How a Financial Advisor Can Help You Understand the Tax Implications of Your Investments

You probably already know that investments come with tax implications. Almost everything you earn, whether it is your salary or profit from an investment, can be taxed. Well, not everything, but most of it. And as an investor, your goal is always to reduce the part of your money that goes toward taxes.

But how do you actually do that?

While you might be focused on earning higher returns, maximizing them is not possible if you ignore the tax bite. Hiring a financial advisor can be your solution here.

Do financial advisors help with taxes?

Yes, they certainly do!

A good tax and investment advisor can help you understand the tax implications of your earnings and create a strategy that saves your money from tax. How? Well, in a myriad of ways, some of which will be discussed in this article.

Can a financial advisor give tax advice?

Yes, a financial advisor can guide you on tax matters as part of their overall approach to managing your finances. Their job is not just to help you invest, save, and budget. They also look for ways to reduce your tax burden.

A financial advisor takes a comprehensive view of your finances to maximize your after-tax returns. They can identify strategies to lower your tax liability, explain how those strategies work, and, depending on your preference, even implement them on your behalf.

Anyone who wishes to provide formal tax advice must be authorized by the Internal Revenue Service (IRS). This typically includes three categories of professionals:

• Certified Public Accountants (CPAs), who are licensed by state boards of accountancy.
• Tax attorneys, who provide legal advice on tax matters and may handle estate planning.
• Enrolled Agents (EAs), who are federally authorized tax practitioners, can represent taxpayers before the IRS.

How do financial advisors do tax-related tasks for you?

1. They can help you select tax-advantaged investments for your needs

One of the first things a financial advisor will do is walk you through all the tax-advantaged accounts available to you. You might already know about your employer-sponsored 401(k) plan, the one your human resources department probably mentioned during your first week at work. But that is just one tool in the toolbox.

And even within a 401(k), there are so many more choices to make. You have two main 401(k) options - a traditional 401(k) and a Roth 401(k). If you opt for a traditional account, your contributions are made with pre-tax dollars. Your taxable income for the year goes down, which is great if you are trying to stay in a lower tax bracket. But when you withdraw the money in retirement, you will pay taxes on it as regular income.

A Roth 401(k) works the opposite way. You pay taxes now, but then your withdrawals in retirement are completely tax-free. A financial advisor can help you decide which option makes more sense for you based on your income, present needs, tax bracket, and retirement goals. They can even help you split contributions between the two if that fits your situation.

Outside of a 401(k), there are Individual Retirement Accounts (IRAs). These work very similarly to 401(k)s, with traditional and Roth versions, but the contribution limits and eligibility rules are different. If you are self-employed or do not have access to a 401(k) through work, IRAs can be suitable for you. Your financial advisor can suggest these to ensure you don't miss out on potential tax benefits just because you are not part of a company plan.

Then there are municipal bonds. These are basically loans you give to local or state governments, and in return, you earn interest. The beauty is that the interest you earn is exempt from federal taxes, and in some cases, even state and local taxes if you live where the bond was issued. Financial advisors often use these for clients in higher tax brackets who want a stable, tax-efficient income stream.

If you have kids or plan to have them someday, your tax and investment advisor might also recommend opening a 529 college savings plan. These plans let your contributions grow tax-free, and as long as you use the money for qualified education expenses, your withdrawals are not taxed either. Some states even give you a tax deduction or credit for contributing. And thanks to recent changes under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, unused funds in a 529 can now be rolled over into a Roth IRA for the beneficiary, which gives you more access to the money if it is not all spent on education.

Grandparents can also use a 529 college savings plan. Coverdell Education Savings Accounts are another option that advisors might suggest for parents and grandparents. They work similarly but are more flexible. You can use them for everything from private school tuition to buying books. The contributions grow tax-free, and you can withdraw them tax-free too, as long as they are spent on qualified education expenses.

Health Savings Accounts, or HSAs, are another hidden gem. If you are on a High-Deductible Health Plan (HDHP), you can put money into an HSA and deduct it from your taxable income. The money grows tax-free, and withdrawals spent on qualified medical expenses are not taxed either. You can use the funds later in life for healthcare expenses, which we all know are likely to increase as we age, thanks but no thanks to inflation.

Now, not every account or investment is right for everyone. Just because there is an investment available offering tax benefits does not mean you should invest in it. And while tax benefits are great, you also need liquidity. A tax and investment advisor helps you strike that balance. They look at your whole financial picture and make sure you are not over-committing to tax-advantaged accounts when you might need cash for a home purchase, a child’s education, or even a business idea.

Perhaps the most significant benefit of having an advisor is that they keep you on track year after year. Tax rules change, contribution limits for accounts like the 401(k) and the IRA can increase, laws like the SECURE Act can alter how accounts function, and your needs can also change every year. Instead of you having to keep track of all this, your financial advisor can update your tax strategy when needed.

