One of the most overused idioms in the investment world is “Don’t let the tax tail wag the investment dog.” Tired as the expression may be, its persistence is grounded in the great lengths people go to avoid paying taxes. Maybe a different take should be how to make the inevitable tax bite as gentle as possible.

I have always been amazed by the impact of taxes on individual investor’s decision making. Many times, the results are negative. One such example was a 45 year old single dad that had seen his options in his company stock, a software company, quintuple in 1999. He suddenly found himself with enough money to send his three kids to college, pay off his mortgage, and even retire if he wanted. The only problem was that he didn’t want to sell at that time and pay taxes on his gains.

I was helping him with his planning in early 2000, and he agreed that he should cash in some of his profits to diversify but he wanted to wait until early 2001 so he could delay the tax hit. The stock dropped about 75% before the New Year rolled around, and ultimately 99% from its high by the time he was ready to sell. Not only did he avoid paying all those taxes, last I heard he is still working to pay off those mortgages and student loans to this day.

The investment industry is keenly aware of people’s aversion to being bitten by the tax dog. All you have to do is see the $35.6 billion in variable annuity sales in the second quarter of this year. [1] If you’re not familiar with variable annuities that is likely because you haven’t encountered an annuity salesperson, as virtually all of these products are sold versus bought. In other words, you went shopping for a mutual fund and walked out with an annuity. The pitch sounds great, grow your money tax-deferred like your retirement account with no limit to your contributions.

The catch? Most investors will never come out ahead versus investing in low-turnover stock index funds. [2] If you wonder why they are sold in such great numbers, all you need to do is follow the commissions paid to the salespeople who market them. If you want to see a salesperson squirm, have them show you what they stand to make if you buy their annuity versus an ETF or index fund that invest similarly to the underlying funds being recommended.

Fortunately, just as fear of taxes can provide negative influences on your decision making, so too can they provide incentives to make the right choices. Here are my six tips for putting a leash on Uncle Sam.

1.       Maximize your work retirement accounts. This isn’t the most innovative recommendation, but I consistently see folks not taking full advantage of their retirement accounts. One recent example was a self-employed client that had a SEP IRA but that instead could use a Self Employed 401k to take advantage of catch up provisions after age 50 (an extra $6,000 in 2015).

For 2015, the maximum contribution for a 401(k), 403(b), or governmental 457(b) is $18,000; $24,000 if you are > age 50, or maybe more in some circumstances. Every dollar invested is pre-tax or grows tax-free if you have a Roth option. If your plan offers a match, not only are you getting the benefit of pre-tax investments, but you’re getting free money (subject to your companies vesting rules).

2.       Contribute to an IRA, even if it’s not deductible. Most folks I talk to think that contributing to a non-deductible IRA isn’t worth the hassle. In 2015, you can put up to $5,500 per person ($6,500 if you’re > age 50) into these accounts to grow tax-deferred without the costs associated with variable annuities. If you qualify for the tax-deduction or a tax-free Roth IRA contribution or conversion, even better.

3.       Pay down debt. With rates on savings well under 1%, the volatility in stock markets, and the lack of liquidity in real estate or private equity, paying off that credit card, automobile loan, or even your mortgage can be an attractive "investment". The savings are like a tax free guaranteed return equal to the interest rate you are paying.

If you’re thinking that giving up the mortgage interest tax deduction is unattractive, think of it like this. Where else would you pay $1 to “save” .40 cents?  A tax deduction for a necessary expense is nice, but it doesn’t make much sense to spend more to save less. If you can’t afford to pay off a mortgage, consider refinancing to a shorter duration loan while interest rates are at all-time lows. 

4.       Choose a high-deductible health care plan (HDHP) paired with a Health Savings Account (HSA). You may take on more out-of-pocket health care costs potentially, but you will typically see lower insurance premiums as one of the benefits. Best of all, for 2015 you can put up to $6,650 ($7,650 if you’re > age 55) into an HSA not only pre-tax, but pre-FICA if it is part of your employer’s cafeteria plan. If you don’t spend it all during the year, it continues to grow tax-free for your future medical out of pocket medical expenses.

5.       Use a 529 College Saving Plan for college savings. These are offered through state sponsored plans, some of which may provide a state income tax break. The biggest benefit, however, is that the growth of the investments is tax free if used for the beneficiary’s qualified higher education expenses paid —tuition, fees, books, supplies, equipment, and room and board. There are fees on these plans, but several are very low cost. A good place to research the different choices and learn more is www.savingforcollege.com.

6.       Harvest some losses. If you have taxable investments that are worth less than you bought them for, selling them can result in losses that can be used to offset gains on others. If you don’t have gains to offset, you can also deduct up to $3,000 per year “above the line” on your tax return. There are potential limitations, such as the “wash sale rule” to be aware of, so you are probably best off to discuss with your tax advisor before implementing this strategy.

 If you are still worried about taxes, you can always take one other piece of advice from Texas A&M football coach Kevin Sumlin, “If you’re scared of that, get a dog.” [3]

[1] http://myirionline.org/docs/default-source/news-releases/iri-issues-second-quarter-2015-annuity-sales-report-%28pdf%29.pdf?sfvrsn=0

[2] http://www.forbes.com/sites/feeonlyplanner/2012/07/02/9-reasons-you-need-to-avoid-variable-annuities/

[3] http://www.dallasnews.com/sports/college-sports/texas-aggies/20120618-texas-am-s-kevin-sumlin-says-aggie-fans-eager-for-sec-road-games-will-have-a-different-answer-for-me-next-year.ece