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Maximize Your Returns with Tax-Efficient Investments

At O1ne Mortgage, we understand the importance of maximizing your long-term returns by minimizing the amount you set aside for income taxes. While retirement accounts like a 401(k) are well-known tax-advantaged savings vehicles, they are not always suitable for short-term goals. Here are five tax-efficient investment options to consider for your shorter-term financial objectives.

1. Treasuries and Federal Bonds

When you lend money to the federal government by purchasing U.S. Treasuries and bonds, your earnings are exempt from local and state income taxes. There are various types of treasuries and savings bonds to choose from, each with different maturity lengths and rules for buying, holding, and selling. All earnings are only taxable at the federal level, which can be beneficial if you live in a state with high income taxes. You can purchase these through a bank, brokerage account, or TreasuryDirect.gov.

2. Municipal Bonds

Municipal bonds, or munis, are sold by local and state governments to fund expenses and large projects. The interest earned from munis is exempt from federal income taxes, and if you buy munis from your state, the interest is often exempt from state income taxes as well. While munis can be a relatively safe investment, there are risks, such as the possibility of municipalities declaring bankruptcy. Investing in munis through a brokerage account can simplify the process.

3. Money Market Funds

Money market funds are mutual funds that invest in safe, short-term securities. These funds can offer higher interest rate returns than high-yield savings accounts, especially when interest rates are rising. However, they are not risk-free and are not covered by Federal Deposit Insurance Corporation (FDIC) insurance. Money market funds may have minimum investment requirements and management fees, but they provide an easier way to manage investments compared to individual treasuries and bonds.

4. Health Savings Accounts (HSAs)

Health savings accounts (HSAs) offer a triple-tax advantage: tax deductions for contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. To open an HSA, you need to be enrolled in a high deductible health plan (HDHP) and meet other eligibility requirements. In 2023, the contribution limit is $3,850 for individuals or $7,750 for a family, with an additional $1,000 for those 55 or older. HSAs allow you to invest money, earn tax-free returns, and make tax-free withdrawals for future medical expenses.

5. Roth IRAs

A Roth individual retirement account (IRA) is a tax-advantaged retirement account that allows for tax-free growth and withdrawals of earnings after age 59½. Contributions to a Roth IRA are made with after-tax money, so you can withdraw your contributions without paying income taxes or penalties. This flexibility makes a Roth IRA a suitable place for an emergency fund or other shorter-term savings. However, there are income limits and annual contribution limits for Roth IRAs.

Keep the Big Picture in Mind

Tax-advantaged investments and accounts can offer significant benefits, especially for those in high tax brackets. However, it’s essential to consider the overall picture, including potential risks and the timing of selling investments. As you explore ways to maximize tax savings, also review your brokerage and retirement accounts to ensure your investments align with your goals. Additionally, check your credit score and report to understand the factors impacting your score.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is here to help you make informed financial decisions and achieve your goals with confidence.

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