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.)
Reduce Taxes in Non-Registered Accounts
Capital gains in non-registered accounts are tax-deferred until you sell.
Compared to ordinary income, eligible dividends are favorably-taxed in non-registered accounts. So, Canadians or Americans can buy stocks on their domestic exchanges that pay eligible dividends in taxable accounts, and those dividends will be taxed lower than the income from your job.
Thirdly, a portion of the distributions from Canadian real estate investment trusts (REITs) can be tax-deferred for Canadians.
Actually, REITs’ distributions are different from dividends. Distributions can consist of other income, capital gains, foreign non-business income and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.
On the other hand, the return of capital portion reduces your adjusted cost basis. This means that that portion is tax-deferred until you sell your units or until your adjusted cost basis turns negative.
So, if you buy REIT units in a non-registered account, you’ll need to track the change in the adjusted cost basis. The T3 that you’ll receive will help you figure out the new adjusted cost basis.
Of course, each investor will need to look at their own situation. For example, if you have room in a TFSA, it doesn’t make sense to have investments in non-registered accounts to be exposed to taxation.
Build Wealth and Never Run Out of Money Again
To build wealth over time, the first step is to save. That is, spending less than what you earn. You can then use those savings to invest in assets that generate income for you month after month, year after year.
Some people like to invest in real estate, and others like to invest in farms. I like to invest in quality dividend stocks. Here’s the article, 3 Tips to Build Wealth, that generated 37 likes and shares.
Actually, given enough time, you can even Become a Millionaire by Investing $500 a Month. My strategy is to build a portfolio of quality dividend growth stocks. Occasionally, I do buy some stocks that are more growth-oriented though, such as Starbucks Corporation (NASDAQ:SBUX).
If you’re conservatively investing for an 8% rate of return, it’ll take more than three decades to get to a $1 million portfolio by saving $500 per month. So, the earlier your start saving and investing, the better, because compounding takes time.
Compounding is the powerful idea of earning interests on your interests, or earning returns on your returns. In other words, using money to earn you more money. However, other than choosing the right investments, the other essential component in the formula is time.
Once you start to save from every paycheck and start investing in quality assets that generate a consistent income for you, you’ll Never Run Out of Money Again. This article of never running out of money generated 56 likes or shares.
I’m sure that’ll be a nice feeling — to never have to worry about money. I don’t mean that one has to be ultra rich, but more like having enough to maintain the kind of lifestyle that one wants.
Invest in REITs to Get Stable Income
I only found out recently that it was nearly impossible for the general public to invest in commercial real estate (which is a lucrative investment), until REITs came about.
The whole purpose of REITs is so that the general public (not ultra rich guys) can easily get exposure to commercial real estates as an investment. Most importantly, REITs can be a part of a diversified portfolio that helps general consistent, and stable income.
So I wasn’t surprised when this article, 7 Benefits of Investing in REITs Over Real Estate, became one of the most popular in 2015.
Canadian REITs like Canadian REIT (TSX:REF.UN), Boardwalk REIT (TSX:BEI.UN), and Dream Industrial Real Estate Invest Trst (TSX:DIR.UN) pay monthly distributions. The first two yield 4.5%, while Dream Industrial yields 9.3%. Usually, any stocks with high yields are seen as riskier.
Of course, nowadays, there are many different types of REITs. To name a few, they include residential, diversified, retail, office, industrial, healthcare, and hotels.
For example, a quality healthcare REIT is Ventas, Inc. (NYSE:VTR), and I believe it’s priced at a value today. It yields 5.4% under $54 per unit.
One thing that concerns REITs is interest rate changes. When interest rate hikes, REITs are likely to pullback, especially the ones that are more leveraged.
Taxes are one of our biggest bills in life, and it never goes away. So, the sooner we learn to reduce it, the more we save. We can invest in tax-free and tax-deferred accounts, and we can also strategically invest in taxable accounts.
Building wealth and never running out of money goes hand-in-hand. First, we must always save a portion of our paycheck. Secondly, we should start investing as early as we can. Consistently investing is essential because we’re building a nest egg for retirement. The earlier we start, the earlier we make mistakes, learn, and recover from them.
REITs is a good way to gain exposure to the real estate market, and to earn stable income. At the same time, just like any other stock, if the yield is too good to be true, it probably is.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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