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Career & Finance Fridays

Money & Finances

Tax Efficiency

My husband and I recently had a meeting with our financial advisor. When I asked him his thoughts on how we should proceed with our retirement savings, his answer was different than I expected it to be.

I expected him to ask me some sort of question about how much money I thought we would need monthly in retirement to do the things we want to do. But what he said that made me think differently about retirement savings is that we need to use the most effective tax sheltering products available to us so that we keep the most amount of money.

Think about it - if you had $100,000 gross per year to live off of, but you end up paying 40% of it in taxes, you have a lot less. Versus, if you have $100,000 gross per year to live off of but you’ve used tax sheltering products and strategies and now you end up paying 20% in taxes, you are way further ahead.

I live in Canada, so he further continued to talk about different tax efficient strategies that are available. He talked about Tax-Free Savings Accounts (TFSA), RESPs, RRSPs, and Flow Through Shares. Further to that there are other products available such as Whole Life Insurance Policies.

I’ve certainly thought about taxes in retirement before, but this conversation made me realize just how important it is to plan for your retirement with tax efficiency in mind.

My husband and I are deep diving into all these different products to help us (legally) pay as little tax as possible.

Recommended Book

The Ultimate Tax Strategy Guide

Apr 17, 2021
ISBN: 9798739396921

Interesting Fact #1

Tax rate: This is the percentage of your income that’s taxed. In Canada, you pay both federal and provincial income tax – provincial tax rates vary from province to province. Tax brackets: Canada has a progressive tax system. That means the more money you make, the more taxes you pay. Different tax brackets may apply, depending on your taxable income.


Interesting Fact #2

Taxable income: This is the portion of your annual income on which tax is applied. Annual income includes your salary and additional revenue such as bonuses, scholarships, tips, investment income, etc.


Interesting Fact #3

Tax credits like the Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit, and American Opportunity Tax Credit reduce the taxes you owe, not just your taxable income.


Quote of the day

“Taxes are what we pay for civilized society, for modernity, and for prosperity. The wealthy pay more because they have benefitted more. Taxes, well laid and well spent, insure domestic tranquility, provide for the common defense, and promote the general welfare. Taxes protect property and the environment; taxes make business possible. Taxes pay for roads and schools and bridges and police and teachers. Taxes pay for doctors and nursing homes and medicine. During an emergency, like an earthquake or a hurricane, taxes pay for rescue workers, shelters, and services. For people whose lives are devastated by other kinds of disaster, like the disaster of poverty, taxes pay, even, for food.” ― Jill Lepore

Article of the day - 6 Strategies to Protect Income From Taxes

Income is taxed at the federal, state, and local levels and earned income is subject to additional levies to fund Social Security and Medicare.12 Taxes are difficult to avoid but there are several strategies you can use to help ward them off. Here are a few you might want to consider.  


  • Contributing to qualified retirement and employee benefit accounts with pretax dollars can exempt some income from taxation and defer income taxes on other earnings.3
  • Tax rates on long-term capital gains are low.
  • Capital loss deductions can reduce taxes further.
  • Interest income from municipal bonds is generally not subject to federal tax.

1. Invest in Municipal Bonds

Governments need money to fund their obligations to their citizens, such as maintaining safe roadways and public schools. They raise this money in part by selling securities: municipal bonds or "munis."4

The advantage here? Assuming you hold the bond until maturity, you don’t have to pay federal taxes on the interest—or state and local taxes either if you live in the locality where the bond was issued. Tax-free interest payments make municipal bonds attractive to investors.5

That said, don’t assume that a bond isn’t taxable just because it’s a muni. There are some exceptions to munis’ tax-free status. A “de minimis” tax can apply if you purchased the bond(s) at a discount of less than 0.25%. Interest and gains derived from the discounted amount are taxed, and they’re taxed as regular income, not at kinder, long-term capital gains rates, no matter how long you hold the bonds. 

Overall, municipal bonds historically have lower default rates than their corporate bond counterparts. A 2022 data report on municipal bonds from 1970 to 2022 found that the default rate was 0.08% for municipal bonds versus 6.9% for global corporate issuers. The data was based on a five-year period.6

Municipals typically pay lower interest rates. Municipal bonds' tax-equivalent yield makes them attractive to some investors because of the tax benefits. The higher your tax bracket, the higher your tax-equivalent yield.

