Don’t Invest In The IRS! Tax Efficient Investing Made Simple

Executive Summary

Investment returns don’t mean much if taxes take a big bite out of them. Too many investors focus on making money without realizing that tax efficiency plays a major role in what they actually get to keep. Without a solid tax strategy, you could pay more than necessary—sometimes significantly more. Learn how taxes impact different investments, strategies to lower your tax bill, and how to structure your portfolio so you hold on to more of what you earn.

Want to watch an in-depth exploration of this topic? Check out this video on my YouTube channel, @savvysteward: Don’t Invest In The IRS! Tax Efficient Investing Made Simple

Don’t Invest In The IRS! Tax-Efficient Investing Made Simple

Imagine this: Your investments are performing well, but when tax season rolls around, a big chunk of your gains disappears. Why? Taxes.

Most people don’t realize that different investments—stocks, bonds, and mutual funds—all follow different tax rules. If you don’t understand how those rules work, you could end up paying more than necessary. And when it comes to building wealth, it’s not just about how much you make—it’s about how much you keep.

Why Taxes Matter In Investing

Taxes can have a major impact on your investment returns. A study from Fidelity compared how taxes affect stocks and bonds. On average, stocks deliver a 10.1% annual return before taxes, but after taxes, that drops to 8.2%—a 20% loss. Bonds fare even worse, with a 5.2% pre-tax return shrinking to just 2.9% after taxes—a massive 40% reduction.

The reason for this difference comes down to how various types of investment income are taxed. Bond interest is treated as ordinary income and taxed at your full income tax rate, which can be pretty high. Stocks, on the other hand, receive more favorable tax treatment. If you hold stocks for more than a year, gains are taxed at the long-term capital gains rate, which is significantly lower.

Another major factor is tax-loss harvesting. When stocks go up and down, savvy investors use those losses to offset gains, reducing their tax bill. Since bonds don’t fluctuate as much, they don’t offer the same opportunity to minimize taxes.

How different investments are taxed

Understanding tax treatment is critical to keeping more of your returns.

• Ordinary income tax applies to bond interest, short-term capital gains (profits from assets held for less than a year), and some mutual fund distributions. These are taxed at the same rate as your paycheck or business income.
• Long-term capital gains tax applies to assets held for over a year, and the rate is significantly lower than ordinary income tax.
• Tax-free income is available through certain investments like municipal bonds or Roth accounts, which allow you to either earn income tax-free or withdraw funds tax-free later.

Since different investments have different tax rules, structuring your portfolio correctly have a positive impact on how much you owe.

Three Strategies To Lower Your Tax Bill

If you want to maximize what you keep, there are three key strategies to focus on:

• Deferring taxes – Postponing taxes so your investments can grow uninterrupted.
• Managing taxes – Making smart moves throughout the year to minimize what you owe.
• Reducing taxes – Using tax-free investment options and charitable giving to cut taxes permanently.

Let’s take a deeper look at each approach.

How To Defer Taxes And Let Your Money Grow Faster

Deferring taxes is like running a race without carrying extra weight. The less you pay upfront, the more your money can compound over time.

• Max out employer-sponsored retirement plans – Contributing to a 401(k), 403(b), or 457(b) lets your money grow tax-deferred. If your employer offers a match, it’s essentially free money added to your account.
• Use traditional IRAs – Contributions can lower your taxable income today while allowing your investments to grow tax-deferred for the future.
• Consider deferred annuities – If you’ve maxed out other tax-advantaged accounts, annuities allow additional investments to grow tax-deferred.

Use asset location strategies – Place tax-inefficient investments like bonds and high-dividend stocks in tax-deferred accounts while keeping tax-efficient investments like index funds in taxable accounts.

Managing your tax bill through strategic moves

Taxes aren’t just something to deal with in April—small actions throughout the year can have a big impact.

• Tax-loss harvesting – Selling losing investments can offset gains, reducing your taxable income. Losses that exceed gains can even offset ordinary income, with any excess carried forward to future years.
• Hold investments for the long term – Gains from assets held over a year are taxed at a lower rate than short-term gains, making patience a profitable strategy.
• Be mindful of mutual fund distributions – Some funds distribute taxable gains even if you didn’t sell shares. Keeping an eye on distribution dates can help you avoid surprise tax bills.
• Rebalance in tax-advantaged accounts – Adjusting your portfolio in an IRA or 401(k) prevents triggering taxable events.
• Consider municipal bonds – These provide tax-free income at the federal (and sometimes state) level, making them attractive for high earners.

Reducing Taxes Permanently With Tax-Free Strategies

Some strategies don’t just defer taxes—they eliminate them altogether.

• Roth accounts – Contributions to Roth IRAs and Roth 401(k)s are made with after-tax dollars, but withdrawals in retirement—including all growth—are tax-free. If you expect to be in a higher tax bracket later, paying taxes now can be a smart move.
• Roth conversions – Converting traditional IRA funds to a Roth IRA allows you to lock in tax-free growth, especially in years when your income is lower.
• Health Savings Accounts (HSAs) – These accounts offer a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. If you don’t need the money immediately, you can let it grow and use it later in retirement.
• Tax-smart withdrawal strategies – Withdrawing from taxable accounts first, then tax-deferred accounts, and saving Roth accounts for last can minimize lifetime tax liability.
• 529 College Savings Plans – If education funding is part of your plan, 529s allow tax-free growth and withdrawals for qualified expenses.
• Charitable giving strategies – Donating appreciated assets or using a donor-advised fund lets you avoid capital gains taxes while still receiving a deduction. Charitable giving isn’t just a tax strategy—it’s a way to make an impact while reducing your tax burden. When done strategically, giving can be a win-win for both your finances and the causes you care about.

Contact Information

Keith Demetriades, CFP®, CKA®, is dedicated to helping individuals, families, and organizations integrate faith-based principles into their financial planning. Oikonomia is a foundational concept in his practice, reflecting his commitment to ethical and values-driven financial management.

Keith welcomes conversations about the topics discussed in this piece and is available to assist in creating a financial plan that aligns with your faith and values. For more information or to start a conversation about your financial future, contact Keith Demetriades at (806) 223-1105 or visit his website at https://www.kingsview.com/advisor/keith-demetriades/.

Disclaimer: The information provided in this blog is for educational purposes only and should not be considered financial advice. Please consult a qualified financial advisor to discuss your specific situation and needs. Past performance does not indicate future results, and all investments carry risks, including potential loss of principal. Any financial product or strategy references are purely illustrative and should not be construed as endorsements or recommendations.