Tax-Efficient Investing: Strategies to Keep More of Your Returns

Tax-Efficient Investing: Strategies to Keep More of Your Returns
Rodd Mann
Tax-efficient investing is well worth careful planning and implementation. There are two reasons for this: First, you lose the money you pay in taxes, and second, you lose the growth that money would have generated if it were still invested.
Most investors know that if you sell an investment, you may owe taxes on any gains. But you could also be on the hook if your investment distributes its earnings as capital gains or dividends regardless of whether you sell the investment or not. And interest-earning investments, along with dividend-paying stocks, will be added to your taxable income if these are distributed to your taxable trading or brokerage account.
Tax-efficient investing requires planning, and varies depending on your goals and objectives, your tolerance for risk, as well as your timeframe and financial situation. This involves minimizing and/or spreading your tax burden over a period. To do this, we need to first choose tax-advantaged investments, such as certain retirement funds or annuities—that is, financial products that will defer our tax liabilities and payments. 
Timing is an important element to the strategy and plan, such as delaying the sale of our investments to avoid short-term capital gains taxes in favor of lower long-term capital gains rates. It also will involve the use of our realized losses to offset taxable gains. 
Working with a financial advisor (see our last article regarding how to pick a good financial advisor) can help sort through the various methods and accounts to boost your after-tax returns and overall tax efficiency.

Some Key Aspects and Approaches

Tax-Advantaged Accounts 

Utilize retirement accounts such as individual retirement accounts (IRAs) and 401(k) accounts, which offer tax benefits. Tax-advantaged accounts like IRAs and 401(k)s have annual contribution limits. In 2023, you could contribute a total of $6,500 to your IRAs, or $7,500 if you’re age 50 or older (because of a $1,000 catch-up contribution.) In 2024, the regular contribution limit increases to $7,000. The catch-up limit is still $1,000, so you can contribute a total of $8,000 if you are age 50 or older.
With 401(k)s, you can contribute up to $22,500 in 2023, or $30,000 with the catch-up contribution. The combined employee/employer contribution can’t exceed $66,000 for 2023. This increases to $73,500 with the catch-up contribution.
Contributions to these accounts can be tax-deductible, and the investments grow tax-deferred or tax-free. Pre-taxed payroll checks are deducted with the amounts we have selected to add regularly to our retirement accounts. Only when we begin withdrawing from our retirement accounts are we taxed at income tax rates. But these rates are presumably lower as we will only withdraw smaller amounts based upon our needs.
A Roth IRA is different, however. You pay the income taxes at the time of the contribution, but when you withdraw amounts in retirement, your principal and the gains are tax free!

Long-Term Capital Gains 

Holding on to investments for more than a year will benefit you in terms of lower long-term capital gains tax rates, as the short-term capital gains are generally taxed just like your income taxes.
If you hold investments in the account for over a year, you'll pay the more favorable long-term capital gains rate of 0 percent, 15 percent, or 20 percent, depending on your tax bracket.
If you hold investments in the account for a year or less, they will be subject to short-term capital gains. This is the same as your ordinary income tax bracket.

Tax-Loss Harvesting 

To reduce your overall taxable income, you can bail out of losing investments and take those tax-advantaged losses as offsets to the gains.

Asset Location 

Place tax-inefficient investments (e.g., blue-chip corporate bonds) in tax-advantaged retirement accounts and place your tax-efficient investments (e.g., index funds) in taxable accounts such as your brokerage trading account.


Most municipal bonds are exempt from federal and some state taxes. Treasury bonds and Series I bonds (savings bonds) are also tax-efficient because they’re exempt from state and local income taxes. But corporate bonds don’t have any tax-free provisions and are better off in your tax-advantaged accounts.


  • 529s—Though contributions may not be deductible, earnings grow tax-free, and withdrawals are tax-free when used for qualified educational expenses for your children or for you!
  • Health savings accounts (HSAs)—For those with high-deductible health insurance plans, taking advantage of an HSA provides triple tax advantages — contributions are deductible, the account grows tax-deferred, and your withdrawals are tax-free if used for qualified medical expenses.
  • Irrevocable trusts—Removing assets from your personal estate by setting up an irrevocable trust can shield you from estate tax and gift tax consequences.
  • Real estate—Investing in real estate can mean tax deductions and write-offs, favorable capital gains tax treatment and other incentives.
  • Life insurance—Proceeds from life insurance (both permanent and term), do not generally result in the imposition of an income tax. 
  • Annuities—These are investment products that are sold by insurance companies, they benefit from tax-deferred growth up until the point when distributions begin.
By implementing these strategies, you get to keep more of your wealth by minimizing what you must fork over to the tax man. These are the main points I want you to take from this article:
  • Taxes can be a significant expense, and deduct from your earnings, interest, and gains more than any other expense, including the cost of your financial advisor. Tax-efficient investing becomes more important when your tax bracket is higher.
  • Investments that are deemed tax-efficient should be deposited and invested in taxable accounts.
  • Investments that are not tax-efficient belong in tax-deferred or tax-exempt accounts.
When you finally retire, you may want to simplify your financial life with just two accounts: a) your taxable brokerage account, and b) your retirement account which may consist of multiple former 401(k) plans and IRAs. At this point, your taxable retirement withdrawals will have to be carefully planned and orchestrated with the aim of keeping your federal (and perhaps state) income taxes to a minimum.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

Rodd Mann writes about carving out a creative and unique new career in a changing world. His own career has taken him all over the world, working in accounting, finance, materials, logistics and manufacturing operations. Author, teacher, writer, consultant, Rodd has worked in many high-tech roles. Follow him here:
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