🪢 Retirement & Taxes: The Power Couple You Can’t Ignore

☕ Good morning!

Retirement and tax planning are like peanut butter and jelly—one just doesn’t taste as good without the other. What you do in one area has big consequences in the other, especially for high earners.

It’s not just about saving for the future or cutting your tax bill now; it’s about striking the right balance between both. 

Some moves will unlock immediate tax benefits, while others are all about setting yourself up for long-term success when retirement finally rolls around. Some strategic gems give you the best of both worlds– save on taxes now and reap more benefits when you retire. 

🎯 Why should you care?

As your income rises, so do the stakes. The IRS takes a bigger bite, and managing that bite today (while planning for tomorrow) gets trickier. 

If you're in that boat, here's what you need to know.

High earners aren’t just dealing with the basics; they’re up against contribution limits, complex tax laws, and even separate tax systems specifically designed for higher-income individuals.  

Trying to minimize how much of your hard-earned money goes to the IRS—both today and in the future– is chess, not checkers. 

Today, we’re focusing on how retirement and tax planning complement each other in your overall financial plan. 

We’ll cover the big questions high earners often ask and explore the real-world strategies that help them navigate this complicated financial landscape more smoothly. 

Let’s get into it.

⏸️ Retirement isn’t just about hitting the stop (or pause) button on work.

Proper retirement is about designing a future where your finances allow you to live the life you want. 

Whether that’s traveling the world, finally starting that passion project, or even learning something new, it’s all about being prepared. 

But there’s a catch: as a high earner, taxes are likely to be your biggest expense, both now and in retirement. 

Isn’t that a pleasant surprise? 

That’s why tax diversification is the most fundamental principle for a solid retirement plan. 

How you balance contributions between tax-deferred and tax-free accounts—like Traditional IRAs or Roth IRAs/401(k)s—could make or break your post-work life.

🪣 Three Buckets, One Strategy

Here’s how the different account types shake out:

🚰  Taxable accounts: These are your brokerage and savings accounts. You fund them with after-tax dollars and owe dividends and capital gains taxes. They’re not ideal for tax savings, but they’re flexible since you can withdraw anytime without triggering additional taxes—unless you’re selling investments for a gain.

🚰 Tax-deferred accounts: This category includes Traditional IRAs and 401(k)s. Contributions reduce your taxable income today, and the money grows tax-deferred. The downside? Withdrawals are taxed as ordinary income in retirement, and RMDs kick in at age 73, which can lead to significant tax bills if you haven’t planned properly.

🚰Tax-free accounts: Think Roth IRAs and Roth 401(k)s. You pay taxes upfront, but withdrawals are completely tax-free. Plus, Roth IRAs don’t have RMDs, giving you more control over your income in retirement.

Proper tax diversification means spreading your savings across these buckets so you can draw from the most tax-efficient source when the time comes. 

For example, if you’re inching into a higher tax bracket, pulling from your Roth can help you lower your overall tax bill.

Contribution limits are a speed bump in the process. 

In 2024, the 401(k) limit is $23,000 (with an additional $7,500 for those over 50), and for IRAs, it’s $7,000 (with a $1,000 catch-up). 

And if you earn a higher income, Roth IRAs start phasing out at $153,000 for single filers and $228,000 for married couples.

But don’t worry—there are ways around that, such as the Backdoor Roth IRA, which allows you to contribute to a Traditional IRA and convert it to a Roth, sidestepping the income caps.

❓Retirement FAQs 

Should I still max out my 401(k) if I expect to be in a higher tax bracket at retirement?

This is a nuanced question since a larger tax-deferred balance could result in a significant tax burden when you begin required minimum distributions (RMDs). 

Diversifying between Roth and traditional contributions can help balance this risk. 

When should I consider a Roth conversion, and how do I time it?

Strategic conversions during lower-income years, like a career sabbatical or a down year in the market, can help minimize the upfront tax hit. Assessing your expected future tax bracket is crucial to see if this strategy aligns with your long-term goals.

How do I protect my retirement savings from inflation?

Considering high inflation periods, it’s wise to include assets like Treasury Inflation-Protected Securities (TIPS), real estate, or even annuities with inflation adjustments to maintain purchasing power throughout retirement.

Is it wise to invest in a Life Insurance Retirement Plan (LIRP)?

LIRPs can offer tax-deferred growth and tax-free policy loans, making them attractive for high earners who have maxed out other tax-advantaged accounts. However, they come with higher costs and should be part of a broader strategy.

