5 Tips for Tax-Smart Investing | Brighthouse Financial
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  • 2-Minute Article
  • |
  • Jun 15, 2017

5 Tips for Tax-Smart Investing

These ideas may help minimize the tax load from your retirement investments.

Help minimize the investment taxes you pay on your retirement accounts by opting for tax-advantaged accounts. These five strategies can get you started.

Maximize Contributions to Tax-Advantaged Retirement Accounts

Retirement accounts such as IRAs and 401(k)s offer two key tax benefits: 

  1. They may reduce your current tax bill
    • IRA contributions can be made pre-tax (subject to certain limits)
    • 401(k) contributions are generally made with pre-tax income
  2. Money you contribute to those accounts grows tax-deferred, although you will owe ordinary income tax on withdrawals

Account 2018 Contribution Limit
401(k)* $18,500
$24,500 for people age 50+
IRA $5,500
$6,500 for people age 50+

Diversify Your Accounts

Holding a variety of investment accounts lets you mix and match income sources and may help minimize taxes in retirement. For example, a Roth IRA with after-tax contributions may complement traditional IRAs and 401(k)s by providing tax-free qualified distributions in retirement. 

Taxable investment accounts like regular brokerage accounts also can be used for retirement income. When you sell investments that you’ve owned for at least one year from these accounts, the proceeds will be taxed at the 0% to 20% capital gains tax rate**, which for many people is lower than the income tax rate — which can be as high as 39.6% — they pay on income from other sources.

Trying to ride the market’s ups and downs always bears some risk, and frequently turning over your investment mix can also boost your tax bill.

Consider Taking Advantage of Annuities and Life Insurance

If you’ve maximized your IRA and 401(k) contributions, you can make tax-efficient investments through annuities and some types of life insurance.

  • Deferred annuities are tax-deferred, meaning you will only be taxed on the growth when you take money out in the future.

  • Some life insurance policies, while offering a death benefit, also offer tax-free growth and tax-advantaged withdrawals on the plan’s cash value.  

Choose Tax-Efficient Investments

Specific investments also carry tax benefits. For example, income earned from most municipal bonds is tax-free at the federal level and, in some cases, at the state and local levels. Other investments to speak with your financial professional about include tax-managed mutual funds, the managers of which actively structure their portfolios for tax efficiency.

Maintain a Long-Term Perspective

Trying to ride the market’s ups and downs always bears some risk, and frequently turning over your investment mix can also boost your tax bill. 

For example, gains realized on stocks held for less than a year are taxed at ordinary income tax rates — which max out at 39.6% — rather than at the long-term capital gains rate of 15% to 20% for most people. 

Every dollar you pay in taxes reduces your returns, so the simple act of assembling an appropriately diversified portfolio and sticking to that plan for the long term puts you in a better position to achieve your goals. Talk with your financial professional about the role tax-advantaged investments play in your portfolio.