Tax-Efficient Investing

Episode 24 of The Smarter Money Show explores tax-efficient investing, offering strategies to minimize taxes and maximize long-term portfolio growth. It highlights how taxes erode returns, with examples showing that a 20% annual tax can reduce a $10,000 investment’s 30-year growth from $76,000 to $44,000. Key strategies include using tax-advantaged accounts like Roth IRAs, holding investments for over a year, choosing low-turnover ETFs, practicing tax-loss harvesting, and optimizing asset location.

Real-world examples, like saving $23,000 in taxes via a Roth IRA or $1,800 through loss harvesting, illustrate the impact of these techniques. A step-by-step action plan guides investors to assess their tax situation, prioritize tax-advantaged accounts, and monitor tax law changes to enhance after-tax returns.

Episode Transcript

Speaker 1 (00:00):
As always before we begin, this podcast is for informational
and educational purposes only. It is not financial advice. Always
do your own research and consult with a licensed advisor
before making any investment decisions. Welcome back to the Smarter
Money Show. I'm your host, and this is episode twenty four.
Today we're diving deep into a topic that can transform

(00:21):
your long term wealth building journey, tax efficient investing. If
you've ever opened your brokerage statement and groaned at how
much of your returns are eaten up by taxes, this
episode is for you. We're going to unpack practical legal
strategies to keep more of your hard earned gains in
your pocket and out of the tax collector's hands. Whether
you're in the US, Germany, Canada, or beyond. Tax efficient

(00:43):
investing isn't about evading taxes or cutting corners. It's about
leveraging the tax code to minimize your tax burden while
maximizing your portfolios growth. Whether you're investing in stocks, bonds, ETFs,
real estate, or even alternative assets, Understanding how taxes impact
your returns can accelerate your path to financial independence. This
approach is critical for long term investors who want to

(01:05):
harness the full power of compounding without losing a significant
portion of their gains to Uncle Sam, the finanzo, or
their local tax authority. By making smart choices about account types,
investment vehicles, and timing, you can keep more of your
wealth working for you over decades. Over the next forty
plus minutes will cover why taxes are a silent killer
of investment returns and how they compound over time, the

(01:28):
different types of investment taxes from capital gains to foreign withholding,
and how they vary globally. A comprehensive set of strategies
to minimize taxes, including account types, asset location, and tax
loss harvesting, real world examples and historical data showing tax
efficient investing in action, common tax traps and mistakes that

(01:49):
can derail your strategy. A detailed step by step action
plan to build or refine a tax efficient portfolio. Let's
dive in why taxes matter. Taxes are one of the
biggest obstacles to building wealth through investing. Every dollar you
pay in taxes is a dollar that can't compound over
time and over decades. This can lead to staggering differences

(02:11):
in your portfolio's value. Let's run the numbers. If you
invest ten thousand dollars and earn seven percent annually after fees.
After thirty years, you'd have about seventy six thousand dollars
in a tax free environment. But if you're paying a
twenty percent tax on your gains each year, that same
investment grows to just forty four thousand dollars of forty
two percent reduction over forty years, the gap widens one

(02:34):
hundred and forty nine thousand dollars without taxes versus seventy
four thousand dollars with taxes. That's a loss of half
your potential wealth simply due to taxes. This isn't just
a US issue. In Germany, a twenty six point three
seven five percent flat tax on capital gains and dividends
can erode returns, while in Canada, high income earners face
up to thirty three percent on investment income. The goal

(02:57):
of tax efficient investing is to structure your portfolio to
minimize this drag, using legal strategies like tax advantaged accounts,
smart asset selection, and timing. By reducing your tax bill
by even one two percent annually, you can add tens
or hundreds of thousands to your portfolio over a lifetime.
The key is to start early, as the benefits of

(03:18):
tax efficiency compound. Just like your investments, taxes also affect
your investment decisions psychologically. High tax bills can tempt you
to trade less frequently or avoid selling winners, which might
not align with your strategy. By planning for taxes upfront,
you gain flexibility and confidence knowing you're keeping more of
your returns. Types of investment taxes. To invest tax efficiently,

