Strategies to reducing taxes and building wealth over time to never run out of money are popular topics. So, how exactly do you achieve them?
In the last month of the year, I thought it’d be insightful to review the most popular investing articles I’ve written in 2015. Of the 328 articles that I wrote on Motley Fool until December 5, 22 articles had 10 or more shares or likes. (The number of tweets no longer show, so I cannot account for them.) The most popular article had over 100 shares or likes!
- 9 of the 22 most popular articles are directly or indirectly related to tax savings via investing. The article that took the number one spot for being most popular is also in this category.
- The articles that took the second to fourth places have to do with building wealth, having a long-term view in investing, and how to never run out of money.
Reduce Taxes by Investing in the Right Accounts
Since tax is one of the surest things in life, it helps tremendously in savings and ultimately building a nest egg by learning how to reduce taxes early in life. Canadians can use Tax-Free Savings Accounts (TFSA) to reduce taxes. Whatever’s earned inside is tax-free, whether it’s interests, dividends, or capital gains.
In the most popular stock investing article that generated over 100 shares or likes, I described 4 Big Mistakes to Avoid With Your TFSA. Essentially, whenever possible, people should contribute consistently, but up to the capacity amount.
Although it’s true that interest earned is taxed at the higher, marginal rate, I think it’s a mistake to put interest earning assets in TFSAs. Ultimately, stock investments would generate higher returns in the long-term.
At the same time, investors should not take on too much risk in TFSAs because what’s lost in there cannot be written off. For example, I would never buy penny stocks in there.
Another article that generated decent social interests is Should You Use Your TFSA or RRSP for Retirement Investing? There are good reasons to contribute to both TFSAs and Registered Retirement Savings Plans (RRSPs). However, there are downsides to using them as well.
Some people maybe tempted to withdraw from TFSAs because there’s no penalty. On the other hand, eventual withdrawals from RRSPs (or Registered Retirement Income Funds (RRIFs)) will eventually be fully-taxed.
Nonetheless, using tax-advantaged accounts early on can only help in building your wealth because the longer you stay invested in those accounts, the longer you’re compounding your money tax-free or tax-deferred.
Although different from Canada, the United States has similar tax-saving vehicles, namely the 401(k) and Roth IRA accounts. (I’m pretty sure Canada borrowed tax-free and tax-deferred ideas from our neighbours in the south.) Read More