Taxes: Your Silent Partner

When most people think about investing, they focus on markets, returns, and risk. What often goes unnoticed is a silent partner that can quietly erode results over time: income taxes.

Unlike market volatility, taxes are not random. With thoughtful planning, their impact can often be reduced, sometimes significantly. The challenge is that many investors make decisions about their investments and taxes in isolation rather than as part of a coordinated strategy.

Below are three key strategies to consider that are designed to help reduce the long‑term drag of taxes on your portfolio, followed by the most important principle of all: planning investments and taxes simultaneously.

As Judge Learned Hand famously wrote in a 1934 tax case, “Anyone may so arrange his affairs that his taxes shall be as low as possible… there is not even a patriotic duty to increase one’s taxes.” In other words, smart tax planning isn’t avoidance – it’s stewardship.

Strategy #1: What You Own Matters

Not all investments are taxed the same way.

One of the clearest distinctions is between tax‑efficient investments and those that tend to generate higher ongoing tax bills. For example, many actively managed mutual funds trade frequently. When they realize gains inside the fund, those gains are passed along to shareholders as taxable distributions each year – even if you never sell a share yourself.

By contrast, broadly diversified index‑oriented and tax‑managed strategies typically trade less. Fewer trades often mean fewer taxable events which can translate into greater tax efficiency over time.

This matters most in non‑retirement accounts where taxes are due annually. Over long periods, reducing unnecessary taxable distributions can potentially improve what you keep, not just what you earn.

Strategy #2: Where You Own Is Just as Important

Once you’ve built a diversified investment allocation, the next question becomes where each investment is held.

Different accounts are taxed differently, and the U.S. tax code distinguishes between:

• Ordinary income, which can be taxed at rates as high as 37%
• Long‑term capital gains whose tax rates top out at 20%

This creates planning opportunities.

A simple example:

• Interest from bonds and CDs is taxed as ordinary income
• Gains on stocks held long‑term are taxed at capital gains rates

Because of this difference, many investors benefit from holding:

• Fixed‑income investments inside tax‑deferred accounts (like IRAs), where taxes on interest are postponed
• Equity investments in taxable accounts, where long‑term capital gains rates may apply and capital losses may potentially be harvested.

This approach – often referred to as asset location – does not change your overall investment strategy. It simply aligns each investment with the account where it may be taxed more favorably.

Over decades, this can have a substantial impact on after‑tax results.

Strategy #3: Withdrawals Should Be Tax‑Efficient Too

Taxes don’t just matter while you’re accumulating wealth – they matter just as much when you start taking money out.

When cash is needed, the goal is not only to meet spending needs, but also to do so as tax‑efficiently as possible while still maintaining your long‑term investment strategy.

Investors with multiple account types often have flexibility:

• Taxable accounts may allow for capital gains planning or the use of losses
• Retirement accounts offer opportunities to manage when income is recognized

In some cases, coordinating withdrawals across accounts can significantly reduce, or even eliminate, taxes on the dollars withdrawn.

Just as important, withdrawals should be coordinated with portfolio rebalancing so that your overall allocation remains aligned with your long‑term plan.

The Most Important Strategy: Plan Investments and Taxes Together

Here’s the central strategy: Investment decisions should never be made in a vacuum.

Many people plan their investments first and deal with taxes later. Over time, that approach can quietly cost them far more than necessary.

The most effective planning happens when investment strategy and tax strategy are designed together, as two parts of the same decision‑making process.

When investments and taxes are coordinated:

• More of your return potentially stays in your pocket
• You gain greater control over when and how taxes are paid
• Your savings and investments can be directed toward what matters most – family, experiences, and charitable goals

Taxes may be a silent partner, but with thoughtful planning, they may not  have to be an expensive one.

The ultimate goal isn’t to avoid taxes, it’s to pay only what you’re legally required to pay, and not a dollar more. That’s not just smart planning. It’s smart stewardship of the wealth you’ve worked hard to build.

How We Can Help

Our role is to help you make smarter decisions by coordinating investment strategy and tax planning together – not separately. By aligning what you own, where you own it, and how you access your money, we focus on improving what truly matters: your after‑tax results and long‑term financial confidence.

Thoughtful planning can’t eliminate taxes, but it can help ensure you’re paying no more than required so more of your hard‑earned wealth goes toward the life you want to live.