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.