Best Post-Tax Investments for Taxable Accounts

The term “post-tax investments” refers to using money that has already been subject to income tax, such as the cash in your bank account from a net paycheck. This approach contrasts with pre-tax investing, like a traditional 401(k), where taxes are deferred until retirement withdrawals. With post-tax investing, you pay taxes upfront, which allows for tax-free growth and withdrawals in certain accounts.

Navigating post-tax investing requires understanding the available accounts and assets, each with distinct rules and tax implications. The goal is to structure investments to minimize the tax impact on returns. By making informed decisions about where and how to invest your after-tax money, you can improve the efficiency of your portfolio.

Tax-Advantaged Retirement Accounts

For those investing with post-tax dollars, certain retirement accounts allow investments to grow and be withdrawn tax-free. The most prominent are the Roth Individual Retirement Arrangement (IRA) and the Roth 401(k). Both are funded with money on which you have already paid income tax, but they provide the advantage of exempting qualified distributions from federal and most state income taxes.

The Roth IRA is an account for anyone with earned income, subject to income limitations. For 2025, the ability to contribute the full amount phases out for single filers with a Modified Adjusted Gross Income (MAGI) between $150,000 and $165,000, and for married couples filing jointly with a MAGI between $236,000 and $246,000. The 2025 maximum contribution is $7,000, with a $1,000 catch-up contribution for those age 50 and older.

To receive the full tax-free benefit, Roth IRA distributions must be “qualified.” A distribution is qualified if taken after the account holder reaches age 59½ and has held any Roth IRA for at least five years. While contributions can be withdrawn anytime tax-free, early withdrawals of earnings may be subject to income tax and a 10% penalty.

The Roth 401(k) is an employer-sponsored plan that combines features of a traditional 401(k) with the Roth tax structure. Unlike a Roth IRA, there are no income limitations to participate. For 2025, the employee contribution limit is $23,500, a combined limit for both traditional and Roth 401(k) contributions. Individuals 50 and over can make a $7,500 catch-up contribution, and some plans may allow a larger catch-up for those aged 60 to 63.

Understanding the Taxable Brokerage Account

The most common vehicle for post-tax investing is a standard taxable brokerage account. It offers great flexibility with no contribution limits, income restrictions, or withdrawal penalties. However, investment earnings are subject to taxation through capital gains and dividends.

Capital gains occur when you sell an asset for a higher price than you paid. If you hold an investment for one year or less, the profit is a short-term capital gain taxed at your ordinary income tax rates, which range from 10% to 37% in 2025.

If you hold an asset for more than one year, the profit is a long-term capital gain, which is taxed at lower rates. For 2025, these rates are 0%, 15%, or 20%, depending on your taxable income. A single filer with taxable income up to $48,475 pays 0%, while those with income between $48,476 and $250,525 pay 15%. The 20% rate applies to income above that threshold.

Dividends are distributions of a company’s earnings to shareholders. Non-qualified dividends are taxed at your ordinary income tax rate. Qualified dividends are taxed at the same lower long-term capital gains rates. To be “qualified,” the dividend must be from a U.S. or qualifying foreign corporation, and you must have held the stock for a specific period around the ex-dividend date.

Tax-Efficient Assets for Taxable Accounts

Selecting assets that generate lower tax burdens is an effective way to manage a taxable brokerage account. Certain investments are inherently more tax-efficient due to their structure or the type of income they produce. Prioritizing these assets can minimize the annual tax drag on your portfolio.

• Municipal bonds: These are debt securities issued by state and local governments. The interest income they generate is exempt from federal income taxes. If you buy bonds from your own state, the interest is often exempt from state and local taxes as well, making them attractive for investors in high tax brackets.
• Index funds and ETFs: These funds track a market index, resulting in low portfolio turnover. Because the fund manager buys and sells securities infrequently, these funds distribute fewer taxable capital gains to shareholders compared to actively managed funds.
• Growth stocks: These are shares in companies that reinvest earnings to fuel expansion rather than paying dividends. The investor’s return comes from the stock’s price appreciation, and the capital gains tax is deferred until the stock is sold.
• Master Limited Partnerships (MLPs): These are publicly traded partnerships, often in the energy sector, that pass income directly to investors. A portion of the cash distributions is often classified as a “return of capital,” which reduces your cost basis and defers the tax liability until the units are sold.

Specialized Tax-Advantaged Vehicles

Several specialized investment vehicles use post-tax dollars to save for specific goals while offering tax benefits. These accounts are designed to encourage saving for major expenses like education and healthcare.

A 529 plan is a state-sponsored account for education expenses. Contributions are made with post-tax dollars, but investments grow federally tax-deferred. Withdrawals are federally tax-free when used for qualified education expenses, which include college tuition, fees, room and board, books, and supplies. Many states also offer a tax deduction or credit for contributions.

Recent changes allow up to $10,000 per year to be used for K-12 tuition. Additionally, unused 529 funds can be rolled over into a Roth IRA for the beneficiary, up to a lifetime maximum of $35,000, subject to certain conditions. The earnings portion of a non-qualified withdrawal is subject to ordinary income tax and a 10% federal penalty.

A Health Savings Account (HSA) offers a triple tax advantage, but you must be enrolled in a high-deductible health plan (HDHP) to contribute. Contributions are federally tax-deductible, funds grow tax-free, and withdrawals are tax-free for qualified medical expenses. For 2025, contribution limits are $4,300 for individuals and $8,550 for families, with a $1,000 catch-up for those 55 and older.

HSA funds roll over each year and are portable if you change employers, allowing the account to serve as a long-term investment vehicle. After age 65, you can withdraw funds for any reason without penalty, though withdrawals for non-medical expenses will be subject to ordinary income tax.

Strategic Tax-Minimization Techniques

Investors can use specific strategies to manage the tax impact within their portfolios. These techniques involve actions to offset gains, defer taxes, and optimize the placement of investments across different account types.

Tax-loss harvesting is a strategy for taxable accounts that involves selling an investment at a loss. This realized loss can then be used to offset any capital gains. If your losses exceed your gains, you can use up to $3,000 of the excess to offset ordinary income, carrying forward any remaining losses to future years.

When using this strategy, you must follow the IRS “wash sale” rule. This rule prohibits you from claiming a tax loss if you sell a security and buy the same or a “substantially identical” one within 30 days before or after the sale. If you violate the rule, the loss is disallowed for the current tax year and is instead added to the cost basis of the new investment.

Asset location is a strategy of placing investments in the most appropriate account based on their tax efficiency. The principle is to hold tax-inefficient assets, like high-yield corporate bonds or actively managed funds, in tax-advantaged accounts like a 401(k) or IRA. This shelters their frequent taxable income and gains.

Conversely, tax-efficient assets like index funds, growth stocks, or municipal bonds are well-suited for taxable accounts. Since they generate minimal taxable income or allow for the deferral of capital gains, the benefit of placing them in a tax-advantaged account is less pronounced. Strategic asset location can reduce your portfolio’s overall tax burden.