Tax-aware investing: How to keep more of your investment returns
How municipal bonds and tax-aware strategies are designed to maximize your after-tax wealth
The wealth you build isn’t defined by what you earn—it’s defined by what you keep. While many investors focus on pre-tax returns, after-tax outcomes can have an even greater impact on long-term results. By incorporating strategies such as tax-exempt municipal bonds and systematic tax-loss harvesting, investors may be able to reduce their tax burden while staying aligned with their broader investment goals.
What is tax drag and how does it affect your investment returns?
Investors have a silent partner taking 20-30% of their returns–and that partner never invested a dime. Over a lifetime, tax drag can potentially cost hundreds of thousands, even millions, of dollars.
While investors naturally focus on pre-tax returns, it’s what they keep after taxes that compounds into real wealth.
How to keep more? Two approaches:
- AVOID paying taxes on income
- MITIGATE by reducing taxes on gains
The compounding penalty of tax drag: A visual breakdown¹
Growth of a Hypothetical $1 Million Investment
For the 20-Year Period Ending 12/31/2025
How can municipal bonds help you avoid taxes on investment income?
The simplest form of tax awareness? Never pay the tax in the first place.
Municipal bonds are designed to deliver income that’s exempt from federal taxes–and often state taxes too. At today’s yields, munis offer higher potential than taxable bonds on an after-tax basis.
Munis Shine After Tax2
As of December 31, 2025
The real dollar impact: municipal bonds vs. taxable bonds
Hypothetical $1 Million Investment2
To match this with taxable bonds?That requires a 7.55% yield—200+ basis points above what taxable bonds offered as of December 31, 2025.
How does tax-loss harvesting help reduce capital gains taxes?
Turn market losses into tax savings
Even in good markets, individual investments experience losses. On average, 35% of S&P 500 stocks are down in any given year—and many more experience temporary declines at some point during the year. Tax-loss harvesting captures losses to offset capital gains—reducing taxes without changing market exposure.
Individual Stocks Create Harvest Opportunities—Even in Up Markets3
The real dollar impact: Tax savings from rebalancing a $1 million portfolio
Hypothetical $1 Million Portfolio With a $200K Embedded Gain Wants to Rebalance Portfolio4
- No tax management: $47,600 tax cost (23.8% rate)
- With tax loss harvesting: $11,900 tax cost
- Tax savings: $35,700
Which tax-aware investing strategy is right for you?
Tax drag can sap 20-30% of investment returns—the question is which approach to use:
Need income? AVOID taxes with municipal bonds
Have capital gains? MITIGATE taxes with tax-loss harvesting
Featured funds
Franklin Dynamic Municipal Bond ETF
Seeks to provide a high level of current income that is exempt from regular federal income taxes.
- Asset Class
- Fixed Income
- Total Net Assets
As of 07/20/2026 - $2.31 bn
- Inception Date
- 08/31/2017
- Dividend Frequency
- Monthly
- NAV
As of 07/20/2026 - $24.87
Franklin High Yield Tax-Free Income Fund - Advisor Class
The fund seeks to provide a high current yield exempt from regular federal income taxes. Its secondary goal is capital appreciation to the extent possible and consistent with the fund's principal investment goal.
- Asset Class
- Fixed Income
- Total Net Assets
As of 06/30/2026 - $4.77 bn
- Inception Date
- 01/03/2006
- Dividend Frequency
- Monthly
- NAV
As of 07/20/2026 - $8.95
Putnam Strategic Intermediate Municipal Fund - Class Y
The fund seeks as high a level of current income exempt from federal income tax as we believe is consistent with preservation of capital by pursuing opportunities across the municipal market.
- Asset Class
- Fixed Income
- Total Net Assets
As of 06/30/2026 - $2.50 bn
- Inception Date
- 01/02/2008
- Dividend Frequency
- Monthly
- NAV
As of 07/20/2026 - $14.13
Frequently asked questions about tax-aware investing
What is the difference between tax-aware investing and tax-efficient investing?
What is tax-loss harvesting?
What is asset location and how does it improve after-tax returns?
Can tax-loss harvesting be done at any time of the year?
Who benefits most from tax-aware investing?
All charts are for illustrative purposes only and do not reflect the performance of any Franklin Templeton affiliated fund. Past performance does not guarantee future results.
1. Source: Morgan Stanley AI Guidebook, Fourth Edition, 1/31/2024. Next Move Strategy Consulting. Initial forecast dates were February 1996 for PC and internet users. January 2010 for smartphone shipments. March 2017 for cloud revenue and January 2023 for AI market size. Artificial Intelligence Market Size & Trends published by Grand View Research, the global AI market reached $196.63 billion in 2023 and is expected to grow at a CAGR of 36.6% from 2024 to 2030, reaching approximately $1.8 trillion. There is no assurance that any estimate, forecast or projection will be realized. Past performance is not an indicator or a guarantee of future performance.
2. Sources: S&P Global, FactSet. The “Magnificent 7” refers to the major tech giants: Amazon, Alphabet (Google), Apple, Meta Platforms (Facebook), Microsoft, NVIDIA and Tesla. The S&P 493 represents all companies in the S&P 500, excluding the Magnificent 7. Earnings growth is measured by trailing earnings per share for each group. Capital expenditures are estimated for the years 2025–2027. There is no assurance any estimate, forecast or projection will be realized. Past performance is not an indicator or a guarantee of future performance.
3. Sources: S&P Global, FTSE Russell, Macrobond. The S&P 500 Index features 500 leading US publicly traded companies, with a primary emphasis on market capitalization. Large cap growth is represented by the Russell 1000 Growth Index, which measures the performance of the large-cap growth segments of the US equity universe. Information technology is represented by the S&P 500 Information Technology Index, which tracks US tech companies within the broader S&P 500 Index and represents leaders in innovation and growth. Digital assets represent the sum of all cryptocurrencies tracked by Macrobond.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Equity securities are subject to price fluctuation and possible loss of principal. The investment style may become out of favor, which may have a negative impact on performance. An investment in a concentration of certain securities, regions or industries is subject to increased volatility. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. The investment style may become out of favor, which may have a negative impact on performance. To the extent the portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. Diversification does not guarantee a profit or protect against a loss. Active management does not ensure gains or protect against market declines.
Please see each product's web page for specific details regarding investment objective, risks, performance, and other important information. Review this information carefully before you make any investment decision.
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