When you choose how to invest, it’s important to consider taxes just like you would other investing expenses. Here are some tax-free investments to consider.
1. Roth IRA
One of the best ways to never pay taxes on your retirement savings is using a Roth IRA. As long as you wait until retirement age, you can withdraw all of your contributions and earnings tax-free.
Roth IRAs can hold almost any type of investment.
Traditional brokerage accounts give you access to stocks, bonds, ETFs, mutual funds, and more. You can also get a real estate IRA or cryptocurrency IRA.
While there are technically income limits to contribute to a Roth IRA, you can almost always get around those limits by using a backdoor Roth IRA. A backdoor IRA is when you contribute to a traditional IRA and then immediately convert the account into a Roth IRA.
The biggest downside to a Roth IRA is that you can only contribute a limited amount each year.
2. Roth 401(k)
A Roth 401(k) is a 401(k) plan that works like a Roth IRA. The money you take out in retirement is generally tax-free.
The main difference is that you have to open a 401(k) through an employer unless you’re eligible for a self-employed solo 401(k).
3. Traditional IRA and 401(k)
Traditional IRAs and 401(k)s are subject to income taxes when you withdraw your money in retirement, but they do have one big tax advantage.
The money inside of your retirement accounts grows tax-free. So even though you’ll pay taxes at the end, you won’t lose money to taxes along the way.
4. Savings Bonds
Savings bonds are another type of investment where you don’t have to pay taxes until later.
You have the choice to either pay taxes on savings bond interest when you cash in the bond or to pay taxes on the interest you earn each year.
Paying taxes when you cash in leaves your money to compound. The downside is that if you cash in a large amount of savings bonds, the years worth of interest could push you into a higher tax bracket.
5. Municipal Bonds
Municipal bonds are bonds that are issued by state and local governments. You can buy individual bonds, ETFs, or mutual funds.
Municipal bond interest is generally exempt from federal income taxes. If you live in a state with no income tax, you won’t pay any taxes on your interest.
U.S. treasury bonds give you the opposite tax treatment. The IRS will tax them, but states aren’t allowed to tax interest on federal bonds.
6. Individual Stocks
Stocks aren’t completely tax-free investments, but they may be more tax-friendly than you think.
There are usually two times you pay tax on stocks — when you get a dividend and when you sell.
Some stocks don’t pay dividends, and others have low dividends to minimize your taxes.
You may also be able to plan your stock sales to avoid capital gains tax. If you keep your income low enough, you may qualify for a 0% capital gains tax rate. You can also give appreciated stocks to charity both to avoid capital gains tax and to get a charitable donation deduction.