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9 Tax-Free Investments Everyone Should Know About

A well-defined strategy could help you minimize the amount of taxes you pay

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Updated Oct. 8, 2024
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You are probably not excited about having to share some of your investment gains with Uncle Sam. After all, who doesn’t want to keep as much of their money as possible?

Fortunately, there are ways to minimize the amount of taxes you pay on investment gains. Some options even offer tax-free investing.

Here is a look at tax-free investments that can help you keep more cash in your wallet and away from the government.

Steal this billionaire wealth-building technique

The ultra-rich have also been investing in art from big names like Picasso and Bansky for centuries. And it's for a good reason: Contemporary art prices have outpaced the S&P 500 by 136% over the last 27 years.

A new company called Masterworks is now allowing everyday investors to get in on this type of previously-exclusive investment. You can buy a small slice of $1-$30 million paintings from iconic artists, all without needing any art expertise.

If you have at least $10k to invest and are ready to explore diversifying beyond stocks and bonds,see what Masterworks has on offer. (Hurry, they often sell out!)

Municipal bonds

Vitalii Vodolazskyi/Adobe municipal bonds Trading concept

Municipal bonds are issued by local governments and help fund roads, schools, and other community investments. That means you are loaning money to the government to help your neighbors.

There’s more good news: You earn a guaranteed rate of return with interest payments that are exempt from federal taxes, and possibly from state or local taxes as well. That can really help you get ahead financially.

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Roth IRAs and 401(k) plans

www.doglikehorse.com/Adobe overfilled full piggy bank

Don’t forget about your retirement options when looking at tax-free investments. Roth IRAs and 401(k) plans are both good choices to consider.

A Roth IRA is an individual retirement account that lets you invest after-tax dollars to make tax-free withdrawals as a retiree. A Roth 401(k) is a workplace retirement plan that works in a similar fashion.

Tax-exempt mutual funds and ETFs

maurice norbert/Adobe Stock portfolio diversity on smartphone

You can also gain access to municipal bonds and other tax-free bonds through mutual funds and exchange-traded funds (ETFs).

These can be good choices if you want to diversify your portfolio, because instead of buying a single bond, you get a basket of bonds in the mutual fund or ETF.

Just remember to review the expense ratio and other fees to see how much you might lose in expenses.

Get a free stock valued between $5 to $200

Secret: You don't need thousands of dollars to buy thousand-dollar stocks or create a diverse portfolio.

Robinhood offers a method of investing called “fractional shares.” On its own, one share of a single stock could cost a lot of money, making it difficult to diversify. Robinhood allows you to buy pieces of stock instead, so you have the option to build a diverse portfolio quickly.

Let’s say you want to invest $250, as an example.

With that amount, you could build a relatively diverse portfolio with an investment of $50 in a big tech stock, $50 in a retail stock, $50 in an energy stock, $50 in a manufacturing stock, and $50 in a bank.1

Even better news? Add a Robinhood Gold membership, and you’ll get access to 4.25% (as of 11/15/24) APY2on your uninvested cash3and the ability to buy and sell stocks 24 hours a day, 5 days a week.

Open and fund a Robinhood account and earn up to $200 in stock

Indexed universal life insurance

thodonal/Adobe Concept of life insurance

An indexed universal life insurance (IUL) policy builds tax-free cash value while also providing a death benefit. You can also take out tax-free loans at any age without a penalty.

Health savings accounts

utah51/Adobe health savings account document

Health savings accounts can offer major tax benefits. Your contributions are deductible, the money grows tax-free, and withdrawals are tax-free if you use them to pay for qualified medical expenses.

However, to be eligible to contribute, you must have a high-deductible health insurance plan.

Donor-advised funds

guy2men/Adobe Hand inserting money in box concept donation

You may not be familiar with donor-advised funds (DAFs), but they can be a tax-free way to help support causes close to your heart.

DAFs are accounts organized to manage donations of individuals, families, and organizations. Contributions are tax-deductible, and the money grows tax-free until you decide where you want it to go.

Series I savings bonds

jetcityimage/Adobe US Savings Bonds

Series I savings bonds are exempt from state and local taxes, but subject to federal tax on interest income.

However, in some cases, if you use the money to pay for educational expenses, withdrawals are tax-free.

529 college savings plans

Andrii/Adobe 529 College Savings Plan on notebook

A 529 college savings plan is another tax-free investment option to consider when it comes to paying for education.

You can open a 529 college savings plan when your child is young and take advantage of tax-free growth and withdrawals.

1031 exchange

Kevin/Adobe 1031 exchange domino pieces

With a 1031 exchange, you can defer paying capital gains taxes if you sell an investment property and reinvest your gains in another such property.

This can be a complicated option, so it might be best to seek the guidance of a financial professional before taking this step.

Earn up to a $300 bonus and grow your money with up to 4.20% APY

This powerful combination checking + savings account from SoFi® allows you to earn up to a $300 bonus with direct deposit and grow your money with up to 4.20% APY.4

This is one of the top accounts we’ve seen, and offers like this can be rare. You work hard, and now it’s time to make your money work for you — with SoFi, you can grow your money with hardly any effort!

SoFi has no account or overdraft fees5 and additional FDIC insurance up to $2 million on deposits is available through a seamless network of participating banks.67 Plus, you can receive your paycheck up to 2 days early.8

How to earn up to $300: Sign up and make a direct deposit within the first 25 calendar days of the promotional period, then collect a $300 cash bonus with a direct deposit of $5,000 or more.

SoFi is a Member, FDIC. 7

Open your SoFi account and set up direct deposit

Bottom line

fizkes/Adobe Happy woman calculating bills

Tax-free investments such as municipal bonds and Roth IRAs can be great options as you try to build wealth.

So, look over the investments on this list and try to determine which options will give you the best bang for your buck. You can be a better investor by always taking taxes into account before you put your hard-earned money to work.

Masterworks Benefits

  • Invest in art like a millionaire for a relatively low cost
  • Art investments have outperformed the S&P 500 by over 131% for 26 years
  • Purchase shares of artwork by top artists
  • Hedge against inflation and diversify your portfolio