Maximize Wealth, Minimize Taxes: Your Ultimate Guide to Tax-Efficient Investing

By: Sara Kate Garman, CPA

As tax time rolls around this year, you may yet again find yourself frustrated with the complexities of taxes seemingly diminishing your hard-earned wealth.

If you share in that frustration this tax season, I’d like to offer some tips into the world of tax-efficient investing that may hold the key to growing your wealth while minimizing the impact of taxes.

Three Investment Strategy Tips To Minimize Your Taxes

As you navigate tax season, here are three tips for turning your frustration into a more tax-friendly financial journey.

1. Incorporate Tax-Efficient Investments Like Municipal Bonds, EFTs, & Tax-Managed Mutual Funds.

Ever wondered about investments that could ease your tax burdens? They exist! Municipal bonds, exchange-traded funds (ETFs), and tax-managed mutual funds are reliable tax-efficient allies.

  • Municipal bonds enjoy exemptions from federal and possibly state taxation.
  • ETFs, quietly efficient, tend to trigger fewer capital gains.
  • Tax-managed mutual funds actively navigate taxes through investor-friendly strategies.

Incorporating these options into your portfolio could be a game-changer for a more tax-friendly financial journey.

2. Utilize “Asset Location” & Place Your Money Where It Works Best For You.

Have you ever heard of the saying, ‘put the right tool in the right place?’ Surprisingly enough, that can apply to your financial investments, too, and it’s known as “asset location.” Some assets generate more taxable income than others, so it can be helpful to match those assets in more tax-efficient accounts.

For example, municipal bonds may be appropriate in a taxable account; meanwhile, a mutual fund may be better suited in a Traditional IRA, a tax-advantaged account.

Overall, it’s about finding the right tool for your investments so that your money is placed where it works best for you.

3. Minimize Your Taxes By Closely Managing Your Capital Gains.

Hold Your Investments For Over A Year To Enjoy A Preferential Capital Gains Tax Rate.

When investing, remember the phrase often used by advisors: ‘It’s time in the market, not timing the market, that matters.’ Holding onto investments for more than a year helps you weather market volatility and grants you a tax advantage.

Here’s the trick: if you hold an investment for over a year, you enjoy a preferential ‘capital gains’ tax rate lower than your regular income tax rate. So, consider holding onto your investments for the long term for maximum gains and minimum taxes.

Harvest Losses To Rebalance Your Portfolio & Improve Your Tax Situation.

While intentionally creating losses may sound counterproductive, there are tax advantages to consider. In 2024, you can deduct up to $3,000 per year for losses that exceed your capital gains. This deduction can benefit your tax situation.

Moreover, advisors might recommend harvesting losses in years with significant capital gains to offset these gains. This helps manage taxes and allows for portfolio rebalancing, enabling you to invest in assets better aligned with your long-term goals and potentially better-performing investments.

financial planner sitting down at a table with a client discussing annual goals and taxes

Hess Is Here To Help With Investment Strategies That Minimize The Impact Of Taxes.

Tax-efficient investing is a great tool, but be wary—there is not a “one size fits all” approach. If you have questions about incorporating this strategy into your investment plan, don’t hesitate to reach out to any member of our team. We would be happy to discuss your taxes with you. Here’s to a smoother tax preparation season!