Sorting through dozens of articles on tax-efficient investing can become confusing, complicated, and downright frustrating. We’ve assembled this list of strategies to provide a broad overview and kickstart your research process without the hassle.
If you want to learn more about any of these topics, we’ve linked helpful resources in every section to guide you on your journey.
Leverage Tax-Loss Harvesting to Your Advantage
Stormy markets can be dangerous to everyone who sails them, but tax-smart investors are always prepared to take advantage of a down year. As one of the primary tax strategies during volatility, tax-loss harvesting entails selling your assets that have lost value to offset gains elsewhere in your portfolio.
This strategy may appear straightforward, but there are many implications to note:
- Sell according to your strategy: Often, the best candidates for tax-loss harvesting are poor performers that don’t match your current investment needs. After selling, you can use the proceeds to replace those investments with new ones that conform to your long-term plan.
Keep transaction costs in mind: Selling your assets can trigger transaction costs. If these costs eclipse the resulting tax advantage, offsetting your gains with the sale could do more harm than good.
- Watch out for the “wash-sale rule”: Reporting losses isn’t allowed if you sell at a loss and then rebuy the same or a “substantially identical” asset within 30 days. The IRS enacted this rule to stop investors from arbitrarily selling and rebuying to lower their taxes.
- Harvesting without capital gains: Even if you don’t have any capital gains to counterbalance, you can still benefit from tax-loss harvesting. The IRS allows you to offset your income tax by taking up to $3,000 in capital losses, providing you with a ray of sunshine no matter how dark the clouds are.
Opportunities exist in every market if you have a plan. Sometimes, that opportunity involves selling off your losses. Check out this informative tax-loss harvesting article to go more in-depth on these points and learn about additional insights.
Invest in Tax-Diversified Accounts
When considering the long-term tax implications of retirement, the significance of tax diversification cannot be overstated. No matter the size of your portfolio, the right amount of advanced planning can make a meaningful difference in your retirement.
Tax diversification means intentionally distributing your assets between investment accounts that are taxed differently. The goal is to create lifetime tax efficiency by reducing the total amount of taxes you pay over time. We sort these accounts into three primary categories:
- In tax-deferred investment accounts, contributions aren’t taxed, but you pay regular income tax on distributions.
- Tax-advantaged investment accounts require ordinary income tax to be paid on contributions, but earnings grow tax-free as long as specific requirements are met.
- Taxable investment accounts, in which earnings and realized gains are taxed at the end of the year.
Most retirement investing typically results in “tax concentration,” particularly in tax-deferred investment accounts that are painless to contribute to. With the help of thoughtful planning and tools such as Roth conversions, you can divide your assets and contributions between these accounts in a way that makes sense for your unique situation. Having the foresight to diversify your portfolios in terms of asset type and tax burden may seem less beneficial in the short term, but can help create more flexibility as you plan for retirement.
To learn more, read our article on how to be tax savvy in retirement, including an illustrative example of how a near-retiree adjusted to a tax-smart strategy by developing a Roth conversion roadmap. If you have questions on Roth conversions in general, check out this article on FAQs.
Reduce Investment Taxes with Smart Asset Location
Beyond the choice of account, working with your advisor to put the right assets in the right retirement accounts is a tax-smart tactic that can compound your benefits. The following list displays assets that harmonize with the three primary account types we explained above:
Tax-deferred accounts may be well suited for investments that regularly generate income, such as mutual funds that provide regular capital gains distributions or actively managed stock funds. The primary benefit is that any distributions or dividends won’t be immediately taxed, so your gains can compound.
Investments with higher growth potential, such as growth stock funds, work best with tax-advantaged accounts. This way, you can pay taxes at the outset, then watch your investments grow without the threat of future taxation.
- Low-tax investments like municipal bonds and tax-efficient mutual funds go well in a taxable account, so you can access them when necessary.
Philanthropy and Estate Planning
Sometimes, having less is more, even when it comes to money. Maximizing your charitable giving each year is a legitimate strategy to help manage your tax liability while doing good for others. Creating a comprehensive estate plan can help you solidify your future goals and start thinking about leaving a legacy. There are many paths you can take to achieve this end:
If you’re age 70½ or older, you can use qualified charitable distributions (QCDs) to reduce your taxable income. Individuals with IRAs generally must begin taking required minimum distributions (RMDs) at age 73 or 75, depending on birth year. This can potentially push retirees into higher tax brackets, which is unfavorable if they don’t want or need the money. Using QCDs, you can transfer IRA funds directly to a qualified charity, and the amount may count toward your RMD. For 2026, the annual QCD limit is $111,000 per eligible individual. This can help reduce taxable income and may lower future Medicare premiums.
Donor-advised funds (DAFs) are like charitable investment accounts designed to support your favorite charities. You can contribute to the fund and take the tax deduction when it’s most beneficial while spreading your gift over time, allowing the assets to grow in the interim. It’s important to understand that the “A” in DAF stands for “advised,” which implies that you don’t have absolute control over where your money goes. So before funding a DAF, make sure your favorite charities are eligible and find a DAF you trust to carry out your interests.
In 2026, you can also use the annual gift tax exclusion to give up to $19,000 per recipient without generally triggering gift tax or using your lifetime gift and estate tax exemption. Gifts above the annual exclusion may apply against the lifetime exemption, which is $15 million per individual in 2026.
- Charitable remainder trusts (CRTs) are tools investors can use to provide for themselves or their beneficiaries and charitable organizations. Donors can load these trusts with assets, then take payments from the trust as an income stream. After the trust expires at a specified time or when the donor dies, the remainder is donated to charity. There are different types of CRTs, and the planning implications can get complicated. Be sure to do your research and talk to your financial advisor before making a final decision.
Tax Regulations and Penalties
No matter how many tax-smart strategies and tactics you employ, knowing the regulations and possible penalties will help you keep as much of your money as possible.
Short-term capital gains rate: If you buy and sell an investment within a year for a gain, called a “short-term” gain, you will see an increased tax obligation compared with holding the investment for longer than a year. Of course, keeping subpar assets for a prolonged period just to avoid taxes may not be the best plan, especially if you’ve identified replacements better suited for your long-term strategy. However, when possible, it’s a good idea to take this nuance into account to avoid the extra tax.
The Net Investment Income Tax (NIIT) is another tax regulation. This policy, enacted in 2010, states that certain individuals, estates, and trusts with net investment income or modified adjusted gross income over certain thresholds may owe an additional 3.8% surtax. You can find examples of NIIT calculations and planning strategies in our article on the Net Investment Income Tax.
Implementing Tax-Smart Strategies
The key to successfully implementing your tax-smart investment strategy is understanding the reason behind the actions you take. Preparing your plan as thoroughly as possible is paramount, especially with many costly mistakes and pitfalls to avoid. Working with a financial advisor can help, and our Roundtable™ approach means you’ll get professional advice for whatever life may bring.
Traditional IRA account owners have several considerations to review before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This article was originally published in 12/2025 and has been updated.
2026-13652
Related insights
