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9 Tax-Free Investments Everyone Should Know About

A well-defined strategy could help you minimize the amount of taxes you pay

By Chris Adam

Edited by Chris Kissell

Updated Oct. 8, 2024

You are probably not excited about having to share some of your investment gains with Uncle Sam. After all, who doesn't want to keep as much of their money as possible?

Fortunately, there are ways to minimize the amount of taxes you pay on investment gains. Some options even offer tax-free investing.

Here is a look at tax-free investments that can help you keep more cash in your wallet and away from the government.

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Municipal bonds

Municipal bonds are issued by local governments and help fund roads, schools, and other community investments. That means you are loaning money to the government to help your neighbors.

There's more good news: You earn a guaranteed rate of return with interest payments that are exempt from federal taxes, and possibly from state or local taxes as well. That can really help you get ahead financially.

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Roth IRAs and 401(k) plans

Don't forget about your retirement options when looking at tax-free investments. Roth IRAs and 401(k) plans are both good choices to consider.

A Roth IRA is an individual retirement account that lets you invest after-tax dollars to make tax-free withdrawals as a retiree. A Roth 401(k) is a workplace retirement plan that works in a similar fashion.

Tax-exempt mutual funds and ETFs

You can also gain access to municipal bonds and other tax-free bonds through mutual funds and exchange-traded funds (ETFs).

These can be good choices if you want to diversify your portfolio, because instead of buying a single bond, you get a basket of bonds in the mutual fund or ETF.

Just remember to review the expense ratio and other fees to see how much you might lose in expenses.

Get a free stock valued between $5 to $200

Secret: You don't need thousands of dollars to buy thousand-dollar stocks or create a diverse portfolio.

Robinhood offers a method of investing called “fractional shares.” On its own, one share of a single stock could cost a lot of money, making it difficult to diversify. Robinhood allows you to buy pieces of stock instead, so you have the option to build a diverse portfolio quickly.

Let’s say you want to invest $250, as an example.

With that amount, you could build a relatively diverse portfolio with an investment of $50 in a big tech stock, $50 in a retail stock, $50 in an energy stock, $50 in a manufacturing stock, and $50 in a bank.¹ This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice. To get stock reward, new customers need to sign up, get approved, and link their bank account. Stock rewards shares cannot be sold until 3 trading days after the reward is granted and the cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at <a href="https://robinhood.com/us/en/support/articles/open-account-pick-your-stock/">rbnhd.co/freestock</a>. Fractional shares are illiquid outside of Robinhood and are not transferable. Not all securities available through Robinhood are eligible for fractional share orders. For a complete explanation of conditions, restrictions and limitations associated with fractional shares, see the Fractional Shares section of our Customer Agreement. Robinhood Gold is offered through Robinhood Financial LLC and is a membership offering premium services available for a fee.

Even better news? Add a Robinhood Gold membership, and you’ll get access to 4.00% (as of 12/27/24) APY² Annual Percentage Yield. Rate valid as of April 12, 2024. To earn interest, a cash balance is needed. If you have a margin balance, there is no cash balance to earn interest. Interest rates for cash sweep and margin investing can change at any time. Fees may reduce interest earnings. on your uninvested cash³ Interest is earned on uninvested cash swept from your brokerage account to partner banks. Partner banks pay interest on your swept cash, minus any fees paid to Robinhood. As of Nov 15, 2023, the Annual Percentage Yield (APY) that you will receive is 1.5%, or 5% for Gold customers. The APY might change at any time at the partner banks' or Robinhood's discretion. Additionally, any fees Robinhood receives may vary and are subject to change. Neither Robinhood Financial LLC nor any of its affiliates are banks. All investments involve risk and loss of principal is possible. Robinhood Financial LLC (member SIPC), is a registered broker dealer. and the ability to buy and sell stocks 24 hours a day, 5 days a week.

Open and fund a Robinhood account and earn up to $200 in stock

Indexed universal life insurance

An indexed universal life insurance (IUL) policy builds tax-free cash value while also providing a death benefit. You can also take out tax-free loans at any age without a penalty.

Health savings accounts

Health savings accounts can offer major tax benefits. Your contributions are deductible, the money grows tax-free, and withdrawals are tax-free if you use them to pay for qualified medical expenses.

However, to be eligible to contribute, you must have a high-deductible health insurance plan.

Donor-advised funds

You may not be familiar with donor-advised funds (DAFs), but they can be a tax-free way to help support causes close to your heart.

DAFs are accounts organized to manage donations of individuals, families, and organizations. Contributions are tax-deductible, and the money grows tax-free until you decide where you want it to go.

