10 Tax-Smart Strategies for Savvy Investors

10 Tax-Smart Strategies for Savvy Investors

My Financial Advisor Jeff Bloomquist with Ameriprise Financial sent me an article about tax savings and since we are comeing to the end of the year I thought I would share it with you.

When it comes to your investments, taxes may be inevitable, but they can certainly be managed. Making smart tax decisions today can help you keep more of your money — both now and in the future. Here are 10 essential tax-efficient strategies to help you protect and maximize your investment returns:

1. Maximize Tax-Advantaged Accounts

Utilize tax-advantaged accounts, such as 401(k)s, IRAs, 529 plans, and Health Savings Accounts (HSAs). These accounts allow you to defer or even eliminate taxes on your contributions and earnings. Max out your contributions to take full advantage of their tax benefits.

Pro tip: If you expect to be in a higher tax bracket in retirement, consider contributing to Roth IRAs or Roth 401(k)s. You won’t pay taxes on withdrawals, and they’re exempt from required minimum distributions (RMDs).

2. Manage Your Tax Bracket

Strategic contributions to accounts like 401(k)s can help reduce your taxable income. If you’re close to a higher tax bracket, adjusting contributions can keep you in a lower bracket. You can also strategically withdraw funds from retirement accounts when you expect to be in a lower bracket.

3. Diversify Your Tax Exposure

Diversify your investments across taxable, tax-deferred, and tax-free accounts. This mix provides more control over your income streams and allows for flexibility when managing taxes in retirement.

4. Use Tax-Loss Harvesting

Tax-loss harvesting involves selling investments that have decreased in value to offset gains in other parts of your portfolio. This helps reduce your tax liability, and you can carry forward any unused losses to future years.

5. Take Advantage of Tax-Gain Harvesting

In contrast to tax-loss harvesting, tax-gain harvesting involves selling appreciated assets to capitalize on lower tax rates or to offset losses. This strategy can also help you rebalance your portfolio without triggering significant tax penalties.

6. Consider Roth Conversions

A Roth conversion allows you to move pre-tax retirement savings into a Roth IRA or Roth 401(k), where your money can grow tax-free. You’ll pay taxes on the converted amount now, but future withdrawals won’t be taxed.

7. Leverage Net Unrealized Appreciation (NUA)

For investors holding company stock in their 401(k) plan, the NUA rule can reduce taxes on the stock’s gains. By shifting the stock to a taxable account, the gains are taxed at the capital gains rate rather than the higher ordinary income tax rate.

8. Make Qualified Charitable Distributions (QCDs)

If you’re over 70½, you can make tax-free donations from your IRA directly to a charity. These QCDs count toward your RMDs, reducing your taxable income and keeping your overall tax burden lower.

9. Plan for Estate Taxes

Careful estate planning helps minimize the tax impact on your beneficiaries. Consider trusts, beneficiary management, and gifting strategies to ensure assets are passed along efficiently. Life insurance can also be a valuable tool for providing tax-free benefits to heirs.

10. Use 83(b) Elections for Stock Options

If you receive stock options as part of a compensation package, an 83(b) election lets you pay taxes on the stock’s value when granted, shifting its tax treatment to capital gains. This can result in lower taxes if the stock’s value rises, but it carries risks if the stock underperforms.

Make Tax-Efficient Investing Part of Your Strategy

By incorporating these tax-smart strategies into your investment plan, you can protect more of your returns. Speak with a tax professional to determine which strategies are best suited for your financial goals