September 2026 | Tanglewood Total Wealth Management

Beyond the Tax Return: Tanglewood’s Critical Role

We are all familiar with Ben Franklin’s most famous quote, “In this world nothing can be said to be certain, except death and taxes.” While that is certainly still true, there is much that can be done today to extend the quality of life and reduce lifetime taxes. Yet neither one happens automatically without taking proactive steps and seeking the guidance of knowledgeable, experienced practitioners to help guide our paths.

Tanglewood’s planning team has comprehensive knowledge and extensive experience in helping our Wealth Management clients through the thicket of ever-changing tax rules and regulations to minimize both their income taxes and legacy taxes with well thought out, interactive long-term tax planning and optimization.

This series on lifetime tax planning, Beyond the Tax Return, provides our clients with a broad overview of tax minimizing opportunities in six specific areas:

Working years
Retirement
Charitable Giving
Investing
Family Wealth transfers
Business Ownership

Although particular strategies were identified within each of those six planning areas, we also pointed out many of the inter-relationships between them. For example, accelerating taxes with a strategy in one area may reduce taxes for years into the future as it impacts other areas. Our multi-year tax modeling allows us to illustrate these trade-offs as well as the potential increase in after-tax wealth from different approaches.

Neither the strategies, nor our modeling are static. They both need to be monitored and updated with changing laws, regulations, and circumstances. This is an integral part of our approach to Total Wealth Management® and one we hope each of our Wealth Management clients takes full advantage.

Opportunities for Business Owners

Owning and running a business comes with its share of challenges, but it also provides some unique tax planning flexibility. Business owners often have greater control over how they are compensated, when income and expenses are recognized, how they contribute toward retirement and, ultimately, how they transition out of the business. That flexibility creates some significant planning opportunities.

The key word here is planning. Most of these strategies need to be considered well before the end of the year if not years in advance. Below are several areas we think business owners should be reviewing with their Tanglewood Wealth Advisor and other tax professionals.

Choosing the Right Business Entity

How a business is structured impacts how its income is ultimately taxed. Sole proprietorships, partnerships, LLCs, S corporations and C Corporations can all have very different tax treatment.

For all but C Corps, the profits and losses flow direct to the owner’s (or “members” in the case of LLCs) tax return and taxed at personal tax rates. This is often called “pass-through” taxation. C Corps however, are considered a separate legal entity that pays its own tax on company profits. While salary and bonus compensation (W2) to C Corp owners is very similar to any other corporate firm, dividends paid to owners from the after-tax profits of the C Corp are subject to taxation again on the owner’s personal return. This double taxation is a significant consideration although other non-tax reasons might make the C Corp a good choice.

Many times, the structure that made sense when a business was started may not necessarily be the best structure after the business has grown and become more successful and profitable, particularly if the number of owners expand.

Taxes are certainly important, but they should not be the only consideration. Liability protection, control and ownership, employee benefits and the eventual transition or sale of the business should all be part of the planning analysis.

Maximize Retirement Plan Contributions

As we wrote in the first two articles of the series, retirement plans are one of the best tax planning tools and savings vehicles available to business owners.

Depending on the size of the company and number of employees, a business plan may consider a SEP IRA, SIMPLE IRA, 401(k), Safe Harbor 401(k), profit-sharing plan, a defined benefit pension plan or even an Employee Stock Ownership Plan (ESOP).

For a highly compensated business owner, we have found combining a 401(k) with a defined benefit pension plan can potentially allow for very large annual tax-deductible contributions – in some cases well into six figures.

Of course, there is no free lunch. Plans covering employees come with additional costs, funding requirements and administrative responsibilities. The objective is to find the right balance between maximizing the owner’s tax deductible retirement savings and providing an appropriate and worthwhile benefit to employees.

How is the Business Owner Paying Themselves?

Business owners have more flexibility than most employees when it comes to how and when they receive income.

Depending on the business structure, owner’s compensation might include salary, bonuses, corporation distributions, partnership income or dividends.

For an S Corporation owner with pass-through taxation, determining an appropriate balance between salary and distributions can be particularly important. Owners working in the business are generally required to pay themselves reasonable compensation, while additional profits may be distributed differently for tax purposes.

There may also be opportunities for the owner to defer income into the following tax year or accelerate business expenses into the current year.

Deferring income into next year is not always the right answer. If the business owner expects their tax rate to be higher next year, accelerating income may actually be beneficial. Likewise, an unusually profitable year may be a good opportunity to accelerate deductions.

We have found that end-of-year reviews should include both current and future year considerations and tax projections.

Evaluate the QBI Deduction

Many owners of pass-through businesses also qualify for the Qualified Business Income (QBI) deduction, which can allow eligible taxpayers to deduct a portion of their qualified business income.

Unfortunately, this is an area where the tax rules can get complicated quickly. The deduction can be limited based on taxable income, the type of business, W-2 wages paid by the company and other factors.

This is an area where tax projections can be especially useful. Income planning, retirement plan contributions and other deductions may reduce taxable income and potentially improve the QBI deduction at the same time.

Take Advantage of Depreciation

Business owners purchasing equipment and other qualifying property may be able to use Section 179 or bonus depreciation to deduct a significant portion of the cost in the year the property is placed in service.