2. Shoot for Long-Term Capital Gains

Investing can be an important tool in growing wealth. Another benefit of investing in stocks, mutual funds, bonds, and real estate is the favorable tax treatment for long-term capital gains.

An investor holding a capital asset for longer than one year enjoys a preferential tax rate of 0%, 15%, or 20% on the capital gain, depending on the investor’s income level. The capital gain is taxed at ordinary income tax rates if the asset is held for less than a year before selling. Understanding long-term versus short-term capital gains rates is important for growing wealth.7

The 2024 zero rate bracket for long-term capital gains applies to taxable income up to $94,050 for married couples who file jointly, up from $89,250 in 2023. The threshold is $47,025 for single individuals, up from $44,625 in 2023.89 A tax planner and investment advisor can help determine when and how to sell appreciated or depreciated securities to maximize gains and minimize losses.

Tax-loss harvesting can also offset a capital gains tax liability if you sell securities at a loss. The lesser of $3,000 of the excess losses or the net capital loss can be deducted from other income if capital losses exceed capital gains. Capital losses over $3,000 can be carried forward to later tax years.7 


Investopedia's Tax Savings Guide can help you maximize your tax credits, deductions, and savings. Order yours today.

3. Start a Business

A side business offers many tax advantages in addition to creating more income. Many expenses can be deducted from income when they're used in the course of daily business, reducing your total tax obligation. Even health insurance premiums can be deductible for self-employed individuals if special requirements are met. 10

A business owner also may deduct part of their home expenses with the home office deduction by strictly following Internal Revenue Service (IRS) guidelines. The portion of utilities and Internet that are used in the business may also be deducted from income.11

The taxpayer must conduct business with the intention of making a profit to claim these deductions. The IRS evaluates several factors to determine this. Taxpayers who realize a profit in three of five years are presumed to be engaged in a business for profit.12

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in 2019. This legislation offers tax incentives to employers who join multiple-employer plans and offer retirement options to their employees.13

4. Max Out Retirement Accounts and Employee Benefits

Taxable income can be reduced for contributions up to $22,500 to a 401(k)  or 403(b) plan in 2023, increasing to $23,000 in 2024. Those who are 50 or older can add $7,500 to the basic workplace retirement plan contribution in 2023 and 2024.14 An employee earning $100,000 in 2023 who contributes $22,500 to a 401(k) in 2023 or $23,000 in 2024 reduces their taxable income to only $77,500.

Those who don’t have a retirement plan at work can get a tax break by contributing up to $7,000 ($8,000 for those 50 and older) to a traditional individual retirement account (IRA) in 2024, up from $6,500 and $7,500 respectively in 2023.14 Taxpayers who do have workplace retirement plans (or whose spouses do) may be able to deduct some or all of their traditional IRA contribution from taxable income, depending on their income.15

The deduction for IRA contributions is phased out for adjusted gross incomes at different levels depending on whether they're claimed on a single taxpayer’s return, a joint return, or by a married individual filing separately. It takes into account any participation by a taxpayer in another plan. The IRS has detailed rules about whether and how much you can deduct. 14


Before the SECURE Act, 401(k) or IRA account holders had to withdraw required minimum distributions (RMDs) in the year they reached age 70½. The SECURE Act increased that age to 72.13

The SECURE Act 2.0 then changed that rule further. RMDs begin at age 73 if you were born between 1951 and 1959, and at 75 if you were born in 1960 or after.16 The SECURE Act also eliminated the maximum age for traditional IRA contributions, which was previously capped at 70½ years old.17

Fringe Benefits

Many employers offer a variety of fringe plans in addition to retirement plan contributions that allow employees to exclude the contributions made or benefits received from their income. Benefits under these programs generally are reflected as non-taxed amounts on employees’ W-2 statements.

These benefits include flexible spending accounts, educational assistance programs, adoption expense reimbursements, transportation cost reimbursements, group term life insurance up to $50,000, and deferred compensation arrangements generally for senior managers and executives.18

5. Use a Health Savings Account (HSA)

Employees with a high-deductible health insurance plan can use a health savings account (HSA) to reduce taxes. As with a 401(k), HSA contributions made by payroll deduction are excluded from the employee’s taxable income. An individual’s direct contributions to an HSA are 100% tax-deductible from their income.19 The maximum deductible contribution level was $3,850 for an individual and $7,750 for a family in 2023, increasing to $4,150 and $8,300 respectively in 2024.2021

HSA contributions can be matched by an employer. These funds can then grow without the requirement to pay tax on the earnings. An extra tax benefit of an HSA is that withdrawals aren't taxed either when they're used to pay for qualified medical expenses.19

6. Claim Tax Credits

Tax credits are perhaps the greatest tax break of all. 

