Tax-efficient investments and accounts can help increase your long-term returns by minimizing how much you have to set aside for income taxes. While retirement accounts, such as a 401(k), might be the most well-known tax-advantaged savings vehicles, there are several other options to consider for shorter-term goals. Here are five tax-efficient investment strategies to help you maximize your returns.

1. Treasuries and Federal Bonds

When you lend money to the federal government by purchasing U.S. Treasuries and bonds, your earnings will be exempt from local and state income taxes. There are several types of treasuries and savings bonds to choose from, including:

• U.S. Treasury bills (maturity lengths of four to 52 weeks)
• Treasury notes (maturities of two to 10 years)
• Treasury bonds (maturities of 20 or 30 years)
• Federal savings bonds, such as Series I bonds

All earnings from these investments are only taxable at the federal level, which can be beneficial if you live in a state with high income taxes. You can buy treasuries and bonds through a bank, brokerage account, or TreasuryDirect.gov account.

2. Municipal Bonds

Local and state governments sell municipal bonds, or munis, to help fund everyday expenses and large projects. The interest you earn from munis is exempt from federal income taxes, and if you buy municipal bonds from the state where you live, the interest is often exempt from state income taxes as well.

Munis can be a relatively safe investment option, but there are risks to consider, such as the possibility of municipalities declaring bankruptcy and not repaying bondholders. You can compare and invest in munis through a brokerage account.

3. Money Market Funds

Rather than buying treasuries and bonds directly, you could invest in a money market fund—a type of mutual fund that only invests in safe, short-term securities. There are different kinds of money market funds, including:

• Government funds (invest in government securities)
• General purpose funds (invest in corporate bonds and certificates of deposit)
• Municipal or tax-exempt funds (primarily invest in tax-exempt munis)

Money market funds may offer higher interest rate returns than high-yield savings accounts, especially when interest rates are rising. However, they are not risk-free, and Federal Deposit Insurance Corporation (FDIC) insurance does not cover money market funds.

4. Health Savings Accounts (HSAs)

A health savings account (HSA) is a tax-advantaged account you can use to save and invest money for future medical expenses. HSAs offer a triple-tax advantage: tax deductions for contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. To open an HSA, you need to meet the eligibility requirements, including being enrolled in a high deductible health plan (HDHP).

In 2023, the contribution limit is $3,850 for individuals or $7,750 for a family, with an additional $1,000 for those 55 or older. You can invest money in an HSA, earn tax-free returns, and make tax-free withdrawals to reimburse yourself for qualified medical expenses at any point in the future.

5. Roth IRAs

A Roth individual retirement account (IRA) is a tax-advantaged retirement account. Unlike a traditional IRA, Roth IRA contributions are not tax-deductible, but investment earnings grow tax-free within the account. You can withdraw the earnings without paying income taxes or penalties once you turn 59½.

Because you contribute after-tax money to a Roth IRA, you can withdraw your contributions without paying income taxes again or an early withdrawal penalty. This makes a Roth IRA a suitable place to keep an emergency fund or other shorter-term savings. However, there are income limits and annual contribution limits for Roth IRAs.

Keep the Big Picture in Mind

Tax-advantaged investments and accounts can offer significant benefits, especially for savers and investors in a high tax bracket. However, it is essential to consider the big picture. Higher returns on a taxable investment could be better than a low, tax-free return. Additionally, there may be other types of risk to consider, such as limits on when you can sell investments.

As you think through ways to maximize tax savings, also look for other ways to improve your personal finances. For example, review your brokerage and retirement accounts to ensure your investments and asset allocation align with your current goals. And if you haven’t checked your credit score recently, get your FICO® Score and credit report to review the factors impacting your score the most.

Contact O1ne Mortgage for Your Mortgage Service Needs

At O1ne Mortgage, we are dedicated to helping you achieve your financial goals. Whether you are looking to invest in tax-efficient accounts or need assistance with your mortgage, our team of experts is here to help. Call us today at 213-732-3074 for any mortgage service needs. Let us help you make the most of your investments and secure your financial future.