By Patrick Swift, CFP®, Partner & President of Wealth Planning at Amplius Wealth Advisors
When it comes to paying taxes, most Americans think: Less is better. Often this is true, but this mindset ought to extend further than just year-to-year income tax planning. At Amplius Wealth Advisors, we believe tax planning should integrate with your overall financial planning, looking beyond the year’s tax return.
Depending upon your circumstances, you and your family might beat the Tax Man over the long run by considering strategies to pay more taxes in the near-term to save considerably in the future. For higher-income executives, professionals, and business owners, reducing income may be difficult, but utilizing your “tax bracket capacity” to accelerate your inherent tax liability into the present could reduce your cumulative lifetime tax burden.
Deferring taxes by maximizing tax-deductible contributions to retirement accounts (such as traditional 401(k)s, defined benefit plans, or SEP IRAs) are one of the few tools still available to higher-bracket taxpayers.
In our experience, however, many retire with substantial value in these accounts that continues to grow well into retirement. Once in their 70s, retirees must begin taking required minimum distributions (RMDs); and these mandatory distributions are added to their reportable income and taxed at ordinary income rates.
These distributions (based upon the prior year-end value of each tax-deferred account) can be considerable and may push the taxpayer into a higher marginal tax bracket. This is also a common issue for surviving spouses who inherit and roll over their deceased spouse’s IRA/401(k) into their own IRA. At that point, their RMDs are based on the new higher amount, but they are now filing as a single taxpayer and lose the benefits of filing jointly.
The impact of these RMDs go beyond the tax ramifications in a single year, they also contribute to a lack of flexibility and creative planning for a client’s overall picture. As such, it’s important to plan many decades in advance to maximize flexibility and optimize outcomes.
As these accounts continue to grow, annual RMDs may not be sufficient to reduce the account value to $0 by the end of the account owner’s life. At that time, pre-tax retirement accounts (and the inherent tax liability) pass to the named beneficiaries. Under current tax law, non-spousal beneficiaries (some exceptions apply) are required to completely withdraw the inherited IRA balance by the end of a 10-year window.
Depending on the age of the account owner at death, your beneficiaries may be required to also take annual RMDs on their inherited IRA in years 1-9 and then deplete the account in year 10. Either way, if the value of the inherited IRA is large enough, the RMDs and the final year-10 distribution could be a huge tax headache for your heirs (who may already be in a higher bracket due to their own earned income).
Adding salt to the tax wound, extra income from RMDs can bite in other ways, via so-called “stealth taxes” that apply to other areas of your finances. For example, those with investment income from non-IRA (taxable) investment accounts may be subject to the 3.8% surcharge on net investment income. This surcharge applies to joint-filing taxpayers over $250,000 AGI or single filers with an AGI over $125,000. Many taxpayers don’t account for the NII and the fact that thresholds are fixed and not indexed for inflation, so the inclusion of RMD income can make this surcharge a painful tax reality.
Further, increased income may also cost you in higher future Medicare premiums via the IRMAA Medicare surcharge. This surcharge is applied to premiums for Medicare recipients based on their tax return income two years prior to the current year (e.g., 2025 premiums are based upon 2023 tax return income).
So how can you better plan for more flexibility around your future taxes and better optimize your estate for your heirs? Here are a few strategies worth exploring to help mitigate the impact:
1.Evaluate your current “tax bracket capacity”: In other words, look to see how much room you have in your current tax bracket before ascending to the next bracket. With this capacity, you could strategically “pull forward taxable income” that you would otherwise defer to the future. For example, going from the 22% marginal bracket to the 24% is certainly less painful than from the 24% bracket to 32%. More on this below.
2. Contributions to a Roth 401(k), or Solo Roth 401(k): Instead of taking a full income tax deduction on contributions to an employer-sponsored retirement account, consider diverting part or most of your retirement contributions to Roth within your 401(k) plan. Unlike a Roth IRA, you are eligible to contribute to a Roth 401(k) regardless of how high your income is.
3. After-Tax 401(k) Contributions: If your plan allows for after-tax contributions, not to be confused with Roth contributions described above, these contributions extend beyond the initial IRS deferral limit of $23,500 in 2025, and can often later be converted to a Roth IRA, which keeps the earnings on those contributions tax-free for the future. Also referred to as a ‘mega back-door Roth strategy,’ we discuss the strategy in more detail here. The 401(k) maximum for employee + employer contributions is $70,000 for 2025.
4. Determine optimal withdrawals on inherited IRAs: If you are fortunate enough to inherit an IRA, even though you may be subject to RMD withdrawals each year, there’s no ceiling on withdrawals during the 10-year window. It may make sense to accelerate withdrawals during otherwise lower-income years or wait (other than the RMD, if you’re subject to them) until later to draw down a substantial portion of the account.
5. Consider Roth IRA and Roth 401(k) conversions: The “granddaddy” strategy for paying taxes early on retirement accounts, the Roth conversion involves converting part or all of a pre-tax retirement accounts (IRAs, 401(k)s) to Roth IRA accounts, with the tax due in the year of conversion. For taxpayers whose taxable income may be low in years prior to claiming Social Security income, those years could be a golden opportunity to use their low bracket capacity and this strategy to draw down on high-value traditional tax-deferred accounts.
Are you a senior executive looking to optimize your tax planning, compensation, and benefits, and align these with your overall wealth management plan? The team at Amplius Wealth Advisors is uniquely positioned to navigate the challenges you face and leverage your opportunities.
Begin your journey toward maximizing your wealth and realizing your ideal financial future today. Schedule a consultation with our team to discuss how our tailored approach can help you navigate the complexities of executive compensation and tax planning.
Patrick Swift is Partner, President of Wealth Planning, & a wealth advisor at Amplius Wealth Advisors, a registered independent advisory firm in Blue Bell, Pennsylvania, helping successful executives, professionals, and multigenerational families solve complex decisions on how to best preserve, sustain, and transfer their wealth. Providing trusted financial guidance since 2015, Patrick’s proactive approach focuses on delivering personalized advice on investments, taxes, estate planning, and insurance, helping clients enjoy peace and confidence through a disciplined and strategic planning process. As President of Wealth Planning, Patrick oversees Amplius’s wealth management operations and emphasizes four key principles: behavioral discipline, proactive monitoring, room for error, and client action. He takes pride in building lasting relationships, providing clients with clarity and confidence as they navigate complex financial decisions.
Patrick holds a degree in finance and marketing from Drexel University as well as his CERTIFIED FINANCIAL PLANNER® certification. He currently lives in Philadelphia, is a Big Brother with Big Brothers Big Sisters of the Independence Region, and enjoys ice hockey, exercising, reading, writing, and cooking. To learn more about Patrick, connect with him on LinkedIn.
Disclaimer: The information provided in this article is for general informational purposes only and should not be considered as personalized tax advice. Tax laws and regulations are complex and subject to change. We strongly recommend consulting with a qualified tax professional or CPA for specific advice tailored to your individual situation. Amplius Wealth Advisors, LLC does not provide tax or legal advice. Please consult your tax and legal advisors regarding your personal circumstances.
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