How Tax Efficient Are Your Investments?

February 12, 2020

Paying taxes is a part of life, no matter if you live in Glendale or elsewhere in the United States. However, there are ways to reduce the amount of taxes you are legally responsible for with essential tax reduction strategies. Most Americans pay too much in taxes, meaning that they pay more than they need to. To avoid this, you must invest in tax planning — and usually months before your taxes are due. Tax planning is different from tax preparation — it is the service provided by tax professionals to ready your taxes to be submitted. Tax planning is proactive and involves every area of your finances.

In our last blog post, “Tax Planning: How to Prepare for Taxes At the End of the Year,” we shared some strategies that our tax advisors suggest to reduce the amount of taxes that you pay on various aspects of your finances. Today, however, we are going to be discussing one specific area of your finances — your investments and your overall investment portfolio. 

Stick around to learn more and be sure to visit our website for a complimentary session with one of our tax advisors. 

Strategies to Help to Reduce the Impact of Taxes

 There are many ways to think about your investments — their purpose, the risk associated with each, when they may pay off, and other factors. However, another way to analyze your portfolio is to think about it in relation to how each is taxed and if you are utilizing each investement’s tax benefits in the best way possible. 


Before we discuss the basics of tax-efficient investment strategies, it is important to understand the three flavors of investment and how they relate to taxes now and later. Understanding how each type of investment relates to taxes as well as how they can work together can help you create the most tax-efficient portfolio — which can help you get the most out of your taxes. 



The first flavor of investment is that which requires gains to be paid as they are acquired or earned. These types of investments include: 

  • Credit Default Swap (CDs)
  • Money-market funds  
Benefits of Taxable Accounts 

Though these investments aren’t hailed as the most advantageous — or in other words don’t provide the tax benefits that you can enjoy with tax-advantaged accounts — they can provide their own advantages that you lose with tax-deferred accounts. 

Withdrawal Flexibility

Unlike tax-deferred accounts which require you to wait till a certain time to enjoy your investments, taxable accounts provide the flexibility to withdraw earnings at any time — usually after holding your investments for a year. 

Minimization of Taxes

To get the most out of your taxed accounts, you must consider which is the most ideal account type. Many find that having an investment with low turnover and low capital gains distributions can provide the most benefits. Bottomline: getting the most out of these accounts often means thinking about the effects of capital gains on your taxes. 

Heirs’ Tax Savings

Taxable accounts could prove to be beneficial for your heirs as well — due to something called a step-up basis. If your heirs decide to sell your taxable investments, they will pay taxes on the value of the investment at the time you passed away. However, capital gains tax will not be paid on the growth of the portfolio (you didn’t have to pay this either), and your heirs can enjoy the rewards of your investments. 

Control When You Retire

When you withdraw from tax-deferred accounts, you will have to pay taxes on those accounts during retirement. However, for those taxable accounts, you have already paid taxes on those accounts and thus this can help you stay within a lower tax bracket if you find yourself on the edge. As a result, you can have more control over how much you pay in taxes in retirement.



Taxes on tax-deferred investments are delayed until later when you wish to withdraw your earnings. In many cases, tax-deferred accounts are withdrawn around age 59 ½ as many types of retirements funds are tax-deferred including: 

  • 401(k)s
  • IRAs
Benefits of Tax-Deferred Accounts

As with taxable accounts, tax-deferred accounts have their own advantages that many hail as the best retirement accounts. However, keep in mind that it’s not always about which investment is the best, but how you can use the advantages of each tax-flavor investment to your advantage. 

Growth at a Faster Rate

Tax-deferred accounts can allow your investment to grow at a faster rate as no tax is taken out — you can deposit a higher amount into your fund. This benefit can also be beneficial when you are paying income taxes for the current year as well; this can lower your income and could keep you in a lower tax bracket. 

Retirees Will Be in a Lower Tax Bracket

One of the ideas at the core of tax-exempt accounts is that retirees will be in a lower tax bracket than when they previously made the investment, meaning that they will have a lower percentage of taxes on their investment than if it was taxed as income when they first invested. With this in mind, as well as the concept that often investors can grow their money at a faster rate, these investments can be highly advantageous depending on your needs and investment portfolio.


Tax-exempt investments or earnings are those that you do not require taxes to be paid. These types of investments include: 

  • HSA
  • Municipal bonds
  • 529 Education funds
  • Real estate Investment  Trusts (REITs)
  • And others
Benefits of Tax-Free Accounts

The name tax-free accounts automatically guarantee that there is an advantage — you don’t have to pay taxes on these accounts. However, these accounts can come with some major stipulations which can fit into your investment portfolio if you understand how they can be used for your benefit. For example, an HSA can earn interest tax-free, but the funds can only be spent on qualifying health-related expenses. 

Tax Reduction Strategies: What Your Tax Advisor Wish You Knew

As you can see, there are a lot of aspects of each investment to consider in addition to learning how each investment can work with the rest of your portfolio to allow you to get the most benefit now as well as later. To optimize your investment portfolio for your best interests, it is advised that you speak to a tax planning specialist. They can help you best understand how these concepts and ideas apply to your needs. However, below are some general concepts that can help you understand how you can create a tax-efficient portfolio.    


The type of investments that you have can greatly impact your current tax situation as well as yours in the future. How so? When you have taxable investments, these can send you into the next tax bracket causing you to pay more in taxes. However, in retirement, those tax-deferred accounts can propel you into a higher tax bracket as well. A tax advisor can help you understand the full impact of your investments and how you can save money now and in the future. 

Capital Gains Rules

A term to understand is capital gains which speaks to how much money you gained from an investment. This income will add to other areas of income and can affect your tax bracket position. To learn more about capital gains and tax strategies, read our last post, “Tax Planning: How to Prepare for Taxes At the End of the Year.

How to Calculate Your Investment Goal

Highest Investment Income – Lowest Taxes Due = Investment Goal


By placing taxable investments in tax-deferred accounts, you can save money now and allow your money to grow at a faster rate. An example of this is placing your income into a tax-deferred retirement account such as 401(k). Many employers offer you the option of creating a retirement account with them and then directly transferring a portion of your income into this account before taxes. This allows you to save on your taxes now and possibly in the future.


An IRA can provide many benefits — if you use it correctly. There are some investments that the IRS prohibits you from diverting into your IRA account and others that are, in most cases, poor choices to put into your IRA. 

Investments to Keep Out of Your IRA

  • Collectables, artwork, gemstones, gold bullion and other valuables (it is prohibited)
  • Life insurance policies (prohibited)
  • Municipal bonds (this investment is already exempt from taxes)
  • Tax-managed mutual funds (already provides tax-advantages)
  • Other tax-exempt or advantaged accounts

Investments That Can Be Beneficial For Your IRA

  • REITs
  • Treasury Inflation-Protected Securities (TIPS)

Do you understand how taxes are affecting your portfolio now and how they might affect you later? Are you paying too much in taxes? No matter your age there is no better time to optimize your portfolio to provide you the most tax-advantages. Stop overpaying your taxes and invest in your future. 

Advisory Group West provides tax planning services to Glendale and the surrounding areas. To learn more about our services and the possibilities for your finances, book a complimentary Cornerstone Vissions™ Strategy Session with one of our tax advisors today! In all that we do, we wish to help you better align your finances with your values and your goals for the future. Visit our website to book your complimentary session.