How to Create a Tax-Efficient Investment Strategy

When it comes to building wealth, taxes play a critical role in determining how much of your investment returns you get to keep. A tax-efficient investment strategy helps you minimize tax liability while maximizing growth, ensuring that more of your money works for you.

1. Utilize Tax-Advantaged Accounts
Take full advantage of accounts that offer tax benefits:

• 401(k) and IRA Accounts: Contributions to traditional 401(k)s and IRAs are tax-deductible, reducing your taxable income now, while Roth accounts allow for tax-free growth and withdrawals in retirement.
• Health Savings Accounts (HSAs): If you’re eligible, an HSA provides triple tax advantages: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.
• 529 Plans: If you’re saving for education expenses, 529 plans allow for tax-free growth and withdrawals for qualified costs.

By maximizing contributions to these accounts, you can reduce your taxable income while growing your investments.

2. Strategic Asset Allocation
Different types of investments are taxed differently, so where you place your assets matters.

• Tax-Deferred Accounts: Hold income-generating assets like bonds, REITs, and actively managed mutual funds here, as they may produce regular taxable distributions.
• Taxable Accounts: Use these accounts for tax-efficient investments, such as index funds, ETFs, or stocks you plan to hold for the long term to benefit from lower capital gains tax rates.

3. Tax-Loss Harvesting
Tax-loss harvesting involves selling investments at a loss to offset gains elsewhere in your portfolio. For example, if you sell a winning stock, you can sell an underperforming asset to reduce the tax impact of the gain. Any excess losses can even offset up to $3,000 of ordinary income per year and carry over to future tax years.

4. Mind Your Holding Periods
Long-term capital gains (for assets held more than a year) are taxed at lower rates than short-term gains. Aim to hold investments for at least a year when possible to minimize tax liability.

5. Revisit Your Strategy Regularly
Tax laws and your financial situation can change, so it’s important to review your strategy annually.

Start Building a Tax-Efficient Portfolio Today

A well-thought-out tax strategy can help you grow your investments while keeping Uncle Sam’s share to a minimum. For personalized guidance on creating a tax-efficient investment plan, contact our office to schedule a consultation. Let’s make sure your money works harder for you.