Tax-efficient investing involves coordinated decisions about what you hold, where you hold it, and how you manage it over time. EP Wealth walks through seven strategies for high-net-worth investors to consider. 

Tax-Conscious Investment Strategies for High-Net-Worth Individuals

For high-net-worth investors, taxes can represent a large recurring drag on investment returns. Federal income taxes, capital gains taxes, the 3.8% Net Investment Income Tax, and state taxes can combine to take a significant share of investment gains and income each year. How a portfolio is constructed—what you hold, where you hold it, and how you manage it over time—affects the after-tax outcome alongside the investments themselves.

Strategies that may help manage taxes on a large portfolio include:

• Holding each investment in the account type where it is taxed most favorably
• Selecting funds and vehicles that produce fewer taxable distributions
• Using municipal bonds to generate tax-exempt income
• Harvesting losses and using direct indexing to offset realized gains
• Converting traditional retirement account assets to Roth for tax-free future growth
• Donating appreciated securities to charity rather than selling and giving cash
• Managing holding periods and the timing of gain recognition

The right combination depends on your circumstances, income sources, and goals. A financial advisor who specializes in financial planning can help evaluate which strategies may fit within your broader financial picture.

How Taxes Can Affect Investment Returns at Higher Wealth Levels

Several layers of taxation can apply to investment income at higher wealth levels, and the rates differ depending on the type of income involved.

• Short-term capital gains and nonqualified dividends are taxed at ordinary income rates, up to 37% federally.
• Long-term capital gains and qualified dividends are taxed at 0%, 15%, or 20%, depending on taxable income.
• The 3.8% Net Investment Income Tax (NIIT) applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers.
• State income taxes vary widely and can add 10% or more in high-tax states.
• Municipal bond interest is generally exempt from federal income tax and, in some cases, from state and local taxes as well.
  • The Alternative Minimum Tax (AMT) is a parallel federal tax system that may apply to higher-income households, with 2026 exemptions of $90,100 (single) and $140,200 (married filing jointly), although taxpayers with ISOs, certain private activity municipal bond interest, or other tax preference items may still be subject to AMT.

Because each type of investment income is taxed at a different rate, the choice of investment vehicle and account type has a direct effect on after-tax returns. 

• Investment Management — Vehicle selection and portfolio construction
• Tax Planning— Gain timing, loss harvesting, and bracket management
• Retirement Planning — Roth conversions, RMDs, and withdrawal sequencing
• Charitable Planning — Donating appreciated securities and QCDs
• Estate Planning— Step-up in basis and holding decisions

7 Tax-Conscious Investment Strategies for HNWIs to Consider

The strategies below address different dimensions of tax-conscious investing, from how investments are selected and where they're held to how gains and income are managed over time.

1. Place Investments in the Right Account Types

Where you hold each investment—referred to as asset location—can meaningfully affect how much of your return is taxed each year.

• Taxable brokerage accounts are generally better suited for tax-conscious holdings: broad index funds, ETFs, municipal bonds, and growth stocks with low dividend yields. These investments produce fewer taxable distributions, and when they are eventually sold, gains are taxed at long-term capital gains rates, which are significantly lower than ordinary income rates.
• Tax-deferred accounts (Traditional IRA, 401(k)) may be more appropriate for tax-inefficient holdings: actively managed funds, REITs, and taxable bonds that generate income taxed at ordinary rates. Holding these in a tax-deferred account avoids annual taxation on that income.
• Tax-exempt accounts (Roth IRA, Roth 401(k)) are potentially well-suited for holdings with higher expected growth, since qualified withdrawals—including all accumulated gains—are tax-free.

Account-type placement also interacts with other planning decisions. Appreciated investments in taxable accounts may receive a step-up in basis at death, while traditional IRA assets do not. Charitable strategies involving appreciated securities can only apply to taxable holdings. A financial advisor can help evaluate how placement decisions fit within the broader portfolio.

2. Choose from Several Investment Vehicles

The structure of an investment vehicle affects how much of its return is taxed each year, even before any sale occurs.

Index funds and ETFs generally produce fewer taxable distributions than actively managed mutual funds. Lower portfolio turnover means fewer realized gains passed through to shareholders. ETFs can also use in-kind creation and redemption mechanisms to manage embedded capital gains, which may result in fewer distributions compared to a traditional mutual fund tracking the same index.

Tax-managed funds are designed to limit taxable distributions through strategies like minimizing turnover, harvesting losses within the fund, and managing dividend exposure.

Two funds tracking the same index can produce different tax outcomes depending on turnover, distribution frequency, and vehicle type. That difference compounds over time—particularly for investors in higher brackets with large taxable accounts.

3. Consider Municipal Bonds for Tax-Exempt Income

For investors in higher federal and state tax brackets, municipal bonds may offer a compelling after-tax yield. Interest income from municipal bonds is generally exempt from federal income tax and, in some cases, from state and local taxes as well.

The relevant comparison is the tax-equivalent yield: the pre-tax return a taxable bond would need to offer to match the after-tax return of a municipal bond. For an investor subject to a combined marginal rate above 40% (federal, NIIT, and state), the tax-equivalent yield of a municipal bond may be meaningfully higher than its stated yield.

