[Disclaimer: These are my own views, not financial advice. Use at your own risk.]

At some point in your investing strategy it’s time to start thinking seriously about taxes.

It’s quite likely that most of your investments are only going to be used in retirement, and in retirement you’ll likely be earning less income. This means your tax bracket is likely to be more favorable than it is now. This is why smart investors talk about deferring taxes: you’ll still need to pay those taxes on your investment income, but you may pay a lower percentage by doing it later.

So how do you defer taxes?

The easiest way is a tax deferred account. Think 401(k), IRA or Roth IRA. Investment income (capital gains from sales, or dividends) in these accounts is taxed only when you withdraw your money (remember, in “regular” taxable accounts you pay those taxes in the tax year they were earned). Hence, earn now, tax later.

So how do you put this on-rails?

There are 2 steps:

1. Automate your savings to maximize your investments in tax deferred accounts (rather than just putting all your savings and dividends in your taxable account). Make sure you’re maxing out your pre-tax contributions to your 401(k) or IRA and post-tax Roth IRA investments first – there are limits, so check the rules first. For example, in 2026, 401(k) employee contributions max at $24,500 (plus catch-up if 50+), and IRAs at $7,500 (plus catch-up).
2. Split your asset allocation (from Part 3: Asset Allocation) to keep as much of the “tax inefficient” investments as possible in those tax deferred accounts.

The first step is important in a couple of ways. By maximizing your pre-tax contributions from your income into an IRA or 401(k) you’re actually lowering your taxable income (and hence paying less taxes that year), in addition to shielding the gains in that account from immediate tax liability. By maximizing your post-tax income (Roth IRA contributions) you are still shielding the dividends and gains on those investments even if you’re not lowering your taxable income for that year.

The second step is about generating less taxable income. Taxable (domestic) bonds are typically the least tax-efficient asset class because interest/dividends are taxed annually at ordinary income rates (often higher than qualified dividends or long-term capital gains from stocks). Broad stock index funds/ETFs are usually highly tax-efficient (low turnover, mostly deferred gains, qualified dividends). International stocks can sometimes be even more tax-efficient in taxable accounts due to foreign tax credits (which are lost in tax-advantaged accounts). So put tax-inefficient assets like taxable bonds, high-yield bonds, or REITs in tax-advantaged accounts (Traditional IRA/401(k) or Roth) to defer/avoid annual taxes. Put tax-efficient assets like broad-market stock funds and international funds in taxable accounts.

There are always caveats: for example while bonds in general generate dividends, municipal bonds are pretty tax efficient and safe to keep in taxable accounts (due to their exemption from federal income taxes in many cases). Also, it’s not a guarantee that you’ll be in a lower tax bracket later on or in retirement (and there are penalties if you withdraw from those tax-deferred accounts before a certain age), so always read the fine print.

By following this pattern you won’t avoid paying taxes, but more of your current income will go back and compound in your investment accounts, and when you do pay your taxes on the profits, you’ll be in a lower bracket and keep more of your hard-earned wealth.

As with all Finance, On Rails ideas, the key is to think about this stuff upfront and automate your plan, rather than accidentally leaving all your domestic binds in your taxable account and getting a surprise tax bill.

Good luck!

-Gary

A great article on this topic can be found here: Tax-efficient fund placement – Bogleheads