2. They can help you implement different tax savings strategies

There are now so many tax savings strategies out there, and you may not be aware of them all. But it is a financial advisor’s job to uncover these opportunities and help you take advantage of them.

For instance, did you know that your charitable endeavours can help you save tax? But you need to make these charitable giving the right way to unlock these benefits.

An advisor might suggest setting up a donor-advised fund. This allows you to make a significant, tax-deductible contribution in one year, receive the deduction immediately, and then spread out the actual donations to charities over time. If you have appreciated assets, like stocks that have grown in value, gifting them directly can also help you avoid capital gains tax while still getting a deduction for the full fair market value. And if you are over 70.5 in age, your advisor might recommend using a Qualified Charitable Distribution (QCD) from your IRA. This keeps your IRA income from being added to your taxable income.

Gifting is another powerful tool for lowering taxes, and your tax and investment advisor can help you with it. The IRS lets you give away a certain amount each year to as many individuals as you like without paying gift tax. As of 2025, that amount is $19,000 per recipient. So, you could gift $19,000 to each of your kids or grandkids this year without eating into your lifetime gift tax exemption, which now stands at $13.99 million for single filers and $27.98 million for married couples filing jointly.

Now you may have known these limits and probably read them somewhere. But did you know that these gifting rules also tie into 529 plans? If you are helping save for a child or grandchild’s education, you can superfund a 529 plan by contributing up to five years’ worth of annual exclusion gifts all at once. This translates to about $95,000 in 2025 ($19,000 x 5). As long as you do not make any additional contributions for that beneficiary for the next five years, the IRS will not count it against your lifetime gift exemption. This is a great way to get a big chunk of money growing tax-free right away. A financial advisor can walk you through the paperwork.

A tax and investment advisor can help you get a handle on your overall tax picture. They can review your most recent tax return and figure out your marginal tax bracket. This is the rate at which your last dollar of income is taxed. A lot of people confuse this with their effective tax rate, which is the average tax you pay across all income.

Knowing the difference matters because certain strategies can help you stay in a lower bracket or at least minimize how much income gets taxed at higher rates. This is especially important if you have multiple income streams, such as a salary, dividends from your investments, and maybe a side hustle or freelance work. Each of those is taxed differently, and when you add them all together, you may end up paying more than you expected. A financial advisor can help you spread out your income or time your sales and capital gains to avoid unnecessary taxes.

3. They can help you use your losses to offset gains and thereby reduce taxes

Whenever you sell an investment in a taxable account, you either have a capital gain if you sold it for more than you bought it or a capital loss if you sold it for less. The IRS classifies these as either short-term or long-term, depending on how long you held the investment. One year or less is short-term, and more than a year is long-term.

Why does this matter?

Because short-term gains are usually taxed at your regular income tax rate, which is, more often than not, higher than the long-term capital gains rate.

Tax-loss harvesting takes advantage of this system. Let’s say you sold some shares of a stock or mutual fund for a $15,000 gain earlier this year. Normally, you would have to pay taxes on that gain. But if you also own another investment that is currently worth less than what you paid for it, your advisor may recommend selling it to realize the $15,000 loss. That loss completely cancels out your gain for tax purposes. If your losses are bigger than your gains, you can even use up to $3,000 of the excess to reduce your ordinary income for the year and carry the rest forward to future years.

Of course, there are rules to follow. A financial advisor can guide you through these rules and help you find alternative investments to stay on track with your portfolio goals while still locking in the tax benefit.

4. They can help you plan your withdrawals to minimize your tax liabilities in retirement

A financial advisor can help you plan how and when you withdraw money from your retirement accounts. Take a traditional 401(k) or IRA, for example. Withdrawals from these accounts are generally taxed as ordinary income. But a financial advisor can help you plan your withdrawals beforehand and minimize your tax burden. In some situations, your tax and investment advisor might recommend a Roth conversion. This involves moving money from a traditional IRA or 401(k) into a Roth IRA. While this triggers taxes in the year of the conversion, it can offer long-term tax-free benefits. A financial advisor can ensure that you convert when your income is lower or during a year with unusually low taxable income, reducing the immediate tax impact while maximizing long-term benefits.

Advisors also help manage withholding. When you take money from a traditional account, you can choose to have federal income tax withheld automatically. This ensures you do not overpay or underpay.

Can you deduct financial advisor fees on your taxes?

They are not currently tax-deductible. Before 2018, you could deduct some or all of the fees you paid to a financial advisor. However, the Tax Cuts and Jobs Act of 2017 removed this deduction. So, while paying a financial advisor can help you save money through tax planning, the fees themselves will not reduce your taxable income.

Why professional tax guidance pays off

If tax planning is a priority for you, then hiring a financial advisor should be too. They can help you uncover strategies to save on taxes and maximize your returns, opportunities you might not even know exist. Working with a professional can boost your savings way more than you think. So, hire a tax and investment advisor if you need help with tax planning. Our free advisor match tool can make it easier to find a suitable advisor for your needs and help you unlock the full potential of your income and investment returns.