“Consider tax efficient investing. First, use passively managed index funds. Index funds have low portfolio turnover which means they do not do a lot of buying and selling of securities.
This results in lower costs and fewer tax consequences. Second, consider the location of your investments.
Tax inefficient investments such as bonds generate dividends that are taxed as ordinary income. They should be placed in tax-deferred accounts like IRAs or 401ks. Tax efficient investments such as stocks generate qualified dividends and long-term capital gains that are taxed at a lower rate. They should be placed in your taxable accounts.
Third, do loss harvesting. Near the end of the year, look at the funds in your taxable accounts. If you have a fund that is at a loss sell it and either buy it back 31 days later or invest in a similar fund. The realized loss can offset your other gains. If you have more losses than gains you can apply up to $3,000 of your remaining losses against your income. Any residual losses can then be carried forward and used in future years.”
-John R. Goddard