Albert Einstein reportedly once told his accountant, “the hardest thing in the world to understand is income taxes.” Decades later, his observation remains just as relevant—if not more—given the increasing complexity of our tax system. While April 15 marks the official tax-filing deadline, effective tax planning isn’t a once-a-year event. Instead, it should be an integral part of a well-structured financial strategy, woven into your overall financial planning throughout the year.
As with most aspects of financial success, preparation is key to tax planning and compliance. Keeping tax documents like W-2s, 1099s, charitable contribution receipts, and other forms organized can save time, help you to share them with your tax professional, and give you a springboard to assess tax optimization strategies.
For the same reason, it is critical to consider taxes as part of your overall financial planning to ensure you aren’t leaving money on the table. Taxes can be complex, so the importance of a proper tax planning strategy also can’t be overstated. Our team at Tenet takes a proactive, tailored approach to tax planning, helping clients navigate tax complexities while optimizing opportunities. We believe tax strategies should be personalized, ensuring that every strategy aligns with their long-term financial and lifestyle goals.
To help provide perspective on the importance of tax strategies, here are five insights to think about this tax season and beyond.
1. Proactive Retirement Planning Should Consider Taxes
Effective tax management of retirement accounts should be viewed as a year-round strategic priority within your comprehensive financial plan, not just a tax season consideration. While retirement accounts offer significant tax advantages, maximizing these benefits is not the only consideration. Current income, expected income in the future, various life events, and aligning the timing of contributions versus other investments requires ongoing attention and planning over a lifetime. Whether you are early in your career, approaching, or already in retirement, there are tax considerations to be aware of.
Proactive tax planning helps optimize both retirement account contributions and withdrawals. For instance, you may consider:
- Should you maximize your 401(k) or contribute to an IRA instead? While IRA contributions can be made until the tax filing deadline, potentially reducing your previous year’s taxable income, 401(k) contributions must be completed by December 31st.
- Are you taking advantage of catch-up contributions if you’re over 50?
- Would a Roth conversion in a lower-income year reduce your future tax burden?
Tax considerations become even more critical during retirement, particularly regarding Social Security as well as Required Minimum Distributions (RMDs) that come into play in your mid-70s (age 73 for those born 1951-1959 and age 75 for those born in 1960 or later). Rather than waiting until year-end, early planning for RMD obligations can help avoid costly penalties and create more efficient withdrawal strategies. Given recent regulatory changes to RMD rules, incorporating regular tax planning has become even more important.
2. Make Use of Tax-Advantaged Strategies
Tools like Health Savings Accounts (HSAs), Roth conversions, backdoor Roth IRA strategies, and tax-loss harvesting are key components of comprehensive tax planning for retirement.
- HSAs exemplify the power of proactive tax strategies, delivering a triple tax advantage that can be leveraged throughout the year: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Additionally, once you reach age 65, you can use your HSA funds for anything you want and avoid the 20% penalty (although income taxes on the distribution would still apply).
- Roth contributions can benefit those who expect their tax rate to be higher in retirement, providing tax diversification through tax-free growth potential as well as tax-free distributions in retirement (as long as you are at least age 59.5 and have had the account for at least five years).
- For certain individuals, Roth conversions can also be a long-term tax-saving strategy by effectively transferring traditional IRA assets to Roth IRA accounts. The conversion itself is taxable, but what you pay in taxes now may save you in future taxes due to the tax-free nature of a Roth. Think of it as “short-term pain for long-term gain.” In ideal cases, you can strategically convert in years where you expect your income to be lower. For example, if you convert in a year where you are in a lower tax bracket, you would likely pay tax on the conversion at a lower rate, but then all future growth in the Roth would be tax-free (as are distributions in retirement). Having more funds converted to a Roth may also reduce your tax on future RMDs given that RMDs are not required for a Roth.
- A backdoor Roth IRA strategy remains a viable option for high-income earners that exceed the income limits for making direct Roth IRA contributions. Instead, these individuals first make a non-deductible contribution to a traditional IRA and then convert those funds into a Roth IRA shortly after. Since the original contribution was made with after-tax dollars, there should be little to no tax due on the conversion, provided no earnings have accrued before the conversion. It is important to be mindful of tax complications that can arise from the pro-rata rule, so working with a professional advisor like your team at Tenet can help you better navigate these nuances.
- Finally, tax-loss harvesting is a strategy where you can use capital losses to your benefit in your non-retirement portfolio (i.e., brokerage and/or trust accounts). More specifically, you can offset capital gains by selling underperforming investments at a loss, thereby potentially reducing your capital gains tax bill for the year. You can also deduct up to $3,000 of any excess capital losses on your taxes, and any remaining losses beyond that can then be carried forward to use in future years. While many investors focus on tax-loss harvesting at year-end, our team proactively monitors opportunities throughout the year to strategically reduce tax liabilities while maintaining portfolio diversification.
