High earners often face a significant tax burden, making effective tax planning a key part of their financial management and retirement plan. With the right tax strategies, you can reduce this burden and maximize after-tax wealth. Working with financial advisors can help you stay informed of the latest tax laws, manage your investments, and make smart financial decisions.
Deferring Income to Retirement Plans
Maximizing retirement accounts like 401(k)s, IRAs, or SEP IRAs is one of the easiest ways to lower your tax burden. These contributions are often tax-deductible, meaning your income tax is reduced while your investments grow tax-deferred until retirement.
Some employers also offer matching contributions to your 401(k), which adds to your retirement fund. If you’re not taking full advantage of this, now is the time to start.
It is necessary to be aware of contribution limits, which may not be enough for high earners. Plus, early withdrawals come with penalties and taxes, so these funds are best for long-term goals, not short-term needs. If you’re looking to shelter even more income, you might consider other tax-friendly investment options.
Build a Tax-Efficient Investment Portfolio
Retirement accounts aren’t the only way to save on taxes. Tax-efficient investment accounts — such as taxable brokerage accounts and tax-managed mutual funds — provide another path to reduce taxes while growing your wealth. The key here is strategy.
Unlike retirement accounts, there are no contribution limits; you can invest as much as you want. To reduce your tax burden, aim for investments that trigger lower tax rates, including qualified dividends and long-term capital gains, which are taxed at lower rates. You can also explore investments like municipal bonds, which generate interest income that is often exempt from federal taxes.
Unlike retirement accounts, though, you won’t get an upfront tax break, and you’ll need to pay taxes on earnings. However, you may qualify for certain credits or other tax benefits depending on the type of investment.
Capital Gains
Capital gains taxes are profits you make from selling investments that have increased in value over a holding period. Common assets include businesses, land, cars, boats, and investment securities such as stocks and bonds.
While short-term capital gains (assets held for less than one year) are taxed as ordinary income, long-term capital gains (assets held for more than one year) are taxed at lower rates. Holding assets for the long term can be a simple but powerful way to lower your tax liability.
Tax-Loss Harvesting
Turning investment losses into tax wins? Yes, please. With tax-loss harvesting, you sell underperforming investments to offset gains from profitable ones. This strategy lowers your overall tax bill while freeing up cash to reinvest elsewhere.
Here’s how it works: If you sell a stock for a profit, you’ll owe capital gains taxes. But if you sell another stock at a loss, you can use that loss to offset your gains. If your total losses exceed your gains, you can deduct up to $3,000 from your ordinary income each year — and any leftover losses roll over into future years.
Keep in mind that tax-loss harvesting requires ongoing attention and expertise. You’ll need to actively monitor your investments and stay informed about tax laws, or you may trigger a taxable event. Also, be mindful of the IRS “wash sale” rule, which prevents you from buying back the same or substantially identical investment within 30 days. For those new to tax-loss harvesting, working with a qualified financial advisor is the best approach.
Leverage Tax-Advantaged Investments
Want to grow wealth without constantly worrying about taxes? Consider tax-advantaged accounts. These include municipal bonds, Health Savings Accounts (HSAs), and 529 college savings plans. They provide tax-deferred or tax-free growth, helping your money work harder.
- Municipal Bonds: Earn interest that’s often exempt from federal taxes (and sometimes state and local taxes).
- HSAs: Triple tax benefits — contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.
- 529 College Savings Plans: Contributions grow tax-free, and withdrawals for education expenses are also tax-free.
These investments diversify your portfolio and reduce your taxable income but they’re not without limits. Contribution caps and penalties for early or non-qualified withdrawals are factors to keep in mind. If you’re planning to use these funds for other purposes, you may want to explore more flexible options.
Give Back and Get Back
Charitable giving is more than just good karma — it’s a chance to lower your taxes too. When you donate cash or assets to qualified charities, you can deduct the contribution from your taxable income, which lowers your overall tax liability.
If you want more control over your giving, a donor-advised fund (DAF) might be the answer. You simply make a large contribution in one year, get an immediate tax deduction, and distribute donations to charities over time.
This strategy is useful if you want to “bunch” multiple years’ worth of donations into one tax year to maximize your deduction. Just know that contributions to a DAF are irrevocable, and some funds charge management fees, which can impact your giving power.
Maximizing Tax Benefits By maximizing retirement accounts, diversifying your portfolio, and leveraging tax-efficient investments, you can significantly reduce your tax liability. However, tax laws can be complex, and the right strategy depends on your unique financial situation. Seeking professional advice from a CERTIFIED FINANCIAL PLANNER™ professional can help you make the most of available deductions and investment opportunities. Don’t just save your money — keep your money working for you and learn why effective tax planning matters now and as you look to the future.