What is Tax-Advantaged?

Tax-advantaged means that some or all of an investor's income is sheltered from taxation, allowing a taxpayer to minimize his or her tax burden.

How Does Tax-Advantaged Work?

One of the best examples of tax-advantaged investing is the 401(k) plan. Offered by employers, 401(k)s allow employees to put pre-tax dollars in their retirement accounts. The primary tax advantage is that employees contribute to the retirement plan with money that hasn't been hit with payroll taxes yet. Furthermore, any taxable events (like dividend and interest payments) that happen inside the 401(k) account are protected from taxation.

So, for example, if your salary is $1,000 a week and your tax rate is 25%, your after-tax income would be $750. If you put $200 of that after-tax money in a savings account, you are left with $550 to pay the rest of your bills.

But a tax-advantaged strategy would be to put $200 in your 401(k). Here’s how the math works out:

In the second scenario, you'd still make $1,000, still save $200 (in a 401(k) account), but have $600 left over -- that is, you'd end up with an extra $50. That's why tax-advantaged investing is so important to individual investors.

Why Does Tax-Advantaged Matter?

Tax-advantaged investing is a cornerstone of retirement and estate planning. Without it, your investment returns will be eaten away by taxes. Over the long run, investors will see a dramatic difference in their portfolios' value because they were able to defer or minimize their taxes.

Ask an Expert about Tax-Advantaged

All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Tax-Advantaged.

Be the first to ask a question

If you have a question about Tax-Advantaged, then please ask Paul.

Ask a question
Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.