Since everyone’s situation is different, it is important to understand which options are best for you. Our team at Tenet carefully evaluates which of these strategies align best with each of our client’s specific financial picture and overall financial plan.
3. Plan for Your Legacy
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Comprehensive wealth transfer planning has become an increasingly important pillar of financial planning, particularly given the evolving tax landscape under different political administrations. The current federal estate tax framework, which allows married couples to transfer up to $27.22 million tax-free and individuals up to $13.61 million, presents an opportunity for legacy planning. However, these thresholds highlight just one aspect of a broader wealth transfer strategy that deserves careful consideration.
Effective wealth transfer planning extends beyond simply understanding current tax thresholds. It requires an all-encompassing approach that integrates estate planning, tax efficiency, and long-term family wealth preservation goals. It may even consider philanthropy and charitable goals. A well-structured wealth transfer plan often incorporates various tools and techniques as well, from basic estate planning documents to more sophisticated trust arrangements. The complexity of these options, combined with varying state-level regulations and tax frameworks, makes professional guidance invaluable in developing and maintaining an effective strategy.
Given these complexities, our team helps clients implement sophisticated wealth transfer strategies, such as:
- Gifting strategies: Leveraging annual gift tax exclusions (currently $19,000 per recipient) to transfer wealth efficiently.
- Trust planning: Utilizing irrevocable trusts, such as charitable trusts and generation-skipping trusts, to protect assets and reduce future estate tax burdens.
- Philanthropic giving: Maximizing charitable donations through Donor-Advised Funds (DAFs) and Qualified Charitable Distributions (QCDs) from IRAs.
4. Investment Tax Implications
Just as investors often focus on capital gains management and tax-loss harvesting near the end of the year, the start of the new year can present opportunities as well. It’s important to consider both to maximize tax efficiency and maintain a well-balanced portfolio.
For prior year liabilities, there are many factors to think about. For instance, the impact of equity compensation, alternative investments, or other investing strategies should be considered. One example is restricted stock units, also referred to as RSUs, which are generally not taxable until they vest. Once they vest, however, they are taxable even if they are not sold. Mutual funds, particularly actively-managed funds, are similar with their year-end capital gain dividend distributions, which are usually unexpected and come with little warning. Municipal bond investments, cryptocurrencies, real estate, collectibles, and other unique assets should all be carefully reviewed as well.
Optimizing after-tax returns through asset location can also be considered as an effective strategy. The practice of asset location (not to be confused with asset allocation) is defined by placing tax-efficient investments (e.g., ETFs, municipal bonds) in taxable accounts while keeping tax-inefficient investments (e.g., REITs, high-yield bonds) in tax-advantaged accounts. It is important to balance asset location with your overall asset mix and strategy to maintain effective diversification across accounts.
5. Prepare for Future Tax Obligation Uncertainty
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The tax landscape continues to evolve. While President Trump’s return to office may mean that the Tax Cuts and Jobs Act will likely be extended, it’s important to remember that significant tax changes will still require Congressional approval. Longer-term, political views on taxes and spending can change over time as well. This uncertainty makes it crucial to maintain flexibility in tax planning and consider multiple scenarios when making long-term financial decisions.
Our team at Tenet keeps a close eye on the shifting tax environment and can help clients adjust strategies accordingly based on their needs and goals, which is the most critical component in our view. Whether it’s preparing for potential tax increases, reviewing Roth conversion opportunities, or leveraging charitable giving strategies before legislative changes, we proactively guide clients through complex tax considerations as part of their overall plan.
The bottom line? Tax planning is an integral part of any financial plan and requires year-round, proactive attention. Integrating tax planning has become even more important with the ever-changing tax landscape, which is why this is an area of focus for our team when working with clients. Contact us today with questions or schedule a meeting to learn more about integrated tax planning and how we can help you specifically.
Investment Advisor Representative of Sanctuary Advisors, LLC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Advisors, LLC.
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About The Author
Kevan Melchiorre, CFP®Co-Founder & Managing Partner
Kevan Melchiorre co-founded Tenet Wealth Partners in 2021 with a focus on delivering a premier client experience, supported by an innovative and fully integrated approach to wealth planning. As a CERTIFIED FINANCIAL PLANNER® practitioner with over 16 years of wealth management experience, Kevan partners with affluent individuals, families, and institutions to help align their capital […]
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