This can provide a substantial deduction in a high-income year.

However, just because this deduction is available does not always mean that it provides the best overall tax result. If significantly higher income is expected in future years, preserving depreciation deductions may ultimately provide the greater tax benefit.

Buying a piece of equipment solely because it provides a tax deduction generally is not a very good investment strategy. The needs of the business should always come first while factoring in the after-tax cost of the equipment.

Put the Kids to Work

For family-owned businesses, employing children or other family members can create an interesting planning opportunity.

Reasonable compensation paid for legitimate work performed by a family member is generally deductible to the business and effectively shifts that income to the family member, who may be in a considerably lower tax bracket.

For children, there can be another benefit. Earned income creates eligibility to contribute to a Roth IRA. Funding a Roth IRA for a teenager or young adult can potentially give those dollars decades to compound tax-free.

Consider How Business Real Estate is Owned

Business owners who own the building or property used by their company should evaluate whether the real estate should be held separately from the operating business.

There can be several reasons for doing this, including liability protection and greater flexibility when the business is eventually sold or divided between heirs working in the business and those not.

An owner might sell the company but retain the real estate and lease it back to the new owner, creating an income stream in retirement. The property could also be sold separately or eventually transferred to family members.

How the real estate is owned should ideally be addressed well before a sale or transition is contemplated and made part of the long-term tax and estate plan.

Start Planning for the Exit Before the Exit

For many successful business owners, the business represents one of the largest if not the largest asset on their balance sheet. A sale may also represent one of the largest taxable events of their lifetime.

Unfortunately, the first time many owners begin thinking seriously about the tax consequences is after a potential buyer has already appeared. At that point, many planning opportunities may no longer be available.

Whether a transaction is structured as an asset sale or stock sale can have very different tax and liability consequences. Installment sales, gifting interests to family members and other strategies should be considered well in advance.

The earlier these conversations begin with knowledgeable planning professionals such as Tanglewood’s Wealth Advisors, as well as accountants and tax attorneys, the more options and strategies business owners are able to explore and build into their lifetime tax plan.

Family Wealth Transfers: Preserving Legacy

Building substantial wealth is a remarkable achievement. However, preserving that capital across generations requires deliberate forethought. Without a structured succession and tax strategy, cumulative taxes such as income tax, capital gains, and estate tax can significantly diminish a family’s net worth for the following generations.

Fortunately, the tax code isn’t just a list of rules. If used strategically, it provides a helpful framework for transferring wealth efficiently. By utilizing the appropriate legal and financial instruments, families can shift assets and income to future generations while reducing their overall tax burden.

We have several key strategies that we can utilize in relevant multi-generational wealth situations.

Intra-Family Loans: Funding the Next Generation

When assisting children with acquiring real estate, or funding a new enterprise, or just seeding an investment portfolio, an outright gift is not the only option. An intra-family loan offers a tax-favored alternative.

How it works: Our clients extend a loan to their child, documented with a promissory note. Crucially, the loan must carry an interest rate at or above the minimum rate established by the IRS, known as the Applicable Federal Rate (AFR).
The Tax Advantage: The primary advantage results from the child investing the principal at a return that exceeds the AFR. The excess growth accumulates to the child and bypasses our client’s estate, effectively transferring wealth free of gift and estate taxes to the younger generation.

In addition, interest payments are paid back to our client rather than to a commercial institution, keeping the money in the family. Often, our client will forgive the interest payments (within the annual gift tax exclusion) to increase the overall tax attractiveness.

Irrevocable Trusts and Strategic Gifting: Providing Guardrails for Protection

Transferring wealth outright to the next generation exposes assets to potential creditors, legal judgments, or marital dissolutions. Irrevocable trusts can offer both guardrail protections and tax benefits.

Additionally, trust agreements can be carefully structured to establish guidelines for distributions, preserving trust assets for their intended long-term purposes — including education, housing, healthcare, and other significant life needs — while providing protection against unforeseen circumstances, such as a future divorce.

How it works: Assets are transferred into irrevocable trusts designed for the benefit of children and grandchildren, leveraging annual gift tax exclusions and lifetime exemptions as future growth accumulates inside the trust, not in our client’s estate. As of 2026, the federal annual gift tax exclusion is $19,000 per recipient, and each individual is entitled to an additional $15 million lifetime exemption from federal gift and estate taxes. That is effectively a $30 million lifetime exemption for a married couple today.
The Tax Advantage: Once assets are placed inside an irrevocable trust, both the principal and all subsequent appreciation are removed from the grantor’s taxable estate.

Note. The $15 million per person lifetime estate tax exemption is relatively new, as it was raised to this amount in 2025. This would appear to substantially reduce the number of our clients who would want to take advantage of these planning opportunities. However, as has happened before, a new administration in D.C. may implement new laws that could lower these lifetime estate tax exemptions.

Family Limited Partnerships (FLPs): Balancing Control and Valuation Discounts

For our client families managing substantial real estate holdings, marketable securities, or operating businesses, Family Limited Partnerships (FLPs) can serve as an effective tax-advantaged vehicle.

