what is tax advantaged 
the term tax advantaged refers to any type of investment financial account or savings plan that is either exempt from taxation tax deferred or that offers other types of tax benefits examples of tax advantaged investments are municipal bonds partnerships uits and annuities tax advantaged plans include iras and qualified retirement plans such as 401 k s understanding tax advantagedtax advantaged investments and accounts are used by a wide variety of investors and employees in various financial situations high income taxpayers seek tax free municipal bond income while employees save for retirement with iras and employer sponsored retirement plans the two common methods that allow people to minimize their tax bills are tax deferred and tax exempt status the key to deciding which or if a combination of both makes sense for you comes down to when the tax advantages are realized tax deferred accounts allow you to realize immediate tax deductions on the full amount of your contribution but future withdrawals from the account will be taxed at your ordinary income rate 1 the most common tax deferred retirement accounts in the u s are traditional iras and 401 k plans in canada the most common is a registered retirement savings plan rrsp essentially as the name of the account implies taxes on income are deferred to a later date for example if your taxable income this year is 50 000 and you contributed 3 000 to a tax deferred account you would pay tax on only 47 000 in 30 years once you retire if your taxable income is initially 40 000 but you decide to withdraw 4 000 from the account taxable income would be bumped up to 44 000 the secure act made alterations to many of the rules related to tax advantaged retirement plans and savings vehicles like traditional iras and 529 accounts 2tax exempt accounts on the other hand provide future tax benefits because withdrawals at retirement are not subject to taxes since contributions to the account are made with after tax dollars there is no immediate tax advantage 1the primary advantage of this type of structure is that investment returns grow tax free popular tax exempt accounts in the u s are the roth ira and roth 401 k in canada the most common is a tax free savings account tfsa if you contributed 1 000 into a tax exempt account today and the funds were invested in a mutual fund which provided a yearly 3 return in 30 years the account would be valued at 2 427 by contrast in a regular taxable investment portfolio where one would pay capital gains taxes on 1 427 if this investment were made through a tax exempt account growth would not be taxed with a tax deferred account taxes are paid in the future but with a tax exempt account taxes are paid right now however by shifting the period when you pay taxes and realizing tax free investment growth major advantages can be realized investopedia s tax savings guide can help you maximize your tax credits deductions and savings order yours today tax advantaged investmentstax advantaged investments shelter some or all of an investor s income from taxation allowing them to minimize their tax burden municipal bond investors for example receive interest on their bonds for the duration of the bond s life the proceeds from issuing these bonds to investors are used by municipal authorities to fund capital projects in the community to incentivize more investors to purchase these bonds the interest income received by investors is not taxed at the federal level in many cases if the bondholder resides in the same state where the bonds were issued their interest income will also be exempt from state and local taxes 3depreciation also yields tax advantages for individuals and businesses that invest in real estate depreciation is an income tax deduction that allows a taxpayer to recover the cost basis of certain property in the u s the cost of acquiring a land or building is capitalized over a specified number of useful years by annual depreciation deductions 4for example assume an investor purchases a property for 5 million the cost basis after five years the investor has depreciation deductions of 500 000 and their new cost basis is 4 5 million if they sell the property for 5 75 million the investor s realized gain will be 5 75 million 4 5 million 1 25 million the 500 000 deduction will be taxed at the depreciation recapture rate and the remaining 750 000 will be taxed as a capital gain without the tax advantage of the depreciation allowance the entire gain realized from the sale of the property will be taxed as a capital gain 5tax advantaged accountswith regular brokerage accounts the irs taxes investors on any capital gains realized from selling profitable investments however tax advantaged accounts allow an individual s investing activities to be tax deferred and in some cases tax free traditional individual retirement accounts iras and 401 k plans are examples of tax deferred accounts in which earnings on investments are not taxed every year instead tax is deferred until the individual retires at which point they can start making withdrawals from the account withdrawing from these accounts without penalty is allowed once the account holder turns 59 years old 6prior to the passage of the setting every community up for retirement enhancement secure act which was signed into law on december 20 2019 once an account holder turned 70 years they were obligated to begin taking required minimum distributions rmds from their tax deferred retirement accounts under secure individuals have until age 72 before the required minimum distributions kick in in addition the age limit for contributing to a traditional ira was removed allowing working account holders to invest indefinitely similar to a roth ira 7the threshold to begin receiving distributions was changed once again when congress approved and passed the secure act 2 0 in december 2022 individuals must begin taking rmds when they turn 73 on or after jan 1 2023 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