(03:44):
you need to understand the main types of taxes that
hit your portfolio and how they vary by country. Capital
gains taxes. These apply when you sell an asset for
a profit. In the US, long term capital gains assets
held over a year are taxed at zero percent, fifteen percent,
or twenty percent based on income. For example, zero percent

(04:06):
for married couples with taxable income below ninety four thousand
and fifty dollars in twenty twenty five, and fifteen percent
up to five hundred and eighty three thousand, seven hundred
and fifty dollars. Short term gains held less than a
year are taxed as ordinary income up to thirty seven percent.
In Germany, capital gains face a flat twenty six point

(04:26):
three seven five percent tax Abgeltungstaire, while in Canada fifty
percent of capital gains are taxable at your marginal rate
up to thirty three percent. Dividend taxes. Qualified dividends from
most US companies held over sixty days are taxed at
long term capital gains rates. In the US, non qualified dividends,
for example, from rates or some foreign firms, are taxed

(04:50):
as ordinary income up to thirty seven percent. In Canada,
eligible dividends from Canadian companies receive a tax credit, reducing
the effective rate, while in Germany all dividends face the
twenty six point three seven five percent flat tax unless
held in tax advantaged accounts. Interest income taxes interest from bonds,

(05:10):
savings accounts or CDs is typically taxed as ordinary income
in the US. This can reach thirty seven percent in
Germany twenty six point three seven five percent in the
UK up to forty five percent for high earners. Municipal
bonds in the US are a key exception, often exempt
from federal and sometimes state taxes. Foreign withholding taxes International

(05:33):
stocks or ETFs may face dividend withholding taxes by foreign governments.
For example, US stocks withhold thirty percent for non residents,
though tax treaties for example fifteen percent for Germans or
Canadians can reduce this. Your broker may help reclaim these taxes,
but it depends on your country and account type. Each
country's tax system has nuances. For instance, Australia's franking credits

(05:57):
offset dividend taxes, while the UK offers an annual capital
gains tax allowance six pounds in twenty twenty five. Always
check your local tax laws or consult a tax professional
to understand your obligations. Strategies for tax efficient investing. Here
are six proven strategies to minimize taxes on your investments,

(06:18):
with practical tips for implementation. Maximize tax advantage accounts. Accounts
like iras four hundred and one kas, wroth iras or
tfsa's Canada allow your investments to grow tax free or
tax deferred. A traditional IRA or four to one K
defers taxes until withdrawal ideal if you expect a lower

(06:42):
tax bracket in retirement, a wroth IRA or TFSA offers
tax free withdrawals, perfect for younger investors or those anticipating
higher future taxes. In Germany, a resterer pension or Betria
Blische Alta's VORSORCA provides similar benefits. For example, contributing seven

(07:02):
thousand dollars annually to a roth Ira in twenty twenty
five can save you thousands in taxes over decades. Prioritize
these accounts before investing in taxable accounts hold investments longer.
Holding assets for over a year qualifies for lower long
term capital gains rates. For instance, selling a stock after
thirteen months might incur a fifteen percent tax in the US,

(07:23):
while selling after eleven months could trigger a thirty seven
percent tax in Germany. Holding stocks in a taxable account
for over a year can sometimes reduce tax liability. Depending
on the asset, A buy and hold strategy not only
lowers taxes, but also aligns with long term wealth building.
Choose tax efficient investments ETFs and index funds. These have

(07:45):
low turnover, minimizing capital gains distributions. For example, the Vanguard
s and P five hundred ETF VOO zero point zero
three percent expense ratio rarely distributes gains, unlike actively managed
funds with fifths ventty one hundred percent annual turnover. Growth
stocks companies like Amazon, Tesla or alphabet which pay no dividends,

(08:08):
defer taxes until you sell, as all returns come from
price appreciation. Municipal bonds. In the US, municipal bond interest
is often exempt from federal taxes and state taxes if
you buy bonds from your state. For example, a four
percent municipal bond is equivalent to a five point three
percent taxable bond for someone in the twenty four percent
tax bracket. International ETFs choose US listed ETFs for foreign

(08:32):
exposure to simplify tax reporting and potentially reduce withholding taxes,
practice tax laws harvesting sell investments at a loss to
offset gains elsewhere, reducing your taxable income. For example, if
you sell a tech ETF for a ten thousand dollars
gain and an energy stock for a ten thousand dollars loss,
your taxable gain is zero, saving you one thousand, five

(08:53):
hundred dollars three thy seven hundred dollars in taxes, depending
on your rate. The US allows up to three thousand
dollars in net losses annually to offset ordinary income. Avoid
the wash sale rule by waiting thirty one days before
repurchasing a similar asset or buying a comparable ETF for
example TECHL to VD optimize asset location, place tax inefficient assets.

