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How Tax-Efficient Investing Could Benefit Your Post-Retirement Strategy

For those nearing or in retirement, it may feel like the investing finish line is close. Now is the time to draw down on tax-advantaged retirement accounts, not put more money into the market, right?
11/03/2022
Retiree couple with pencils and notebooks, calculating their post-retirement tax strategy.

In reality, you can utilize tax-efficient investments well into retirement. Understanding how to invest and lower taxes on investment gains can mean more money in your retirement budget.

Learn more about how these strategies could help you make more tax-mindful investment decisions.

Common Investment Taxes in Retirement

There are two types of taxes that can complicate things for investors who are approaching or are in retirement:

Capital gains taxes. When an asset is sold, the investor’s gain is taxed—or a loss may be written off on a tax return. Certain investments, such as mutual funds, also realize capital gains or losses when their underlying assets are adjusted.

Income taxes. Proceeds from asset sales or interest from investments also can get added to investors’ income for that year. These additions can be important to those receiving Social Security and especially for those who are still working.

Depending on your specific situation, you might have additional tax considerations to consider.

What Is Tax-Efficient Investing?

Tax-efficient investing helps cut down the capital gains and income taxes investors face.

Most people associate tax benefits with retirement accounts, or tax-advantaged investing. Tax-advantaged investments are either:

  • Tax-exempt. Withdrawals from these accounts are not subject to tax. Examples include Roth IRAs and Roth 401(k) plans.

  • Tax-deferred. Initial contributions aren’t taxed. This includes traditional IRAs, employer-sponsored 401(k) and 403(b) plans.

Tax-advantaged accounts come with annual contribution limits and some withdrawal limitations and penalties.

Tax-efficient investing includes retirement accounts, but also encompasses:

Exchange-traded funds (ETFs). ETFs have built-in tax advantages, making them appealing in retirement.

Bonds. Investing in municipal, Treasury or Series I bonds may be advantageous, as interest income isn’t always taxed at the federal level and may be tax-exempt at the state and local level.

Health Savings Accounts (HSAs). These accounts can be a great way to save tax-efficiently for health expenses in retirement.

Additional Tax Strategy: Tax-Loss Harvesting

One technique that’s commonly used to contain capital gains on investments is tax-loss harvesting. This method involves offsetting capital gains with capital losses. For example, if you report capital gains from a mutual fund, you may be able to offset them with losses from another investment.*

Your Post-Retirement Investment Strategy

For those in or nearing retirement, when investment income is a priority, incorporating tax-efficient vehicles could translate into owing less in taxes, which can mean more money to meet expenses and invest for your future. Approaching your investments in a tax-mindful way can help you keep more of your assets, rather than paying them to Uncle Sam.

Consider working with an advisor or tax professional to weigh your options. And if you’re reaching retirement, or already enjoying it, reach out to one of our financial consultants today to discuss how to take advantage of tax-efficient investing in retirement.

Need Additional Tax Tips?

Understand how tax rules affect your investments.

Long- and short-term capital gains are taxed at different rates. Long-term gains may only be offset by longer-term losses. Likewise, short-term gains may only be offset by short-term losses.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.

Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.

IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.