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This Investing Strategy Could Boost Your Portfolio Returns in 2026 and Beyond

How tax-efficient investing helps investors keep more of their returns working over time.

By Jordan Major

Edited by Laura Hohenstein

Updated Feb. 3, 2026

When people think about improving investment returns, they usually focus on picking better stocks or timing the market. But one of the most reliable ways to grow a portfolio has nothing to do with beating the market at all.

It's called tax-efficient investing, and for long-term investors, it can quietly add thousands, or even hundreds of thousands of dollars to your portfolio value over time. If you're invested for the long haul, it's one of the smart money moves you can make.

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What is tax-efficient investing?

The practice of structuring your investments in a way that legally reduces the amount of taxes you pay on dividends, interest, and capital gains is called tax-efficient investing. The goal isn't to avoid taxes entirely, but to keep more of your returns working for you instead of going to the IRS.

Taxes act as a drag on performance. Every dollar paid in taxes is a dollar that can't be reinvested or compounded. Over long time horizons, that drag adds up, especially in higher tax brackets or actively managed portfolios.

Tax efficiency focuses on when and how taxes are triggered, not just how much your investments earn on paper.

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How tax-efficient investing works

At its core, tax efficiency is about control. Investors can't control market returns, but they often have control over when gains are realized and where income-producing assets are held.

For example, selling an investment after holding it for more than a year typically results in lower long-term capital gains tax rates than selling within a year. Similarly, placing high-income or frequently traded investments inside tax-advantaged accounts can reduce the annual tax bill.

Another key element is turnover. Portfolios that trade frequently tend to generate more taxable events. Lower-turnover strategies often keep more gains compounding uninterrupted.

Over time, these small decisions compound into meaningful differences in after-tax returns.

Tax efficiency can translate into higher returns

Two portfolios can earn the same pre-tax return and end up with very different outcomes. The difference is what's left after taxes.

Consider an investor earning 7% annually. If taxes reduce that return by even 1% per year, the long-term impact is significant. Over 25 or 30 years, that gap can translate into tens of thousands of dollars, without changing the underlying investments at all.

Tax-efficient investing doesn't increase risk or rely on predicting the market. It simply improves the net result, which is what actually matters.

Tax-friendly investment accounts to know

One of the easiest ways to invest more tax-efficiently is by using the right types of accounts. Different accounts receive different tax treatment, and understanding how they work can help investors decide where to place their money.

Tax-deferred retirement accounts, such as traditional workplace retirement plans, allow investments to grow without being taxed each year. Taxes are paid later, usually in retirement, when income and tax rates may be lower. These accounts are particularly useful for assets that generate regular income.

Tax-free accounts, like Roth IRAs and Roth 401(k)s, offer the opposite trade-off. Contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. Over long periods, this structure can be especially powerful for high-growth investments.

Taxable brokerage accounts don't offer upfront tax advantages, but they provide flexibility. Investors can take advantage of long-term capital gains rates, tax-loss harvesting, and strategic timing of sales. For goals outside of retirement, taxable accounts often play a necessary role.

Taxable accounts also allow investors to use tax-loss harvesting, a strategy that involves selling investments at a loss to offset capital gains or taxable income. When used thoughtfully, tax-loss harvesting can help reduce an investor's tax bill and improve after-tax returns without changing long-term investment goals.

Each account type has its place. The key is not choosing one over the others, but understanding how to use them together.

Asset location

Income-heavy assets, such as bonds or high-dividend funds, are often more tax-efficient when held inside tax-advantaged accounts. Growth-oriented assets that benefit from long-term capital gains treatment may be better suited for taxable accounts.

This concept, known as asset location, is often overlooked, but it can materially improve after-tax performance without changing overall portfolio risk.

Common mistakes that reduce tax efficiency

Many investors unintentionally create tax drag by reacting emotionally to short-term market moves, trading too frequently, or ignoring tax consequences altogether.

Selling investments without considering holding periods, reinvesting dividends without understanding their tax impact, or holding the same assets across all account types can all reduce long-term returns.

Tax efficiency doesn't require complex strategies. Often, it's about avoiding unnecessary moves and being intentional with portfolio structure.

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Tax-efficient investing in 2026

As portfolios grow and tax brackets rise, the importance of tax efficiency increases. Higher interest rates, larger dividend payouts, and more frequent capital gains distributions can all create additional tax exposure.

At the same time, markets in 2026 are becoming more competitive, making it harder to outperform through stock selection alone. In that environment, keeping more of what you earn becomes a competitive advantage.

Bottom line

Tax-efficient investing won't make headlines, but it can make a real difference to your results. Paying less in taxes means more of your money stays invested and continues to grow year after year. That quiet advantage can add up faster than most people expect, and it's something you can control to help you build wealth, regardless of what the market does next.

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