Invest Smarter, Not Harder.
Tax season is upon us, but with smart strategies, you can reduce your tax burden and keep more of your hard-earned money. Tax-smart investing involves strategically managing your investments to maximize tax efficiency, both in the short term and over the long run.
Here are some effective strategies to consider:
1. Maximize Contributions to Tax-Advantaged Accounts
Contributing to IRAs, 401(k)s, and HSAs can reduce your taxable income. Traditional IRAs and 401(k)s offer tax-deferred growth, while Roth accounts may provide tax-free withdrawals in retirement. HSAs offer a unique triple tax benefit: contributions are tax-deductible, growth is tax-free, and withdrawals for medical expenses are also tax-free.
| Account Type | 2024 Contribution Limit | 2024 Contribution Deadline |
|---|---|---|
| IRA | $7,000 ($8,000 if age 50+) | April 15, 2025 |
| Roth IRA | $7,000 ($8,000 if age 50+) | April 15, 2025 |
| 401(k) | $23,000 ($30,500 if age 50+) | December 31, 2024 |
| HSA* | $4,150 Individual, $8,300 Family ($1,000 catch-up if age 55+) | April 15, 2025 |
* Must be enrolled in a High-Deductible Health Plan. Source: Internal Revenue Service.
2. Utilize Tax-Loss Harvesting
If you’ve experienced losses in your taxable investment accounts, you can sell those investments to offset gains and potentially reduce your taxable income. Even if you don’t have gains to offset, up to $3,000 in losses can be used to reduce ordinary income each year.
3. Use Annuities for Tax Benefits
Annuities offer tax-deferred growth, allowing your money to compound without immediate tax consequences. Unlike taxable accounts, where interest, dividends, and realized capital gains are taxed annually, annuities are not taxed until withdrawal. Annuities can be funded with either qualified (pre-tax dollars) or non-qualified money (after-tax dollars).
4. Consider Asset Location Strategies
Asset location involves strategically placing investments in different account types to optimize tax efficiency. Investments such as bonds, REITs, high-dividend stocks, and private credit generate income that is taxed at higher ordinary income tax rates. These investments might be best held in tax-advantaged accounts like IRAs or 401(k)s.
By contrast, Exchange-Traded Funds (ETFs) are typically a smart choice for taxable accounts because they generate few taxable distributions. Unlike mutual funds, which must sell securities to meet investor redemptions, ETFs trade on exchanges, allowing investors to buy and sell shares without forcing the fund manager to liquidate underlying assets. For those seeking long-term growth with tax efficiency, ETFs offer a compelling advantage by deferring taxes until shares are sold, potentially resulting in lower tax liabilities and enhanced after-tax returns.
5. Evaluate Municipal Bonds
Municipal bonds offer a unique tax advantage as the interest income they generate may be exempt from federal income taxes and, in some cases, state and local taxes as well. This makes municipal bonds particularly attractive for high-net-worth investors or those in higher tax brackets.
6. Donate to Charity
Donating appreciated securities to a qualified charity can help you avoid capital gains taxes and earn a charitable deduction for tax purposes. Best of all, you get to support a cause you care about!
7. Review Your Sources of Retirement Income
If you are in or approaching retirement, strategically planning withdrawals from taxable, tax-deferred, and tax-free accounts can help manage your tax liability and maximize portfolio longevity. Trajan Wealth can help you develop a withdrawal strategy that aligns with your financial goals, time horizon, and tax considerations.
Key Takeaway: It’s Not Just About This Year
Tax-smart investing is not just about minimizing this year’s tax bill—it’s about creating a long-term strategy that supports your overall financial goals. By making informed decisions now, you set yourself up for a more prosperous and tax-efficient future.
References:
Retirement Topics – IRA Contribution Limits. https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000
IRS Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans https://www.irs.gov/publications/p969
IRS Federal Income Tax Rates and Brackets. https://www.irs.gov/filing/federal-income-tax-rates-and-brackets
IRS Topic no. 409, Capital gains and losses. https://www.irs.gov/taxtopics/tc409