How it works: Assets are moved into a client created FLP, a non-taxable event. Our client retains the General Partnership interests, maintaining full control over management, operations, and investment decisions, while gifting Limited Partnership interests to their children, all at once or in stages.
The Tax Advantage: Because limited partners lack managerial control and cannot unilaterally liquidate their interests, the IRS permits “valuation discounts” on the gifted units. For example, if our client gifts a 10% slice of real estate worth $1 million to a child, the IRS might value it at a discounted rate (say, $700,000) for gift tax purposes because of those restrictions. This discount allows our clients to transfer a larger proportional share of wealth utilizing a smaller portion of their lifetime estate tax exemption.

Spousal Lifetime Access Trusts (SLATs): Maintaining Access to Funds

A common hesitation regarding irrevocable trusts is the permanent relinquishment of control and access to capital. A Spousal Lifetime Access Trust (SLAT) addresses this concern.

How it works: Either the husband or wife of a client couple can use a percentage of their lifetime estate tax exemption to establish and fund an irrevocable trust for the benefit of the other spouse and potentially their descendants.
The Tax Advantage: The gifted assets and future growth on them are excluded from both of our clients’ taxable estates. Because one spouse is a beneficiary, the client family retains indirect access to trust distributions if financial needs arise.

Some clients may wish to establish two SLATs, one each for the other spouse. However, this strategy requires careful drafting to avoid the IRS applying the reciprocal trust doctrine, under which each spouse could be treated as having created a trust for his or her own benefit. If that were to occur, the trust assets could be included in each spouse’s taxable estate, defeating many of the intended estate tax benefits. To mitigate this risk, reciprocal SLATs should not be substantially identical. An experienced estate planning attorney can incorporate meaningful differences between the trusts while still achieving the couple’s overall planning objectives.

Family Business Recapitalization and Succession Planning

Transitioning a privately held operating business presents unique governance challenges, particularly when balancing our client’s children active in the business with those pursuing outside endeavors.

How it works: A corporate recapitalization of a “C” corporation restructures the business equity into two distinct classes: voting shares, retained by the founder to maintain operational control, and non-voting shares, which can be gifted or sold to the next generation, particularly those not working in the business.
The Tax Advantage: Non-voting shares typically qualify for a valuation discount because they lack voting rights and control, similar to non-managing interests in Family Limited Partnerships (FLPs). This can allow our client business owners to transfer ownership to the next generation gradually and in a more tax-efficient manner. When combined with a well-designed succession plan, this strategy can facilitate a smooth transition of leadership and ownership, promote business continuity, and help minimize potential estate tax exposure and family conflicts.

Maximizing the Step-Up in Basis

A cornerstone of traditional estate planning is the optimization of capital gains tax rules upon the passing of a client.

How it works: Generally, assets purchased and sold during one’s lifetime trigger capital gains tax on appreciation. Long-term capital gains (for assets held longer than one year) are taxed in progressive tiers determined by our client’s total taxable income.

15% Bracket: Applies to most earners, covering income above basic thresholds up to $545,500 (single) or $613,700 (married filing jointly) in 2026.

20% Bracket: The maximum baseline rate, applied to capital gains exceeding those high-income limits.

23.8% Effective Rate: High-income clients face an additional 3.8% Net Investment Income Tax (NIIT) once Modified Adjusted Gross Income crosses $200,000 (single) or $250,000 (married), increasing the top 20% capital gains rate to an effective 23.8%.

However, assets held until death receive a step-up in basis adjustment and eliminate accumulated capital gains.

The Tax Advantage: Under current law, assets transferred at death receive a step-up in basis, resetting their tax valuation to the fair market value at the date of death. This mechanism effectively eliminates all prior accumulated capital gains, allowing heirs to sell the inherited asset with little to no capital gains tax liability.

For married clients in Community Property states such as Texas, Community Property comes with a significant income tax advantage upon the first spouse’s death. Both spouses’ interests in Community Property receive a step-up in tax basis to the asset’s fair market value as of the date of death—not just the deceased spouse’s share. This can substantially reduce, or potentially eliminate, the capital gains tax that would otherwise be incurred if the surviving spouse later sells the assets.

The tax benefits can continue upon the surviving spouse’s death. Assets inherited by the next generation receive another step-up in basis to their fair market value at that time. As a result, heirs may be able to sell the assets with little or no capital gains tax, potentially eliminating significant built-in capital gains over the course of both spouses’ lifetimes.

As discussed in our third article in this series on Investing, our long-term planning in managing one’s investment portfolio can greatly expand this benefit.

Conclusion: An Integrated Approach to Wealth Preservation

Successful wealth preservation and transfer require more than individual planning techniques; they require a coordinated strategy. Estate planning tools such as Family Limited Partnerships (FLPs), Spousal Lifetime Access Trusts (SLATs), intra-family loans, and step-up-in-basis planning are most effective when thoughtfully integrated into a comprehensive, multi-generational wealth plan. When these strategies work in concert, along with proactive coordination with wealth advisors, qualified estate planning attorneys, and tax professionals, they can enhance tax efficiency, strengthen asset protection, and help preserve our client’s wealth and capital for generations to come.

