13 Tax-Saving Investment Strategies (Earn More, Pay Less)

Just like every other aspect of your financial life, you can’t afford to lose sight of taxes when it comes to investing. Understanding the difference between tax-deferred accounts, taxable accounts, and which types of investments to store where can make or break your ability to successfully build wealth and reach your retirement goals.

Here’s the rundown on 13 strategies that help maximize your investment gains while minimizing your tax-related stress.

A 401(k) is an employer-sponsored retirement account, typically either traditional (make contributions before taxes) or Roth (make contributions after taxes). Many employers offer to match a certain amount of their employees’ 401(k) contributions, so it’s a smart retirement strategy to put enough of your paycheck toward your 401(k) to qualify for the match.

A traditional 401(k) allows you to enjoy a tax deduction now since you make contributions before taxes (but will pay taxes on withdrawals in retirement), while a Roth 401(k) allows you to take withdrawals in retirement tax-free.

An individual retirement account (IRA) is a tax-advantaged investment account that anyone can open, regardless of whether their employer offers a 401(k). You’re allowed to contribute a certain amount of money per year to an IRA, then deduct that amount from your taxable income, as long as you’re below the income thresholds set by the IRS.

Unlike traditional IRAs, the money you store in a Roth IRA isn’t tax deductible. Making contributions to a Roth IRA doesn’t save you money on taxes now — but it can in the future since withdrawals are tax-free, which is an important consideration for retirees who need to consider how taxes will impact their withdrawal strategy.

If you’re self-employed, you might consider opening a solo 401(k) to maximize your savings.

With a solo 401(k), you can make tax-deductible contributions of up to $23,000 for the 2024 tax year. And since you’re your own employer, you can also make employer contributions of 25% of your business’s income up to a certain limit. In total, you could save as much as $69,000 tax-deductible dollars this year alone.

Like solo 401(k)s, SEP IRAs — aka simplified employee pension IRAs — allow self-employed individuals like freelancers to save money for retirement. You can save up to $69,000 in this tax-deferred account for the 2024 tax year with a SEP IRA.

However, bear in mind that if you hire employees, you’ll be required to contribute the same percentage to their SEP IRAs as you do to your own.

A health savings account (HSA) is a tax-advantaged savings account where you can save tax-free money to spend on qualifying medical expenses. As long as you spend the money on qualifying expenses, HSA funds aren’t subject to an income tax once you withdraw them.

Once you reach age 65, you’re free to use money from your HSA for non-medical expenses as well. While you’ll pay a regular income tax on money you withdraw, you won’t have to pay a 20% tax penalty fee for spending that money on a non-medical expense.

If you turn a profit on an asset you sell after holding it for up to one year, that profit is considered a short-term capital gain, and you’ll have to pay your typical income tax rate on that profit.

However, if you can keep that asset for at least one year and one day, your profit becomes a long-term capital gain subject to a much lower tax rate (between 0% and 20%, rather than between 10% and 37%).

Tax-efficient investments are investments that keep your tax burden as manageable as possible. Put another way, these types of investments maximize your overall gains while minimizing the amount you owe in taxes.

Some common tax-efficient investments include index funds, tax-exempt municipal bonds, and exchange-traded funds (ETFs).

In some cases, losing money on investments isn’t as bad as it seems. When you sell investments like stock or real estate at a loss, you can offset it with your gains for the year, or up to $3,000 in ordinary income if you don’t have any gains. Amounts above $3,000 can be carried forward to future years.

Once you’ve retired, you might want to consider withdrawing funds from your tax-deferred accounts (like IRAs) before your taxable accounts. Doing so might give you more power over your tax bracket and help you avoid bracket-based tax payments on your Social Security checks.

Generally speaking, it’s more beneficial to your bottom line to put assets with a high tax liability in a tax-advantaged account like an IRA or 401(k).

These types of investments could include government bond funds (which generate interest taxed at your normal income tax rate) and actively managed stock funds (which generate short-term gains that are subject to high tax rates).

Individuals over age 70 1/2 may use the money in an IRA to make tax-free charitable donations of up to $100,000. Once you reach age 72, these qualified charitable distributions (QCBs) count toward your required minimum distributions and may lower your overall taxable income for the year.

An asset allocation strategy that made sense a few years ago might not give you as many tax advantages a few years down the road, especially if your tax bracket has shifted. Instead of allocating assets once and ignoring them, reevaluate which accounts your assets are stored in and consider strategic reallocations as you increase your wealth.

While you don’t want your investing life to be all about taxes, it’s important to take taxes into account when you’re creating an investment strategy.

A financial advisor can help you build a diverse portfolio that keeps your tax burden reasonable while you save enough money to retire.