Let’s look at a scenario: Maybe your overall income for the year was $50,000. You spend $8,000 of that on IRS-friendly deductible expenses. You’ll pay your ordinary tax rate on $42,000, assuming that none of the money derived from long-term capital gains. Now, let’s say that you’re also eligible for one or more tax credits. They’re worth $5,000. But that $5,000 doesn’t reduce your taxable income. It comes directly off the tax you owe the IRS on that $42,000. It’s a dollar-for-dollar perk.  

A tax deduction worth a dollar is actually worth only 24 cents in a 24% tax bracket. But a dollar tax credit is worth a dollar.


There are many tax credits available, and here are two of the more commonly claimed credits:

The Child Tax Credit  

The Child Tax Credit is an important one for U.S. taxpayers with children, in that it can significantly lower your tax burden. This Child Tax Credit was worth $2,000 for each qualifying child in tax year 2022 (the return filed in 2023). To qualify for the full credit amount, you can’t earn more than $200,000 if you’re single or $400,000 if you’re married and file a joint return. You might qualify for a partial credit if you earn slightly more.22

Internal Revenue Service. "Child Tax Credit."


Your child or children must be younger than age 17 as of the last day of the tax year to qualify. They must have lived with you for more than half the year and they can’t have paid for more than 50% of their own support needs. Stepchildren, siblings, and descendants can qualify, too, provided that you claim them as dependents on your tax return.22

The child tax credit is different than the child and dependent care credit.23

The Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) can be a nice financial gift for low- to lower-middle income families. To qualify, you must have some earned income and there’s a cap on how much it can be, as well as on the amount of any unearned income you might enjoy.24

A low-income taxpayer could claim credits up to $7,430 with three or more qualifying children, $6,604 with two, $3,995 with one, and $600 if none in tax year 2023. This is the return you'll file in 2024.25 They increase to maximums of $7,830, $6,960, $4,213, and $632 in 2024.26

The maximum amount of the credit is a calculation based on your income, marital status, and the number of children you support. (It’s worth noting that you can potentially qualify with no children if your income is very low.) 

The average return from the EITC was $3,099 for a family with children in 2020, the last year for which comprehensive IRS data is available.

You must have a Social Security number to qualify and you must be a U.S. citizen or resident alien.24 You generally won’t qualify if you’re married and filing a separate tax return, but there are some limited exceptions to this rule.

Other Tax Credits

The American Opportunity Tax Credit offers a maximum of $2,500 per year for eligible students for the first four years of higher education as of January 2024.27 The Lifetime Learning Credit allows a maximum of 20% credit for up to $10,000 of qualified expenses or $2,000 per return.28 This credit isn't indexed for inflation.

There is also the Saver’s Credit for moderate and lower-income individuals looking to save for retirement. Individuals can receive a credit of up to half their contributions to a plan, an IRA, or an ABLE account.3

How Can I Reduce My Taxable Income?

There are a few methods recommended by experts that you can use to reduce your taxable income. These include contributing to an employee contribution plan such as a 401(k), contributing to a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.

How Much Should I Put Into My 401(k) to Reduce My Taxes?

401(k) accounts are pre-tax accounts. The money you contribute to them isn't taxed at the time you make the contributions, thereby reducing your overall income that is taxed. This results in a smaller tax bill. The more money you contribute to your 401(k), the lower your taxable income will be, and the less you'll have to pay in taxes.

What Does the IRS Allow You to Deduct If You're Self-Employed?

The IRS allows you to deduct quite a few expenses. These include home office costs, vehicle costs, cell phone costs, self-employed retirement plan contributions, and self-employed health insurance premiums.29

The Bottom Line

It's important to pay all that is legally owed to tax authorities, but nobody has to pay extra. A few hours on the IRS website ( and scouring reputable financial information sites may yield hundreds and maybe even thousands of dollars in tax savings.

It also may be wise to check with a tax professional before you claim them on your tax return. You’ll want to be sure you qualify when all the intricate qualifying rules are applied—and then enjoy the money you saved because of your diligence. 

Question of the day - What is your best strategy to be as tax efficient as possible in retirement?

Money & Finances

What is your best strategy to be as tax efficient as possible in retirement?