THIS WEEK’S FOCUS

Tax-Efficient Investing: How to Minimize Capital Gains and Maximize Returns 💰

Taxes—no one enjoys paying them, but when it comes to investing, understanding how to manage them is crucial. The truth is, tax efficiency can significantly boost your overall returns over time. While it’s easy to focus solely on picking the right stocks or funds, ignoring taxes can cost you in the long run.

Today, we’re breaking down tax-efficient investing—one of the most underrated ways to keep more of your profits. From smart asset placement to understanding how different accounts work, we’ll guide you through actionable strategies you can apply right now.

WHY THIS MATTERS

Why Tax-Efficient Investing Should Be on Your Radar 🧠

Before diving into specific strategies, it’s important to grasp why tax efficiency matters. Taxes reduce your returns, plain and simple. Every time you sell an asset, receive dividends, or earn interest, the IRS is standing by to take a slice of the pie.

Here’s the kicker: taxes are a controllable factor in your investment strategy. You may not be able to control market volatility, but with the right approach, you can minimize how much of your gains are lost to taxes.

INVESTMENT OPPORTUNITY

Unlock Tax-Efficient Gains with T. Rowe U.S. Equity Research Tracker 🚀

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Imagine what that could mean for your portfolio over time—especially when combined with a tax-efficient approach that maximizes your take-home gains 💸.

With an annual return of 34.73% and a focus on high-growth sectors like technology (51%) and consumer cyclical (32%), this strategy offers:

👉 Minimal trades per day (0.01), which keeps capital gains taxes lower
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Don't miss out on the potential to grow your wealth while reducing your tax liability—check out the strategy now and see how you can benefit from smarter, tax-efficient investing strategies!

SHORT TERM VS. LONG TERM GAINS

The Two Types of Capital Gains: What You Need to Know 🏛️

Capital gains are classified into two categories:

• Short-term capital gains: These occur when you sell assets you’ve held for less than a year and are taxed at your ordinary income rate, which can be as high as 37%.

• Long-term capital gains: These are realized when you hold assets for more than a year, and they’re taxed at much lower rates—0%, 15%, or 20%, depending on your income bracket.

💡 Pro tip: Whenever possible, aim to hold your investments for more than a year to take advantage of lower long-term capital gains tax rates. Even a small reduction in your tax rate can have a huge impact on your net returns over time.

STRATEGIC ASSET LOCATION

The Right Investments in the Right Accounts ✨

One of the most effective ways to reduce your tax burden is through asset location. The idea here is to place tax-efficient investments in taxable accounts and tax-inefficient investments in tax-advantaged accounts, like IRAs or 401(k)s. Let’s break that down:

• Tax-efficient assets: These include investments like index funds or growth stocks, which typically have lower turnover and don’t generate frequent taxable events. These are ideal for taxable accounts.

• Tax-inefficient assets: These include bonds, REITs, and high-dividend-paying stocks. Interest and dividends from these investments are taxed as ordinary income, so it’s best to hold them in tax-deferred accounts like a traditional IRA or 401(k).

By being smart about where you hold certain types of assets, you can significantly lower your tax liability and keep more of your profits working for you.

TIP FROM THE PROS

Tax-Loss Harvesting: Turning Losses Into Opportunities 📉➡📈

Nobody likes to lose money in the market, but with tax-loss harvesting, you can turn those losses into a tax advantage. This strategy involves selling investments that have lost value to offset gains from other investments, reducing your taxable capital gains.

Here’s how it works:

• If you sell an asset at a loss, you can use that loss to offset capital gains from other assets.

• If your losses exceed your gains, you can use up to $3,000 per year to offset ordinary income, and carry any remaining losses forward to future years.

Tax-loss harvesting is especially effective during volatile market conditions, as it allows you to make the most of your losses without hurting your overall portfolio performance. Plus, Surmount’s automated platform makes it easy to implement this strategy without the hassle of manually tracking losses and gains.

TAX-ADVANTAGED ACCOUNTS

Maximize Your Tax Savings 🔄

When it comes to minimizing taxes, few tools are more effective than tax-advantaged accounts like IRAs, 401(k)s, and HSAs. Here’s how they work:

• Traditional IRA/401(k): Contributions are made pre-tax, and your investments grow tax-deferred. You’ll pay taxes when you withdraw in retirement, but by then, you may be in a lower tax bracket.

• Roth IRA/401(k): Contributions are made post-tax, but your investments grow tax-free, and qualified withdrawals in retirement are also tax-free. This is a great option if you expect to be in a higher tax bracket in the future.

• Health Savings Accounts (HSAs): These accounts offer a triple tax advantage—contributions are tax-deductible, earnings grow tax-free, and withdrawals for medical expenses are tax-free.

By maxing out these accounts, you can minimize your taxable income now and enjoy tax-free or tax-deferred growth.

ESTATE PLANNING AND TAX EFFICIENCY

Estate Planning and Tax Efficiency: Planning for the Future 🏡

Tax efficiency doesn’t end with your lifetime. If you’re planning to pass on wealth to your heirs, it’s worth understanding how taxes play into that transfer. Estate taxes can take a chunk of your wealth if your estate exceeds certain thresholds.

• One tax-efficient strategy for passing on wealth is gifting stocks to family members in lower tax brackets. When they sell the stock, they’ll pay less in capital gains taxes.

• Another tool to consider is the step-up in basis rule, which allows heirs to avoid paying taxes on unrealized gains. When an asset is inherited, its cost basis is “stepped up” to the current market value, potentially eliminating large capital gains taxes.

It’s always smart to plan ahead, especially if you have significant assets to pass down. Consulting a tax advisor or estate planner can ensure you’re maximizing tax efficiency across generations.

HELPFUL TIPS

Beyond Just Taxes… 💡

To truly optimize your investment strategy, tax efficiency is just one piece of the puzzle. Here are a few related topics that can help you take a more holistic approach:

1. Rebalancing Your Portfolio: While keeping your portfolio in line with your target allocation is key, doing so too frequently can trigger capital gains taxes. Consider tax-efficient rebalancing strategies or using tax-advantaged accounts for major shifts.

2. Managing Inflation: Inflation can erode the real value of your investments over time. By keeping your portfolio tax-efficient, you help offset some of the hidden costs of inflation that slowly eat away at your wealth.

3. Roth Conversions: If you expect your tax rate to rise in the future, consider converting traditional IRA funds into a Roth IRA. You’ll pay taxes now but enjoy tax-free growth and withdrawals down the line.