Being able to manage your investments in a tax-efficient manner can significantly boost your overall returns. However, understanding the complex interplay between investment strategies and U.S. tax laws can be challenging, leaving many investors unsure about how to optimize their portfolios to lower their tax liabilities.
Before exploring tax-efficient investment strategies, identify the type of investment accounts you have—typically these are taxable, tax-deferred, or tax-exempt. For taxable accounts, you’ll need to pay taxes on the returns in the year they are generated.
A recent Streetwise survey by E*TRADE revealed that although many experienced investors are aware of tax implications, most are not fully leveraging available tools and resources to minimize their annual tax payments on investments.
As tax season approaches, E*TRADE has investigated investor tax habits and offers a variety of tools to help manage taxes now and in the future. Considering taxes is crucial for long-term investments since taxes on capital gains can be considerable.
If you’re a do-it-yourself investor wanting to take control of your finances, E*TRADE provides an array of easy-to-use tools and resources in their Education Center. These tools help both investors and traders understand and manage their taxes more effectively.
The Education Center is accessible to everyone, offering numerous educational resources even to non-registered users. Additionally, E*TRADE has a dedicated Tax Center, a comprehensive hub with tools and resources covering everything from cost basis reporting to managing capital gains and losses.
Most people invest through Tax-Advantaged Accounts, sometimes unknowingly, which is already somewhat tax-efficient, like 401(k)s. This can be extended through accounts like Roth IRAs, where investments grow tax-free after using taxed dollars, provided they are withdrawn after age 59 and a half.
An E*TRADE survey shows that investors recognize the benefits of tax-advantaged accounts such as IRAs, 401(k)s, HSAs, and 403(b)s, with 45% believing these are the best ways to reduce annual tax payments on investments. Around 50% of all trading happens in tax-advantaged accounts, increasing to 60% among younger investors.
Other effective strategies for minimizing tax payments on investments include selling underperforming positions to offset capital gains, holding investments for at least a year for tax deductions on gains, investing in tax-free municipal bonds, tax-deferred annuities, and low turnover funds.
Maximizing these accounts can result in substantial savings. As Tax Day approaches, your online broker can help you invest efficiently from a tax perspective, providing tools accessible to all investors, whether they are customers or not. Remember, tax avoidance shouldn’t be the only reason behind your investment decisions.