7 Ways to Invest Smarter by Reducing Taxes

By George P. Jackson, MBA, CPA, CFA, CFP®, CMT, CLU, ChFC

The right investment strategy can minimize taxes without sacrificing growth. This article shares proven tactics to help you hold on to more of your returns.

Investing isn’t just about picking the right stocks, funds, or assets—it’s also about keeping as much of your returns as possible. Taxes can take a significant bite out of your investment gains, but with the right strategies, you can minimize your tax liability while still building wealth. Below, we explore seven practical, proven tactics to invest smarter by reducing taxes, helping your portfolio work harder for you.

1. Leverage Tax-Advantaged Accounts

One of the most effective ways to reduce taxes on investments is to use tax-advantaged accounts like IRAs, 401(k)s, or HSAs. These accounts offer tax benefits that can significantly boost your long-term returns.

• Traditional IRA or 401(k): Contributions are often tax-deductible, reducing your taxable income in the year you contribute. The investments grow tax-deferred, meaning you don’t pay taxes on gains until you withdraw the funds in retirement. For 2025, the contribution limit for a 401(k) is $23,500 (or $31,000 if you’re 50 or older), and for an IRA, it’s $7,000 (or $8,000 if 50+).
• Roth IRA or 401(k): While contributions are made with after-tax dollars, qualified withdrawals—including all gains—are tax-free. This is ideal if you expect to be in a higher tax bracket in retirement or if tax rates rise in the future.
• Health savings account (HSA): If you have a high-deductible health plan, an HSA is a triple tax-advantaged gem: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. In 2025, contribution limits are $4,300 for individuals or $8,550 for families, with an additional $1,000 catch-up for those 55+. Note that non-medical withdrawals from an HSA before age 65 are taxed as income with an additional 20% penalty.

Action Tip: Max out contributions to these accounts based on your financial situation and goals. A financial advisor can help you decide between traditional and Roth options based on your current and projected tax brackets.

2. Hold Investments Longer to Qualify for Long-Term Capital Gains

The length of time you hold an investment can drastically affect your tax bill. In the U.S., assets held for more than one year qualify for long-term capital gains tax rates, which are significantly lower than short-term rates.

• Short-term capital gains (assets held for one year or less) are taxed at your ordinary income tax rate, which can be as high as 37% for high earners in 2025.
• Long-term capital gains (assets held for more than one year, meaning one year + one day) are taxed at 0%, 15%, or 20%, depending on your income. For example, in 2025, single filers with taxable income up to $48,350 pay 0% on long-term gains, while those earning between $48,350 and $533,400 pay 15%.

Action Tip: Adopt a buy-and-hold strategy for stocks, ETFs, or mutual funds to take advantage of lower long-term capital gains rates. Avoid frequent trading unless you’re using a tax-advantaged account.

3. Tax-Loss Harvesting: Turn Losses Into Tax Savings

Tax-loss harvesting involves selling investments that have lost value to offset gains from other investments, reducing your taxable income. 

• Offsetting income: If your losses exceed your gains, you can use up to $3,000 of net losses annually to offset ordinary income, with any excess carried forward to future years.
• Avoid the wash-sale rule: Be cautious not to buy a “substantially identical” security within 30 days before or after the sale, or the IRS will disallow the loss deduction.

Action Tip: Review your portfolio at least annually (or after market downturns) to identify opportunities for tax-loss harvesting. Work with a tax professional to maintain compliance with IRS rules.

4. Invest in Tax-Efficient Funds

Not all investments are created equal when it comes to taxes. Some mutual funds and ETFs generate more taxable events than others due to frequent trading or high dividend payouts.

• Index funds and ETFs: These typically have lower turnover than actively managed funds, meaning fewer taxable capital gains distributions. ETFs are particularly tax-efficient because of their structure, which minimizes in-fund capital gains.
• Municipal bonds: Interest from municipal bonds is often exempt from federal income tax (and sometimes state taxes if issued in your state). These are especially attractive for high-income investors in higher tax brackets.

Action Tip: When investing in taxable accounts, prioritize low-turnover index funds, ETFs, or municipal bonds to minimize taxable distributions.

5. Strategically Plan Withdrawals in Retirement

How and when you withdraw money from your investment accounts can significantly impact your tax bill. A smart withdrawal strategy can help you stay in a lower tax bracket.

• Sequence withdrawals: Start with taxable accounts, then tax-deferred accounts (like traditional IRAs), and finally Roth accounts. This allows tax-advantaged accounts to continue growing longer.
• Manage required minimum distributions (RMDs): For traditional IRAs and 401(k)s, RMDs begin at age 73. Plan to strategically use your RMDs to cover large purchases and expenses.
• Roth conversions: Consider converting a portion of a traditional IRA to a Roth IRA in low-income years (e.g., early retirement before RMDs kick in). You’ll pay taxes on the conversion but enjoy tax-free withdrawals later.

Action Tip: Work with a financial planner to model withdrawal scenarios and optimize for tax efficiency based on your income and account types.

6. Take Advantage of Tax Credits and Deductions

Certain investments and financial moves can qualify you for tax credits or deductions, further reducing your tax burden.

• Saver’s credit: Low- and moderate-income investors may qualify for a tax credit of up to $1,000 ($2,000 for couples) for contributions to retirement accounts like IRAs or 401(k)s.
• Energy credits: Investments in renewable energy, such as solar panels for your home, may qualify for federal tax credits (e.g., the Residential Clean Energy Credit).

Action Tip: Consult a tax advisor to identify credits and deductions specific to your investments and financial situation.

7. Stay Informed About Tax Law Changes

Tax laws evolve, and staying ahead of changes can help you adapt your investment strategy. For instance, proposed changes to capital gains rates or retirement account rules could impact your planning. Following trusted financial news sources or working with a tax professional can keep you informed.

Action Tip: Review your investment strategy annually, especially after major tax law updates, to confirm it aligns with current regulations.

Partner With Jackson Wealth Management to Balance Growth and Tax Efficiency

Investing smarter isn’t just about chasing high returns; it’s about keeping more of what you earn. By leveraging tax-advantaged accounts, holding investments longer, harvesting losses, choosing tax-efficient funds, planning withdrawals, and staying informed, you can minimize taxes without sacrificing growth. Always consult with a financial advisor or tax professional to tailor these strategies to your unique situation.

We at Jackson Wealth Management, LLC would love to partner with you to help you take control of your financial future. If you’re ready to schedule a consultation, call (407) 585-0235, email gj@jacksonwm.com, or book online today!

About George

George P. Jackson is the CEO and CIO of Jackson Wealth Management, LLC, based in Lake Mary, Florida. With over 33 years of experience in the financial services industry, George is passionate about making a meaningful difference in his clients’ lives through comprehensive, integrated wealth management. He specializes in helping clients make confident financial decisions by serving as their trusted “one-stop shop” for anything money related, from investments and retirement planning to taxes and estate strategies.

George obtained his Bachelor of Business Administration as well as his Master of Business Administration (with an emphasis in quantitative analysis) from University of Cincinnati. His designations include Certified Public Accountant (CPA), Chartered Financial Analyst®, CERTIFIED FINANCIAL PLANNER®, Chartered Market Technician®, Chartered Life Underwriter®, and Chartered Financial Consultant®. Outside the office, he enjoys tennis, flying airplanes, traveling, spending time with his adult children, Christina and Matthew, and anything to do with the ocean. To learn more about George, connect with him on LinkedIn.

Disclaimer: This article is for informational purposes only and not a substitute for professional financial or tax advice. Consult a qualified advisor before making investment or tax-related decisions. Tax laws can change and examples may not reflect all state tax laws.