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4 Ways Wealthy Investors Can Minimize Investment Taxes


Investing is all about building wealth but taxes can curb your portfolio’s growth if you’re putting your money in the wrong places. Keeping your investments as tax efficient as possible is especially important for high net worth investors, who typically land in a higher tax bracket. Minimizing what you owe isn’t that difficult if you’ve got a strategy for managing your investments.

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1. Focus on Tax-Advantaged Accounts First

Where you put your money is just as important as what you invest in. When you’re trying to cut down on your tax liability, you’ll want to max out your investments in tax-advantaged accounts, such as your company’s 401(k), a 403(b) or an IRA.

There are two reasons why these kinds of accounts are beneficial. For one thing, every dollar you put into an employer-sponsored plan usually reduces your taxable income for the year. Depending on your income, you may also be able to deduct the money you save in a traditional IRA.

The other advantage is that you can use these accounts to minimize the tax burden associated with other types of investments. That includes anything that generates a steady stream of taxable income, such as stocks that pay out dividends or mutual funds. Any tax due on these investments is deferred until you begin making withdrawals in retirement.

By the same token, you’d want to stick with tax-efficient investments in your taxable accounts. That includes things like individual stocks that you buy and hold, exchange-traded funds and municipal bonds, which often generate tax-free income.

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2. Use Your Dividends to Rebalance

4 Ways Wealthy Investors Can Minimize Investment Taxes

Rebalancing your portfolio strategically is another small step that can minimize investment taxes. For wealthy investors, that usually means selling off investments that have done well and buying more of the ones that haven’t performed well. However, you can use your dividends to reach the same goal without bumping up your tax bill.

For example, to maintain the right asset balance you can use dividend payouts from mutual funds to buy up investments that are under performing. That way, you avoid having to sell off the ones that have made serious gains. By not selling off investments that have appreciated, you’re not getting hit with the capital gains tax.

3. Master the Art of Tax Loss Harvesting

When done properly, tax loss harvesting can have a positive impact on your long-term tax outlook. This involves selling off investments that are trading at a loss and purchasing similar ones to keep the same asset balance in your portfolio. Losses can be used to offset your ordinary income tax or capital gains tax in the short-term and the savings can be reinvested.

There are a few things to keep in mind when harvesting losses. For one thing, the new investment can’t be identical to the one you sold and it can’t be purchased within 30 days of the initial sale.

You also need to take a look at the cost basis of your investments. The cost basis is how much you paid to purchase the investment, including any fees or commissions you paid to the broker. This determines how much of a loss you’re able to net by selling it off.

Related Article: 5 Investment Challenges Even Wealthy Savers Face

4. Watch out for the Medicare Surtax

4 Ways Wealthy Investors Can Minimize Investment Taxes

Single filers who earn more than $200,000 a year and married couples who take home more than $250,000 annually are subject to the 3.8% Medicare surtax on the investment income portion of their earnings.

If you’re close to the limit, you may be able to dodge the tax by snagging every deduction possible. Maxing out tax-advantaged retirement accounts, making charitable donations or writing off business-related expenses can all bring your income down so you’re not stuck paying the extra tax.

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