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Tax Freedom Day generally falls around this time each year. Th is is the day when the nation as a whole has earned nough money to pay off its total tax bill for the year, according to the calculations made by the Tax Foundation. So you may want to use Tax Freedom Day to think about ways you can liberate yourself from some of the investment-related taxes you may incur.
Of course, Tax Freedom Day is something of a fiction, in practical terms, because most people pay their taxes throughout the year via payroll deductions. Also, you may not mind paying your share of taxes, because your tax dollars are used in many ways – law enforcement, food safety, road maintenance, public education, and so on – that benefit society. Still, you may be able to reduce those taxes associated with your investments, leaving you more money available to help you work toward your important goals, such as a comfortable retirement.
Here are some suggestions for making investing less “taxing”: Contribute regularly to tax-advantaged retirement plans. Contribute as much as you can afford to your IRA and your 401(k) or another employer-sponsored retirement plan. Traditional IRA earnings grow tax-deferred, and your contributions may be tax-deductible, depending on your income. (Taxes will be due upon withdrawal, however, and withdrawals made before you turn 59½ may be subject to a 10% IRS penalty.) Your 401(k) or similar plan also provides the opportunity for tax-deferred earnings growth.
Roth IRA contributions are not deductible, but your earnings are distributed tax-free, provided you don’t take withdrawals until you’re 59½ and you’ve had your account at least five years.