Legal ways to reduce your tax bill: a value-investor’s checklist

Tax efficiency is one of the few free lunches in investing — but only if you’re disciplined about the basics. Here’s the checklist.

Most of what people call “tax planning” isn’t planning at all — it’s a December scramble for deductions or whatever a friend recommended at dinner. That approach occasionally helps. More often, it creates expensive mistakes.

A better approach is the one a serious investor would recognize: treat tax efficiency as a systematic discipline. The goal isn’t to outsmart the IRS — it’s to use the rules, exactly as written, to keep more of what you earn year after year. Most of the value comes from getting the basic accounts and asset locations right. The exotic stuff is mostly noise.

What follows is a checklist. Walk through it once, set up the structure, revisit annually.

1. Maximize qualified contributions (the biggest lever for most people)

If you do nothing else on this page, do this. Tax-advantaged accounts are the single largest, most reliable source of savings available to ordinary high earners. The contribution limits change every year — check the current IRS limits — but the concepts are stable.

401(k), 403(b), or Solo 401(k)

If your employer offers a match, capture every dollar of it before you do anything else. The match is the closest thing to a guaranteed return that exists in finance — instant return, before the market does anything.

Beyond the match, you can choose pre-tax (traditional) or Roth contributions, depending on whether you’d rather take the deduction now or take tax-free withdrawals later. People expecting higher rates in retirement often lean Roth; people expecting lower rates lean traditional. Most readers should probably have some of each.

If you’re 50 or older, take advantage of catch-up contributions. If you’re self-employed, a Solo 401(k) lets you contribute as both employee and employer — a meaningful jump in shelterable income compared to a SEP-IRA.

Health Savings Account (HSA)

The HSA is the most tax-advantaged account in the entire code — the only one with a true triple benefit: contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.

To contribute, you must be enrolled in a qualifying high-deductible health plan. If you are, fund it. Better still, if you can afford to pay current medical bills out of pocket, don’t spend the HSA — invest it and save your medical receipts. Decades later, you can reimburse yourself tax-free for those old expenses, meaning the HSA functions as a stealth retirement account that compounds tax-free for thirty years and then comes out tax-free.

IRA, Roth IRA, and the Backdoor Roth

A Traditional IRA gives you a deduction today (subject to income limits) and taxable withdrawals later. A Roth does the opposite: no deduction today, tax-free growth and withdrawals. For high earners, direct Roth contributions are phased out — but the “Backdoor Roth” is a legal workaround: contribute non-deductibly to a Traditional IRA, then convert. The mechanics matter (especially the pro-rata rule if you have other pre-tax IRA money); see our dedicated IRA explainer.

529 plans for education

If you have children or grandchildren, a 529 lets you fund education with tax-free growth and tax-free withdrawals for qualified expenses. Many states add a state income-tax deduction or credit on contributions. The federal benefit is the same in every state; the state benefit varies, so check yours.

Mega Backdoor Roth

Some 401(k) plans permit after-tax contributions above the standard employee limit, with an in-service conversion to Roth. When supported, this can shelter a large additional amount each year. It’s only relevant if you’re a high earner with capacity to save more than the regular limits and your plan document allows it. Ask HR. If they don’t know what you’re talking about, it probably isn’t available.

2. Tax-loss harvesting

Tax-loss harvesting is the practice of intentionally selling a position at a loss in a taxable account, then using the realized loss to offset realized gains elsewhere — plus up to a modest amount of ordinary income each year, with any excess carried forward indefinitely.

The mechanic

You sell Position A at a $10,000 loss. That loss first offsets any realized capital gains you have. If you have no gains, you can use up to $3,000 against ordinary income this year, and carry the rest forward. The loss never expires.

For example, in a 24% bracket, a $10,000 harvested loss applied against ordinary income saves $2,400 in current taxes. If you reinvest the proceeds in a similar (but not “substantially identical”) security, your portfolio is essentially unchanged — and the $2,400 of deferred-tax dollars compound for the rest of your holding period. That’s why disciplined harvesting can add real basis points to long-term after-tax returns.

The wash-sale rule

This is the trap. The IRS disallows the loss if you buy “substantially identical” securities within 30 days before or after the sale — a 61-day window. The replacement also can’t be in a related account you control, including your IRA (a particularly easy mistake).

“Substantially identical” is a judgment call at the margins. Selling Vanguard’s S&P 500 fund and buying Schwab’s S&P 500 fund the next day is asking for trouble. Selling an S&P 500 fund and buying a total-market or large-cap-value fund is generally accepted as different enough. If unsure, wait the 31 days.

When it isn’t worth doing

Harvesting only makes sense in taxable accounts — there’s nothing to harvest in an IRA or 401(k). Small losses often aren’t worth the trading friction. And if you’re in a very low bracket already (or expect to be in a higher one later), you may be better off banking the loss for a future year. Several brokerages and robo-advisors will harvest automatically — fine, but make sure it’s coordinated with your other accounts so it doesn’t accidentally create a wash sale.

3. Asset location: which asset belongs in which account

This is the most underrated decision in personal finance. Two investors with identical holdings can have very different after-tax returns simply because of where those holdings live.

Tax-deferred accounts (Traditional 401(k), Traditional IRA) are the right home for tax-inefficient assets that throw off ordinary-income distributions: bond funds, REITs, actively managed funds with high turnover. The account shields the annual tax drag.
Roth accounts are the right home for your highest-expected-return assets — small-cap, growth equities, anything you expect to compound aggressively over decades. Roth dollars never get taxed again, so you want maximum compounding inside them.
Taxable accounts are the right home for tax-efficient core holdings: broad-market index ETFs, individual stocks held for the long term, municipal bonds. They produce minimal annual taxable distributions and benefit from preferential long-term capital gains rates when you eventually sell.

Getting this right often saves more than any clever harvesting strategy. It just doesn’t get marketed because nobody sells a product called “asset location.”

4. Roth conversions in low-income years

A Roth conversion is voluntarily moving money from a Traditional IRA to a Roth, paying tax on the converted amount today in exchange for tax-free growth forever after. It’s particularly valuable in years when your income is unusually low — early retirement before Social Security and RMDs kick in, a layoff or sabbatical year, or a big market drawdown when account values are temporarily depressed (you convert more shares per dollar of tax).

We cover the mechanics, the five-year rule, and the bracket-management math in our IRA explainer. The discipline: every fall, look at your projected income, and if you’re in an unusually low bracket, ask whether a partial conversion makes sense before year-end.

5. Charitable strategies (for those who give)

If you give anyway, the form of the gift matters as much as the amount.

Donate appreciated securities, not cash

If you’ve held a stock or fund for more than a year and it’s appreciated, donating the shares directly to a qualified charity is dramatically more efficient than selling and donating cash. You eliminate the capital gains tax entirely and deduct the fair market value (subject to AGI limits). The charity, being tax-exempt, sells the shares without owing tax.

Donor-Advised Funds (DAFs)

A DAF is a charitable account you fund in one big tax year, take the deduction immediately, and distribute to charities at your own pace. This is especially valuable in high-income years (a business sale, a big bonus, an RSU vest) — bunch several years of intended giving into one tax year, take the larger deduction when it’s worth more, and grant it out gradually. DAFs accept appreciated securities directly, capturing the same capital-gains benefit without coordinating transfers with each charity.

Qualified Charitable Distributions (QCDs)

For retirees, the QCD is one of the most underused tools in the code. If you’re at the age where RMDs kick in, you can direct up to a current annual limit from your Traditional IRA directly to a qualified charity. The distribution satisfies your RMD, never appears as taxable income, and lowers your AGI — which can reduce Medicare premiums, the taxable portion of Social Security, and other AGI-linked items. For retirees who give and would otherwise take the standard deduction, the QCD is often more valuable than itemizing.

6. Tax-efficient fund selection

Not all funds are created equal from a tax standpoint.

ETFs are generally more tax-efficient than mutual funds. The “in-kind redemption” mechanism most ETFs use lets them shed appreciated shares without recognizing gains for remaining shareholders. Traditional mutual funds, when they sell to meet redemptions, distribute those gains to everyone holding the fund — including you.
Index funds beat actively managed funds on average in taxable accounts, mostly because their turnover is lower. Less trading inside the fund means fewer distributions out.
Watch year-end capital gains distributions. Buying a mutual fund in November, right before its annual distribution, means you pay tax on growth you didn’t capture. Most fund companies publish estimated distributions in October — check before you buy.

