There’s no “u” in taxes, only an “axe”. Striking at the tree of fortune you want to grow for your family.

And building a strong yet flexible long-term investment strategy can easily get marred in the return department if you forget to deal with your taxes in it.

Fortunately, there are several ways in which you can minimize your tax liability and save more on your investment gains.

From using tax-advantaged retirement accounts to strategic portfolio management techniques, I’ll cover everything to keep more of your hard-earned money in your own pocket.

So, let’s dive in and take a look at some of the best ways to save your investment returns from the man.

1. Invest in tax-advantaged accounts

One of the best ways to save your investment from the wrath of taxes is to invest in tax-advantaged accounts such as 401(k)s, IRAs, and Roth IRAs.

What are these things? These are special investment accounts that offer tax benefits to investors. Contributions to these accounts are made with pre-tax dollars, which reduces your taxable income for the year.

And gains made within these accounts are tax-deferred or tax-free, which means you won’t owe taxes on them until you withdraw the money.

Let me explain it in easy English because it gets confusing to me too sometimes — when you put money into these accounts, it isn’t counted as taxable, which means that your taxable income will be reduced for that year.

And when your money grows inside these accounts, you don’t have to pay taxes on it until you withdraw it. This helps you save a lot of money on taxes over time.

These tax-advantaged accounts are a huge blessing to save most of your money yourself!

2. Use tax-efficient investment strategies

Capital gains tax rates are lower for investments held for more than one year!

So, develop long-term investment strategies instead of shorter-term ones since the tax payable on the shorter ones is larger than the long-term, say if you hold your investments for a year before selling them, you pay fewer taxes!

One more such strategy could be to invest in index funds or ETFs (exchange-traded funds) which have low rates of turnover, that reduce the amount of capital gains distributions and associated taxes.

Additionally, you could also consider using tax-loss harvesting strategies. Meaning, sell your investments that have experienced losses so you don’t have to pay overall taxes on them.

3. Choose tax-efficient investments

Municipal bonds are exempt from federal income taxes, even state and local taxes sometimes. A few low-cost, tax-managed mutual funds are also certain types of investments that are tax-efficient.

Other tax-efficient investments include exchange-traded funds (ETFs) that track broad market indexes and passively managed index funds.

Invest in them to save a few more bundles of cash on taxes.

4. Minimize trading activity in taxable accounts

Each time you sell an investment in a taxable account, you may be subject to capital gains taxes.

It is heavily advised to not trade frequently and to hold on to investments for at least a year before selling them.

Additionally, try to avoid unnecessary trading, which can result in higher taxes and lower investment returns.

5. Rebalance your portfolio with tax consequences in mind

Rebalancing a portfolio involves buying and selling assets to maintain a desired asset allocation. But it can also trigger capital gains taxes.

To minimize the tax impact, you are advised to rebalance your portfolio with a long-term view of minimizing taxes.

This means selling assets with capital losses to offset gains or using tax-efficient funds to rebalance. Also, I’d advise you to go rebalancing during periods of low or no capital gains tax rates.

6. Be mindful of required minimum distributions (RMDs)

If you have Traditional IRAs and 401(k)s, it’s important to be aware of the Required Minimum Distributions (RMDs). RMDs are the minimum amount that you must withdraw from such accounts each year you reach the sexy age of 72 (or age 70 ½ for those who reached 70 ½ before January 1, 2020).

Because failing to take the RMD out can result in a few penalties.

And yes, these withdrawals are subject to ordinary income tax, so heads up!

7. Use a health savings account (HSA):

An HSA is a tax-advantaged savings account designed for those with high-deductible health plans.

You can put pre-tax dollars into an HSA and the money in the account grows tax-free!

You can use the funds in the HSA to pay for qualified medical expenses without owing any taxes on the withdrawals. It’s a way to save money on taxes while also planning for future medical expenses.

8. Consulting with a tax professional

Tax professionals typically begin to help you by reviewing your investment portfolio and analyzing your tax situation.

This means examining your income, deductions, and other relevant factors to determine the best tax strategies for your specific circumstances.

They can also make it clear what your investment goals and risk tolerance should be for better investment decisions.

They can advise you on tax-efficient investment strategies, identify tax deductions and credits that you may be eligible for, and help you avoid costly mistakes that could trigger a tax liability.

Conclusion

In conclusion, you just can’t overlook the tax aspect when developing a solid investment portfolio.

And look, like we just discussed here, there could be many strategies you could apply. Some obvious ones, some not-so-obvious ones.

But, in case you are new to finance and investing, my only big piece of advice is going to be, you guessed it, to get a professional to look at your case.

I’m an experienced finance meddler for quite some time and even I’ve got a buddy who advises me before I do anything rash.

That’s it. Happy investing.