Tax Planning: How to Minimise Taxes on Investments and Income

Tax-Advantaged Accounts

401(k): Pre-Tax Contributions, Tax-Deferred Growth

A 401(k) allows you to contribute pre-tax dollars, reducing your taxable income in the year you contribute. The money grows tax-deferred, and you pay ordinary income tax when you withdraw in retirement. The contribution limit is $23,000 in 2026 (plus $7,500 catch-up if 50 or older), and many employers offer matching contributions. Best for: high earners who want a tax deduction now and expect to be in a lower tax bracket in retirement.

Traditional IRA: Pre-Tax with Income Limits

A traditional IRA offers pre-tax contributions and tax-deferred growth, with taxes due on withdrawal. The contribution limit is $7,000 in 2026 (plus $1,000 catch-up at 50). The key catch: if you or your spouse have access to a workplace retirement plan, your ability to deduct contributions phases out starting at $77,000 MAGI for single filers. If you cannot deduct the contribution, the tax benefit disappears.

Roth IRA: Post-Tax Contributions, Tax-Free Growth

With a Roth IRA, contributions are made with after-tax dollars, but all growth and withdrawals are tax-free in retirement. There are no required minimum distributions, making it ideal for estate planning. Income limits apply: phaseout starts at $161,000 for single filers in 2026. Best for: young investors who expect higher future tax rates. High earners can use the backdoor Roth IRA strategy. Build your full retirement plan →

HSA: The Triple Tax-Advantaged Account

A Health Savings Account (HSA) is the most tax-efficient account available. Contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. There is no other account with this triple tax advantage. For 2026, contribution limits are $4,300 for individuals and $8,600 for families. If you pay medical expenses out of pocket and invest your HSA for retirement, it effectively becomes a supercharged retirement account. Many experts consider the HSA the best retirement account most people overlook.

529 Plans: Tax-Free Growth for Education

529 plans offer post-tax contributions with tax-free growth for qualified education expenses. Recent legislative changes also allow up to $35,000 to be rolled over to a Roth IRA for the beneficiary if unused. Contributions grow federally tax-free and are free from state tax in many states. Best for: parents and grandparents saving for a child's education expenses.

Tax-Loss Harvesting

Tax-loss harvesting is the practice of selling investments that have declined in value to realize a capital loss, which offsets capital gains from other investments. If losses exceed gains, you can deduct up to $3,000 against ordinary income each year. Unused losses carry forward indefinitely. The strategy turns losing trades into a tax benefit — you get the deduction without leaving the market by reinvesting in a similar but not substantially identical security. The wash sale rule prohibits buying the same or substantially identical security within 30 days before or after the sale. Full tax-loss harvesting guide →

Asset Location: Which Assets Go in Which Accounts

Asset location is the strategy of placing different types of investments in the most tax-efficient accounts. Taxable accounts should hold tax-efficient assets: index ETFs (low turnover generates few capital gains), municipal bonds (federal tax-free interest), and buy-and-hold stocks with low turnover. Tax-advantaged accounts (401(k), IRA) should hold tax-inefficient assets: REITs (high ordinary income distributions), bonds that pay high interest, actively managed funds (high turnover generates more capital gains), and high-dividend stocks. By placing assets strategically, you can reduce your annual tax drag by 0.5% to 1% without changing your overall portfolio allocation. Learn about asset allocation →

Capital Gains Tax Rates (2024)

Short-term capital gains (assets held less than one year) are taxed at ordinary income rates, ranging from 10% to 37% depending on your tax bracket. Long-term capital gains (assets held more than one year) receive preferential rates: 0% for taxable income up to $47,025 (single), 15% for income up to $518,900, and 20% above that. High earners also pay the Net Investment Income Tax (NIIT) of 3.8% on investment income when MAGI exceeds $200,000 (single) or $250,000 (married filing jointly). The difference between short-term and long-term rates is significant: holding an asset for 13 months instead of 11 months can cut your tax rate by nearly half.

What is the most tax-efficient way to invest?

The most tax-efficient approach combines three strategies. First, prioritise tax-advantaged accounts: max out your 401(k) to get the employer match, then contribute to a Roth IRA, then go back to your 401(k) or HSA. Second, use tax-loss harvesting in your taxable account to offset gains and generate ordinary income deductions. Third, practise asset location by holding tax-efficient assets (index ETFs, municipal bonds) in taxable accounts and tax-inefficient assets (REITs, bonds, active funds) in retirement accounts. Together, these strategies can add 1-2% to your after-tax returns annually.

Should I put bonds in my 401(k) or Roth IRA?

Bonds should generally go in your 401(k) or traditional IRA rather than your Roth IRA or taxable account. Bonds generate ordinary income (interest payments), which is taxed at your full marginal rate. By holding bonds in a traditional 401(k) or IRA, you defer taxes on that interest until withdrawal. In a Roth IRA, the interest is tax-free, but you are using valuable Roth space that could be better allocated to stocks (which have higher expected growth and would benefit more from tax-free compounding). In a taxable account, bond interest is taxed as ordinary income each year, creating an annual tax drag. The general rule: stocks in Roth, bonds in traditional, tax-efficient assets in taxable.

How does tax-loss harvesting work?

Tax-loss harvesting involves selling an investment that has lost value to realize a capital loss. That loss first offsets any capital gains you have realised in the same year. If your losses exceed your gains, you can deduct up to $3,000 of the excess against your ordinary income each year. Any remaining losses carry forward to future years indefinitely. You then reinvest the proceeds into a similar (not substantially identical) investment to maintain market exposure. For example, sell an S&P 500 ETF that is down $5,000, offset $5,000 in gains from other sales, and buy a different S&P 500 ETF or a total market ETF immediately. Your portfolio stays invested, and you save on taxes.

What is the wash sale rule?

The wash sale rule prevents you from claiming a tax loss on a security if you buy the same or a substantially identical security within 30 days before or after the sale. If triggered, the disallowed loss is added to the cost basis of the replacement shares, deferring rather than eliminating the tax benefit. The 30-day window is 61 days total: 30 days before the sale, the day of the sale, and 30 days after. The rule applies across all accounts you control, including retirement accounts. To avoid it, wait at least 31 days to repurchase, or buy a different security that is not substantially identical.

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