Tax efficiency is an attempt to minimize tax liability when given many different financial decisions. A financial decision is said to be tax-efficient if the tax outcome is lower than an alternative financial structure that achieves the same end. Tax efficiency refers to structuring an investment or a financial plan so that the least possible taxation occurs. A taxpayer can open income-producing accounts that are tax-deferred, such as an Individual Retirement Account (IRA) or a 401(k) plan. Tax-efficient mutual funds are taxed at a lower rate relative to other mutual funds. A bond investor can opt for municipal bonds, which are exempt from federal taxes. Tax efficiency refers to structuring an investment so that it receives the least possible taxation. There are a variety of ways to obtain tax efficiency when investing in the public markets. A taxpayer can open an income-producing account whereby the investment income is tax-deferred, such as an Individual Retirement Account (IRA), a 401(k) plan, or an annuity. Any dividends or capital gains earned from the investments are automatically reinvested in the account, which continues to grow tax-deferred until withdrawals are made.1 With a traditional retirement account, the investor gets tax savings by reducing the current year's income by the amount of funds placed in the account. In other words, there's an upfront tax benefit, but when the funds are withdrawn in retirement, the investor must pay taxes on the distribution. On the other hand, Roth IRAs do not provide the upfront tax break from depositing the funds. However, Roth IRAs allow the investor to withdraw the funds tax-free in retirement. In 2019, changes were made to the rules regarding retirement accounts with the passage of the SECURE Act by the U.S. Congress. Below are a few of those changes that take effect in 2020. If you have an annuity in your retirement plan, the new ruling allows the annuity to be portable. So, if you leave your job to take another job at another company, your 401(k) annuity can be rolled over into the plan at your new company. However, the new law removed some of the legal liabilities that annuity providers previously faced by reducing the ability of account holders to sue them if the provider fails to honor the annuity payments. For those with tax-planning strategies that include leaving money to beneficiaries, the new ruling may impact you too. The SECURE Act removed the stretch provision, which allowed non-spousal beneficiaries to take only the required minimum distributions from an inherited IRA. Starting in 2020, non-spousal beneficiaries that inherit an IRA must withdraw all of the funds within ten years following the death of the owner. The good news is that investors of any age can now add money to a traditional IRA and get a tax deduction since the Act removed the age limitation for IRA contributions. Also, required minimum distributions don't need to begin until age 72–versus age 70 1/2 previously. As a result, it's important for investors to consult a financial professional to review the new changes to retirement accounts and determine whether the changes impact your tax strategy. Investing in a tax-efficient mutual fund, especially for taxpayers that don’t have a tax-deferred or tax-free account, is another way to reduce tax liability. A tax-efficient mutual fund is taxed at a lower rate relative to other mutual funds. These funds typically generate lower rates of returns through dividends or capital gains compared to the average mutual fund. Small-cap stock funds and funds that are passively-managed, such as index funds and exchange-traded funds (ETFs), are good examples of mutual funds that generate little to no interest income or dividends. A taxpayer can achieve tax efficiency by holding stocks for more than a year, which will subject the investor to the more favorable l