(09:19):
For example, bonds raites high dividend stocks in tax advantage
accounts to avoid annual taxes on interest or dividends. Keep
tax efficient assets for example, ETFs growth stocks in taxable accounts.
For example, hold a bond fund yielding four percent in
an IRA to defer taxes on interest while keeping Voo

(09:41):
one point eight percent dividend in a taxable account where
its dividends qualify for lower rates. This can save hundreds
annually in taxes, minimize turnover, frequent trading triggers, short term
capital gains, taxes, and brokerage fees. A buy and hold
strategy reduces taxable events, letting your investments compound on an
interrupted For example, an investor who trades monthly might face

(10:03):
thirty seven percent taxes on gains, while a buy and
hold investor pays fifteen percent after a year, saving thousands
over time. Real world examples. Let's explore tax efficient investing
through detailed examples. Example one wroth Ira Growth Sarah thirty
invests six thousand, five hundred dollars annually in a roth

(10:26):
IRA buying VEEO after twenty years at seven percent annual returns,
her one hundred thirty thousand dollars in contributions grows to
two hundred eighty three thousand dollars, all tax free. Upon
withdrawal in retirement. In a taxable account with fifteen percent
capital gains tax, she'd owe twenty three thousand dollars in taxes,

(10:48):
reducing her net to two hundred sixty thousand dollars. Over
thirty years, the tax savings grow to sixty thousand dollars,
highlighting the power of tax free accounts. Example two tax
loss harvesting. John sells a tech etf XLK for a
fifteen thousand dollars gain, but also sells an energy stock
at a twelve thousand dollars loss. During a market dip,

(11:09):
his taxable gain drops to three thousand dollars, saving him
one thousand, eight hundred dollars in taxes at fifteen percent.
He reinvests the proceeds into a similar etf VD after
thirty one days to avoid the wash sale rule. During
the twenty twenty market crash, investors using the strategy offset
gains from tech winners like Zoom with losses from energy stocks,

(11:31):
saving thousands in taxes. Example three asset location. Maria holds
a bond fund yielding four percent two thousand dollars annually
in her IRA, avoiding seven hundred and forty dollars in
annual taxes thirty seven percent rate. She places VU in
her taxable account, where it's one point eight percent dividend

(11:52):
nine hundred dollars on fifty thousand dollars is taxed at
fifteen percent one hundred and thirty five dollars. She reversed
this holding the bond fund in a taxable account, she'd
pay seven hundred and forty dollars annually versus one hundred
and thirty five dollars, costing her six hundred and five
dollars more per year. Over ten years, this strategy saves

(12:14):
her six thousand and fifty dollars. Example four Municipal bonds. David,
a high income earner in the thirty seven percent tax bracket,
invests one hundred thousand dollars in a municipal bond fund
yielding three dot five percent COMMA tax free. This is
equivalent to a five point six percent taxable bond, saving
him seven hundred and forty dollars annually, compared to a

(12:36):
corporate bond fund. During the nineteen eighties, when tax rates
were higher, municipal bonds were a go to for wealthy investors,
and they remain a staple for tax efficiency today. Common
tax traps and mistakes tax efficient investing requires discipline to
avoid these pitfalls. Ignoring tax advantaged accounts, Failing to contribute

(12:57):
to iras four hundred and one K or tfsas means
missing out on tax free or deferred growth. For example,
maxing out of four h one K twenty three thousand
dollars in twenty twenty five can save eight thousand, five
hundred and ten dollars annually for someone in the thirty
seven percent bracket. Frequent trading selling stocks within a year

