5 Tax Strategies That Could Help You Keep More of Your Wealth

1. Choose Appropriate Investment Vehicles

One of the foundational principles of a tax-efficient strategy is strategically allocating your assets to different types of accounts.

• Tax-deferred accounts, like Traditional IRAs and 401(k)s, allow you to postpone paying taxes on contributions and investment gains until withdrawal.
• Taxable accounts are subject to annual taxes on interest, dividends, and realized capital gains, but they may offer more flexibility and potential for tax-efficient growth.
• Tax-free accounts, such as Roth IRAs and Roth 401(k)s, are funded with after-tax dollars, and both the growth and withdrawals are tax-free, provided certain conditions are met.

For more complex portfolios, alternative investments like private equity or hedge funds may offer unique tax benefits, but often come with their own tax complexities.

2. Utilize Tax-Efficient Assets

Some investments are inherently more tax-efficient than others, and incorporating them into your portfolio can help reduce your tax burden. Here are a few examples.

• Municipal bonds generate tax-exempt income, especially beneficial for those in higher tax brackets, and are often exempt from federal, state, and local taxes.
• Exchange-Traded Funds (ETFs) typically don’t trigger taxes until you sell the shares, giving you more control over when you pay taxes on your investment gains.
• Tax-efficient mutual funds are designed to minimize taxable distributions, and can be an excellent option for investors concerned about tax liabilities but who want the benefits of professional management.

3. Strategically Manage Capital Gains

Timing is crucial when it comes to managing capital gains. By holding investments for over a year, you can benefit from lower long-term capital gains tax rates. Additionally, consider realizing gains in lower-income years to potentially benefit from lower tax brackets.

4. Plan Distributions Carefully

Dividends and interest income can significantly impact your tax situation. Consider minimizing exposure to high-dividend stocks or interest-heavy investments to reduce taxable income. Focusing on qualified dividend strategies can provide more favorable tax treatment. For complex investments like real estate or business interests, consider tax-deferred vehicles or structuring income across multiple years to mitigate tax exposure.

5. Leverage Tax-Loss Harvesting

Tax-loss harvesting—selling underperforming investments to realize losses—can help you offset up to $3,000 of taxable income per year. After selling an underperforming investment, you can reinvest the proceeds in a similar asset. However, be mindful of the IRS’s wash sale rule, which prohibits repurchasing the same or a substantially identical asset within 30 days of the sale.

Work With a Financial Professional

While these strategies can be powerful tools, tax laws are complex and ever-changing. A financial professional can help you navigate these complexities and develop a tailored, tax-efficient strategy.

Let’s work together to build a tax-intelligent investment strategy that aligns with your unique needs and goals. Contact the office today.