While some investments are "tax-hungry," others are naturally "tax-sippers." These tax-efficient assets generate very little taxable income on an annual basis, or the income they do generate is taxed at preferential rates . Because they don't trigger large annual tax bills, these assets are the ideal residents for your taxable brokerage account. By placing them there, you "save" your limited tax-advantaged space (like IRAs and 401(k)s) for the inefficient assets that need it most .

The Power of Passive Investing: Index Funds and ETFs

One of the most significant developments for tax-conscious investors has been the rise of passively managed index funds and Exchange-Traded Funds (ETFs). These vehicles are designed to track a specific market index (like the S&P 500) rather than trying to beat it through active trading.

Low Turnover, Low Taxes

Because index funds only buy or sell stocks when the underlying index changes, they have very low "turnover" . This means they rarely realize capital gains, and when they do, those gains are typically long-term. For an investor in a taxable account, this is a massive advantage. You can hold an S&P 500 index fund for decades, watching it grow, without ever having to pay a significant capital gains tax until the day you finally decide to sell your shares .

The ETF Structural Advantage

ETFs are often even more tax-efficient than index mutual funds due to their unique "in-kind" redemption process. This technical mechanism allows ETF managers to adjust the fund's holdings without triggering capital gains taxes for the shareholders. As a result, many ETFs go years without ever distributing a taxable capital gain .

Municipal Bonds: The Federal Tax "Cheat Code"

If you want to hold bonds in a taxable account, municipal bonds (or "munis") are often the best choice. These are bonds issued by state and local governments to fund public projects like schools, highways, and bridges.

Tax-Exempt Interest

The primary draw of municipal bonds is that the interest they pay is generally exempt from federal income taxes . In many cases, if you buy bonds issued by your home state, the interest may also be exempt from state and local taxes .

Comparison: Taxable vs. Municipal Bonds

Feature	Corporate Bond (Taxable)	Municipal Bond (Tax-Exempt)
Interest Rate	5%	3.5%
Federal Tax (32% bracket)	1.6%	0%
After-Tax Yield	3.4%	3.5%

Even though the municipal bond has a lower "headline" interest rate, the investor in a high tax bracket actually keeps more money with the muni because the IRS doesn't take a cut . This makes municipal bonds or municipal bond ETFs a perfect fit for a taxable brokerage account .

Individual Stocks and the "Buy and Hold" Strategy

Individual stocks can be highly tax-efficient, provided you have the discipline to hold them for the long term. When you own an individual stock, you are in total control of when a taxable event occurs .

The One-Year Rule

The IRS rewards patience. If you sell a stock you have held for one year or less, your profit is taxed as a short-term capital gain at your ordinary income rate (up to 37%) . However, if you hold that stock for more than one year, it is taxed at the long-term capital gains rate, which is significantly lower (0%, 15%, or 20% for most investors) .

Qualified Dividends

Many established companies pay dividends to their shareholders. If these are "qualified dividends," they are taxed at the same lower rates as long-term capital gains rather than the high ordinary income rates . This makes high-quality, dividend-paying U.S. stocks relatively tax-advantaged and suitable for taxable accounts .

Tax-Managed Equity Funds

For investors who want professional management but are worried about taxes, some mutual funds are specifically designated as "tax-managed" . The managers of these funds use specific techniques—such as selling losing positions to offset gains (tax-loss harvesting) or intentionally avoiding short-term trades—to minimize the tax impact on shareholders . These funds are explicitly designed to be held in taxable accounts .

Summary Table: What to Put in Your Taxable Account

Asset Type	Why it's Tax-Efficient
Index Funds / ETFs	Low turnover means fewer taxable capital gains distributions .
Municipal Bonds	Interest is exempt from federal (and often state) taxes .
Individual Stocks	You control the timing of sales; long-term gains get lower rates .
Tax-Managed Funds	Managers actively work to reduce the tax bill for shareholders .
Buy-and-Hold Equities	Avoiding frequent trading keeps taxes deferred for years or decades .

Practical Application for Beginners

If you are just starting out and only have a taxable brokerage account, focus on building your foundation with broad-market index funds or ETFs. These are the "gold standard" for tax efficiency . As your portfolio grows and you open tax-advantaged accounts like a 401(k) or IRA, you can begin to move your less efficient assets (like taxable bonds or REITs) into those sheltered buckets, while keeping your core index fund holdings in your taxable account . This strategic split ensures that you are using every tool in your shed to keep your tax bill as low as possible.