(13:19):
trigger short term taxes up to thirty seven percent. In
the US, holding for thirteen months can cut the rate
to fifteen percent, saving thousands. Overlooking wash sale rules repurchasing
a stock within thirty days of selling it for a
loss voids the tax benefit plan sales Carefully using similar
but not identical assets for example, spy to v Misplacing

(13:44):
assets holding bonds or REITs and taxable accounts generates annual taxes,
while ETFs in iras, waste tax advantage space, Optimize asset
location for maximum efficiency forgetting foreign taxes, International and vents
may face fifteen thirty percent withholding taxes on US dividends.
For example, a German investor holding fifty thousand dollars in

(14:08):
VO one point eight percent dividend loses one hundred and
thirty five dollars annually unless their broker reclaims taxes via treaties.
Neglecting tax law changes, tax rates and rules evolve. For instance,
US capital gains rates may rise post twenty twenty five
if tax cuts expire. Stay updated via financial news or

(14:29):
a tax advisor. Step by step action plan ready to
make your portfolio more tax efficient. Here's a detailed roadmap.
Assess your tax situation. Review your income, tax bracket and
local tax rules for example, US capital gains, German abdultung Stewer,
Canadian dividend tax credits. Use tools like TurboTax tax Act

(14:54):
or a local tax advisor to estimate your tax liability.
Maximize tax advantage accounts. Contribute the maximum to iras seven
thousand dollars in twenty twenty five four hundred and one
Ka's twenty three thousand dollars or equivalents like tfsa's or
reaster pensions. Prioritize WROTH accounts for tax free growth if

(15:14):
your income allows, for example under one hundred and sixty
one thousand dollars for singles in twenty twenty five. Choose
tax efficient investments. Focus on low turnover ETFs for example
voo SCHB expense ratios zero point zero three, zero point
zero four percent, growth stocks for example Tesla, Alphabet or

(15:37):
municipal bonds for taxable accounts. Avoid high turnover funds or
riits in taxable accounts. Implement asset location place bonds riri it's,
or high dividend stocks for example a tant in iras
or four hundred and one ktas. Keep ETFs and growth
stocks in taxable accounts. Review your portfolio annually to ensure

(15:57):
optimal placement practice tax loss harvesting. Check your portfolio quarterly
for loss opportunities, especially during market dips. Offset gains with losses,
and reinvest in similar assets after thirty one days. For example,
sell a losing energy etft XLE and buy VD. Minimize turnover.
Adopt a buy and hold strategy, trading only when necessary

(16:21):
for example, rebalancing or harvesting losses. Aim to hold assets
for at least a year to qualify for lower tax rates.
Stay informed, monitor tax law changes via financial news for
example Bloomberg, Financial Times or your broker's resources. Adjust your
strategy if rates or rules shift, such as potential US
tax hikes in twenty twenty six. For example, an investor

(16:44):
in twenty twenty five might max out a wroth IRA
with vou hold a bond fund in a traditional IRA,
and keep growth stocks like Nvidia in a taxable account.
They'd harvest losses during a market dip, offsetting five thousand
dollars in gain to save seven hundred and fifty dollars
eight hundred and fifty dollars in taxes, and rebalance annually

(17:06):
to maintain tax efficiency. Tax efficient investing isn't about avoiding taxes.
It's about being strategic to maximize your after tax returns.
By leveraging tax advantage accounts, choosing tax efficient investments, optimizing
asset location, and timing trades wisely, you can significantly boost
your long term wealth. It's a disciplined approach that requires

(17:27):
some planning, but pays off by ensuring your portfolio works
as hard as you do keeping more of your gains
where they belong, in your pocket. As a reminder, this
podcast is for informational and educational purposes only. It is
not financial advice. Always do your own research and consult
with the licensed advisor before making any investment decisions. If

(17:47):
you found this deep dive valuable, follow the Smarter Money Show,
leave a review and share it with someone who wants
to keep more of their investment gains. They might be
surprised at how much they can save with a few
smart moves. In our next sept will explore alternative investments,
how assets like real estate, commodities, or private equity can
diversify your portfolio and potentially enhance returns in any market environment.

(18:11):
Until then, stay smart, stay patient, and stay invested.