Ask an advisor: How can I save my investments from capital gains tax?

Welcome back to “Ask an Advisor,” the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

Many investment accounts have tax advantages — as long as they serve a specific purpose. For retirement, there are 401(k)s and IRAs. For education, there’s the 529. For health care, there are health savings accounts (HSAs). Each of these plans offers some tax protection, during either the contribution, growth or disbursement phase — or, in the case of HSAs, all three.

But what about direct, old-fashioned investments? Sometimes people simply buy shares of a stock or a fund without having a specific life goal in mind. Are there any tax advantages for such open-ended investing?

The short answer is, not really. Investments that aren’t shielded by some kind of long-term account are subject to capital gains taxes, which vary according to the investor’s income. For example, in 2024, a single person earning between $44,626 and $492,300 would pay 15% of their capital gains in taxes. If they earned more than $492,300, they’d pay 20%.

READ MORE: HSAs come with pitfalls — here’s how to avoid them

Is there any way around this? That’s the question troubling a young engineer in Providence, Rhode Island. At age 26, he’s just beginning to invest some of his savings, and not all of it is through his retirement account. How can he avoid someday handing over 15% or even 20% of his profits to the taxman?

Here’s what he wrote:

Dear advisors,

I’m directly invested in an exchange-traded fund. Is there any way I can avoid taking a huge hit in taxes?

A little about me: I’m a single, 26-year-old engineer in Providence, Rhode Island. Through a Fidelity account, I have about $7,000 invested in the Invesco S&P 500 GARP ETF (SPGP). My salary is $73,000, but I expect (and hope) it will grow by the time I sell my holdings. 

As far as I know, the Fidelity account is not tax-protected in any way. If I cash it out in 20 or 30 years, how much do I stand to lose to capital gains taxes? And is there any way to avoid this, or at least minimize it?

Sincerely,

Problem Solving in Providence

And here’s what financial advisors wrote back: