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How Investors Can Optimize Taxable Accounts

Three strategies can help investors lower their IRS bill for money outside of tax-sheltered accounts, says Christine Benz.

Note: This video is part of Morningstar's Tax Relief Week special report.

Christine Benz: Hi, I’m Christine Benz for Morningstar.com.

There are practical reasons to hold money outside of a tax-sheltered account. For example, if you think you may need to tap the account prior to retirement, or if you've maxed out your IRAs, 401(k)s, and other tax-sheltered options.

If you have taxable accounts, pay close attention to what you put inside them. The name of the game is to focus on those investments that limit their income and capital gains distributions over your holding period. For equity investors, index funds and exchange-traded funds are good choices, while municipal bonds often make sense for investors with shorter time horizons.

It's also worthwhile to take a hands-off approach to your taxable accounts. If you're jockeying your portfolio around, you could trigger short-term capital gains, which are taxed at your ordinary income tax rate.

Finally, taxable-account investors have a few tactics that are unavailable to investors inside of tax-advantaged accounts like IRAs and 401(k)s. For example, they can take advantage of tax-loss selling, which means unloading depreciated assets to offset gains elsewhere in their portfolios.

All of these strategies can help lower the taxes you owe on your taxable account.

Thanks for watching. I'm Christine Benz for Morningstar.com.