While taxes are an important consideration in any financial plan, you shouldn't base your investment strategy on tax-avoidance. However, there are some easy ways to reduce the bite of taxes. Tax-deferral through retirement plans One way to reduce taxes is to maximize your retirement plan contributions whenever you can. When you invest in an IRA or in a retirement plan at work, you defer paying taxes until you withdraw the money after you retire - when your tax rate may be lower. In the case of employer-sponsored retirement plans, all or a portion of your contribution may be matched by your employer.
IRAs increase the tax benefit even more.
With a Roth IRA, the earnings on the account may be exempt from taxes. Which one is right for you depends on your income and other factors. Either way, because money isn't constantly taken out to pay taxes, it can work harder for you. Compounding The way your money can grow through compounding is the greatest single benefit a long-term investment plan can offer you. When you invest, you not only earn money on what you've contributed, you also have the potential to earn money on your earnings.