Many people plan their investment strategies for acceptable risk and better than average returns. If successful, this is a great plan. But what about taxes? Should you consider tax implications while executing your investment strategies? Should you consider what future taxes will do to your retirement nest egg? Let’s explore some tax-advantaged strategies that might prove beneficial to you when building an investment portfolio for: retirement, college, or general investments.

First, let’s define the difference between tax deferral and tax free. A tax deferral means you are delaying until a future year the payment of income taxes on income you earn in the current year. An example would be your 401(k) retirement account. You pay into this account for the years that you work, but taxes aren’t paid on your investments into the 401(k) or the earnings on the 401(k) until you begin making withdrawals. Tax free means that no income taxes are due at all. An example would be a Roth IRA, which generates tax-free income.

Tax deferral savings methods can be beneficial because:

The money you would have spent on taxes remains invested

At retirement, you may be in a lower tax bracket when you make withdrawals from your accounts

You can accumulate more dollars in your accounts due to compounding

Compounding means that your earnings are added to your investment, and the combined amount continues to earn interest. Compounding may not seem significant in the early years of your investment, but the long term boost to your investment from compounding can be dramatic.

One of the best ways to accumulate funds for any investment objective is to use tax-advantaged (i.e., tax-deferred or tax-free) savings methods. There are several to choose from when planning for retirement:

Traditional IRAs—Anyone under age 70½ who earns income or is married to someone with earned income can contribute to an IRA. In 2010, you can contribute up to $5,000 to an IRA, and individuals age 50 and older can contribute an additional $1,000. These contributions grow tax-deferred. There are restrictions based on your amount of earned income and participation in other tax-deferred plans, so consult a tax or investment professional before opening a traditional IRA.

Roth IRAs—Roth IRAs are open only to individuals with incomes below certain limits. Your contributions are made with after-tax dollars, but they will grow tax deferred and qualified distributions will be tax free when you withdraw them. The amount you can contribute is the same as for traditional IRAs. Total combined contributions to Roth and traditional IRAs can’t exceed $5,000 each year for individuals under age 50.

Simple IRAs and Simple 401(k)s—If you’re self-employed or own a small business, you may be able to take advantage of these retirement plans. Your contributions grow tax deferred, but you’ll owe income taxes when you make a withdrawal. For 2010, you can contribute up to $11,500 to one of these plans; individuals age 50 and older can contribute an additional $2,500.

Employer-sponsored plans (401(k)s, 403(b)s, 457 plans)—Contributions to these types of plans grow tax deferred, but you’ll owe income taxes when you make a withdrawal. For 2010, you can contribute up to $16,500 to one of these plans; individuals age 50 and older can contribute an additional $5,500.

Annuities— Under an annuity contract, in exchange for your lump sum or periodic contributions, the insurance company that issues the annuity agrees to pay you or your beneficiary an income stream for life. There’s no limit to how much you can invest, and your contributions grow tax deferred. However, you’ll owe income taxes on the earnings when you start receiving distributions. Always check the financial health of the insurance company issuing the annuity because if this company fails, the ability to pay the income stream back to you or your beneficiary could be impaired.

Tax-advantaged savings vehicles for college include:

529 plans—College savings plans and prepaid tuition plans let you set aside money for college that will grow tax deferred and be tax free at withdrawal at the federal level if the funds are used for qualified education expenses. These plans are open to anyone regardless of income level. Contribution limits are high—typically over $300,000—but vary by plan.

Coverdell education savings accounts—Coverdell accounts are open only to individuals with incomes below certain limits, but if you qualify, you can contribute up to $2,000 per year, per beneficiary. Your contributions will grow tax deferred and be tax free at withdrawal at the federal level if the funds are used for qualified education expenses.

Series EE bonds—The interest earned on Series EE savings bonds grows tax deferred. But if you meet income limits at the time you redeem the bonds for college, in addition to being exempt from state tax, the interest will be free from federal income tax too.

All-purpose tax-advantaged investment:

Tax-free municipal bonds—Interest earned on tax-free municipal bonds is generally exempt from state tax if the bond was issued in the state in which you reside, as well as from federal income tax. But if purchased as part of a tax-exempt municipal money market or bond mutual fund, any capital gains earned by the fund are subject to tax, just as any capital gains from selling an individual bond are.

Consult your friendly home town banker when considering tax strategies for your investment portfolio. Using tax-advantaged savings methods will keep more money in your pocket.