In order to reduce the tax you pay on investments held in a taxable account–that is, outside of a tax-favored account such as the TSP or an IRA–consider these alternatives:
* Tax-managed funds: A number of mutual funds have “tax-managed” in their names. These funds attempt to take losses to offset gains so that no net gains are passed through to investors. If they must take gains, they try to hold stocks for a year or longer before taking profits, in order to qualify for low-taxed long-term gains.
* Index funds: These funds track an index such as the Standard & Poor’s 500. They generally do little trading so they may not realize gains that have to be passed through to investors.
* Exchange-traded funds (ETFs): These are index funds that trade like stocks. They may be even more tax-efficient than index mutual funds.
Note: In many cases, index mutual funds and ETFs have low expenses. This also can boost the returns investors enjoy.