High earners often overlook long-term care, assuming their savings will be enough. However, the costs of extended care can rapidly deplete retirement funds, making a hybrid life insurance policy with a long-term care rider an option worth considering.

Should I worry about Social Security being taxable?

Yes, up to 85% of your Social Security benefits may be taxed if your income exceeds certain thresholds. Smartly timing retirement account withdrawals can help manage your provisional income and reduce the tax hit.

📊 How about the tax planning aspect?

If retirement is your endgame, then tax planning is the playbook that gets you there with more points on the board. For high earners, tax planning is a necessity. 

Every dollar over the top marginal tax bracket could face a 37% federal tax, and if you live in a high-tax state, your total tax bite can easily creep into the 40-50% range. 

Thousands of people clock into work, knowing that half of what they make that day goes to the government. 

However, with some strategy, you can mitigate the hit. 

Every extra dollar feels like a battle if you're earning in the upper tax brackets (think 37%+). 

Here’s how to fight back:

Max out tax-advantaged accounts by starting with 401(k)s and IRAs to lower your taxable income. 

Harvest tax losses by selling underperforming investments to offset gains, which can help reduce your tax bill. 

Use tax-efficient funds, such as index funds and ETFs, as they trigger fewer taxable events than actively managed funds. 

Finally, itemize deductions if your expenses exceed the standard deduction, which can lead to significant savings.

Unmitigated annual tax erosion is what gradually chips away at lasting wealth, keeping you working harder for longer. 

Effective tax planning starts with acknowledging that it’s a year-round effort, not just something you save last minute for tax season. The earlier you start fine-tuning your tax strategy, the more impact you’ll see down the line.

For high earners with equity compensation, like stock options or restricted stock units (RSUs), timing is everything. 

For incentive stock options (ISOs), holding your shares long enough to qualify for long-term capital gains rates (instead of regular income) could cut your tax rate nearly in half. 

Similarly, RSUs are taxed as income when they vest, but you can time the sale of those shares to spread out gains and avoid a big tax hit all at once.

The Alternative Minimum Tax (AMT) also shouldn’t be ignored; it’s triggered when your income and deductions pass a certain threshold, nullifying many regular tax breaks you’d typically use.

Certain actions, like exercising stock options, can inadvertently push you into the AMT zone. 

❓ Tax Planning Faqs

How do I minimize the impact of the Net Investment Income Tax (NIIT)?

The NIIT adds a 3.8% tax on investment income for those with high adjusted gross incomes. Strategically shifting investment income into tax-efficient accounts or focusing on tax-free municipal bonds can help. 

Can I use tax-loss harvesting to offset large gains from stock sales or bonuses?

Yes, tax-loss harvesting can offset capital gains dollar-for-dollar and reduce your taxable income by up to $3,000 each year. This is especially beneficial during years when stock options or RSUs push up your income.

How should I handle my equity compensation when I plan to retire in the next five years?

Evaluating the timing of exercising options or selling shares is crucial. Spreading out these actions can help avoid pushing yourself into the highest tax brackets during peak earning years.

Can I use a Health Savings Account (HSA) as a tax-advantaged retirement account?

HSAs are triple tax-advantaged, offering pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified expenses. After age 65, you can use HSA funds for non-medical expenses, making it a stealth retirement account.

How do I prepare for sunsetting the Tax Cuts and Jobs Act (TCJA) in 2025?

With tax rates set to rise when the TCJA provisions expire, high earners should evaluate the timing of income and deductions now. Consider accelerating income to take advantage of lower rates or locking in today’s tax brackets with Roth conversions.

Making Sense of Retirement and Tax Planning

For high earners, retirement and tax planning are two sides of the same coin. 

The financial moves you make today—choosing the right investment accounts or optimizing your tax strategy—will shape how much of your wealth you get to keep when you retire. 

Diversifying across taxable, tax-deferred, and tax-free accounts gives you flexibility, while tax-saving strategies can significantly boost your long-term financial security.

If two people earn the same amount but one ignores tax strategy, they may end up working several more years to achieve the same retirement goals as someone who actively manages their taxes.

Don’t leave your future to chance. The right balance between these elements can mean the difference between simply retiring and retiring comfortably.

Next in our series, we’ll dive into risk management and estate planning—because protecting what you’ve built is just as critical as growing it.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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