Municipal bonds are generally most useful in taxable accounts, where the tax exemption provides a direct benefit. In tax-deferred or tax-exempt accounts, the exemption is redundant and the investor may be better served by higher-yielding taxable alternatives. As with any fixed-income investment, credit quality, duration, and liquidity are important considerations.

4. Use Tax-Loss Harvesting and Direct Indexing

Tax-loss harvesting involves selling positions that have declined below their purchase price to realize losses that offset gains elsewhere in the portfolio. Losses offset gains dollar for dollar, with up to $3,000 in excess losses applied against ordinary income each year. Remaining losses carry forward. The typical approach is to replace the sold position with a similar, but not substantially identical, investment to maintain market exposure while observing the IRS's wash-sale rule.

Direct indexing extends this concept. Instead of holding an index fund, the investor owns the individual securities that make up the index. This allows losses to be harvested at the security level; even in a rising market, some component stocks will be down at various points. Direct indexing is particularly relevant for investors with large taxable accounts or concentrated stock positions—such as those holding significant employer equity or shares from a business sale—where the need to offset realized gains is greatest.

Tax-loss harvesting often creates a deferral of tax rather than permanent elimination, since the replacement investment carries a lower cost basis. The deferral can still be valuable over long time horizons.

5. Evaluate Roth Conversions for Tax-Free Growth

Converting traditional IRA or 401(k) assets to a Roth generates taxable income in the conversion year, but qualified Roth withdrawals—including all future growth—are tax-free. For high-net-worth investors, Roth conversions may serve several purposes:

• Reducing future required minimum distributions, which can push retirees into higher brackets and trigger Medicare premium surcharges (IRMAA)
• Building a pool of tax-free assets that provides flexibility in managing taxable income during retirement
• Shifting growth from a tax-deferred to a tax-exempt environment

Lower-income years—early retirement before RMDs begin, a sabbatical, or a year with reduced business distributions—may present opportunities to convert at a lower marginal rate.

Conversion amounts can affect NIIT exposure, income-related monthly adjustment amount (IRMAA) surcharges, and the value of itemized deductions, so modeling the full impact before proceeding is important. An advisor who specializes in retirement planning can help evaluate the multi-year trade-offs.

6. Use Charitable Giving to Manage Investment Tax Exposure

For investors with charitable goals, donating appreciated securities—rather than selling and giving cash—can potentially avoid triggering the capital gain while supporting a deduction at fair market value (subject to AGI-based limits).

• Direct donations of appreciated stock to a qualified charity can eliminate the embedded capital gain and may provide a deduction at fair market value, generally up to 30% of AGI for appreciated property.
• Donor-advised funds (DAFs) allow the investor to contribute appreciated securities, take the deduction in the contribution year, and direct grants to specific charities over time. DAFs can be particularly useful in high-income years when concentrating charitable deductions may offer greater tax planning benefit.
• Qualified charitable distributions (QCDs) allow investors age 70½ and older to send IRA funds directly to a qualified charity. The distribution counts toward RMDs but does not add to taxable income, which may also help manage IRMAA exposure.

For top-bracket filers, the tax benefit of itemized charitable deductions is currently capped at 35%, and a 0.5% AGI floor applies to cash donations for itemizers. Donating appreciated securities, which are not subject to the cash-donation floor, and using QCDs, which reduce AGI directly, may be particularly worth considering given these limits.

7. Manage Holding Periods and the Timing of Gains

The rate difference between short-term and long-term capital gains treatment can be 15 to 20 percentage points at higher income levels. Several timing-related decisions affect the tax outcome:

• Holding period awareness. Selling an appreciated position before the one-year mark converts what would be a long-term gain into a short-term gain taxed at ordinary income rates.
• Spreading gains across tax years. Recognizing gains in smaller increments over multiple years—rather than in a single large transaction—may keep more income in lower brackets. This is especially relevant when diversifying out of a concentrated stock position, where a multiyear selling plan can spread the tax impact rather than concentrating it in a single year.
• Coordinating with other income. A year with a large bonus or business distribution may be a less favorable time to realize gains. A year with lower income may present an opportunity to recognize gains at a reduced rate.
• Coordinating with Roth conversions. Both realized gains and Roth conversion income add to taxable income for the year. Planning them together can help avoid pushing into a higher bracket unnecessarily.
• Holding for a step-up in basis. Inherited assets in taxable accounts receive a cost basis reset to fair market value at death, which may eliminate embedded capital gains for heirs. For investors with highly appreciated positions who don't need immediate liquidity, this may make holding more tax-efficient than selling during their lifetime. Traditional IRA and 401(k) assets do not receive a step-up.

Building a Tax-Conscious Investment Approach

Tax-conscious investing typically involves coordination across portfolio construction, account structure, and tax strategy. EP Wealth advisors work alongside in-house tax planning and estate planning teams to evaluate which strategies fit your circumstances and how they interact with one another.

If you'd like to discuss how tax-conscious strategies may apply to your investment approach, contact EP Wealth to speak with an advisor. 

DISCLOSURES

• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
• EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability.
• Hiring a qualified advisor and/or financial planner does not guarantee investment success and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made so that any direct or implied results or projections being represented here will be met or sustained.
• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
• Tax matters can be complicated. All tax references are general in nature and are not intended to supersede professional advice. Please consult with an accountant and/or attorney before implementing any of the strategies discussed. EP Wealth Advisors is not engaged in the practice of law or accounting.