Every April, the looming tax deadline reminds us just how much of our hard-earned money can disappear in the form of taxes. For investors, it’s not just a once-a-year concern—taxes quietly chip away at your returns every day. But with a little planning, you can keep more of your money working for you.
Why Tax Efficiency Matters
You’ve heard it before: it’s not just about how much you make—it’s about how much you keep. Even small tax drags can add up over time and eat away at your long-term gains.
However, you have more control over your taxes than you might think—especially when it comes to where and how you invest. Below are some strategies you can use; use them alone or combine them (according to your individual circumstances) for maximum effectiveness.
Pick the Right Account for Each Investment
Not all investment accounts are taxed the same. There are two major types:
Tax-Advantaged Accounts
These are your retirement accounts—your IRAs, 401(k)s, and Roth IRAs—and accounts like 529s and HSAs. For the sake of simplicity, we’ll stick to the retirement variety here. These accounts offer tax deferral or even tax-free growth, making them perfect for investments that tend to generate higher taxes, such as:
- Actively managed funds that may generate more short-term gains
- Taxable bond funds, especially high-yield bonds, inflation-protected bonds, and zero-coupon bonds
- Real estate investment trusts (REITs)
Taxable Accounts
If you’re not working or have funds outside of your retirement savings to invest, consider a taxable account. These include individual, non-retirement brokerage accounts. They’re flexible in many ways (e.g. they offer a large variety of investment options and have no contribution limits or withdrawal penalties), but they don’t offer tax breaks. Use them for investments that naturally lose less to taxes, such as:
- Individual stocks you’ll hold long-term
- Stocks or funds that pay qualified dividends, which are subject to the same tax rates as long-term capital gains
- Municipal bonds (which offer “built-in” tax advantages)
Further Diversify by Tax Treatment
Just like you diversify investments by asset class, you can diversify how your investments are taxed. If you’re uncertain about the tax bracket you’ll be in during retirement, tax diversification can give you added peace of mind, as you’ll have more flexibility when it comes to withdrawing funds.
Examples:
- If all your retirement assets are in a tax-deferred account, consider converting some of that money to a Roth IRA, where future withdrawals can be tax free if certain conditions are met. However, note that you will be taxed on any amount converted in the year of the conversion.
- Keep high-growth assets in a Roth IRA—when it comes time to take withdrawals, you’ll benefit from tax-free withdrawals on that increased growth.
- Remember that any tax-free benefit of municipal bonds is “wasted” in a tax-deferred account, as withdrawals from those accounts are subject to ordinary income tax rates.
- Always compare the after-tax return on taxable bonds to the tax-exempt return on municipal bonds to see which makes the most sense on an after-tax basis, and then purchase them in the appropriate account.
Diversifying by tax treatment now gives you the option in retirement to mix and match your distribution sources and minimize your tax bill from year to year. This strategy is even more powerful when combined with a taxable account option that you can tap in higher income-tax years (as qualified dividends and capital gains are taxed at lower capital gains rates).
Other Tax Moves to Consider
- Rebalance strategically: You know you need to rebalance occasionally. But there’s a catch: doing so in taxable accounts may trigger capital gains taxes. Consider formally rebalancing only inside of your tax-deferred or Roth accounts, and taking a more casual approach with your taxable accounts: when adding funds to those accounts, buy more shares in the underweighted asset classes instead of selling shares of overweighted asset classes and generating capital gains.
- Use tax loss harvesting in taxable accounts: You can sell losing investments to offset gains and reduce your tax bill.
- Consider any philanthropic goals: A Qualified Charitable Distribution (QCD) is a direct transfer of funds from an IRA (not a 401k) to a qualified charity, allowing individuals aged 70.5 plus to make tax-free donations, potentially satisfying their required minimum distributions (RMDs). The amount donated (up to $108,000 for 2025) is excluded from taxable income.
- Want to leave something for your heirs? Taxable accounts are generally preferable, as your heirs will receive a “step up” in basis. This means the value of the asset is adjusted to its fair market value at the time of your death, rather than its purchase price. This can significantly reduce or even eliminate capital gains taxes for the heir. In contrast, assets in tax-deferred accounts don't receive this treatment since all distributions are taxed as ordinary income.
Remember: Your Portfolio Is One Big Picture
Even though your investments may live in different accounts, they’re all part of your single, unified portfolio. So think holistically, act strategically, and keep the tax man from getting more than his fair share.
Want help building a tax-smart portfolio? Your Oklahoma Financial Center advisor is just an email or phone call away!