By: Reed C. Fraasa, CFP®, AIF®, RLP®
As a financial advisor, I often remind clients that investment returns are only part of the story—the after-tax returns are what truly matter. Without careful planning, taxes can erode your gains year after year. Fortunately, there are several strategies you can use to reduce your tax liability and grow your wealth more efficiently. Here are five proven ways to ensure your investments are tax-efficient in 2025 and beyond.
1. Take Advantage of Tax-Deferred and Tax-Free Accounts
One of the simplest ways to reduce the impact of taxes is by choosing the right type of investment account. Accounts like 401(k)s, IRAs, Roth IRAs, and HSAs provide different types of tax advantages:
401(k) and Traditional IRA: Contributions are made pre-tax (or are tax-deductible), and investments grow tax-deferred. You only pay taxes when you withdraw the money—ideally in retirement, when you may be in a lower tax bracket.
Roth IRA: Contributions are made with after-tax dollars, but all future earnings and withdrawals (if qualified) are tax-free.
HSA (Health Savings Account): Offers a triple tax advantage—tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Example:
Investing $6,500 annually in a Roth IRA over 20 years with a 7% annual return could grow to over $300,000—all of it tax-free when withdrawn, assuming you’re over 59 ½ years old.
2. Use Tax-Loss Harvesting to Offset Gains
Tax-loss harvesting allows you to sell investments currently worth less than what you paid for them and use those losses to offset realized gains elsewhere in your portfolio. You can deduct up to $3,000 of net capital losses annually against ordinary income.
Steps to follow:
Sell an underperforming investment to realize a capital loss.
Use that loss to offset realized gains from other investments.
If your losses exceed your gains, deduct up to $3,000 against ordinary income.
Carry over any remaining losses to future years.
Example:
You sell a technology exchange-traded fund (ETF) for a $6,000 loss and realize $5,000 in capital gains elsewhere in your portfolio. The net $1,000 loss can be used to reduce your ordinary income.
Important: Be cautious of the wash-sale rule, which disallows the deduction if you buy the same or “substantially identical” security within 30 days before or after the sale.
3. Prefer Qualified Dividends Over Interest Income
Not all investment income is taxed equally. While interest income is taxed at your ordinary income rate, qualified dividends benefit from the lower long-term capital gains tax rates.
2025 Federal Tax Rates on Qualified Dividends and Long-Term Capital Gains:
*These are thresholds for taxable income after deductions.
Qualified dividends generally include dividends paid by U.S. corporations and some foreign companies if holding period requirements are met.
Tax planning tip:
Hold qualified dividend-paying stocks and stock ETFs in taxable accounts.
Hold interest-generating investments like bonds and Real Estate Investment Trusts (REITs) in tax-deferred or tax-free accounts such as an IRA or 401(k).
Example:
If you earn $1,000 in corporate bond interest and are in the 32% tax bracket, you’ll owe $320 in tax. But if you earn $1,000 in qualified dividends and fall within the 15% bracket, you’ll only owe $150—or potentially zero if your taxable income is below the 0% threshold.
4. Harvest Gains Strategically in Low-Income Years
In low-income years—such as during a career break, early retirement, or after business losses—you may be eligible to realize long-term capital gains and pay 0% federal tax.
This technique is known as capital gain harvesting, and it can be a powerful way to “reset” your cost basis and lower future tax bills.
Example:
A married couple with $60,000 of taxable income could realize up to $36,700 in long-term capital gains and pay no federal tax on those gains, assuming the total income remains under the $96,700 threshold for 0% gains.
Strategy tip:
Sell appreciated assets during a low-income year, then repurchase them to reset the cost basis—this strategy lowers future taxable gains without incurring tax today.
5. Strategically Locate Investments Across Accounts
Asset location refers to placing investments in accounts based on their tax characteristics. The goal is to reduce the overall tax drag on your portfolio.
General guidelines:
Tax-deferred accounts (IRA/401(k)): Good for tax-inefficient assets like taxable bonds, actively managed funds, and REITs.
Taxable accounts: Good for tax-efficient assets like stock index funds, ETFs, municipal bonds, and stocks held for the long term.
Roth accounts: Good for high-growth investments like small company stocks or emerging market funds since future gains will be tax-free.
Example:
A municipal bond paying 3% in a taxable account may be more tax-efficient than a corporate bond paying 4%—especially if you’re in a high tax bracket. Conversely, that 4% corporate bond may make more sense in a tax-deferred IRA.
Final Thoughts
Tax efficiency doesn’t require exotic strategies—it simply requires thoughtful planning. By leveraging the tax code and structuring your portfolio wisely, you can retain more returns and achieve your goals faster. Whether it’s through the proper use of retirement accounts, innovative harvesting strategies, or optimizing where you hold certain investments, every slight improvement adds up over time.
Want help reviewing your portfolio’s tax efficiency?
Let’s schedule a time to identify where you might be overpaying and create a strategy to help you keep more of what you earn.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.
Content provided is for information purposes only. Opinions expressed herein are solely those of Highland Financial Advisors, unless otherwise specifically cited. Highland Financial Advisors does not provide tax, accounting, or legal advice. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
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