Written By
Paul Tracy
Updated June 15, 2021

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.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
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 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.

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

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Tax-Advantaged

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms