Morgan Stanley
Wealth Management

4 Tax-Smart Steps to Help Build Wealth

Apr 7, 2026

Even small tax adjustments in your portfolio can yield significantly more wealth over time.

Author
Daniel Hunt, Senior Investment Strategist, Morgan Stanley Wealth Management

Key Takeaways

  • Consider evaluating your portfolio’s tax efficiency across three levels: the use of tax-advantaged accounts, strategies for specific taxable assets and portfolio-level techniques.
  • Different tax-efficiency techniques, when used thoughtfully in concert with one another, can significantly enhance after-tax returns.
  • Such return improvements can compound meaningfully over time, often making a sizeable difference in the amount of wealth you’re able to accumulate.

Thanks to the power of compounding, even small improvements in an investment’s after-tax growth rate can make enormous differences in the amount of wealth you’re able to accumulate over time — and that can mean the difference between achieving a financial goal and failing to do so.

 

In one hypothetical study, a high-net-worth investor aiming to build wealth over 20 years could see an additional 1.6% return per year when integrating multiple tax-efficient strategies in their portfolio, resulting in nearly 73% more gains over that horizon.1

 

Here are four key steps that can help you position your investments for potential tax efficiency. 

  1. 1
    Make the Most of Tax-Advantaged Accounts

    Take full advantage of the benefits of tax-advantaged accounts like 401(k) and individual retirement accounts (IRAs), including contributing the maximum allowable amount each year, ideally with matching funds from an employer.

     

    These accounts can offer significant tax benefits that may help accelerate the potential growth of your investments. For instance:

     

    • Traditional 401(k)s and IRAs are funded with “pre-tax” dollars—meaning contributions aren’t subject to current taxes—and can potentially grow tax-deferred. Withdrawals are taxed as ordinary income. Once you reach Required Minimum Distribution (RMD) age, which ranges from age 70 ½ to 75 depending on your date of birth, it may be mandatory to begin RMDs from pre-tax retirement balances if you are no longer working.2
    • Roth accounts are funded with “after-tax” dollars, but assets may grow tax-free and can be withdrawn tax-free. Qualified withdrawals are tax-free, and there are no RMDs.3

     

    Choosing between these accounts often depends on your current tax bracket and expected financial situation in retirement:

     

    • If you expect your income needs will be lower in retirement than during your working years, as is the case for many retirees, traditional accounts might make more sense.
    • However, if tax rates increase in the future, Roth accounts and their tax-free withdrawals may become more attractive.
    • For some people, a hybrid approach can capture the best of both worlds. For example, you could use the option some employers provide to convert after-tax 401(k) contributions to a Roth 401(k) in the year they are contributed.
  2. 2
    Invest in Stocks Tax-Efficiently

    If you’ve maxed out tax-advantaged retirement accounts or cannot use them due to restrictions or income limitations, there are other tax-efficient strategies to consider when investing in stocks.

      

    For example, investors who prefer passively investing in equity indices like the S&P 500 may want to consider direct indexing. Instead of you buying an index-tracking fund, an investment manager establishes direct ownership of individual stocks that make up the chosen index through a separately managed account that you own. This may allow you to take advantage of security-level opportunities for “tax-loss harvesting,” in which declining stocks are sold to offset potential gains in other investments held in your taxable accounts, potentially helping lower your tax bill. Such opportunities are generally not available with traditional index-tracking funds.

     

    Meanwhile, investors who prefer active stock-picking may find certain insurance vehicles helpful. Active investing often involves frequent trading to try to beat a benchmark, resulting in higher “turnover,” which can create more taxable capital gains. One option is to hold active funds inside an investment-only variable annuity (IOVA) or variable universal life (VUL) policy, which can generally let potential investment gains grow tax-deferred until you take money out, similar to a 401(k) or IRA. IOVA withdrawals are taxed as ordinary income and are typically penalty-free after age 59½. VUL insurance also provides a death benefit and may allow loans or withdrawals from the policy’s cash value, though taxes, fees and restrictions can apply. Morgan Stanley Financial Advisors can help you weigh the tax trade-offs, costs and risks to see whether these strategies fit your overall plan.
  3. 3
    Consider Tax-Smart Bond Strategies

    As you diversify your portfolio, bonds can become crucial, especially as a source of income and a potential buffer against market volatility in later stages of life. However, bonds are often subject to unfavorable tax treatment. To help improve after-tax returns, consider:

     

    • Municipal bonds: These fixed-income securities are issued by U.S. state and local governments and are exempt from federal income tax and, in some cases, state and local taxes as well. This can make them particularly attractive for investors in higher tax brackets.
    • Indexed universal life (IUL) insurance: These insurance products offer bond-like investment returns alongside insurance features such as a death benefit. Policyholders are paid an interest credit based on the performance of a market index, with minimum and maximum growth rates that limit potential upside and downside. Potential cash value growth is typically tax-deferred.
  4. 4
    Help Reduce Taxes Across Your Portfolio

    Seeking tax efficiency isn’t just about selecting the right investments for you; it’s also about how and where you hold them.

     

    For instance, asset location—not to be confused with asset allocation—involves deciding where to place each investment to help maximize after-tax return potential. For example, investments with high growth potential and low tax efficiency would go in tax-advantaged accounts, while tax-efficient, lower-growth-potential assets can go in taxable accounts.