7. Holding periods matter more than people realize

Sell a position held one year or less and the gain is taxed at your ordinary income rate — for a high earner, that can be 32%, 35%, or 37% federally, plus state. Hold one day longer than a year and the gain is taxed at long-term capital gains rates: 0%, 15%, or 20% depending on income. The difference is enormous.

This single decision can change after-tax returns by one to two percentage points per year for an active investor. If you’re going to sell, and you’re close to the one-year mark, the right answer is almost always to wait the extra few weeks.

8. Step-up in basis at death

When someone passes away, the cost basis of their taxable holdings resets to fair market value as of the date of death. The unrealized gain that accumulated during their lifetime is wiped out for tax purposes. (This applies to taxable accounts only — not IRAs or 401(k)s, which have their own rules.)

The implications shape good late-life planning:

Don’t reflexively sell highly appreciated holdings late in life if you can comfortably hold them through. Heirs receive them with a stepped-up basis.
For charitable gifts, use the low-basis shares (you’d owe a lot of capital gain if you sold them; the charity won’t).
Hold the high-basis shares for inheritance — the step-up matters less there, and you may want them available for spending.

Estate-tax law changes periodically, and the basis-step-up rule has been a political target more than once. Treat any plan built around it as needing a review every few years.

9. State-level considerations

Federal tax gets all the attention, but state tax moves the needle. Some states (Washington, Florida, Texas, Nevada, and others) levy no income tax. California’s top bracket exceeds 13%. The gap is enormous over a working lifetime, and even larger over a retirement.

Residency planning is legitimate, but it requires you to actually move — change your driver’s license, vote there, spend the requisite days, sever ties with the old state. High-tax states audit aggressively for fake moves, and they usually win.

States also vary on whether they tax retirement distributions, Social Security, and pensions. If you’re considering relocating in retirement, the after-tax difference can be larger than the cost-of-living difference — worth modeling before you sign a lease.

10. What we don’t recommend

A short list of things we steer people away from:

“Tax-loss harvesting at all costs.” Chasing losses in volatile names you don’t actually want to own — or creating wash sales by buying back too soon — usually destroys more value than it saves.
Esoteric shelters and “asset protection” structures sold by promoters. If a strategy requires a flowchart with seven boxes and a Caribbean island, the IRS already knows about it. The promoter takes a fee; the client takes the audit risk.
Anything that requires you to lie or “creatively interpret” the rules. The legitimate strategies above are powerful enough. There’s no need to drift into the gray zone.
Frequent trading “for tax purposes.” Turnover almost always creates more tax than it saves.

11. The order of operations

For most readers, in priority order:

Capture every dollar of employer 401(k) match.
Max the HSA, if eligible.
Max the IRA, or do a Backdoor Roth if your income is above the direct-contribution limits.
Max your 401(k) employee contribution.
Mega Backdoor Roth, if your plan supports it.
Taxable account with tax-efficient holdings — ETFs, individual stocks, munis where appropriate — plus ongoing, disciplined tax-loss harvesting.
529 plans for children or grandchildren.
Charitable strategies if you give: appreciated securities, DAFs, QCDs in retirement.

That’s the whole list. There’s no step nine.

Closing thought

Most of these strategies are mechanical. Once you know the rules, the discipline is in executing them every year, not finding the next exotic shelter. The investors who keep the most of what they earn aren’t the ones with the cleverest tax plan — they’re the ones who set up a sensible structure once, fund it consistently, and don’t get distracted.

If you’d like a second pair of eyes on whether your current portfolio and account structure are leaving tax money on the table, schedule a complimentary 30-minute review with Tim Travis.

This is general educational content and is not personalized tax, legal, or investment advice. Tax law changes frequently, contribution limits and phase-out ranges adjust annually, and the right strategy depends on your specific situation. Consult a qualified tax professional or CPA before acting. T&T Capital Management is an SEC-registered investment adviser; we are not a tax preparation firm. Registration with the SEC does not imply a certain level of skill or training.