonqualified annuities, Roth IRAs and Roth-style employer-sponsored savings plans are not deductible. Earnings that accumulate in Roth accounts generally can be withdrawn tax free if you meet the requirements for a qualified distribution.
Withdrawals prior to age 59½ from a qualified retirement plan, IRA, Roth IRA or annuity may be subject to an additional 10% federal tax. Moreover, early withdrawals from annuities may be subject to additional fees charged by the issuing insurance company.

Consider U.S. government and municipal bonds

Interest on U.S. government issues is subject to federal income tax, including upon redemption or attainment of the final maturity date, but is exempt from state taxes. Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in-state may be free of state and local taxes as well. U.S. government and municipal bonds are subject to market fluctuations and, if sold prior to maturity, may be worth less than the original cost upon redemption or attainment of the final maturity date.

Look for tax-efficient investments

Tax-managed or tax-efficient investment accounts are managed in ways that can help reduce their taxable distributions. Investment managers can potentially minimize portfolio turnover, invest in stocks that do not pay dividends and selectively sell stocks at a loss to counterbalance taxable gains elsewhere in the portfolio.

Put losses to work

You may be able to use losses within your investment portfolio to help offset realized gains. If your losses exceed your gains, you can offset up to $3,000 per year of the difference against ordinary income. Any remainder can be carried forward to offset capital gains or income in future years.

Keep good records

Maintain records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate your adjusted basis (generally, how much you paid) for the shares you own and choose the most preferential tax treatment for shares you sell.
Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time.

Footnote 1 This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

Income from investing in municipal bonds is generally exempt from federal income tax and state taxes for residents of the issuing state. While the interest income may be tax-exempt, any capital gains distributed may be subject to federal income tax to the investor. Income for some investors may be subject to the federal alternative minimum tax (AMT).

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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

Because of the possibility of human or mechanical error by SS&C or its sources, neither SS&C nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall SS&C be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
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