Tax Planning: Keep More of What You Earn

The U.S. tax code offers several powerful tools for retirement savings. Understanding the tax treatment of each account type is fundamental to effective planning.

Pre-tax accounts (Traditional 401(k), Traditional IRA, 403(b), 457(b)): Contributions reduce your taxable income today. Growth is tax-deferred. Withdrawals are taxed as ordinary income. Best when your current tax rate is higher than your expected retirement tax rate.

After-tax/Roth accounts (Roth 401(k), Roth IRA): No upfront tax deduction, but qualified withdrawals are completely tax-free — including all investment gains. Best when your current tax rate is lower than your expected future rate, or when you want tax diversification.

HSA (Health Savings Account): Available with high-deductible health plans (HDHP). Triple tax advantage — contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. In 2024, contribution limits are $4,150 (individual) or $8,300 (family), plus $1,000 catch-up at age 55. After age 65, HSA funds can be withdrawn for any purpose (taxed as income, similar to a Traditional IRA) — making this arguably the most tax-efficient account available.

A Roth conversion moves money from a Traditional IRA or 401(k) to a Roth IRA. You pay income tax on the converted amount now, but all future growth and withdrawals are tax-free.

Roth conversions are most valuable during low-income years: early retirement before Social Security begins, a gap year between jobs, or a year with significant deductions. The goal is to "fill up" lower tax brackets with conversion income.

For 2024, the federal income tax brackets for single filers are: 10% (up to $11,600), 12% ($11,601–$47,150), 22% ($47,151–$100,525), 24% ($100,526–$191,950), 32%, 35%, and 37% at higher levels. A married couple filing jointly with $50,000 in other income could convert roughly $44,050 and stay entirely within the 12% bracket.

Be aware of secondary effects: conversion income can increase Medicare premiums (IRMAA surcharges apply two years later), push Social Security benefits into taxability, or affect ACA premium subsidies. Model the full impact before converting.

There is no limit on how much you can convert in a given year, but there's no undo — Roth conversion recharacterization was eliminated by the Tax Cuts and Jobs Act of 2017.

The IRS requires you to begin withdrawing from Traditional IRAs, 401(k)s, and other pre-tax retirement accounts starting at age 73 (as of the SECURE 2.0 Act). This age increases to 75 starting in 2033.

RMD amounts are calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from IRS Uniform Lifetime Table. For example, at age 73, the factor is 26.5 — so a $500,000 IRA would require an RMD of approximately $18,868.

Failing to take your full RMD results in a 25% excise tax on the shortfall (reduced from the previous 50% penalty by SECURE 2.0). This drops to 10% if corrected within two years.

RMDs do not apply to Roth IRAs during the owner's lifetime — another major advantage of Roth accounts. However, Roth 401(k)s were subject to RMDs until 2024, when SECURE 2.0 eliminated this requirement.

Strategic planning involves converting pre-tax balances to Roth during the years between retirement and age 73 to reduce future RMDs and their tax impact. This "Roth conversion window" is one of the most valuable planning opportunities in the tax code.

Investment income is taxed differently depending on how long you hold an asset. Short-term capital gains (assets held less than one year) are taxed at your ordinary income rate. Long-term capital gains (assets held more than one year) receive preferential rates: 0%, 15%, or 20%, depending on your taxable income.

In 2024, married couples filing jointly pay 0% on long-term gains up to $94,050 in taxable income. This creates a powerful opportunity: retirees with modest income can harvest significant gains at a 0% federal rate.

Tax-loss harvesting involves selling investments at a loss to offset gains. You can deduct up to $3,000 in net capital losses against ordinary income per year, with excess losses carried forward indefinitely. The wash-sale rule prohibits repurchasing a "substantially identical" security within 30 days — but you can buy a similar (not identical) fund to maintain market exposure.

Qualified dividends receive the same preferential rates as long-term capital gains. Non-qualified (ordinary) dividends are taxed at your regular income rate. Most dividends from U.S. corporations held for at least 60 days qualify for the lower rate.

The federal estate tax exemption is $13.61 million per individual ($27.22 million for married couples) in 2024. Estates below this threshold owe no federal estate tax. However, this elevated exemption is scheduled to sunset at the end of 2025, reverting to approximately $7 million per person (adjusted for inflation) unless Congress acts.

The annual gift tax exclusion allows you to give $18,000 per recipient in 2024 without using any of your lifetime exemption. A married couple can give $36,000 per recipient. Gifts to 529 education savings plans can be front-loaded — up to $90,000 ($180,000 for couples) in a single year, treated as five years of gifts.

State estate taxes add complexity. Twelve states and the District of Columbia impose their own estate taxes, often with much lower exemptions (as low as $1 million in Oregon and Massachusetts). Six states impose inheritance taxes on recipients. Maryland is the only state with both.

For high-net-worth individuals, strategies like Grantor Retained Annuity Trusts (GRATs), Irrevocable Life Insurance Trusts (ILITs), and Spousal Lifetime Access Trusts (SLATs) can transfer wealth efficiently. These require professional legal counsel.

Tax planning is rarely anyone's passion, but the money you save flows directly into the life you want to build. Every dollar preserved through smart tax strategy is a dollar available for the activities, relationships, and goals that give your life meaning.

The most impactful tax decisions — choosing between Roth and Traditional contributions, timing Roth conversions, managing RMDs — are best made in the context of your overall life plan. When do you want to retire? Where do you want to live? How do you want to spend your time? These answers shape the optimal tax strategy.

Start with the big levers: maximize employer match contributions, fully fund your HSA if eligible, and consider Roth conversions in low-income years. These three moves alone can save more than any amount of receipt-tracking or deduction-hunting.