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“It’s not what you make; it’s what you keep.” Although we may not use these precise words, we spend a lot of time communicating this basic message to HNW clients. The message becomes particularly important as they reach their earning “summit” and start preparing for retirement.
A holistic approach to this important life transition involves careful thinking and conversation around investment strategy, tax efficiency, income needs, and estate planning. The goal, of course, is to minimize the drag of taxation on lifetime earnings and wealth accumulation while maintaining both compliance and attention to the client’s priorities and values.
This effort should encompass the character of present income, investments, and savings. However, it should also be forward-looking, anticipating the changing needs, opportunities, and challenges that typically accompany retirement.
Tax Efficiency Is Key
We certainly encourage high earners to contribute as much as possible to standard tax-advantaged vehicles like 401(k)s and 403(b)s. With that said, it’s also important to deploy mediums that can afford higher contribution levels, especially in the peak earning years leading up to retirement.
Defined benefit and cash balance plans are too often overlooked. For clients who are business owners, these can provide the means of sheltering much larger amounts of income from both current taxation and the tax drag on growth. They absolutely should be part of the discussion when planning for retirement.
Tax-efficient retirement income planning must also consider the character of the income that will be generated during retirement. This means working with the client to forecast the impact of RMDs and other taxable sources. As part of this goal, we typically emphasize the advantages of Roth conversions. For those who expect to have multiple sources of taxable retirement income, taking the “tax hit” on a portion of tax-advantaged assets now can pay off with greater availability of tax-free income in retirement.
Roth Conversions a Useful Tool
By incorporating Roth conversion strategies, we can reduce or even eliminate RMDs for retirees, granting them greater control over their income and future tax liabilities. Careful analysis of both current and projected future tax liability is required, but a systematic approach to Roth conversion during the years leading up to retirement can yield a more flexible and tax-conscious retirement income strategy.
Continuing the tax-free retirement income theme, we favor the use of backdoor and (for applicable clients) mega-backdoor Roth IRAs. Backdoor and mega-backdoor Roths help HNW clients bypass income constraints on regular Roth contributions, gain more tax-free sources of income, reduce RMDs, and get more control over the timing of retirement income. In this connection, we discuss the benefits of building a tax-advantaged legacy for beneficiaries that can simplify estate planning and bypass probate, allowing a more efficient transfer of assets.
High RMDs not only lead to higher total taxes but also have a spillover effect. Using proper Roth strategies, retired HNW clients have potential for reducing IRMAA surcharges, providing savings on premiums. While paying the tax initially doesn’t offer immediate tax benefits, the longer-term advantages typically outweigh this consideration for many of our HNW clients.
Maintaining Tax-Efficient Portfolios
Naturally, proper asset allocation plays a leading role in the portfolios we design for our clients. But we also find that discussing the benefits of proper asset location is important. Leading up to retirement, tax friction on investments can be reduced by attention to the location of less tax-efficient assets.
High-yield bonds, for example, might be best situated in tax-advantaged accounts like 401(k)s or IRAs. At the same time, taxable accounts should emphasize more tax-efficient holdings, like low-cost funds and ETFs with limited turnover, equities held long-term (especially those yielding qualified dividends), or municipal bonds and bond funds.
Tax-aware timing of asset sales and systematic rebalancing coupled with tax-loss harvesting as appropriate also enhance the long-term tax efficiency of non-tax-advantaged accounts. We find that explaining these matters to HNW clients enhances their appreciation of the value we add to the relationship.
Estate Planning, Philanthropy, & the Tax Drag
The permanence of the $15 million lifetime exemption provided by OBBBA has obviously simplified the tax implications of generational wealth transfer for many situations. However, most HNW estates will still benefit from tax-aware design.
Especially for those with philanthropic interests, charitable remainder trusts offer a means of providing current income while benefitting valued charitable causes. Further, the OBBBA established a new floor on the deductibility of annual charitable gifts at 0.5% of adjusted gross income (AGI). That has foregrounded the usefulness of donor-advised funds (DAFs) and other vehicles that allow “bunching” of gifts.
Advisors to HNW clients and families can make themselves most valuable to clients by helping them weave all these elements into retirement planning. Such a coordinated approach recognizes the need to evolve along with the client’s changing circumstances and priorities and and the importance of remaining attentive to the ever-shifting tax, legislation, financial, and economic landscapes.
Nathan Boyer, EA is Vice President at Stirling Capital. He specializes in building personalized retirement, tax, and investment strategies. He works closely with clients to develop financial plans that reflect their values, timelines, and long-term goals—providing guidance that balances practical insight with thoughtful planning. Over the past decade, he has grown with the firm and now focuses on helping clients navigate key financial milestones with confidence and clarity. He holds Series 7 and 66 licenses and brings a disciplined, analytical approach to each client relationship. Nathan is also an EA and provides tax compliance services through Stirling Tax Services Ltd.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.