How To Save Thousands in Taxes on Your Investments, According to a Self-Made Millionaire
Written by
Gabrielle Olya
Edited by
Molly Sullivan
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If you’re not choosing your investment accounts wisely, you could be paying thousands more in taxes than you need to — and this is a pretty common mistake.
“In looking at hundreds of people’s finances, I see them putting money into investment accounts that cost them more in taxes than they need to pay,” Bernadette Joy, a financial coach and self-made millionaire, wrote in her book “Crush Your Money Goals.”
In addition to choosing the wrong accounts, choosing the wrong investment strategy can also cost you more in taxes. To reduce your tax bill, Joy recommended following these two tips.
Use Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy that entails investing a fixed amount of money into a particular asset or investment at regular intervals, regardless of the asset’s price. Using this strategy can reduce the taxes you pay.
“Dollar-cost averaging happens automatically when you contribute to an employer-sponsored retirement account like a 401(k),” Joy told GOBankingRates. “Instead of trying to time the market, you invest consistently over time, which helps reduce risk and smooth out market fluctuations.
“Plus, your contributions lower your taxable income now while growing tax-deferred for the future,” she continued.
Invest In Tax-Advantaged Accounts
Choosing the right investment accounts will also reduce your taxes.
“Use every tax-advantaged account available to you,” Joy said. “Max out your 401(k), IRA and HSA before investing in a taxable brokerage account. I refer to them as the ‘real luxury bags’ in my book, and I see too many people making the mistake of opening a brokerage account before filling up their retirement accounts and wasting tons of money on taxes.”
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