Over a lifetime of investing, your portfolio is probably going to generate a lot of taxes. Not that taxes are a bad thing, but if you can reduce them, you will come out ahead in the long run.

With the tax-filing deadline (April 18 this year) upon us, let’s take a closer look at some tax-smart strategies that are almost certain to have a positive impact on your financial net worth.

First, take advantage of your workplace retirement plan. Whether it is a 401(k), 403(b), or any other work-sponsored plan, the dollars you sock away usually reduce your taxable income by the same amount. On top of that, these dollars grow tax-deferred, which can have a significant impact on your account’s future value. As an added bonus, many companies match their employees’ contributions up to a specified limit. However, don’t let the absence of a workplace plan keep you from saving for retirement. You have the opportunity to create your own “traditional” Individual Retirement Account (IRA) that receives the same tax benefits of a 401(k).

In addition to these traditional tax-deferred accounts, there are many other tax-advantaged retirement accounts to consider, including Roth IRAs, nondeductible IRAs, and Roth 401(k)s. The complexities of how to integrate all these accounts, which might have income limitations, is too complex to discuss in this column, but financial providers, including Charles Schwab, Vanguard, and Fidelity have an abundance of resources to help you navigate the maze of retirement account options.

Tax-conscious investing should not be limited to retirement accounts. Taxable accounts can be structured to be extremely tax-efficient, as well. Once you have reached the contribution limit in your tax-deferred accounts, it is time to establish a taxable account that accentuates your saving goals. Now you have two separate accounts with two different taxing parameters, and asset “location” of your stocks and bonds is key to maintaining tax efficiency inside your entire portfolio.

SmartInvestingBillBecause most bonds (except municipal bonds) pay interest that is taxable, and thus inherently “tax inefficient,” it makes sense to locate your bond funds inside your tax-deferred retirement account.

If you also invest in a taxable account, this is an ideal location for any dollars you commit to the stock market. But beware: The choice you make on “how” you invest in the stock market is key to tax efficiency, and your annual tax bill. There is a wide disparity between mutual funds and the frequency with which a mutual fund manager buys and sells stocks throughout the year, a metric known as “turnover.” Many actively managed mutual funds have a turnover ratio of 100 percent or more, and you are on the “tax” hook for any capital gains generated by this activity. For Coffeehouse Investors, the smart alternative to these active funds is low-cost index funds. Because of their very nature of tracking an index such as the S&P 500 Index, the turnover within most index funds is extremely low, and very tax-efficient.

There is another reason to locate your stock holdings within a taxable account instead of your 401(k) or IRA. When the time comes during retirement to start drawing on your portfolio, most dollars that come out of your traditional IRA or 401(k) will be taxed at your ordinary income rate. Realized gains on stock positions held one year or more in your taxable account will be taxed at the long-term capital gains rate, which is likely to be a lower rate than distributions from your IRA.

With all these financial decisions, it makes sense to consult your CPA or certified financial planner to confirm that you have structured your “entire” portfolio in a tax-efficient manner. Remember, it is not how much you earn, but how much you keep that matters most of all.

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