(MONEY Magazine) -- To hang on to more of your money, give up less to the government.
This is part of a special report on 101+ ways to build wealth. In this story, readers and experts weigh in with advice on ways to significantly boost your tax savings.
Make more with munis. Triple-A-rated munis pay a lot more than Treasuries on an after-tax basis (2.7%, vs. 1.8%, in the 28% bracket). Plus, they're safer than you may think -- the default rate for investment-grade 10-year municipal bonds last year was 0.0002%.
Just be choosy about where your munis come from, say San Diego planners Steve Wolff and Cliff Wiese: Stick with triple-A-rated general-obligation city or state munis.
Favor ETFs over mutual funds. ETFs are more tax-efficient than mutual funds in taxable accounts. The reason: When you sell shares in a regular fund, the manager may have to dump stocks to raise cash, potentially creating a taxable gain for remaining investors.
With ETFs, you buy shares directly from others. The upshot is fewer taxable payouts: Over the past five years, the average ETF had capital gains distributions equal to 0.03% of assets vs. 1.16% for the average fund, says Morningstar.
Stash tax-free cash
Some 54% of employees take advantage of flexible spending accounts, according to the American Payroll Association. Join that majority -- by opening a medical, transportation, or dependent-care account. You'll cut your taxable income by the total you put away. Then save the reimbursement checks!
Keep your gains from Uncle Sam. The payouts from bonds and REITs are taxed at ordinary income rates rather than more favorable capital gains rates. So shield those income producers in a 401(k) or IRA, where earnings compound freely until you make withdrawals (with Roths, withdrawals are tax-free too).
The same goes for funds that throw off lots of short-term gains. Sample savings: $1,400 on $5,000 in bond interest, in the 28% tax bracket.
Choose tax-efficient funds. No matter what happens to tax rates in 2013, you want to minimize the bite on funds in taxable accounts.
What to look for: Below-average turnover (fewer trades means fewer gains). Morningstar's five-year tax-cost ratio measures how much the taxes you'll owe on distributions would chip away at a fund's return: 0.50% or less is best.
Five funds that fit the bill: FAM Value (), Primecap Odyssey Aggressive Growth ( ), T. Rowe Price Growth & Income ( ), Vanguard Total Stock Market ( ) and Wasatch Small Cap Growth ( ).
READERS WEIGH IN
Bank Your Refund. "I purposely have more deducted for income taxes than I know I will owe. This guarantees that I will get a refund. An extra $10 a week would be spent. An extra $500 refund at once can be added to savings." -- Joseph Kannar, Fort Lauderdale, Fla.
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