The Art of Tax Planning: Optimizing Your Investments for Lower Taxes

Tax planning can help you decide which accounts to use, where to hold investments, and when to recognize income or investment gains and losses. These decisions may help manage taxes while supporting your long-term financial goals.

How Can I Structure My Investments and Assets to Manage My Tax Burden?

When tax season arrives, many people focus on forms, deadlines, and what they owe. Tax preparation looks at activity that has already happened. Tax planning takes a forward-looking approach.

Tax planning involves reviewing your income, expenses, investments, and financial goals to identify choices that may improve your after-tax results. Because tax rules and personal circumstances vary, consider working with a qualified tax professional and financial advisor before making changes.

Understanding Asset Location

Asset location is the process of deciding which investments to hold in taxable, tax-deferred, or tax-free accounts. It is separate from asset allocation, which determines how your portfolio is divided among investment types.

Different accounts receive different tax treatment:

• Taxable brokerage accounts may generate taxable interest, dividends, and capital gains.
• Traditional 401(k) contributions are generally made on a pre-tax basis. Traditional IRA contributions may be deductible depending on your income, filing status, and workplace retirement-plan coverage.
• Roth IRA and Roth 401(k) contributions are made with after-tax dollars. Qualified distributions are generally tax-free.
• Health savings accounts may provide federal tax advantages for eligible individuals when the money is used for qualified medical expenses.

The right mix of accounts depends on your financial situation, expected tax rates, income needs, and long-term goals.

Traditional and Roth Accounts

Choosing between traditional and Roth contributions often involves comparing your current tax rate with the rate you expect to face later.

Traditional contributions may provide a current tax benefit and could be helpful when you expect your current tax rate to be higher than your future rate.

Roth contributions do not provide a current federal income-tax deduction, but qualified distributions are generally tax-free. They may be helpful when you expect your future tax rate to be higher than your current rate.

Future tax rates are uncertain, so some investors divide their savings between traditional and Roth accounts to create more flexibility during retirement.

2026 Contribution Limits

For 2026, the combined contribution limit for traditional and Roth IRAs is $7,500. People age 50 and older may contribute an additional $1,100. Eligibility to deduct traditional IRA contributions or contribute directly to a Roth IRA may depend on income and other factors.¹

Eligible individuals may contribute up to $4,400 to an HSA with self-only coverage or $8,750 with family coverage in 2026.²

These limits are adjusted periodically and should be reviewed each year.

Roth Conversions and Health Savings Accounts

People whose income prevents them from contributing directly to a Roth IRA may consider a Roth conversion strategy. A conversion moves money from a traditional IRA into a Roth IRA. Any previously untaxed amount converted is generally included in taxable income for that year.

Because Roth conversions can have immediate and long-term tax consequences, review the strategy with a tax professional before moving money.

An HSA may also provide tax benefits for people who meet the eligibility requirements. Contributions may be deductible or excluded from federal taxable income, account earnings can grow tax-deferred, and distributions for qualified medical expenses are generally tax-free at the federal level.

Choosing Investments for Different Accounts

Some investments regularly generate taxable interest, dividends, or capital-gain distributions. Holding these investments in a tax-deferred or tax-free account may reduce current taxable income.

Investments that generally produce fewer taxable distributions may be suitable for taxable accounts. This can include certain index funds and exchange-traded funds, although their tax treatment varies.

Municipal bonds may provide interest that is exempt from federal income tax. However, the tax treatment can depend on the type of bond and the investor’s circumstances. A municipal bond’s lower yield, credit risk, and interest-rate risk should also be considered.

Tax treatment is only one factor when choosing an investment. Your goals, risk tolerance, time horizon, fees, and need for access to the money also matter.

Other Tax-Planning Strategies

Tax-loss harvesting involves selling an investment at a loss to offset certain realized capital gains. The proceeds may then be reinvested in an investment that supports the portfolio’s strategy.

The wash-sale rule may prevent a loss from being deducted when substantially identical securities are purchased within 30 days before or after the sale.³ Tax-loss harvesting should be coordinated across accounts and reviewed carefully with a tax professional.

Charitable giving may also be part of a tax-planning strategy. Depending on the person’s situation, giving appreciated securities or using another charitable-giving method may provide different tax results than giving cash.

The timing of Social Security benefits and retirement-account distributions can also affect a retirement income plan. Delaying Social Security beyond full retirement age can increase the monthly benefit until age 70, although the best claiming decision depends on health, income needs, life expectancy and other household benefits.⁴

Building a Coordinated Tax Strategy

Tax planning should be coordinated with your investment plan, retirement goals, and expected cash needs. A strategy that works well for one person may not be appropriate for another.

Review your plan regularly with your financial advisor and tax professional, especially after major income changes, investment transactions, retirement decisions, or changes in tax law.

Connect with OneDigital’s Wealth Management team to learn more.

 

Tax loss harvesting is a strategy that involves selling securities at a loss to offset capital gains and potentially reduce your overall tax liability. While this may include certain benefits such as tax deferral and reduction, or potential opportunities to rebalance your portfolio with a lower tax cost. There are also risks associated with the strategy such as the loss being disallowed due to the Wash-Sale rule should you repurchase the same or identical security within 30 days before or after the sale. There is no guarantee of tax savings. Benefits will depend various items, including but not limited to, your individual tax situation, type of account holding your investments, whether losses are short-term or long-term, and any changes to current tax laws.

Investment advice offered through OneDigital Investment Advisors LLC, an SEC-registered investment adviser and wholly-owned subsidiary of OneDigital. These materials are provided for informational and educational purposes only and do not constitute a recommendation to buy, sell, or hold any security, nor do they constitute legal, accounting, investment, or tax advice. The materials and the information provided are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. All included information and data are limited only to the inputs and other financial assumptions indicated.