Charitable Giving: Making Your Generosity Go Further

In our conversations with clients, charitable giving almost always starts with values, not tax rules. Clients typically want to support causes they care about, and the tax benefits are often secondary. That said, how gifts are structured can make a real difference in how much lifetime giving actually reaches the charity versus getting eaten up by taxes along the way.

Changes to the tax code have made this even more relevant than it’s been in the past. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, with additional deductions for seniors. That’s a high bar to clear, and it means a lot of taxpayers who give modest amounts to charity each year aren’t getting any tax benefit at all, because their total itemized deductions (including charitable gifts) never exceed the applicable standard deduction.

There are also two new considerations for 2026 that impact charitable deductions. If you itemize deductions, the first 0.5% of your Adjusted Gross Income (AGI) given to charity is no longer deductible currently. For example, if your AGI is $300,000, the first $1,500 of what you give does not count toward your deduction, only the amount above that is deductible.

However, those taking the standard deduction can now deduct up to $1,000 (or $2,000 if married filing jointly) in cash gifts, above the applicable standard deduction. Therefore, depending on your situation, the best way to give in 2026 may be different from what it used to be, and it’s worth revisiting even if you haven’t changed your giving habits.

For itemized charitable deductions, you should also consider the different ceilings for how much you are able to deduct in any given year, which are percentages of your AGI. These percentages vary based on what type of property you are giving and to whom, ranging from 20% to 60% of your AGI. Disallowed deductions over these thresholds can be carried forward for up to 5 years.

A Few Strategies Worth Knowing

Bunching: If your annual giving doesn’t get you past the standard deduction, one option is to bunch several years of giving into a single year. For example, rather than giving $10,000 a year, you might give $30,000 once, then scale back for the next couple of years. In that bunched year, itemizing could produce a tax deduction that smaller gifts over time never would have. We usually suggest clients think about which years make the most sense to bunch into. A year with a bonus, a big capital gain, or a Roth conversion is often a good candidate, since you’re already going to have a larger tax bill to offset, and a bigger charitable deduction may reduce your tax bill and potentially your marginal tax rate.

Donor-advised funds (DAFs): A donor-advised fund can help make the bunching described above more practical. Schwab Charitable among other custodians offer these accounts, which may be thought of as a much simpler foundation. You contribute amounts to the DAF, get to take a charitable deduction that year, and then recommend grants to the charities you support from the DAF on whatever timeline works for you, whether that’s all at once or over several years. We like DAFs because they take the pressure off deciding exactly where every dollar goes right away. You get the tax benefit in the year of the DAF contribution and figure out the giving as you go.

For clients who want their adult children involved in the family’s giving, a DAF can be a nice way to start that conversation as the children can also be given the power to make grants and could be the successor owners of that “family charitable fund.”

Gifting appreciated stock: If you’re holding taxable investments that have grown significantly, donating the shares directly, instead of selling them and giving cash, is often the more efficient move. You can generally deduct the full fair market value if you itemize, and neither you nor the charity owes capital gains tax on the appreciation. We’ve seen this work particularly well for clients sitting on a concentrated stock position from years of investing or from equity compensation. It’s a way to reduce that concentration in a tax efficient manner while supporting a cause you care about.

This strategy is often paired with the DAF account described above to facilitate the gifting. This brings up another advantage of a DAF. Large gifts of appreciated securities can be made to the DAF, yet the DAF can make very small dollar contributions in cash. This removes the potential hassle of multiple small securities transactions.

Qualified Charitable Distributions (QCDs): As mentioned in our previous retirement tax planning article, for clients 70½ or older, Qualified Charitable Distributions let you send money from your IRA straight to charity so that those pre-tax dollars are never taxed. In 2026, you can direct up to $111,000 from an IRA this way ($222,000 for a married couple, if each spouse gives from their own account).

If you’ve reached Required Minimum Distribution (RMD) age, a QCD can satisfy some or all of that requirement. Because QCDs are not included in your Adjusted Gross Income, they can also help keep you under the income thresholds that trigger higher Medicare premiums or additional taxation of Social Security.

In addition to lifetime gifting of pre-tax IRA assets via QCD, IRAs are also ideal to fulfill any charitable bequests at your passing by naming your charities as direct beneficiaries on the retirement accounts. A charity will have full use of IRA funds without income tax consequences unlike any individual beneficiaries.

Which Strategy Fits You

Everyone’s situation is unique, and the right combination of charitable giving strategies really depends on your age, income, and the composition of your assets, among other factors. A few questions we consider with clients:

Would bunching a few years of giving into a DAF this year actually save you more than giving smaller amounts annually
Do you have appreciated stock sitting in a taxable account that would make more sense to gift directly?
If you’re 70½ or older, would a QCD make more sense than making a cash gift, or even a contribution to a DAF, also considering whether you’ve started RMDs?
If you’re taking the standard deduction most years, are you at least using the new $1,000/$2,000 cash deduction?
Is this a year with a bonus, a large gain, or a Roth conversion where a bigger gift might help offset that?

Final Thoughts

Giving is about your values first, and we don’t think that should ever change. But a little planning around timing and how a gift is funded can mean more of it ends up where you want it, or it takes less assets to make the same after-tax gift.

