Insights

Top Tax Strategies for Investors to Maximize After-Tax Returns

By Kari Clark

Taxes play a critical role in determining your long-term returns. A smart, tax-efficient investing strategy can significantly increase your long-term returns—potentially saving you thousands, or even hundreds of thousands, of dollars over time.

For investors who are still building wealth, understanding how different accounts are taxed, which strategies to use, and how to plan for the future is essential. This article will explain the most effective tax strategies for brokerage accounts, Individual Retirement Accounts (IRAs), and IRA-to-Roth conversions.

Why Taxes Matter for Investors

When you invest, you’re not just growing your portfolio—you’re also potentially creating taxable events along the way. Dividends, interest, and capital gains may all create annual tax bills that reduce your net returns. The more tax-efficient your investment strategy, the more of your money stays in the market—growing and compounding over time.

Savvy investors prioritize after-tax returns—because it’s not just about what you earn, but what you keep. This requires strategic decisions about which accounts to use, what types of investments to hold in each account, and how and when to realize gains.

What Investors Should Be Looking For

When building your investment plan, it’s important to think about how taxes can impact your returns. Here are four key tax-related factors to consider:

  1. Account Type and Structure
    • There are three types of accounts: taxable, tax-deferred and tax-free growth.
    • Choosing the right type of account for your mix of investments can help you keep more of your returns over time.
  2. Investment Tax Efficiency
    • Some investments generate more taxable income than others. Placing them in the right account can reduce your overall tax burden.
  3. Timing of Gains and Income
    • Managing when you sell, when you receive income, and how you rebalance your portfolio can influence your tax bill.
  4. Long-Term vs. Short-Term
    • Long-term capital gains are taxed more favorably than short-term ones. Holding investments longer can result in significant tax savings.

Tax Strategies in Brokerage Accounts

Unlike retirement accounts, brokerage accounts offer flexibility—you can deposit or withdraw money at any time and invest in a wide range of assets. However, they don’t come with tax advantages, which means you may owe taxes each year on dividends, interest, and capital gains.

To make the most of your brokerage account and minimize your tax bill, keep these key strategies in mind:

1. Tax-Loss Harvesting

Selling investments that have declined in value can offset taxable gains elsewhere in your portfolio. If losses exceed gains, you can offset up to $3,000 against ordinary income each year, with the rest carried forward.

2. Tax-Gain Harvesting

If your income puts you in the 0% long-term capital gains bracket (for example, during a sabbatical or a year of lower earnings), you can sell appreciated assets, realize gains without owing tax, and immediately repurchase them to reset your cost basis.

3. Asset Location

The type of account you use to hold your investments can make a big difference in how much you owe in taxes each year:

  • Tax-efficient investments—index funds, Exchange-Traded Funds (ETFs), growth stocks and the like tend to generate fewer taxable events. These are generally well-suited for taxable brokerage accounts.
  • Tax-inefficient investments—bond funds, Real Estate Investment Trust (REITs), and actively managed funds with high turnover often produce regular taxable income. These are better placed in tax-advantaged accounts like IRAs or 401(k)s, where that income can grow without immediate tax consequences.

4. Dividend Awareness

Not all investment income is taxed the same way—especially when it comes to dividends and interest. Knowing the difference can help you build a more tax-efficient portfolio and reduce annual tax liabilities.

  • Qualified dividends are taxed at long-term capital gains rates.
  • Non-qualified dividends and bond interest are taxed as ordinary income.

Tax Planning Tips for Traditional and Roth IRAs

IRAs allow for tax-deferred or tax-free growth, making them powerful tools for long-term investors.

1. Traditional vs. Roth IRA Contributions

  • Traditional IRA: Contributions may be tax-deductible, reducing current taxable income, but withdrawals in retirement are taxed as ordinary income.
  • Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.

2. Backdoor Roth Contributions

High-income investors who exceed Roth IRA contribution limits can use the backdoor Roth strategy. This is where you contribute to a non-deductible traditional IRA, then convert the funds to a Roth IRA. See more details below.

3. Growth Without Annual Taxes

Unlike brokerage accounts, investments inside IRAs are not subject to annual taxation on dividends or gains. This makes IRAs ideal for holding tax-inefficient assets like bond funds or REITs.

How to Manage IRA-to-Roth Conversions

You can move money from a traditional IRA to a Roth IRA through a process called a Roth conversion. When you do this, you must pay income taxes on the converted amount in the year of the conversion. Once the funds are in the Roth IRA, they grow tax-free, and qualified withdrawals in retirement are not subject to any further taxes. When is the best time to convert to a Roth?

During Low-Income Years—For example, if you take a career break, start a business, or have a down year, your lower income may allow you to convert at a reduced tax cost.

Future Tax Planning—If you expect higher tax rates in the future (either due to personal income growth or potential policy changes), conversions can lock in today’s rates.

Building Tax Diversification—Having a mix of pre-tax, Roth, and taxable accounts gives you flexibility later when deciding where to withdraw from.

It’s important to be aware that converting too much at once can push you into higher tax brackets. Also, you need to have funds available to pay the conversion taxes outside of the IRA.

Coordinating Accounts for Maximum Tax Efficiency

The most effective tax strategy involves viewing all accounts together, not in isolation.

  • Brokerage accounts allow for flexibility and strategies like tax-loss harvesting.
  • IRAs provide tax-deferred or tax-free growth.
  • Roth conversions create long-term tax-free income potential.

By placing the right assets in the right accounts and managing the timing of income, investors can boost after-tax returns and reduce lifetime tax costs.

For investors, taxes are just as important as investment returns. By paying attention to where you hold investments, how you realize gains, and when you contribute to retirement accounts, you can improve your long-term wealth in meaningful ways.

The goal isn’t just to minimize taxes today—it’s to build a strategy that maximizes what you keep tomorrow. A thoughtful tax plan can help you compound wealth more efficiently, giving you a stronger foundation for your future.