Planning for retirement involves major life decisions that can determine your financial trajectory for years to come.

When it comes to investing, most people focus on returns while overlooking one of the biggest factors that impact their wealth: taxes. Even high-net-worth investors and seasoned professionals often make costly tax mistakes that erode their gains. Below are five common tax blunders that could be costing you up to 48% of your wealth—and what you can do to avoid them.

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1. Ignoring Tax Loss Harvesting

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Tax loss harvesting (TLH) is a strategy that involves selling underperforming investments to offset capital gains taxes. Many investors fail to take advantage of TLH, leaving valuable tax savings on the table. By systematically harvesting losses, you can reduce your taxable income and reinvest the proceeds in similar assets to maintain market exposure.

The Power of Tax Loss Harvesting: A Compounding Effect

Tax loss harvesting alone can improve portfolio performance by approximately 0.8% to 1.5% per year. Over time, this advantage compounds, leading to significantly higher wealth accumulation.

Below is a comparison of a standard portfolio earning 9% annually vs. a tax-optimized portfolio with a 1.25% tax efficiency boost, compounded over 25 years with an initial $1M investment:

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The result: improvement up to 48% with tax loss harvesting.

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2. Poor Asset Location Strategy

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3. Holding Mutual Funds in Taxable Accounts

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Mutual funds are tax-inefficient due to capital gains distributions that occur even if you don’t sell your shares. This creates unnecessary tax burdens that can be avoided by switching to ETFs, or better, directly held shares or direct indexing.

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4. Sticking with ETF's Instead of Moving to Direct Indexing

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ETFs are more tax-efficient than mutual funds, but direct indexing or direclty held equities are best. Direct indexing allows investors to hold individual securitiesfor more precise tax loss harvesting. By identifying losses at the individual security level, investors can increase tax efficiency and generate greater after-tax returns.

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5. Overlooking Tax Lots in Securities Transactions

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Tax lot optimization is essential when selling securities, but many investors—and even some wealth management firms—fail to implement this strategy. When you sell investments, you should specify which tax lots to sell, choosing those with the highest cost basis to minimize taxable gains.

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Take Control Today

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Advanced tax strategies often require the support of a financial advisor. FinanceAdvisors.com was built to deliver wealth strategies that earn more wealth. Sadly, most investors don't know these straegies or are too busy to stay on top of the changing landscape of finance and taxes.

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Our no-cost tool makes it easy to find a vetted advisor so you can make an informed decision, compare, and choose the right one for you.

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