Investing your money can be a great way to help build your savings to prepare for the future. Still, there are many factors to take into account when making investments, such as the specific tax considerations of each investment vehicle. Here are some potential ways to save on taxes when making your investment decisions.

Determine how long you’ll hold the investments: Tax codes usually encourage long-term investments. So, if you sell your investment within the first year of owning it, you’ll pay ordinary tax rates, which could be 25 percent to 35 percent or more on that asset. That’s why it may be beneficial to hold an investment for more than one year. Securities held for more than a year may be taxed at a lower, long-term capital gains tax rate. Remember, you’ll have to pay taxes on any dividends, but otherwise you pay taxes only on the difference between your cost basis and the sales amount of the investment.

Consider where you keep your funds: Keeping your investments in the right place is vital to helping reduce your tax bills. By regularly investing in your retirement account, you can reduce your current taxable income and sustain any potential tax-deferred growth. You’ll pay tax on IRA and 401(k) accounts only when you take the money out, presumably during retirement. For the Roth IRA, as long as you don’t withdraw the money until age 59½ and your contribution has been in the Roth IRA for five years, you don’t have to pay taxes when withdrawing any earnings on the money you’ve invested.

If you choose to invest in a Roth IRA, keep in mind that contributions are taxed before the money is deposited in your account. On the positive side, your principal has the potential to grow tax-free and you pay no further taxes on qualified withdrawals. This is especially advantageous if you think your taxes will rise in the future, since you're paying taxes now rather than later. Another advantage of the Roth IRA is that it has no required minimum distributions for the account owner.

Know how to handle losses: When investing, you have to accept the risk of taking a loss on one or more of your investments. If the loss can’t be recovered, many investors will sell investments and use the capital losses to offset capital gains and help reduce tax bills. If your net losses exceed your gains, you are only allowed to use a certain amount of capital losses to offset ordinary income each year.

Understanding the tax code for different investments can help you be strategic in your choices and help you reap the potential benefits. As always, consult with a tax advisor for guidance specific to your situation.

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