6 tax-saving strategies for smart investors

Comment by Jessica McBride, CFP®, CTFA Senior Financial Advisor

Everyone wants to pay less, right?

We are all investing in specific goals. What we want to achieve varies from one investor to another, but we can all probably agree that we want to earn more towards our goals – and less towards the IRS.

Not sure where to start? Consider these questions:

  • Which investment should I choose?
  • Where should I keep my investment?
  • When do I sell shares?
  • How can I make the most of my charitable giving?
  • Which order should I withdraw?

Here are my favorite strategies for reducing investment taxes.

1. Consider tax-efficient funds

When choosing an investment for your portfolio, there are several things to consider. When it comes to your non-retirement account, two important things to consider are return on investment and tax efficiency.

An important goal can be the highest post-tax return for your portfolio. Selecting investments with built-in tax efficiency, such as index funds-mutual funds and ETFs (exchange-traded funds) is a way to reduce lost returns to taxes.

ETFs can offer an additional tax benefit. The way the transaction is handled allows the ETF to avoid potential capital gains.

Because ETFs offer the best of both worlds – low cost and tax efficiency – I often use them as the basis of some client portfolios.

Note: Index mutual funds track a benchmark, so their goal is to match the performance of the benchmark. If you want to go beyond a benchmark, these investments may not be what you are looking for.

2. Weigh using the funds managed for tax savings

Some clients I work with may be looking for special tax-saving strategies. When I build a portfolio of those clients, I can choose funds that manage to add an extra level of tax efficiency.

If a client chooses to invest in an active fund, I can include a tax-managed stock fund in their portfolio. These funds use strategies designed to reduce the tax burden for investors compared to other stock funds.

For clients in higher tax brackets, we may consider investing in tax-free bond funds, which offer lower interest rates but maximize post-tax returns. **

When I work with my clients, I create strategies for tax-efficient asset positions in their custom financial plans, so that they are able to keep their returns high.

3. Share assets between accounts

Ready to start getting better control of your taxes?

Our advisors are here to help you.

Tax-efficient investment selection is a way to maximize tax returns, but you also want to choose the right type of account to hold your investments.

At the highest level, asset positioning is a way to reduce taxes by dividing your assets into taxable and non-taxable accounts. So you keep investments that are tax-exempt accounts where you can defer taxes, and you make tax-efficient investments in taxable accounts.

When I work with my clients, I create strategies for tax-efficient asset positions in their custom financial plans, so that they are able to keep their returns high.

Taking advantage of the position of tax-efficient assets

Asset Location is a way to reduce taxes by dividing your assets into different types of accounts. Here’s what it might look like:

Taxable accounts should have tax-efficient assets such as:

  • Index Mutual Fund
  • Index ETF
  • Tax-free bonds
  • Stock

Non-taxable accounts should have low tax-efficient assets such as:

  • Actively managed mutual funds
  • Taxable bonds

4. Look for opportunities to offset profits

As an investor, you are only taxed on your capital gains – the amount you have reduced the investment loss – so any
Available losses can help reduce your tax bill. Therefore, if you know that you are going to realize the benefits, it could be
The sense of looking for opportunities to realize losses to offset them.

For example, if you have a share of the fund or stock that has lost value since you bought it, you can
Consider selling them.

This deliberate sale of investments at low tax losses is known as tax-loss harvesting. ***

If you have a year when your capital gain is greater than your capital gain, you can use a net loss of up to $ 3,000.
Years of offsetting general income in your federal income taxes. You can “carry forward” losses in future tax years. E.g.
As with any tax-related matter, there are tax-loss harvesting rules and restrictions that you need to be aware of before using.
Methods A vanguard advisor can help you.

5. Optimize your withdrawal order

When you start taking money out of your portfolio, make sure your withdrawal strategies are included in the tax.

Once you start deducting from your unselected accounts, consider cashing all distributions from those accounts instead of reinvesting them, so that you don’t end up paying double taxes. One such strategy is to make sure my clients are keeping as much money in their pockets as possible.

How can I optimize my withdrawal?

Note: This chart is intended to provide general guidance. You should discuss your personal situation with your tax advisor.

6. Make the most of your donations

If philanthropy is part of your “purpose of money,” you can give in ways that can help reduce your taxes.

Consider these strategies to make the most of your payments:

  • Itemize cash donations at the time of your return to avail tax deductions up to a certain limit.
  • Gift-appreciated securities, such as mutual funds, ETFs, or individual stocks to reduce future capital gains. (Not all charities can accept investment grants, so I often recommend donating to my clients through donor-advised funds, which makes it easier.)
  • Donate up to $ 100,000 annually to a qualified charity directly from your IRA through a charitable distribution. (Unless certain rules are met, such as at least 70½ when you make a gift, and the check is not reported as payable, distributable income directly to the eligible donor.)

* It is possible that the funds will not meet their tax-efficiency objective.

** Although income from a fund’s municipal bonds is exempt from federal tax, you can pay tax on any capital gains earned through the trading of the fund or the redemption of your own shares. For some investors, a portion of the fund’s income may be subject to state and local taxes as well as federal alternative minimum taxes.

*** There are some risks to reaping the tax-loss harvest, which include, the new investment may cost more than the original investment and may introduce portfolio tracking errors in your account. There may also be unintended tax effects. We recommend that you carefully review the terms of consent and consult with a tax advisor before taking action.

Want to create a tax-smart strategy in your plan?

Working with Vanguard Personal Advisor Services gives you access at any time to advisers who are trusted – always working in your best interests. You will also find a custom financial plan with built-in strategies to reduce your tax burden.


All investments are at risk, including the potential loss of money you invest.

When withdrawing money from the IRA 597 years ago, you may have to pay general income tax and 10% federal penalty tax.

We recommend that you consult a tax or financial advisor about your personal situation.

Counseling services are provided by Vanguard Advisors, Inc., a registered investment advisor, or Vanguard National Trust Company, a federally chartered, limited purpose trust company.

The services provided by clients selected for ongoing consultation will vary depending on the amount of resources in the portfolio. Please review the Vanguard Personal Advisory Service brochure for important details about the service, including asset-based service levels and fee breakpoints.

Research our investment professionals with FINRA’s BrokerCheck.

Certified Financial Planner Board of Standards Inc. owns CFP® and Certified Financial Planner cert in the United States, which rewards individuals who successfully meet the CFP Board’s initial and ongoing certification requirements.

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