Keeping investment taxes low

Points to know

• Your account type, investment type, and trading behavior will all impact the amount you owe Uncle Sam.

Every investment decision is an opportunity to save

There are a lot of choices you'll need to make in investing, whether you're just getting started or you've been investing for decades. Many of these decisions will have a tax impact.

Taxes directly reduce your returns, so it's smart to familiarize yourself with the potential tax hits—or tax savings—you could be in for.

When choosing an account type

Use tax-advantaged accounts when saving for retirement or education

Roth and traditional IRAs, 401(k) plans, and 529 savings plans all give you tax benefits on the money within these accounts.

Make the future less taxing with an IRA

Save for college in a 529 plan

When choosing investments

Choose investments that are tax-efficient

Some investments, like index mutual funds and ETFs (exchange-traded funds), are naturally tax-efficient. Others, including tax-managed funds and tax-exempt bonds, were created specifically for investors concerned about lowering their taxes.

Pick tax-saving investments

A note on after-tax returns

When reporting performance, mutual funds and ETFs include "after tax" figures that are meant to represent what an investor might have left over once taxes are paid.

These figures are unlikely to perfectly represent your exact situation, but they'll give you an idea of how tax-efficient the fund is.

Even if you're in a high tax bracket, it's important not to just focus on taxes when you're selecting funds. A fund with a return of 10% and a 3% tax bite is still going to leave you with more than a fund with a 5% return and a 1% tax burden.

After-tax return figures help you keep this total picture in mind.

When managing your portfolio

Manage different accounts in ways that minimize your taxes

If you own some accounts with tax advantages and some without, you have greater flexibility to lower your tax burden across all your accounts.

Manage accounts to lower taxes
 

Consider selling at a loss

While you should never sell an investment for the sole reason of lowering your taxes, you should keep tax implications in mind when making trades.

Offset taxable gains through tax-loss harvesting
 

Limit your trading

Every time you sell investments in a taxable account—especially if you're selling in order to lock in gains—you could be increasing your tax bill. Instead, stick to your investment plan and limit your trading activity.