Tax-efficient investing refers to the careful strategies and techniques investors can use to minimize their tax liability on the investments they make. If you’re familiar with tax-free accounts such as Roth IRAs and HSAs, and tax-deferred accounts such as 401(k)s and IRAs, you’re already aware of some of the best tools investors can use to optimize their portfolio.

But tax-efficient investing isn’t limited to a particular set of accounts or asset types. It’s an investment strategy that includes optimizing the way your investments are distributed across different kinds of accounts, and how you manage those investments to take advantage of favorable tax treatment.

Speaking of taxes, big changes are coming in 2023. Are you ready?

How tax efficient investing works

The best tax efficiency is obtained by placing your assets in the right types of accounts with the right tax treatment, and making proactive adjustments as the market— or your income— fluctuates. It requires close monitoring of numerous factors to make sure you’re always optimizing your after-tax return.

Here’s an example of how this advanced investment strategy works:

Say you have a $100,000 portfolio, including brokerage money and retirement funds, and you want to maximize your after-tax return. Who wouldn’t! If you purchase investments such as bond funds or actively managed mutual funds that pay large year-end distributions in your brokerage account, you’ll be required to pay taxes on any capital gains, dividends, and interest income you receive. This is referred to as “tax drag” on your portfolio, because increased taxes can drag down your after-tax return.

Instead, your Cook Wealth advisor may recommend you purchase tax efficient funds such as ETFs, index funds, or municipal bonds in your brokerage account, leaving less tax efficient funds for your IRA or 401(k). Since your IRA or 401(k) allows you to defer taxes until you withdraw the funds, there’s no tax impact from purchasing less tax efficient funds in these accounts.

By purchasing the right investments in the right types of accounts, you have the potential to reduce your tax liability, maximize your after-tax return, and benefit from diversification.

This is a very simple example of how your Cook Wealth tax advisor can help you improve your tax efficiency. You can see how a little planning up front can have a significant impact on April’s tax bill!

Tax-efficient investing has compounding benefits

Tax-efficient investing isn’t just good for this year’s tax burden. It’s a benefit that increases with each season. By reducing your capital gains taxes, federal income taxes, and other taxable income this year, you have more to invest in your portfolio next year. And as your savings account grows, so does your wealth.

In the meantime, some of your investments in your Roth IRA can grow tax-free. And the longer you follow these tax-efficient strategies, the more of a benefit you’ll receive.

The most tax-efficient investing strategies require complicated calculations

Unfortunately, it can be hard to find a tax advisor willing to put in the effort it takes to create a tax-efficient investing strategy— and continuously track your assets. The financial industry is already developing advanced analytics and detailed procedures that can help tax advisors offer this service more easily. But adoption among both tax and financial advisors is slow.

At Cook Wealth, we see the enormous benefit of leveraging tax-advantaged accounts, tax-deferred accounts, tax loss harvesting, and other tax-efficient strategies to maximize every dollar you invest. That’s why we prioritize this service for every client we partner with— from our new investors to our most complicated portfolios.

When you’re ready for an investment strategy that considers both ROI and tax efficiency, Cook Wealth can help 

Our joint team of tax and financial advisors help investors make the most of every dollar— and keep more dollars along the way! Our collaborative team ensures you get the strongest investment advice with the best tax benefits, because we believe sound strategies should take both sides into consideration. 

Learn what we can do for you when you book an intro call with our team.