It’s undeniable that retirement accounts are great for sheltering your investments from taxes. But what happens when you’ve also got assets held in regular taxable brokerage accounts – Especially ones that have experienced significant growth over the years? Is there a way to make them more tax efficient? 

Yes, there is. And the solution is very simple: Don’t sell them.

Generally speaking, a taxable event occurs when two things happen: 

1. Money leaves you to go towards the purchase of an asset (such as a stock or ETF)
2. Money from that asset comes back to you in one form or another (either through the sale of the asset or distributions)

When an asset is worth more than what you originally paid, this is called a “capital gain”. Capital gains can either be:

1. “Unrealized” or on paper – This means you haven’t sold the asset yet. But if you did, you’d make a profit.
2. “Realized” – You actually did sell the asset and made a profit. 

From the IRS perspective, gains are only taxable when they’re realized. Therefore, as long as you leave them sitting around in your brokerage account and don’t sell them, they will stay unrealized and won’t incur a capital gains tax.

Depending on your investment goals, targeting stocks or funds that don’t have regular distributions and leaving them to grow can help you avoid the headache of figuring out your taxes each year. This is a stark contrast from other securities that regularly spin-off capital gains or unqualified distributions to their shareholders.

Here’s an example. Let’s say you bought $10,000 in shares of an ETF that’s done phenomenally well over the past five years such as Invesco QQQ. This is a fund that’s focused on growth, so it doesn’t make distributions back to its shareholders. 

Insert image 086A – QQQ

Since the fund is up over 100%, your investment would now be worth over $20,000 – and it probably has a lot further to grow over the next five years. However, none of that would be taxable until you absolutely need to sell this ETF.

That’s quite a different tax liability situation as opposed to investing in an ETF like JEPI. JEPI has been gaining massive popularity due to its ability to pay monthly dividends with an average annual yield north of 10%. 

While a 10% distribution sounds nice, this does create a tax liability for you each year. On top of that, since JEPI mainly generates income from the premium it collects by selling covered calls, most of this dividend will be unqualified and not taxed at the more favorable long-term capital gains tax rates (0%, 15%, or 20%).

This is yet another reason why it pays to be a long-term investor. Not only can better position yourself to benefit from growth, but you can also design your portfolio to be more tax efficient. Ultimately both of these traits will result in you having better financial security and more money to enjoy.