Key Tactics for Maximizing Tax Efficiency in Your Investment Portfolio
What is tax efficiency?
Tax efficiency refers to the ability to minimize the tax impact on investment returns. It involves strategies aimed at reducing taxable income, deferring taxes, and optimizing the timing of capital gains and losses.
Asset location strategy
- Bonds and high-dividend stocks in tax-deferred accounts;
- Growth stocks and equity index funds in taxable brokerage accounts.
Tax-loss harvesting
- Sell investments at a loss to offset capital gains;
- Avoid purchasing substantially identical securities within 30 days to comply with the wash-sale rule.
What is a tax-efficient asset?
Choosing tax-efficient investments can also help minimize tax liabilities. Tax-efficient investments generate minimal taxable income, such as low turnover index funds or ETFs that focus on capital appreciation.
Retirement account contributions
Contributing to retirement accounts like Traditional IRAs or 401(k)s can provide immediate tax benefits by reducing taxable income. Roth accounts offer tax diversification and flexibility in retirement planning.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.