Building Wealth and Saving Taxes – Top Investment Options for Tax Efficiency

The reality is that taxes gobble up a huge chunk of your investment returns; shaving off a little bit off what Uncle Sam takes can allow you to reach the finish line.

Tax efficiency means minimising your tax obligation by investing in the right accounts and making transactions in the right order. It also means maximising your contributions to your retirement accounts.

1.Tax-Free Investments

Regardless of which investment strategy you use, or even the simple decision of how much to invest, taxes remain unavoidable. Fortunately, the liability from federal income taxes can usually be reduced through thorough planning.

Investors devote tons of time and effort pouring over stocks, bonds, mutual funds and ETFs with the prospect of good returns. Yet few of them give serious thought to the question of taxes.

That may be in the form of maxing out annual contributions to 401(k) and individual retirement plans, also known as IRAs, or utilising tax-deferred 529 accounts to offset the rising costs of education tuition. To be clear, there are myriad ways investors can store money: the point is to do so in a manner that remains sheltered from the emerald eyes of Uncle Sam. There’s a good chance that you’re already aware of many of these strategies and have then incorporated them within your overarching wealth-accrual and savings plan. But there’s more to bestowing tax-sheltered benefits on yourself than meets the eye. Again, this is where it helps to seek the advice and counsel of an expert. Consider the various entities, such as municipal bonds, life insurance policies and exchange-traded funds (ETFs) that can contribute to a comprehensive wealth-building and savings plan aimed at decreasing your tax burden.

2.Exchange-Traded Funds (ETFs)

(ETFs, that is, baskets of stocks or bonds chosen together because they all fit some investment objective, are one of the most popular products ever designed for individual investors.) You buy and sell ETFs as if they were shares in a company. Each ETF has its own ticker symbol. With each ticker, brokers’ websites display live, intraday prices throughout the trading day.

ETFs trade throughout the day, unlike mutual funds, which trade only once, at the end of the day. They also generally have lower expense ratios than do traditional mutual funds.

Some are more tax-efficient than mutual funds, particularly those that track indexes or that passively follow a market benchmark; they typically sell securities in-kind for buying and selling ETF shares, which leads to less capital gains for investors. Some ETFs track municipals. If you are interested in municipals (local bonds), these can offer similar tax breaks as an investment. As you inquire about tax breaks with your ETF pick, remember state and local taxes.

3.Tax-Advantaged Accounts

Tax-advantaged accounts all play a role in many investors’ strategy for accumulating wealth. Tax-advantaged accounts help you save current-year taxes (called investing with a pre-tax benefit) either by reducing your current-year taxable income or deferring taxes until you gain access to your money in retirement (for example, a traditional IRA), or both (in the case of both a 401(k) plan and an health savings account or HSA), postponing income taxation until withdrawal.

The specifics of the type of account will depend on your particular circumstances, and you should consult your financial advisor to determine which is superior. For example, if you plan to sell company stock from your employer-sponsored account as part of a tax-loss harvesting strategy, using the taxable account should work well, as it’ll help to offset any capital gains you incur. It’s also possible that you have bond allocations in both taxable and tax-advantaged accounts. In this case, rebalance your assets to move investments that generate taxable distributions from your taxable accounts to your tax-advantaged accounts, where they provide the most benefit on an after-tax basis. This will maximise your after-tax return.


It is necessary to have debt for many things in your life such as buying a car and buying a home. However it is important to know how debt affects your finances and know the difference between good debt and bad debt.

Good debt’, for example, might be a mortgage – it’s money you pay, over time, which grows your home equity and your net worth; it’s an ‘investment’ in your stability. ‘Bad debt’, conversely, tends to be an unsecured consumer loan that you don’t pay off right away – leaving you with credit problems that feel more like a weight around your neck.

Making tax-efficient investments can reduce your tax bill over the long run, enabling your assets to grow more quickly, so that is an area where a financial professional might be able to help. SmartAsset’s free tool matches you with financial advisors in your area who serve investors like you. SmartAdvisor matches you with up to three vetted advisors that meet your needs. Just click on the “I want advice” button below to complete our matching questionnaire.

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