Tax-Efficient Investing Strategies

No one likes making payments to the IRS, but the amount of taxes paid can be a factor in how many dollars a person actually makes in returns. That being said, there are many factors to consider when getting started, such as what you invest in and what kind of account you put it into.

Income generating investments that generate the highest short-term capital gains and ordinary income tax rates can be best held in a more tax advantaged investment account such as an IRA.


Deferral is an essential concept for tax-efficient investing. Deferring the taxes on capital gains and on income reduces your overall tax bill – perhaps enabling you to invest more.

Tax-efficient investing involves not only choosing your investment products, but also the timing of your purchase and sale decisions, where and how your assets are held, and tax-loss harvesting – which involves selling your investments at a loss to offset tax on capital gains. In addition to these concerns, tax-advantaged accounts are an essential element of any investor’s toolkit, helping to minimise your tax obligations and any associated costs.

Because tax rules and laws are so complex, financial professionals can help you develop a strategy to minimise your tax burden and, once you understand why you’re making certain moves, help ensure that your investments achieve your long- and short-term financial goals.

Tax-Advantaged Accounts

Asset selection and asset allocation drive most of the returns, but minimising taxes contributes as well, by ‘bringing the tailwinds’: pound for pound, reducing taxes increases long-term returns.

Tax drains assets of their growth, so any means of reducing that drain helps long-term returns. They provide a convenient and effective way to reduce taxes on money from capital gains, dividends or interest. The types include tax-advantaged accounts at brokers, IRAs and 401(k) plans, as well as 529 college savings plans and health savings accounts in which you put in post-tax money that grows tax free.

In order to take full advantage of both strategies, you can have a portion of your assets in taxable buckets and tax-free buckets, depending of course on your investment objectives and risk tolerance.

Tax-Exempt Bonds

Because of their level of taxes, typically investing is something you want to do tax-efficiently; but as you approach retirement and have [less] income, it’s even more so.

You can also take advantage of choices about where and how you keep various investments, such as paying capital gains tax on housing investments important to one’s portfolio in taxable accounts, while reserving dividend- or interest-paying stocks for tax-advantaged accounts. Using tax loss harvesting in any of these cases can help to lower your tax burden.

However, bear in mind that tax considerations should never drive your investing decisions. Discuss your options with your financial adviser, and make sure that whatever course of action you take helps you reach your longer-term goals while, at the same time, employing tax-efficient strategies that are aligned to your personal set of circumstances.


A simple way for investors to lower taxes is to periodically rebalance their portfolios – that is, buy and sell assets to adjust weightings of asset classes – which lowers the annual tax bill, without the investor ever having to pay capital gains taxes. Bonds, including municipal bonds, or tax-managed mutual funds might have the best place inside a taxable account, while funds that generate little tax, like bonds, might be best placed there, and those generating significant taxable income – such as growth stocks – might work best inside non-deferred accounts.

Taxes may be the least influential consideration when making investment decisions, but reviewing the tax results of various accounts and tax-efficient strategies you keep, and then using them to offset an extra special return, for instance, could be appropriate. You may have found that the basic building blocks of a diversified strategy, such as the US large- and small-cap companies and international companies the author of this article has suggested, have facilitated the development of your wealth through investment performance and that integrating best-in-class financial advice from a trusted financial adviser can aid you in reaching your objectives.

Charitable Giving

Everybody hates the IRS … but you don’t have to Wave a flag for Great Britain’s tax collectors, but that doesn’t make it better. An active tax management strategy may help reduce taxes … but it might also improve investment performance.

Put taxable investments (those that generate taxable income) in tax-advantaged accounts: retirement accounts, 529 plans or other education savings accounts. Hope to find, in health-savings accounts, the super-tax-advantaged investments that are permitted by those accounts. Maybe tax-exempt municipal bonds have good potential for tax savings.

Finally, charitable giving can help lower your tax bill – sometimes in significant way. Those who are more than 70 1/2 old can use the tax benefit of qualified charitable distributions (QCD) from an IRA to make a direction transfer to charity ultimately lowering the overall tax bill for the year in which the donation was made. It is important to make sure that this approach makes sense for you and your financial goals – and also for your charitable desire. So, sit down with your own financial adviser and decide on a strategy that will help you accomplish the task at hand – the twofold benefit of good intention and a good financial outcome.

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