We would rather see a client’s charitable dollars go further for the causes they care about than watch those same dollars get diminished simply because nobody looked at the timing or the funding source ahead of time. Your Wealth Advisor can help you evaluate charitable giving strategies as part of your broader financial plan, so your generosity has the greatest possible impact.

Investing: Managing for After-Tax Wealth

Pre-tax portfolio performance gets most of the attention from investors. Yet only after-tax returns provide the dollars available for us to spend, invest, give, or leave to the next generation.

Investment decisions are rarely made in isolation. Portfolio choices have tax consequences, and tax planning opportunities have investment implications. Our role is to coordinate both as part of a unified lifetime wealth strategy.

For example, decisions involving Roth conversions, charitable giving, Social Security, Medicare premiums, Required Minimum Distributions, and estate planning all influence various portfolio selections and placements. Rather than treating investments and tax planning as separate decisions, we coordinate them as part of our long-term tax management.

As mentioned in the first two articles in this Lifetime Tax Planning series, when evaluating your family’s circumstances, opportunities we routinely explore include:

Does a Roth conversion make sense this year…over several years?
How best can we coordinate investment decisions with your charitable giving intentions and estate plan?
Are lower-income years before Required Minimum Distributions being fully utilized while considering Medicare premium thresholds?
Does it make sense to delay Social Security, considering both spouses?
For married couples, should more tax-free assets be preserved for the surviving spouse as the filing status changes?

These planning opportunities and investment decisions shape how we manage your portfolio. The portfolio itself then presents additional opportunities to improve long-term after-tax results.

One of the most valuable aspects of tax-efficient portfolio management happens quietly behind the scenes. It rarely appears on a quarterly investment report. Throughout the year, we continually evaluate questions such as:

Should gains be realized this year or deferred?
Are there losses worth harvesting to offset current or future gains?
Can capital loss carryforwards be used more effectively?
Which tax lot should be sold?
Are irrevocable trusts being managed as tax efficiently as possible?
How should withdrawals be sourced to minimize lifetime taxes?
Are investments located in the accounts where they are expected to produce the best long-term after-tax outcome? (Asset location is discussed in more detail below.)

No single decision is likely to transform a portfolio in one year. Collectively, however, hundreds of thoughtful decisions made consistently over time can have a meaningful impact on lifetime after-tax wealth.

Asset Location: It’s Not Just What You Own—It’s Where You Own It

When most investors think about improving returns, they focus on what they own.

Which stocks? Which bonds? Which funds?

Those are certainly important decisions.

But another question can matter just as much:

Where should those investments be owned?

Two families can hold remarkably similar portfolios yet experience very different after-tax outcomes simply because one portfolio was built with taxes in mind.

That’s why we often say:

How investments are owned can be nearly as important as what investments are owned.

Rather than managing each account independently, we begin by viewing your household as one integrated portfolio.

From there, we determine which investments belong in which accounts based on their tax characteristics and your long-term objectives. A taxable account, Traditional IRA, Roth IRA, trust, or inherited IRA are not simply different places to hold investments—they are different tax environments. The same investment can produce very different after-tax results depending on where it is held.

Asset location is not simply about reducing this year’s taxes. It’s about anticipating the taxes that may arise years—or even decades—from now.

As retirement progresses, Required Minimum Distributions, Roth assets, taxable accounts, charitable giving strategies, and estate planning begin interacting in increasingly important ways. Our objective is to coordinate those moving pieces so they work together rather than against one another. Examples include:

Appreciated investments held in taxable accounts may receive a step-up in basis at death, making them more valuable to retain than to gift during life.
Qualified Charitable Distributions become available several years before Required Minimum Distributions begin, creating a valuable planning opportunity.
Roth IRAs currently have no Required Minimum Distributions during the owner’s lifetime, making them attractive accounts for long-term growth assets.

Why One Account May Look Unbalanced

This planning approach often surprises clients.

An individual account may appear unusually aggressive or unusually conservative when viewed by itself.

A Roth IRA may hold mostly equities.

A Traditional IRA may emphasize income-producing investments.

A taxable account may appear different still…holding larger than expected cash for ongoing withdrawals.

We do not seek to balance every account individually. We seek to balance your household portfolio as a whole.

Rather than evaluating accounts in isolation, we evaluate how they work together to support your family’s long-term after-tax goals.

Your agreed-upon Investment Policy (asset allocation) remains intact. It is simply distributed across your various accounts in the way we believe is most tax-efficient over many years.

If a single account has ever looked out of step with the others, this is usually why. We are always happy to walk through the reasoning behind your portfolio’s design.

The Bottom Line

Investment management isn’t simply about selecting good investments.

It is also about thoughtfully managing where investments are held, when taxable events occur, and how each investment decision fits within your broader lifetime tax plan.

As noted, much of this work happens quietly behind the scenes and may never appear on a performance report. Yet over time, these decisions can have a meaningful impact on your family’s lifetime after-tax wealth.

Investment success isn’t measured by pre-tax returns. It’s measured by how much of your wealth remains available to accomplish the goals that matter most to you.

