10 Tips for Tax-Savvy Investing

For most people, taxes come to mind twice a year: December 31, when many deduction deadlines occur, and April 15, when individual income tax returns are usually due.

Taking a few planning-focused steps throughout the year may mean fewer surprises and less stress during tax prep—and a potentially lower tax bill, too.

Tax Tip #1: Understand and Project Your Current Year Tax Bracket

Your income tax bracket can play a big role in informing your decision when making an investment move or holding off for a while. Not only can tax legislation change the overall tax rates and rules, but your personal tax brackets can change from year to year as well.

Refer to our Tax Fast Facts to review the brackets for the current tax year.

Tax Tip #2: Know Your Investments’ Cost Basis

Cost basis is the price you paid when you bought a security, mutual fund share or exchange-traded fund (ETF) plus any commissions and expenses.

Before you make withdrawals, knowing your cost basis can help you determine whether you’ll have a gain or loss on your investment, as well as whether you’ll owe taxes on any gains, called capital gains taxes (depending on your holding period).

There are several cost-basis calculation methods, such as average cost or first in, first out (FIFO). You choose your preferred method at the time you purchase any mutual fund shares or securities within your brokerage accounts. You may want to discuss which method to choose with your tax advisor or CPA before you invest.

When it comes to making gifts of securities to loved ones or charities, your cost-basis method plays a crucial role in doing so in a tax-efficient manner for you and the recipient of the gift.

You’ll receive a 1099-B with cost-basis information (usually in late January¹) for any American Century mutual fund shares purchased in 2012 or later.

Tax Tip #3: Check Your Mutual Funds’ Estimated and Year-End Distribution Dates

Knowing important dates—and checking on American Century’s estimated capital gains distributions before the actual ones occur—can help you:

• Pick a tax-savvy time to invest. Investing in a fund close to its distribution date (called buying the distribution) could mean you may end up owing tax on distributed gains when you file your taxes. Waiting to buy fund shares until after the distribution date, called the ex-dividend date, is one way to help contain your tax costs. (Saving on your tax bill should be just one of many things you consider when you choose to invest.)

• Be prepared for potential tax bills. Checking estimated distribution amounts can help you estimate your tax bill for your upcoming tax filing. That way, you avoid any surprises.

Tax Tip #4: Look at Where Your Investments Are Located

The type of account (e.g., taxable, tax-deferred and tax-free) you invest in and how these accounts are taxed can make a difference taxwise, so consider tax diversification to provide flexibility and tax efficiency.

For example, because actively managed mutual funds generally distribute capital gains—and have tax consequences—they can be better suited from a tax perspective in tax-advantaged accounts such as IRAs, other retirement plans or 529 education savings plans.

On the other hand, exchange-traded funds (ETFs), which are generally more tax efficient due to their structure, can be beneficial in taxable accounts.

Tax Tip #5: Consider Taxes and Investment Location When Making Withdrawals

If you’re looking to withdraw money, the investment you choose can affect your tax bill. Remember, it’s what you keep from your investment earnings after taxes and fees that matters, rather than simply what you earn.

Tax-Loss Harvesting

You might also be able to sell an investment where you’ve had a loss and then apply that loss to offset capital gains and capital gains distributions, a strategy known as tax-loss harvesting.* Beware of the wash-sale rules, and talk to your tax advisor to see if you could benefit from this approach.

Rebalancing

After reviewing your portfolio asset mix, you might discover it has strayed from its targeted allocation due to gains or declines. To return to your optimal mix, consider rebalancing: selling shares in the investment type where you have more than your desired allocation and then purchasing shares in the type where you have less.

Unless the funds are all in an IRA, retirement plan or another tax-deferred account, the rebalancing may create taxable gains. That means you’ll also want to consider the tax implications when rebalancing your portfolio.

Coordinating your rebalancing with your tax loss or gain harvesting can help provide tax savings.

Tax Tip #6: Explore Roth IRA Conversions

Roth IRAs have gained in popularity due to their tax-free earnings growth, as well as no required minimum distributions during the lifetime of the owner. If you’re currently in a low tax bracket and expect to be in a higher one in future years, choosing a Roth IRA could make sense for you and your heirs. Post-tax dollars must be used when contributing to a Roth.

You can convert your traditional IRA or employer plan to a Roth—but be sure to consult with a tax professional to understand the potential tax impacts now and potential benefits later for you and your heirs.

Roth Conversion Basics

• Some or all the amount you convert to a Roth may be taxable, depending on the types of contributions you previously made to your traditional IRA or employer plan.

