Tax Advantages Help You Make the Most of Your Investments | American Funds

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Investing Fundamentals

Tax Advantages Help You Make the Most of Your Investments

Proper planning can help diminish the negative effects of taxes on your investment returns. 

Tax-Advantaged Retirement Accounts

Tax-Deferred Accounts

Individual retirement accounts (IRAs) and many employer-sponsored retirement plans, including SIMPLE IRAs, 401(k)s and 403(b)s, allow for tax-deferred investments. The benefit is that you can generally lower your taxable income by the amount of pre-tax contributions you make to these accounts each year. Because of this tax benefit, there are limits — which vary by plan type — as to how much you can contribute to an employer-sponsored plan or IRA each year.

With tax-deferred accounts, you’re responsible for paying taxes on your contributions and any earnings when you withdraw money from your account. Typically, these withdrawals occur when you’re retired and may be more likely to benefit from a lower tax rate.

Tax-Exempt Accounts

Roth IRA and Roth 401(k)/403(b) accounts are another tax-advantaged investing option for retirement. In contrast with traditional IRAs and other retirement plan accounts, your contributions to Roth IRA and Roth 401(k)/403(b) accounts are made with after-tax money. The benefit is that all withdrawals from the amount contributed are tax free. If you satisfy certain requirements and the withdrawal is considered qualified, the earnings are also tax free.

Tax-Exempt Investments

Income from municipal bond funds is generally exempt from federal income, and in some cases, state and local taxes too. Some municipal bonds, however, are subject to the alternative minimum tax and you may be subject to capital-gains taxes on any gains.

The tax savings on income could make tax-exempt funds a good investment option for taxable accounts for higher income taxpayers. Typically, you wouldn’t want to invest in a tax-exempt fund in an IRA or another retirement plan because you wouldn’t benefit from the tax savings on income and you could potentially miss out on greater returns from other types of investments.

To determine the best investment option for your situation, be sure to speak with your financial or tax-planning advisor.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.