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Tax-Efficient Investing 2024: Key Questions Investors Should Ask

Feb 28, 2024

Factoring the impact of taxes into your investment decisions can help you to keep more of your hard-earned money, both now and in the future.

Key Takeaways

  • Even small reductions in your tax costs today could have a big impact on the amount of wealth you’re able to build over time.
  • Consider saving as much as you can in tax-advantaged retirement accounts.
  • Taking steps to minimize estate taxes may allow you to leave a larger legacy to the people you care about most.

Building and preserving wealth may involve more than maximizing your investment returns. You can also consider your portfolio’s tax efficiency. Even small reductions in your tax costs today could have a big impact on the amount of wealth you’re able to build over time and how quickly you’re able to build it. Tax-efficient planning might also help you preserve more of your wealth for your beneficiaries, whether loved ones or charities. 

 

Because tax planning and investment planning often go hand in hand, it’s important to ensure that your tax advisor and Financial Advisor are working together to help you put a strategy in place. Consider meeting with them jointly and asking these four questions to help get the conversation started:  

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  1. 1
    How can I manage taxes on my current income?

    A good place to start is thinking about how you can minimize your taxable income. There are numerous ways to do so, but one key strategy is to save as much as you can in your tax-advantaged accounts, including a 401(k) plan and an individual retirement account (IRA). Setting aside pretax dollars in these accounts may help you reduce your taxable income today, while making progress toward your long-term goals like retiring with a sizeable nest egg.

     

    If you’re charitably inclined, another way to reduce your taxable income is through charitable contributions:

    • Donate directly to a qualified public charity:
      • For 2024, you may deduct cash contributions of up to 60% of your adjusted gross income if made to a qualified public charity, subject to certain limitations.1
      • Those at last 70½ years old may be able to make a qualified charitable distribution (QCD) from their IRA. With a QCD, you can give up to $100,000 per year to eligible charities of your choice without paying taxes on the withdrawal (if certain requirements are met), although you won't be able to write the donation off on your taxes. For those who are RMD Age2, a QCD can also count toward satisfying the required minimum distribution for your IRA for the year.3
     
    • Donate through a donor advised fund (DAF), such as the Morgan Stanley Global Impact Funding Trust (MS GIFT). Taxpayers can donate stock, mutual funds or other eligible assets to a DAF and claim a federal income tax deduction in the year the donation is made, if they itemize deductions.4 Additionally, these assets can stay invested and potentially grow tax-free until you recommend which charities will receive a cash donation from the fund.5

     

    Your tax advisor can guide you on how best to put any of these strategies in place.

  2. 2
    How can I help minimize taxes on my investments?

    In taxable investment accounts, like a nonretirement brokerage account, it may be a good idea for some investors to consider holding securities for more than a year. This could allow any appreciation on those assets to be taxed at the lower long-term capital gains rate.

     

    If you need to tap into your investments to free up cash, your Financial Advisor can help you identify a withdrawal strategy that may help reduce taxes you may owe by using Morgan Stanley’s Intelligent Withdrawals tool. It provides your Financial Advisor with an analysis across all your accounts to help determine not only which accounts to consider drawing from first, but also which securities within those accounts you might sell to help achieve tax efficiency and maintain your investment strategy.

     

    You may also want to consider a longer-term strategy known as tax-aware asset location. This generally involves placing tax-efficient, lower-growth assets in your taxable accounts, while putting income-generating assets, such as high-dividend-paying stocks, in tax-advantaged accounts to help minimize your exposure to current taxes.

     

    Tax-loss harvesting is another way to potentially lower your tax obligation in a taxable investment account. When selling investment securities at a loss, you get to recognize a capital loss, which you may be able to use to offset capital gains, and then reinvest the proceeds.6 If you have offset all your capital gains and still have capital losses remaining, you can apply up to $3,000 of excess capital losses to offset your ordinary income. Still have capital losses after that? If so, you can use them to offset income or capital gains in future tax years.  

  3. 3
    How can I lessen the bite of taxes on my retirement savings?

    Just as you consider the impact of taxes while you’re working and saving up for retirement, it’s important to be strategic about taxes once you stop working full time and start living off of your nest egg.

