| Tax-advantaged investing is merely
any type of investment program or vehicle that strives to reduce the
impact of taxes on investor earnings. There are tax-advantaged investment
vehicles in just about every asset category.
The name "tax-advantaged" generally refers
to two different kinds of investments: tax-deferred and tax-free.
Tax-deferred investments simply defer taxes until investment earnings
are withdrawn, at which time the investor is more likely to be in
a lower tax bracket. Tax-free investments produce earnings that are
actually free from federal taxes, and sometimes free from both federal
and state taxes.
Tax-deferred investments include most
retirement investing vehicles, like Traditional IRAs, 401(k)s, pension
plans, annuities, etc. Municipal bonds, municipal bond funds, municipal
money market funds and Roth IRAs, are considered tax-free. (Of course,
there are several restrictions. For more information on municipal
bonds, see the Investment Basics section of the library. For more
information on the Roth IRA or tax-advantaged retirement options,
visit the Retirement Planning section of
the library.)
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