Lifetime Tax Planning: The Retirement Years

Retirement Tax Planning

Retirement tax planning is not a one-time exercise. It is an ongoing conversation that evolves with ever-changing tax laws, market conditions, goals and life’s inevitable curveballs. The reality is that taxes can take a big bite out of your savings if you are not careful. The key is to think ahead and consider the full retirement period.

At Tanglewood, we use detailed modeling and collaborative planning to help clients optimize these interconnected areas tax efficiently:

Coordinating retirement income sources
Protecting against tax bracket creep
Medicare surcharges
Optimizing Social Security
Required Distributions

Strategies That Help Coordinate Your Income

Think of your retirement dollars like a team of players. You have taxable accounts (e.g., regular brokerage accounts) that generate taxable income each year, tax-deferred accounts (e.g., Traditional IRAs and 401(k)s) where investment income is not taxable unless paid out as withdrawals, and tax-free accounts (e.g., Roth IRAs, Health Savings accounts) where neither the investment income nor withdrawals are taxable. These are the “tax buckets” discussed in the first article of this series, The Working Years. A smart plan mixes withdrawals from these different accounts each year based upon a long-term plan of lifetime tax minimization.

The foundation of strong retirement tax planning is income coordination. It helps smooth taxable income year to year, potentially lowering your overall lifetime tax burden while preserving eligibility for favorable tax treatment in other areas.

Common planning strategies include:

Roth Conversions in lower-income years to reduce future Required Minimum Distributions (RMDs) and create tax-free growth.
Tax bracket management by “filling” lower tax brackets intentionally.
Bunching income or deductions where beneficial.
Timing withdrawals from taxable brokerage accounts before tapping tax-deferred accounts.
Shifting taxable income among family members

Federal Tax Brackets in Retirement

The sources of income in retirement often look quite different from working years, with a mix of pensions, Social Security, investment returns, and retirement plan distributions. The federal tax brackets are progressive, so increases in taxable income push you into higher tax rates. This becomes problematic as many retirement assets are subject to rules that require taxable distributions that increase over time whether the account holder needs the income or not.

The primary goal throughout retirement is to try to equalize or average your lifetime income and stay within more favorable brackets, minimizing the amount of taxes you pay over your lifetime.

Any retiree (especially one with a large IRA) that has a year with very low tax liability is likely a missed planning opportunity.

A strategy we frequently employ, is strategic Roth Conversions during “gap years” between when you first retire and your Required Minimum Distribution (RMD) age. This is when you move (convert) some money from a Traditional IRA to a Roth IRA. The idea here is to pay taxes at a low rate now and average down the lifetime tax rate. Later, the money in the Roth IRA—and all its growth—can come out tax-free.

Finally with respect to income tax brackets, an important consideration is the tax impact of a surviving spouse moving from a married filing joint tax filer to a single tax filer. Often times, there is little change to taxable income after a spouse passes, but deductions are lower and tax brackets are much more compressed.

Social Security and How It Fits In

Social Security benefits are a cornerstone for many retirees, yet up to 85% of benefits are taxable depending on your combined income. Combined income includes typical forms of income (e.g., wages, interest, dividends, pension payments, retirement plan distributions), plus nontaxable interest and 50% of Social Security benefits.

Social Security filing decisions—such as delaying benefits for higher monthly amounts or coordinating spousal strategies—interact directly with your overall tax picture. Some of the important questions include:

How will other retirement income affect the taxation of your benefits?
Would coordinating withdrawals help minimize the taxable portion of Social Security?
How do survivor benefits or spousal strategies fit into a broader plan?

For example, taking large withdrawals from an IRA before your RMD age could make more of your Social Security benefits taxable. By planning the size and timing of those withdrawals, or using money from more tax efficient accounts first, you may be able to keep more of your Social Security tax-free.

Medicare and IRMAA

Medicare helps pay for health care, but high-income retirees pay extra premiums called Income-Related Monthly Adjustment Amounts (IRMAA), specifically for Parts B and D.

It is based on your Modified Adjusted Gross Income (MAGI) which is essentially the sum of all your taxable and tax-free income. This additional premium is based upon a look back period of two-years. So your 2027 premium will be a function of 2025 income and your current 2026 income will adjust your 2028 Medicare premiums.

The possibility of incurring IRMAA can create a strong incentive to keep your MAGI in check. Strategies like careful Roth Conversions, using Qualified Charitable Distributions (QCDs) for required withdrawals, or timing other income are ways to potentially help you reduce the impact of IRMAA.

QCDs are especially helpful. If you are age 70½ or older, and do not rely on your RMD for living expenses, in 2026 an individual can distribute up to $111,000 from their IRA directly to a qualified charity (up to $222,000 if married filing jointly provided each spouse distributed $111,000 from their own IRA). If done correctly, the QCD counts toward your RMD but does not raise your taxable income or trigger higher Medicare costs.

Retirement Account Distributions

RMDs begin at your applicable RMD age (73 to 75 depending on the year you were born) and must be taken from most tax-deferred accounts. However, viewing RMDs merely as a compliance task misses the opportunity to integrate them into a broader tax strategy.

