Pay attention to your portfolio
“Two basic steps that people of all ages and income levels can take to minimize their income tax liability are:
1. Take full advantage of all pre-tax employee benefits available to you through your employment, whether you work for a company or are self-employed. These include retirement savings plans as well as benefits such as health insurance, life and disability insurance, and flexible spending accounts.
2. Pay attention to the location of investment assets within your overall investment portfolio. Structure your portfolio so that your most tax inefficient investments are held within tax-deferred or tax-free accounts (401k or 403b, Traditional IRA, Roth IRA, etc.) and more tax-efficient investments are held in taxable accounts.
Tax-efficient investments generally consist of individual stocks, stock index funds and ETFs, and individual municipal bonds and municipal bond funds because they generate income that is taxed at lower preferential tax rates. Tax inefficient investments generally include taxable bonds and bond funds, high turnover actively managed stock funds, REITs, and various “alternative investments” because they typically generate ordinary income and/or short-term capital gains that are taxed at higher tax rates.
As always, consult with your tax and investment professionals to optimize the tax efficiency of your investment portfolio.”