Investment decisions should be guided primarily by your goals, financial situation and risk tolerance – but tax considerations also play a part.
SmartAsset provides a free tool to connect you with trusted financial advisors who can assist in creating tax-efficient investing strategies and implement them successfully.
1. Put Your Money in the Right Account
Tax-efficient investing is one of the best ways to minimize Uncle Sam’s share of your returns and help maximize financial potential over time – particularly during retirement, when taxes tend to be more burdensome.
Investing is a fantastic way to save for retirement, education expenses and legacy purposes; however, many investors don’t realize that taxes may reduce how much of your returns you actually keep.
Dividends and capital gains are two primary ways that stock investments can trigger tax events with the IRS; dividends and interest payments are taxed at both the federal level as well as at both state and local levels.
To reduce taxes, consider adopting a buy-and-hold investing approach. This strategy is less likely to generate capital gains distributions and may provide better returns than active management strategies that regularly trade stocks. Furthermore, keeping assets in their appropriate accounts may help lower tax liability through techniques known as “tax loss harvesting”, which allow you to offset gains made on certain investments with losses on others.
2. Don’t Overtrade
As taxes can eat away at returns, tax efficiency should be prioritized when setting out to invest.
Tax-efficiency comes in various forms. Avoiding unnecessary trading can help avoid capital gains tax; using tax-loss harvesting (selling shares that have experienced value loss to offset any gains on stocks held for over one year) may also help.
Tax-advantaged accounts such as IRAs and 401(k)s offer another means to reduce tax losses on investments. But for optimal returns it is best to work with a financial advisor who can advise on the most tax-efficient investment approach tailored specifically to you – SmartAsset’s free tool matches you up with advisors who are committed to helping you meet your investing goals – get searching today.
3. Don’t Overpay for Taxes
Save and invest for many reasons, including increasing after-tax returns. But it is essential that you consider Uncle Sam’s share so as to not overpay.
One simple way of doing so is avoiding excessive trading. Avoiding day trading helps limit how much in taxable capital gains you need to pay each year.
Select investment vehicles and strategies with built-in tax efficiencies, such as index ETFs or tax-managed separately managed accounts that offer tax alpha. Such investments seek to add after-tax returns by creating tax losses which offset any gains elsewhere in your portfolio – an approach known as tax alpha.
Make quarterly estimated payments if required to do so and avoid overpaying; the IRS will return any excess payment as a refund.
4. Use Tax-Advantaged Accounts
Tax efficiency should remain an integral component of your investing strategy, helping to preserve more of the growth from your investments and ensure more returns on your investment dollars.
Brokerage accounts and tax-advantaged IRAs and 401(k)s offer better solutions for investments that lose less of their returns to taxes than others; taxable accounts such as brokerage accounts tend to lose less return to taxes than these other options.
SmartAsset’s free tool connects you with experienced financial advisors in your area who can offer tax-efficient investing advice and strategies. SmartAsset matches you with qualified advisors who can offer expert guidance as you pursue your financial goals – no strings attached! Interested in learning more? Sign up and we’ll send monthly retirement guidance, financial planning tips and market updates straight to your inbox without ever sending spam! Unsubscribe at any time as we respect our clients’ privacy. Please read our Policy before getting started.