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Series I savings bonds

Series I savings bonds are exempt from state and local taxes, but subject to federal tax on interest income.

However, in some cases, if you use the money to pay for educational expenses, withdrawals are tax-free.

529 college savings plans

A 529 college savings plan is another tax-free investment option to consider when it comes to paying for education.

You can open a 529 college savings plan when your child is young and take advantage of tax-free growth and withdrawals.

1031 exchange

With a 1031 exchange, you can defer paying capital gains taxes if you sell an investment property and reinvest your gains in another such property.

This can be a complicated option, so it might be best to seek the guidance of a financial professional before taking this step.

Earn up to a $300 bonus and grow your money with up to 3.80% APY

This powerful combination checking + savings account from SoFi® allows you to earn up to a $300 bonus with direct deposit and grow your money with up to 3.80% APY.⁴ New and existing Checking and Savings members who have not previously enrolled in Direct Deposit with SoFi are eligible to earn a cash bonus of either $50 (with at least $1,000 total Direct Deposits received during the Direct Deposit Bonus Period) OR $300 (with at least $5,000 total Direct Deposits received during the Direct Deposit Bonus Period). Cash bonus will be based on the total amount of Direct Deposit. Direct Deposit Promotion begins on 12/7/2023 and will be available through 1/31/2026. See full bonus and annual percentage yield (APY) terms at <a href="http://www.sofi.com/banking#1">sofi.com/banking#1</a>. SoFi Checking and Savings is offered through SoFi Bank, N.A., Member FDIC. SoFi members who enroll in SoFi Plus with Direct Deposit or by paying the SoFi Plus Subscription Fee every 30 days or with $5,000 or more in Qualifying Deposits during the 30-Day Evaluation Period can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. Members without either SoFi Plus or Qualifying Deposits, during the 30-Day Evaluation Period will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Only SoFi Plus members are eligible for other SoFi Plus benefits. Interest rates are variable and subject to change at any time. These rates are current as of Jan. 24, 2025. There is no minimum balance requirement. Additional information can be found at <a href="http://www.sofi.com/legal/banking-rate-sheet">http://www.sofi.com/legal/banking-rate-sheet</a>. See the SoFi Plus Terms and Conditions at <a href="https://www.sofi.com/terms-of-use/#plus">https://www.sofi.com/terms-of-use/#plus</a>.

This is one of the top accounts we’ve seen, and offers like this can be rare. You work hard, and now it’s time to make your money work for you — with SoFi, you can grow your money with hardly any effort!

SoFi has no account fees⁵ We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at <a href="http://sofi.com/legal/banking-fees/">sofi.com/legal/banking-fees/</a> or overdraft fees⁶ Overdraft Coverage is limited to $50 on debit card purchases only and is an account benefit available to customers with direct deposits of $1,000 or more during the current 30-day Evaluation Period as determined by SoFi Bank, N.A.  The 30-Day Evaluation Period refers to the "Start Date" and "End Date" set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the "30-Day Evaluation Period"). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY.  Members with a prior history of non-repayment of negative balances are ineligible for Overdraft Coverage. and additional FDIC insurance up to $3 million on deposits is available through a seamless network of participating banks.⁷ SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at <a href="http://sofi.com/banking/fdic/sidpterms">SoFi.com/banking/fdic/sidpterms</a>. See list of participating banks at <a href="http://sofi.com/banking/fdic/participatingbanks">SoFi.com/banking/fdic/participatingbanks</a>. Plus, you can receive your paycheck up to 2 days early.⁸ Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

How to earn up to $300: Sign up and make a direct deposit within the first 25 calendar days of the promotional period, then collect a $300 cash bonus with a direct deposit of $5,000 or more.

SoFi is a Member, FDIC. ⁷ SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at <a href="http://sofi.com/banking/fdic/sidpterms">SoFi.com/banking/fdic/sidpterms</a>. See list of participating banks at <a href="http://sofi.com/banking/fdic/participatingbanks">SoFi.com/banking/fdic/participatingbanks</a>.

Open your SoFi account and set up direct deposit

Bottom line

Tax-free investments such as municipal bonds and Roth IRAs can be great options as you try to build wealth.

So, look over the investments on this list and try to determine which options will give you the best bang for your buck. You can be a better investor by always taking taxes into account before you put your hard-earned money to work.

More from FinanceBuzz:

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Author Details

Chris Adam

Chris Adam is a seasoned personal finance, technology, and general assignment journalist. As a broadcast and digital journalist, he's served as a leader in network and local newsrooms. Some of his favorite topics to write about include investing, shopping, retail, and stocks.