By: Reed C. Fraasa, CFP®, AIF®, RLP®
"It's not what you earn, it's what you keep that counts."
— David Chilton, The Wealthy Barber
For high-net-worth families, investing wisely is only part of the equation. Preserving wealth through tax efficiency is just as critical. Tax planning can dramatically affect long-term returns, especially when compounded over decades. Here are five strategies to help ensure your investments are working as hard after taxes as they are before.
1. Maximize Tax-Deferred and Tax-Advantaged Accounts
Tax deferral is a powerful tool. Contributions to accounts like 401(k)s, IRAs, and HSAs grow tax-deferred, meaning you don't pay taxes on the gains each year. This can accelerate growth through compounding.
Strategies for high-net-worth investors include:
Backdoor Roth IRAs: Even if you exceed income limits for a Roth IRA, you may still contribute via a backdoor Roth strategy.
Mega Backdoor Roth 401(k): Some employer plans allow after-tax contributions up to IRS limits, which can then be rolled into a Roth account.
Health Savings Accounts (HSAs): Triple tax-advantaged (deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses).
Tax-advantaged accounts serve as the foundation for a tax-efficient portfolio.
2. Be Strategic with Asset Location
Not all accounts are created equal. Where you place your assets—taxable, tax-deferred, or tax-free accounts—can impact your after-tax returns.
Best practices for asset location:
Hold tax-inefficient investments (like taxable bonds, REITs, and actively managed funds with high turnover) in tax-deferred accounts.
Place tax-efficient assets (like ETFs, municipal bonds, and large-cap stocks) in taxable accounts.
Use Roth accounts for high-growth investments that could benefit most from tax-free appreciation.
This simple shift in where your assets are held can lead to significant long-term tax savings.
3. Harvest Tax Losses Proactively
Tax-loss harvesting is the process of selling investments that have declined in value to offset capital gains elsewhere in your portfolio.
Why it matters:
Offsets capital gains from appreciated assets
Up to $3,000 of net losses can offset ordinary income annually
Unused losses carry forward indefinitely
How to do it effectively:
Regularly review your taxable portfolio, especially during market downturns
Avoid wash-sale rules by replacing sold investments with similar, not identical, securities
Coordinate harvesting with gains you may realize from selling appreciated investments or rebalancing
When managed year-round, tax-loss harvesting can reduce your tax liability and improve net returns.
4. Be Mindful of Capital Gains Timing
Capital gains tax rates can vary widely depending on how long you've held an asset, your income level, and current tax policy.
Timing strategies to consider:
Hold investments for more than one year to qualify for lower long-term capital gains rates (0%, 15%, or 20%)
Delay realizing gains until a lower-income year, such as retirement
Donate appreciated stock instead of cash to avoid capital gains and take a charitable deduction
For example, gifting $50,000 of appreciated stock instead of cash to a charity may allow you to avoid up to $10,000 in capital gains taxes, depending on your tax bracket.
5. Coordinate with Your Broader Tax Plan
Investment decisions shouldn’t happen in a vacuum. Tax efficiency comes from integrating your investment strategy with your overall financial and tax situation.
Key coordination opportunities include:
Work with a CPA or tax advisor to time income and deductions in a tax-advantageous way
Incorporate charitable giving strategies like donor-advised funds (DAFs) to bundle deductions
Use Qualified Charitable Distributions for IRA Required Minimum Distributions to reduce top line taxable income
Plan for estate taxes using tools such as irrevocable trusts, family limited partnerships, and lifetime gifting strategies
Be aware of the Net Investment Income Tax (NIIT), a 3.8% surtax on high-income earners
When your financial advisor, CPA, and estate attorney are on the same page, your tax picture improves substantially.
Final Thoughts
High-net-worth families have more complex portfolios, which can mean more opportunities—but also more tax pitfalls. By being proactive, intentional, and strategic, you can minimize the drag of taxes and allow your wealth to grow more efficiently.
Remember: The goal isn't to avoid taxes altogether, but to pay only what's necessary while aligning with your broader financial goals.
A well-constructed, tax-efficient investment strategy is not just about dollars and cents—it's about preserving your legacy.
If you'd like a customized review of your investment portfolio through a tax lens, reach out to schedule a free call to discuss your situation.
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.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
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.