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An old chestnut holds it’s not what you earn, but what you keep. Unfortunately, that hasn’t taken hold with investors who view taxes as a pleasant problem — higher income taxes can mean a high performing portfolio — if they consider taxes at all.

Even investors who consider taxes often do so after the fact, noted Portland, Oregon, financial planner Glen Clemans.

“It is not so much an issue of downplaying taxes, but rather, looking at it too late,” he said. “Most people focus on taxes in March or so, when they are filing for the previous year.”

But there are savvy investors who know how to lessen the impact of taxes on their earnings and retirement savings plans.

“In the decision-making process, a less common consideration is the impact of taxes. And even less common is the disciplined selection of investment strategies that allow goals to be realized in a tax-efficient manner,” reported “Strategies to Manage the Ever Bigger Bite of Taxes,” a March 2015 study by AMG Funds.

Comparing accounts

One of the first steps to better manage taxes on investments is to understand the difference between fully taxable and tax-deferred accounts.

For fully taxable accounts, which include conventional investment and checking and savings accounts, investors are obligated to pay taxes on earnings from these investments in the year the income was received.

Tax-deferred accounts don’t generate any sort of tax obligations until funds are withdrawn. These include Individual Retirement Accounts (IRAs), Roth IRAs, 401(k)s and 529 college savings plans, among others. (Roths and 529s are also tax-free when the money is withdrawn — withdrawals from other accounts generate taxes.)

To illustrate the difference: A 20-year investment program starting with $1,000 and annual contributions of $1,000 earning 8 percent a year totals $50,423 in a tax-deferred account. Assuming a marginal tax bracket of 25 percent, the same program in a fully taxed account would total only $39,993. There are online calculators, such as this website, where you can run your own projections.

There are other reasons to take advantage of tax-deferred accounts. For employees with 401(k) or 403(b) plans, there’s a two-tiered tax break. First, earnings are only taxable when money is withdrawn. Next, an employee's net salary can be taxed after the regular contribution is made to the savings plan — an immediate “return” on tax savings.

“People really have to make sure they’re taking full advantage of their pretax plan at work,” said Clemans.

It’s also helpful to carefully compare tax-deferred accounts. For instance, investors can deduct from their income taxes contributions to a conventional IRA, provided they meet income guidelines (roughly $60,000 in annual income for singles and $181,000 for couples.) But withdrawals from IRAs are fully taxed.

A Roth IRA provides no tax break for contributions, but earnings and withdrawals are generally tax-free.

“It’s advisable for those who can to go with a deductible IRA,” said Clemans. “On the other hand, for those who may be in a higher bracket in retirement, look to the Roth instead.”

Self-employed people can also take advantage of tax-conscious savings vehicles. While Simplified Employee Pensions (SEPs) may be recognizable to many, the Solo 401(k) has the added plus of potentially higher contribution levels, depending on how contributions are calculated, according to the blog Oblivious Investor, which offers more detailed explanations of retirement savings options for the self-employed.

Calculating the impact

Although much depends on an investor’s specific situation — particularly with regard to the applicable tax bracket — it’s also helpful to know the basic tax consequences of specific investments.

Since portfolio turnover is a major tax culprit for mutual funds, index funds and Exchange Traded Funds, or ETFs, are a popular choice to minimize taxes. Rather than aggressively buying and selling individual stocks, index funds are designed to track other groups of investments, such as major stock market indices.

“With some active mutual funds there are capital gains and losses produced by the fund managers which the investor has little or no control over,” said Andrew Feldman of AJ Feldman Financial in Chicago.

Another choice is tax-managed funds. Like index funds, they buy and hold investments for a long time to reduce taxes from portfolio turnover. Additionally, they avoid dividend-paying stocks, yet another source of tax activity. Some also allocate a portion of their portfolio to tax-free municipal bonds.

Investors can get a sense of an investment fund’s tax exposure by investigating its turnover ratio. This represents the portion of a fund’s portfolio that changes annually. A low percentage (30 percent or lower) represents a modest turnover ratio. Morningstar lists turnover ratio on a fund's main page.

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“The higher that number, the more the fund is buying and selling stocks, which creates tax consequences in accounts that are not tax-deferred,” said Ed Snyder of Oaktree Financial Advisors in Carmel, Indiana. “You could have a year where your account is down in value, but still have taxes due because your funds sold some investments that they had held for a long time that were up. That sale creates a gain that is passed through to you.”

A time when turnover can be in the taxpayer's interest is when an investment loses its value. If an investor has a stock or fund that is selling for less than they paid, selling it and investing the money elsewhere locks in a tax-deductible loss.

Jeff Wuorio lives in southern Maine, where he covers personal finance and entrepreneurship. He may be reached at jwuorio@yahoo.com and his website is at jeffwuorio.com.