10 Tips for Tax-Savvy Investing

For most people, taxes come to mind twice a year: December 31, when many deduction deadlines occur, and April 15, when tax returns are usually due.

Taking a few planning-focused steps throughout the year may mean fewer surprises and less stress during tax prep—and a potentially lower tax bill, too.

Tax Tip #1. Understand and Project Your Current Year Tax Bracket

Your tax bracket can play a big role in informing your decision when making an investment move or holding off for a while. Not only can tax legislation change the overall tax rates and rules, but your personal tax brackets can change from year to year as well.

Refer to our Tax Fast Facts to review the brackets for the current tax year. Having your tax advisor run a tax projection for the current year is a good idea.

Tax Tip #2. Know Your Investments’ Cost Basis

Cost basis is the price you paid when you bought a security, mutual fund share or exchange-traded fund (ETF) plus any commissions and expenses.

Before you make withdrawals, knowing your cost basis can help you determine whether you’ll have a gain or loss on your investment, as well as whether you’ll owe taxes on any gains, called capital gains taxes.

There are several cost-basis calculation methods, such as average cost or first in, first out (FIFO). You choose your preferred method at the time you purchase any mutual fund shares or securities within your brokerage accounts. You may want to discuss which method to choose with your tax advisor or CPA before you invest.

When it comes to making gifts of securities to loved ones or charities, your cost-basis method plays a crucial role in doing so in a tax-efficient manner for you and the recipient of the gift.

You’ll receive a 1099-B with cost-basis information for any mutual fund shares purchased in 2012 or later.

Tax Tip #3. Check Your Mutual Funds’ Estimated and Year-End Distribution Dates

Mutual funds buy and sell holdings throughout the year and distribute their portion of sale proceeds to shareholders (capital gains distributions), usually in December. Early estimates are often available in October and November. The fund’s price per share gets adjusted downward to make up for the distribution, so the value of the share price doesn’t increase based on the payment.

Knowing these dates—and checking on estimated capital gains distributions before the actual ones occur—can help you:

• Pick a tax-savvy time to invest. Investing in a fund close to its distribution date (called buying the distribution) could mean you may end up owing tax on distributed gains when you file your taxes. Waiting to buy fund shares until after the distribution date, called the ex-dividend date, is one way to help contain your tax costs. (Saving on your tax bill should be just one of many things you consider when you choose to invest.)

• Be prepared for potential tax bills. Checking estimated distribution amounts can help you estimate your tax bill for your upcoming tax filing. That way, you avoid any surprises.

Tax Tip #4. Review Your Investment Balances With Taxes in Mind

When you’re looking to replenish your cash flow and spending account, the investment bucket you choose can affect your tax bill. Remember, it’s what you keep from your investment earnings after taxes and fees that matters, rather than simply what you earn.

You might want to harvest gains from your taxable accounts at a time you expect those gains to benefit from the zero capital gains rate (such as when your income falls below the tax threshold) or when you have other capital losses in your portfolio.

You might also be able to sell an investment where you’ve had a loss and then apply that loss to offset capital gains and capital gains distributions, a strategy known as tax-loss harvesting.* Talk to your tax advisor to see if you could benefit from this approach.

After reviewing your portfolio asset mix, you might discover it’s strayed from its targeted allocation. That situation can arise when the markets have had dramatic gains or declines. When such a straying has occurred, you could consider first selling shares in the investment type in which you have more than your allocation. Then you can purchase shares in the investment type in which you have less. This common technique is called rebalancing.

Unless the funds are all in an IRA, retirement plan or another tax-deferred account, the rebalancing is taxable. That means you’ll also want to consider the tax implications when rebalancing your portfolio. Coordinating your rebalancing with your tax loss or gain harvesting can help provide tax savings.

Tax Tip #5. Look at Where Your Investments Are Located

The type of account (e.g., taxable, tax-deferred and tax-free) you invest in and how these accounts are taxed can make a difference tax-wise, so consider tax diversification to provide flexibility and tax efficiency.

For example, because actively managed mutual funds generally distribute capital gains—and have tax consequences—they can be better suited from a tax perspective in tax-advantaged accounts such as IRAs, other retirement plans or 529 education savings plans.

On the other hand, ETFs, which are generally more tax-efficient due to their structure, can be beneficial in taxable accounts. (Learn more about ETFs.)

Tax Tip #6. Explore if You Should Convert to a Roth IRA

Roth IRAs have gained in popularity due to their tax-free earnings growth, as well as no required minimum distributions during the lifetime of the owner. If you’re currently in a low tax bracket and expect to be in a higher one in future years, choosing a Roth IRA could make sense tax- and savings-wise for you and your heirs.

Because Uncle Sam expects his tax cut sooner or later, post-tax dollars must be used when contributing to a Roth.

You can convert your Traditional IRA to a Roth IRA—but be sure to consult with a tax professional to understand the potential tax impacts now and potential benefits later for you and your heirs.

Roth conversions have income tax consequences. You'll owe taxes on any pre-tax contributions you made, plus earnings, on the federal level and possibly the state level. To spread the taxes owed over multiple years, you might want to do several partial conversions over multiple years. Tax professionals generally suggest using nonretirement assets to make the tax payments on the Roth conversions.

Consider coordinating your partial Roth conversions during years when you expect your income to be lower than it would be in the future. Also, have your tax advisor prepare a multi-year tax projection to identify the range of annual conversion amounts.

Tax Tip #7. Don’t Wait to Contribute to Your Retirement Accounts

Whether you contribute to a Traditional or Roth IRA, you benefit from tax-advantaged investing.

Contributing earlier means you’re less likely to miss out on the tax benefits that saving in these types of vehicles can provide. You have until Tax Day of the following year—typically April 15—for these contributions to count toward the previous tax year.

Plus, your investments will have more time in the market to potentially grow in a tax-deferred manner.

Tax Tip #8. Make Sure You Take RMDs—and Review Tax Withholding for Them

If you’re over age 72 with a retirement account, be sure to take your retirement plan required minimum distributions (RMDs). You can mark your calendar or set up automatic withdrawals. If you miss taking RMDs by December 31, you could face a 25% tax penalty on the amount you failed to take.

If you inherited a retirement plan, note that certain beneficiaries may qualify for a waiver from taking 2024 RMDs, but you may consider whether it is appropriate to take those distributions before the end of the year to spread the income rather than delay until 2025.

RMDs count toward your income in the tax year they’re taken (unless you inherited a Roth account). Check the amount being withheld from each redemption to cover taxes.

Making quarterly tax payments? Having enough withheld to cover the taxes or paying the appropriate estimated amount can be especially important to avoid underpayment—and their potential interest penalties.

Tax Tip #9. Check Education Expenses and Invest in a 529

You may be able to take advantage of the tax benefits on education-related costs for your student attending college or another eligible education institution .

Income can play a factor in qualifying for education tax breaks, so check your expected income to see if you can take advantage of those deductions. You may also qualify for educational credits , such as the American Opportunity Tax Credit and the Lifetime Learning Credit .

Income limits aren’t a factor for contributions to 529 Qualified Tuition Programs , although the amount contributed can’t exceed a state's aggregate contribution limit. The limit is an estimate of the full cost, including tuition, room, and board, for a beneficiary’s undergraduate and graduate education. (The Learning Quest 529 Education Savings Plan caps the contribution amount per beneficiary at a $455,000 balance.)

Unused balances can also be rolled over to another beneficiary of the same generation in the same family or transferred to a Roth IRA for the beneficiary under the SECURE 2.0 Act rules.

Many states offer income tax benefits for residents contributing to 529 plans. If state laws permit, a contributor to your student’s 529 account generally doesn’t have to be a relative to qualify for a provided tax deduction. However, contributions must be made by December 31 to take advantage of those state tax deductions .

Tax Tip #10. Make Gifts to the Charities and Loved Ones You Care About

Generosity can be tax smart and help support the people and causes that matter to you.

For example, donating appreciated securities held for more than one year in taxable investments to a qualified charitable organization can be a win-win for both of you. When you donate securities in-kind, meaning giving the asset itself instead of proceeds from its sale, you don't pay capital gain taxes on any growth in value over what you paid for it—and you might also qualify for a charitable tax deduction.

Along with reviewing the IRS website , talking to a tax professional about this type of gift could be worthwhile.

Gifts to loved ones during your lifetime can be an effective way to reduce your taxable estate, plus have the joy of seeing people benefit from your gifts.

The IRS sets an annual gift-tax exclusion , which allows you to give someone up to a set limit without using your lifetime gift exemption. For 2024, the IRS allows you to give up to $18,000 per person. These amounts are adjusted for inflation and will be $19,000 in 2025.

You can still give more than the annual limit to an individual in the form of direct payments of education and medical expenses. You should consult with tax advisor on the reporting requirements using Form 709 when you file your taxes. Gifts beyond these levels count towards your lifetime exemption amount ($13.61 million in 2024 ). Married couples can double these amounts and gift $36,000 in 2024 per year to each recipient ($38,000 in 2025).

Planning Ahead Can Help You Get Closer to Your Investment Goals

Looking ahead has its benefits. The earlier you plan with taxes in mind, the easier and less stressful it is to identify—and take advantage of—potential benefits, plus prepare for possible consequences while you still have plenty of time.

And when you can keep your tax bill in check, you’ll have more to invest and progress toward reaching your investment goals.

Find more tax-planning help in our Tax Center.