10 tax strategies for savvy investors

Leverage these 10 tax-smart strategies to potentially keep more of your investment returns.

Taxes might not be avoidable, but they can be managed, especially when it comes to your investments. Making tax-smart decisions now is critical to helping you keep more of your money — today and in the future.

In collaboration with your tax professional, we can help identify tax-smart strategies that make sense for your investment portfolio and your overall financial goals.

To get started, here are 10 tax-efficient strategies investors should know:

1. Maximizing tax-advantaged accounts

A foundational approach to long-term financial planning, maximizing your use of tax-advantaged accounts can help you reduce the taxes you pay over the long run. If possible, make sure you’re utilizing and contributing up to the IRS limits on these accounts to take advantage of all the tax benefits available to you. Tax-advantaged accounts include:

401(k) plans^1,2
IRAs^1,2
529 plans³
Health savings accounts (HSAs)
Flexible spending accounts (FSAs)

Advice spotlight

If you’re early in your career or expect your tax bracket to be higher in retirement, a Roth IRA or Roth 401(k) can be particularly advantageous. Contributions are made with after-tax money, but you won’t have to pay taxes on earnings or withdrawals in retirement. Roth IRAs and Roth 401(k)s are also not subject to required minimum distributions (RMDs).

2. Tax bracket management

Being aware of your tax bracket can help you with various aspects of your finances, but it’s especially helpful if you are on the threshold of a higher or lower tax bracket. For example, increasing your contributions to a 401(k) plan can help reduce your current taxable income. If you know you’ll be in a lower tax bracket one year, for example, it may make sense to take advantage of a Roth IRA or Roth conversion or harvest investments gains. For those over age 59 ½ who aren’t yet required to take RMDs, taking withdrawals from pre-tax retirement accounts can help lower future RMDs and save Roth assets for years when they might be in a higher bracket.

Learn more: Proactive tax planning: 7 steps

3. Tax diversification

Tax diversification builds on the idea of investing across various types of tax-advantaged and non-tax-advantaged accounts available to you. It’s a strategy that accounts for the different tax treatment of all your different assets, potentially providing you more flexibility and control over your income — now and in retirement. To employ this strategy, you will allocate assets across accounts falling into one of three categories: taxable, tax-deferred and tax-free. The goal is to diversify your investments based on tax treatment so that you have more options for managing your income and help minimize the amount of taxes owed on your retirement assets.

Learn more: Tax diversification

4. Tax-loss harvesting

Tax-loss harvesting uses investment losses to reduce the amount you would otherwise owe in capital gains. With this strategy, you sell an investment — usually a stock, mutual fund or exchange-traded fund — at a loss to offset capital gains in other investments. By using this strategy, you can deduct up to a certain amount of losses from your total annual income and carry forward any additional losses into the following tax years. Given the complexity of tax-loss harvesting, consider consulting a tax professional if you think this strategy may make sense for you.

Learn more: Tax-loss harvesting

5. Tax-gain harvesting

The opposite of tax-loss harvesting, tax-gain harvesting involves selling assets that have increased in value, typically to take advantage of lower tax bracket, offset investment losses or to reduce the risk of being too concentrated in an asset class. When done properly, tax-gain harvesting can help reduce your future taxes and lower your portfolio’s risk.

Learn more: Tax-gain harvesting, explained

6. Roth conversions

A Roth conversion offers you a way to move assets from a qualifying account or employer-sponsored retirement plan and roll them into a Roth IRA or Roth 401(k), which provides tax-free growth and tax-free withdrawals in retirement. By doing so, you are essentially converting pre-tax assets into ordinary income. The downside is that a Roth conversion can result in an income tax bill for the tax year you do the conversion. In effect, you pay a one-time tax now, so you don’t have to pay taxes later.

Learn more: Roth IRA strategies for high-income earners

7. Net unrealized appreciation

The net unrealized appreciation (NUA) rules allow people who hold highly appreciated employer securities in their 401(k) or employee stock ownership plan (ESOP) to potentially pay lower taxes on those assets. With this tax strategy, you convert some of the assets so that they’re taxed as long-term capital gains instead of ordinary income. However, there is a downside with this strategy: You’ll have to pay ordinary income tax on the cost basis of the employer stock immediately. The NUA rules can be complicated, so consult your plan administrator and your tax professional to see if you qualify and it makes sense for you.

Learn more: Net unrealized appreciation

8. Qualified charitable distributions

Qualified charitable distributions (QCDs) allow clients over the age of 70½ to make tax-free donations of up to $100,000 annually directly from a traditional IRA to a qualified nonprofit. The distribution counts as your RMD for the year while not being added to your adjusted gross income, potentially keeping you below the threshold for surcharges on Medicare premiums. QCDs may also help limit the percentage of your Social Security benefits subject to taxes.

9. Estate tax management

Taxes can make a large impact on what your beneficiaries receive, but there are a variety of ways to help reduce taxes and make sure you pass along assets as efficiently as possible, including the strategic use of personal trusts, beneficiary management and charitable giving and gifting. Another option is a capital transfer strategy, which allows the repositioning of certain taxable accounts — such as CDs and brokerage accounts — for a cash-value life insurance policy, which can provide tax-deferred growth and a guaranteed death benefit for your heirs.

Learn more: Advanced estate planning: Strategies to help reduce the taxable value of your estate

10. 83(b) elections

If you receive stock options or equity in a company as part of a compensation package, you can choose to be taxed on those assets at the time of the grant instead of when you become vested by filing what’s called an 83(b) election with the IRS. By accelerating your taxation, you shift the equity’s tax treatment from ordinary income taxes to capital gains taxes and potentially save money on taxes — especially if the asset’s value at the time it’s granted is nominal and it appreciates in value over time. However, if you file an 83(b) election, but don’t stay with the company long enough to vest or the value of your shares goes down, you could overpay in taxes. Work with a tax professional to determine if this makes sense for you.