By aligning RMDs with your overall cash flow needs, tax situation, charitable intentions, and how you leave money to your heirs, you can have a more favorable lifetime tax planning outcome. The result is often greater confidence and more resources available for the life you want to live.

Lifetime Tax Planning: Working Years

Wealth building is not just about how much you put away, but how much you keep. For those in their peak earning years, thoughtful tax planning can leverage savings programs and improve long-term financial outcomes.

During working years, income is often at its highest, tax rates are likely elevated, and retirement may still be years away. Most of our conversations with clients about planning for retirement begin with our client asking, “When can I retire?”. That leads into a full discussion of available employee benefits, tax efficiency, balancing current and future spending goals, and portfolio structure.

Qualified Retirement Plans

Qualified accounts include traditional 401(k)s, 403(b)s, 457(b)s, pensions, and profit-sharing plans. The term “qualified” means they must meet strict federal rules and regulations under the Employee retirement Income Security Act (ERISA).

Contributions made by both employers and employees alike to these plans reduce current taxable income (via pre-tax deferrals), investments grow tax-deferred. These pretax contributions allow the participant to save with less of an impact to spendable take-home pay. There are also typically employer matching incentives for participating in these programs.

In exchange for this tax deferral, there are generally early withdrawal penalties or plan prohibitions when trying to withdrawal prior to age 59 ½. Tax deferral cannot go on forever and there are forced withdrawal formulas starting at age 73 or 75, depending on birth year. When withdrawals are made in retirement every dollar distributed from the account is taxed as ordinary income.

For many, the Qualified Retirement Accounts are the primary wealth building platform for recurring savings and investment. Although the tax incentives are substantial, this can build up significant tax liability later. Thoughtful planning using tax diversification buckets creates flexibility of tax efficient income planning down the road.

Non-Qualified Retirement Plans

Some companies offer non-qualified plans – which fall outside of ERISA which means they are exempt from the strict non-discriminatory and other testing rules. They are offered as part of a compensation package for key executives or other special or highly paid employees. Examples are Deferred Compensation plans, Supplemental Executive Retirement Plans (SERPs), Executive Bonus Plans, 457(f) “Top Hat” plans.

Deferred Compensation plans are the most popular form of non-qualified plan. They can be valuable for individuals who have already maximized other retirement savings opportunities, particularly those nearing retirement by deferring income until after retirement when tax rates may be lower for the employee.

In exchange for that flexibility, the promise to pay the executive a non-qualified benefit in the future is not protected if the company goes bankrupt. Along with employer credit risk, there’s often limited flexibility, and complex distribution rules.

The decision to participate should be evaluated carefully based on timing, risk, other opportunities, and overall financial objectives.

Individual Retirement Accounts (IRAs)

Traditional IRA vs. Roth IRA: Core Differences

Traditional and Roth IRAs both provide tax-advantaged retirement savings, but the main difference is when taxes are paid. A Traditional IRA may provide a current-year tax deduction, allow investments to grow tax-deferred, and is generally taxed upon withdrawal as ordinary income in retirement. A Roth IRA is funded with after-tax dollars which does not provide an upfront deduction; however, withdrawals of contributions and earnings are typically tax-free. From a planning standpoint, Traditional IRAs may be more attractive when today’s tax rate is expected to be higher than retirement tax rates, while Roth IRAs may be more attractive when future tax rates or income are expected to be higher or when tax-free retirement income flexibility is desired. In short, the choice is whether to pay a one-time tax now in exchange for tax-free growth and withdrawals later, or defer taxes today and pay ordinary income tax on both contributions and earnings when the money is withdrawn.

Backdoor & Mega-Back Door Roth IRA Contributions

Many high-income earners cannot contribute directly to a Roth IRA because of income limits. A Backdoor Roth IRA strategy may provide an alternative by allowing individuals to make a non-deductible Traditional IRA contribution and then immediately convert those funds to a Roth IRA.

When structured properly, this strategy can help build valuable tax-free retirement assets and provide greater income planning flexibility in the future.

For savers who have maxed out Traditional retirement contributions, a Mega Backdoor Roth may allow additional after-tax contributions to be converted to Roth savings through eligible 401(k), Solo 401(k), or 403(b) plans. Unlike a standard Backdoor Roth IRA, it can support much larger annual tax-free savings and help high-income professionals build Roth assets faster.

By gradually building Roth assets each year, one creates a pool of retirement savings that is not subject to future income taxes, providing greater flexibility when managing withdrawals, tax brackets, and retirement income decades down the road.

Employer Benefits and Compensation

HSA Plans

Healthcare savings accounts can be valuable tax-planning tools. There most popular is Health Savings Accounts (HSAs).

HSAs are savings accounts coupled with a high-deductible health insurance plan. HSAs offer three tax advantages:

Tax-deductible contributions
Tax-deferred investment growth
Tax-free withdrawals for qualified medical expenses

These accounts can accumulate over time. When possible, allowing HSA funds to remain invested can create a valuable source of tax-free healthcare funding during retirement.

Equity Compensation

Employer stock compensation can become a significant source of wealth, but it also requires careful tax and diversification planning.

