Five Lifetime Tax Management Tips for High Net Worth Families

February 27, 2024


Anastasia K. Wiese

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Anastasia K. Wiese


Senior Financial Advisor

Another tax season is upon us. Another year of handing your CPA a slew of paperwork, and hoping for the best. In addition to reporting your 2023 taxable income, why not start taking some tax-savvy steps to limit your lifetime tax exposure? Especially for families with high net worth, lifetime tax planning can be far more effective than tackling your tax management one year at a time. The following are five ways you or your financial advisor can seek to rein in your total tax burden over time.

1. Revitalize Your Charitable Giving Through DAFs and QCDs

Charitable giving has long been an important tax-management tool… at least until the Tax Cuts and Jobs Act of 2017 slashed most taxpayers’ ability to directly deduct qualified contributions from one year to the next. Fortunately, there are still ways to continue giving, while reaping some tax savings along with it. Enter Donor Advised Funds(DAFs) and/or Qualified Charitable Distributions (QCDs); each may factor in at different points in your life.

Donor-Advised Funds: A DAF is a charitable investment account into which you make tax-deductible charitable contributions. Instead of giving smaller annual donations, you establish a DAF (typically through a public charity, or a financial institution’s non-profit entity) and fund it with large, lump sum contributions in particular years. You can then deduct the sizeable donation(s) in the year(s) you fund your DAF. Over time, you distribute DAF funds to charities of your choosing, while investing the remainder for potential growth. You can also donate highly appreciated taxable holdings to a DAF, to effectively eliminate their embedded gains.  

Qualified Charitable Distributions: Once you’re at least 70½ years old, you can also make annual QCDs, by directly donating funds to a charity (not a DAF) out of your traditional Individual Retirement Account (IRA). You won’t take an itemized charitable deduction for a QCD, but it can reduce, or even satisfy your required minimum distribution (RMD) for the year, thus reducing your reportable taxable income.

2. Max Out Your Health Savings Account

The triple-tax-free treatment of a Health Savings Account (HSA) is another often-overlooked tax-mitigation opportunity. If your employer offers an HSA plan, consider contributing the maximum amount. You contribute pre-tax dollars to your HSA. HSA earnings grow tax-free, and you can spend both the capital and earnings tax-free, as long as you spend it on qualified health care costs. You could spend HSA assets on current medical costs. But if you instead invest the assets in anticipation of future costs, your HSA balance has more time to grow.

3. Have a Long-Term Plan for Tax Gain and Loss Harvesting

By taking greater control over when and how you realize capital gains and losses within your taxable portfolio, you can better manage your tax liabilities today, as well as down the road.

Tax-Gain Harvesting: To harvest capital gains, you intentionally sell appreciated positions in your taxable portfolio to realize some or all of their embedded gains. This strategy is particularly useful if you’re currently in a lower tax bracket than you expect to be in future years, and/or if capital gain tax rates are expected to increase moving forward. By realizing gains and reinvesting the proceeds in a similar holding, you reset your cost basis, which can reduce potential capital gains taxes when the investment is sold in the future. This strategy tends to work very well when combined with tax-loss harvesting …

Tax-Loss Harvesting: To harvest capital losses, you intentionally sell positions in your taxable portfolio at a loss. You can then use these losses to offset taxable capital gains, potentially lowering your lifetime tax liability. You can also deduct up to $3,000 in losses against ordinary income each year. If you still have losses after you’ve offset your gains and up to $3,000 in ordinary income, you can carry any excess loss forward to use in future years.

4. Embed Tax Planning Into Your Investment Universe  

There also are ways to integrate lifetime tax efficiency into your ongoing investing.

Account Management: By understanding tax treatments within your various accounts, you can optimize each for its ideal role. In general, try to locate your least tax-efficient investments where they’ll benefit from the most favorable tax treatment … and vice versa.

- Traditional IRAs or 401(k)s: You contribute pre-tax dollars, the funds grow tax-free, and withdrawals are taxed at ordinary income rates.

- Roth IRAs: You contribute after-tax dollars, the funds grow tax free, and withdrawals remain tax free.

- Taxable investment accounts: You invest after-tax dollars. You may pay taxes at various rates while the funds grow, as well as when you sell positions at a gain.

Investment Selection: It’s also important to think about the tax impact of holding stocks, bonds, mutual funds, and/or exchange traded funds (ETFs). There are usually many ways to invest in a particular market position; some are more tax efficient than others.

5. Withdraw Wisely From Your Portfolio

When the time comes to create your retirement paycheck, you’ll want to plan for how and when to tap your taxable, tax-deferred, and tax-free accounts for optimal tax-efficiency. There is no universal answer on which account(s) to tap first and then next. Your strategy might even change each year! Retirement cash-flow planning calls for a deep familiarity with your particular accounts and assets, the rules for deploying each, and your particular spending goals. All that, while keeping a close eye on any changes that may alter your plans.

Get Good Advice as You Go

We’ve barely scratched the surface of ways to reduce your lifetime tax exposure within your total wealth management. There is one important theme across them all:

Before you proceed, please consult with a financial advisor or qualified tax professional for timely, personalized guidance.

As you might guess, the tax laws and regulations surrounding each of these strategies can be complex and subject to change. There are almost always a number of critical caveats to know before you go. You’ll also want to avoid stretching for a tax saving if it means abandoning your greater investment plans.

Given the nuances and qualifications involved, it is important to work with an advisor who knows how to balance the parts within your whole. At Grand Wealth, we love keeping a close eye on our clients’ after-tax bottom line. Let us know if you’d like to learn more.

The opinions expressed herein are those of Grand Wealth Management (“GWM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. This article is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. GWM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This is not a recommendation to buy or sell a particular security. GWM is an independent investment adviser registered under the Investment Advisers Act of1940, as amended. Registration does not imply a certain level of skill or training. More information about GWM including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.