     

    One such strategy is income smoothing, in which you take future taxes into account when determining how much to withdraw from your retirement accounts each year. For example, you may decide to withdraw more money than you need from certain tax-advantaged accounts, such as traditional IRAs (but not Roth IRAs), earlier than required to lower your balance when you need to start taking required minimum distributions (RMDs)7 from the accounts. The reason? Even though you’d have to pay taxes now on the withdrawals, if done correctly, you could avoid being pushed into a higher tax bracket that would result in larger payments when your RMDs kick in. Plus, you’d have more resources to spend and enjoy during the most active years of retirement.  

  4. 4
    How can I preserve more of my wealth for family or charity?

    Taking steps to minimize how much of your estate goes to taxes can allow you to leave a larger legacy to the people and causes you care about most. One strategy involves making financial gifts to the next generation while you’re still alive. In 2024 federal law allows you to gift up to $18,000 per person per year ($36,000 per person per couple) without owing U.S. federal gift tax. Gifts that exceed that amount will count toward your lifetime U.S. federal gift and estate tax exemption, which for 2024 is $13.61 million per person and $27.22 million per married couple.8,9

     

    You may also want to consider a trust, which can be a valuable tool for ensuring that your wealth benefits the people and causes you care for. Trusts can be a tax efficient way to preserve your financial and philanthropic legacy for generations to come.

     

    Building, protecting and passing on a legacy involves much more than investing wisely. It requires a careful analysis of your objectives, intelligent structuring of your assets and strategic planning for implementation.

Bring your advisors together 

If you typically work with your Financial Advisor and tax advisor separately, you may find that a closer relationship between them could uncover investment-planning opportunities that could help mitigate your tax liability.

 

Wondering where to start? Consider a joint meeting to discuss the interplay between your investments and tax situation. This can happen any time of the year, and it may be easier to find time with both after tax-filing season. Be prepared to bring your investment statements and your filed tax returns—and consider using these questions to help you get the most out of the conversation.

 

Some of the tax-smart techniques and strategies described above are part of Morgan Stanley Total Tax 365, which your Morgan Stanley Financial Advisor can offer to help you reduce the impact of taxes.

 

In addition, if you have complex tax planning needs, your Morgan Stanley Financial Advisor can connect you with an experienced tax professionals at leading U.S.-based providers across the country to help optimize your tax strategy.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.

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1 The 60% limitation excludes giving to private non-operating foundations.

2 RMD Age is (a) age 70 ½ (for individuals born before July 1, 1949), (b) age 72 (for individuals born after June 30, 1949 but before 1951), (c) age 73 (for individuals born after 1950 but before 1960), and (d) age 75 for all others – note, apparent drafting error in the statutory language, makes it unclear when age 75 starts to apply in lieu of age 73, but it appears age 75 is intended to apply to individuals born after 1959.

3 Inherited IRAs are also eligible for QCDs if the applicable conditions have been met (e.g, you must be at least 70½)

4 National Philanthropic Trust “The Tax Advantages of Donor-Advised Funds” Accessed December 4, 2023 https://www.nptrust.org/what-is-a-donor-advised-fund/daf-tax-consideration/

5  These features also create the possibility for donors to implement a “bunching” strategy, which may be tax-efficient if you are anticipating a large capital gain or income event (such as the sale of a home or business) in a particular year. For example, if you donate a regular amount to a given qualified public charity on an annual basis, you could instead donate multiple years of contributions to your DAF and potentially offset the large capital gain or income increase. This could allow you to take a deduction for the full amount (subject to adjusted gross income limitations) in the year you make the donation, and then recommend that the DAF make annual grants to your charity of choice per your regular annual schedule. 

6 Remember that the “wash sale” rules won’t let you recognize a tax loss on a current basis if you buy the same or substantially identical securities within 30 days before or after the sale that generates the tax loss.

7 The Secure Act of 2022 increased the Required Minimum Distributions (RMD) age from 72 to 73 beginning in 2023, and to 75 beginning in 2033.

8 On Jan 1, 2026, unless legislative change is enacted, the gift and estate tax exemption reverts to its pre-Tax Cuts and Jobs Act amount of $5 million, subject to inflation adjustments.

9 IRS. “IRS Provides Inflation Adjustments for Tax Year 2024,” https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024 Accessed November 28, 2023

 

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When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.

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