• Taxes are due when you file your return for the year you convert.

• The converted taxable amount is added to your other taxable income for that year, so be mindful of your federal and state tax bracket.

• If you choose to have money withheld from your conversion, not only is the withholding considered taxable income, but you may also incur penalties for premature withdrawals if you are under age 59½.

• Tax-free withdrawals from a Roth conversion account are not allowed until the fifth calendar year after the conversion, and you are over 59½.

To spread the taxes owed over multiple years, you might want to do several partial conversions over multiple years. Tax professionals generally suggest using nonretirement assets to make the tax payments on the Roth conversions.

You can also consider coordinating your partial Roth conversions during years when you expect your income to be lower than it would be in the future. Your tax advisor can prepare a multi-year tax projection to identify the range of annual conversion amounts.

Tax Tip #7: Don’t Wait to Contribute to Your Retirement Accounts

Whether you contribute to a Traditional or Roth IRA, you benefit from tax-advantaged investing. Contributing earlier in the year means you’re less likely to miss out on the tax benefits that saving in these types of vehicles can provide. You have until Tax Day of the following year—typically April 15—for these contributions to count toward the previous tax year.

Plus, your investments will have more time in the market to potentially grow and compound in a tax-deferred manner.

Tax Tip #8: Take RMDs on Time—and Review Tax Withholding

If you’re over age 73 with a retirement account, be sure to take your retirement plan required minimum distributions (RMDs). You can mark your calendar or set up automatic withdrawals. If you miss taking RMDs by December 31, you could face a 25% tax penalty on the amount you failed to take. You may delay taking your first RMD until April 1 of the following year, but you still must take your second RMD by the end of that year.

If you inherited a retirement plan, note that certain beneficiaries (non-spouses) are required to take RMDs under the 10-year rule and empty the plan by the end of the 10th year of the account owner’s death.

RMDs count toward your income in the tax year they’re taken (unless you inherited a Roth account). Check the amount being withheld from each redemption to cover taxes.

Making quarterly tax payments? Having enough withheld to cover the taxes or paying the appropriate estimated amount can be especially important to avoid underpayment—and their potential interest penalties.

Try the RMD Planning Calculator.

Tax Tip #9: Explore the Tax Benefits of Education Accounts

You may be able to take advantage of the tax benefits on education-related costs for your student attending college or another eligible education institution . Income can play a factor in qualifying for education tax breaks, so check your expected income to see if you can take advantage of those deductions.

Income limits aren’t a factor for contributions to 529 Qualified Tuition Programs , although the amount contributed can’t exceed a state's aggregate contribution limit. The limit is an estimate of the full cost, including tuition, room, and board, for a beneficiary’s undergraduate and graduate education.

Unused balances can also be rolled over to another beneficiary of the same generation in the same family or transferred to a Roth IRA for the beneficiary under the SECURE 2.0 Act rules.

Many states offer income tax benefits for residents contributing to 529 plans. If state laws permit, a contributor to your student’s 529 account generally doesn’t have to be a relative to qualify for a provided tax deduction. However, contributions must be made by December 31 to take advantage of those state tax deductions.

Tax Tip #10: Make Gifts to Charities and Loved Ones

Generosity can be tax smart and help support the people and causes that matter to you. For example, donating appreciated securities held for more than one year in taxable investments to a qualified charitable organization can be a win-win for both of you. When you donate securities in kind, meaning giving the asset itself instead of proceeds from its sale, you don't pay capital gains taxes on any growth in value over what you paid for it—and you might also qualify for a charitable tax deduction.

Gifts to loved ones during your lifetime can also be an effective way to reduce your taxable estate. The IRS sets an annual gift-tax exclusion , which allows you to give someone up to a set limit without using your lifetime gift exemption. For 2026, the IRS allows you to gift up to $19,000 per person or $38,000 for a married couple. The federal gift and estate tax exemption is set to $15 million per individual in 2026, with those amounts increasing by inflation in future years.

You can still give more than the annual limit to an individual in the form of direct payments of education and medical expenses. You should consult with a tax advisor on the reporting requirements using Form 709 when you file your taxes. Gifts beyond these levels count toward your lifetime exemption amount ($15 million in 2026 ).

Planning Ahead Can Get You Closer to Your Investment Goals

Looking ahead has its benefits. The earlier you plan with taxes in mind, the easier and less stressful it is to identify—and take advantage of—potential benefits, plus prepare for possible consequences while you still have plenty of time.

And when you can keep your tax bill in check, you’ll have more to invest and progress toward reaching your investment goals.