Work with Trusted Advisors

There is no one-size-fits-all approach to tax-efficient investing. Every strategy comes with its own potential benefits and drawback. For many investors, the best options will be to seek out advice from professionals with access to sophisticated financial planning software and tools that can reflect your individual circumstances, preferences and needs.

 

Morgan Stanley Financial Advisors can help you potentially make your portfolio more tax efficient. With Morgan Stanley’s Total Tax 365, your Financial Advisor can use sophisticated tools and tax-smart strategies to help reduce the impact of taxes, all year round.

 

To learn more about tax-efficient investing, ask your advisor for a copy of the Global Investment Office special report, Preparing for the Next Tax Regime: Six Steps to a More Tax Efficient Strategy.

It’s What You Keep That Counts

Connect with a Morgan Stanley Financial Advisor to explore tax-smart strategies that may help you keep more of what you earn.

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Footnotes:

1For full methodology, see the Global Investment Office special report, Preparing for the Next Tax Regime: Six Steps to a More Tax Efficient Strategy.

2RMD Age is age 70 ½ if born before July 1, 1949; age 72 if born after June 30, 1949, but before 1951; age 73 if born after December 31, 1950, but before 1960; age 75 if born after December 31, 1959.

3A Qualified Distribution is a distribution that occurs (a) after the five tax-year holding period, and (b) on or after age 59 1/2, or on account of the death or qualifying disability of the participant.

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Also, municipal bonds acquired in the secondary market at a discount may be subject to the market discount tax provisions, and therefore could give rise to taxable income.  Typically, state tax-exemption applies if securities are issued within one’s state of residence and, if applicable, local tax-exemption applies if securities are issued within one’s city of residence. The tax-exempt status of municipal securities may be changed by legislative process, which could affect their value and marketability.

Insurance does not pertain to market values which will fluctuate over the life of the bonds; it covers only the timely payment of interest and principal.  Credit quality varies depending on the specific issuer and insurer.

Alternative investments may be either traditional alternative investment vehicles, such as hedge funds, fund of hedge funds, private equity, private real estate and managed futures or, non-traditional products such as mutual funds and exchange-traded funds that also seek alternative-like exposure but have significant differences from traditional alternative investments. The risks of traditional alternative investments may include: can be highly illiquid, speculative and not appropriate for all investors, loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than open-end mutual funds, and risks associated with the operations, personnel and processes of the manager. Non-traditional alternative strategy products may employ various investment strategies and techniques for both hedging and more speculative purposes such as short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. These investments are subject to the risks normally associated with debt instruments and also carry substantial additional risks. Investors could lose all or a substantial amount of their investment. These investments typically have higher fees or expenses than traditional investments.

REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.

Monte Carlo Analysis Assumptions: As indicated above, this forward-looking analysis uses a Monte Carlo simulation to generate randomized, correlated returns that overall have similar characteristics to the Global Investment Committee’s 2025 strategic (seven-year capital markets assumptions. The Monte Carlo simulation involves sampling from those monthly returns for the constituent asset classes. From those monthly returns, we can compute hypothetical monthly returns for portfolios constructed with a lump-sum investing or dollar-cost averaging approach as of any month in the simulated returns data.

IMPORTANT: The projections or other information generated by this Monte Carlo simulation analysis regarding the likelihood of various investment outcomes do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

Variable Annuities

Variable annuities are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges and expenses, and other information regarding the variable annuity contract and the underlying investments, which should be considered carefully before investing. Prospectuses for both the variable annuity contract and the underlying investments are available from your Financial Advisor. Please read the prospectus carefully before you invest.

Variable annuities are long-term investments designed for retirement purposes and may be subject to market fluctuations, investment risk, and possible loss of principal. All guarantees, including optional benefits, are based on the financial strength and claims-paying ability of the issuing insurance company and do not apply to the underlying investment options.

Optional riders may not be able to be purchased in combination and are available at an additional cost. Some optional riders must be elected at time of purchase. Optional riders may be subject to specific limitations, restrictions, holding periods, costs, and expenses as specified by the insurance company in the annuity contract.

If you are investing in a variable annuity through a tax-advantaged retirement plan such as an IRA, you will get no additional tax advantage from the variable annuity. Under these circumstances, you should only consider buying a variable annuity because of its other features, such as lifetime income payments and death benefits protection.

Taxable distributions (and certain deemed distributions) are subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10% federal income tax penalty. Early withdrawals will reduce the death benefit and cash surrender value.

Morgan Stanley Smith Barney LLC offers insurance products in conjunction with its licensed insurance agency affiliates.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices.  Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers.  Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Direct indexing may only be appropriate for people who have a considerable amount to invest in a taxable account and want a level of customization they couldn’t otherwise obtain through a portfolio of funds or individual securities. If you invest in a tax-deferred account, such as a 401(k) or IRA, the tax-harvesting benefits of direct indexing may provide no additional benefit to you. There is no guarantee that you will maximize value by tax-loss selling; holding onto slumping stock may have resulted in value greater than that obtained through tax-loss harvesting via direct indexing.  In addition, you will incur asset-based fees and expenses in a direct indexing account that may be higher than those for other investments, as well as transaction costs arising from customization and frequent rebalancing.

IRS rules stipulate that if a security is sold by an investor at a tax loss, the tax loss will not be currently usable if the investor has acquired (or has entered into a contract or option on) the same or substantially identical securities 30 days before or after the sale that generated the loss.  This so-called “wash sale” rule is applied with respect to all of the investor’s transactions across all accounts.

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