Restricted Stock Units (RSUs): Generally taxed as ordinary income when they vest, with subsequent appreciation taxed as capital gains when sold.
Employee Stock Purchase Plans (ESPPs): Tax treatment depends largely on when the stock is sold and the applicable holding period.
Incentive Stock Options (ISOs): may qualify for favorable tax treatment but can create Alternative Minimum Tax (AMT) considerations.
Nonqualified Stock Options (NSOs): Generally create ordinary income when exercised.

Employees and founders who receive restricted stock may also consider an 83(b) election, which allows taxation at the time of the grant rather than at vesting. This can be beneficial when shares have a relatively low value at grant and are expected to appreciate significantly. However, the election carries risk and generally must be filed within 30 days after receiving the shares.

The unique planning opportunity with equity compensation is to allocate and diversify these assets across taxable, tax-deferred, and tax-free buckets to support long-term financial goals and help manage overall portfolio risk.

Three Buckets of Tax Planning

Tax planning before retirement considers more than simply reducing taxes today. Effective planning considers how future retirement income will be generated and taxed over time considering the next 5, 10, 20+ years. The goal is to diversify the sources across three primary tax buckets for future withdrawals. Because each bucket is taxed differently, building assets across multiple categories can give retirees greater control over when income is recognized and how tax brackets are managed throughout retirement.

Taxable Assets include traditional brokerage accounts and savings accounts. These assets provide liquidity and flexibility but generate taxable investment income each year in the form of interest, dividends, and capital gains.
Tax-Deferred Assets include retirement accounts (401ks and IRAs for example) and other tax -deferred vehicles such as annuities. These assets grow without having to pay tax on the investment income each year. This tax deferral adds to compounding over time since there’s no tax drain along the way. With most tax-deferred accounts, income taxes are ultimately paid when funds are withdrawn.
Tax-Free Assets include Roth accounts and health savings accounts. These accounts offer the best of both worlds, tax-deferral AND if certain conditions are met, tax-free withdrawals, creating valuable flexibility during retirement.

Every client’s circumstances, goals, and portfolio composition are unique, so there is no one-size-fits-all approach to tax planning. The broader objective is to create balance across multiple tax buckets when possible, providing greater flexibility when making retirement income decisions. By maintaining assets in taxable, tax-deferred, and tax-free accounts, retirees have more opportunities to manage taxable income, adapt to changing tax laws, and respond to evolving spending needs throughout retirement.

Below, we’ll talk further about one key tax smart opportunities to provide education for children or grandchildren.

Education Funding

For many families, education funding is a major financial goal alongside retirement planning. A 529 plan is often one’s primary education savings vehicle because investments grow tax-deferred and qualified withdrawals are tax-free. Eligible expenses typically include tuition, fees, books, supplies, room and board, certain apprenticeship programs, and other qualified education costs.

The 529 plan can also provide estate planning benefits, including the ability to front-load up to five years of annual exclusion gifts, or $95,000 per beneficiary ($190,000 for a married couple electing to split gifts). Unused 529 plan assets can also be rolled into a beneficiary’s Roth IRA, provided that the beneficiary has earned income, the 529 has been open at least 15 years, and is limited to a $35,000 lifetime rollover limit.

A key planning strategy for education funding is to ensure it is developed cohesively alongside retirement planning, cash flow needs, and estate planning objectives. By taking an integrated approach, families can pursue education funding goals while maintaining progress toward other financial priorities, helping to ensure that one objective does not unintentionally come at the expense of another.

Big Picture

The years before retirement offer some of the greatest wealth planning opportunities in one’s lifetime. For high-income individuals and families, these years provide an opportunity to convert strong earnings into long-term financial security and flexibility.

Coordinating retirement contributions, Roth strategies, equity compensation, healthcare savings, education funding, and future income planning allows families to make more intentional decisions about when and how taxes are paid.

Many of the most effective tax strategies must be put in place years before they are needed. A thoughtful lifetime tax plan can help preserve wealth, reduce unexpected tax costs, and provide greater control over retirement income and legacy goals.

Beyond the Tax Return: A Lifetime Tax Planning Series

When most people think about tax planning, they think about reducing the current year’s taxes. While there are certainly opportunities for current year planning, often a far larger tax reduction comes from planning that covers one’s entire life span.

Tanglewood is introducing a six-part series addressing long-term tax strategies, the tax planning opportunities that often require thoughtful preparation well in advance of implementation to recognize, capture, and optimize a full array of tax benefits.

Working Years – Tax opportunities available while building wealth and earning income.
Retirement – Strategies that help coordinate income, tax brackets, Social Security, Medicare, and retirement distributions.
Charitable Giving – Approaches that maximize charitable impact while optimizing tax benefits.
Investing – Tax efficient portfolio structuring and maintenance that integrates with other tax strategies.
Family Wealth Transfer – Techniques that shift wealth and income across generations to maximize multi-generational tax savings.
Business Ownership – Advanced opportunities available to business owners throughout the business life cycle, including succession planning.

Each installment will be full of tax strategies on that subject but also make connections with the other five.

A final installment will amplify the connections between all relevant tax strategies.

Lifetime Tax Planning is an integral part our wealth management services to participating clients.