How Can High-Net-Worth Investors Avoid Creating an Unnecessarily Large Tax Bill?

If you have accumulated significant wealth, taxes can become one of the biggest expenses you face—especially once you retire.

But paying taxes is not necessarily a bad thing. In many cases, paying some tax today can be preferable to creating an even larger tax bill later.

The real question for high-net-worth investors is:

How can you avoid paying more taxes than necessary while still making sound financial decisions?

But first – hello! I’m Charlie.

I’m a CPA and CFP® professional, and I help pre-retirees, retirees, and affluent families create tax-efficient financial plans.

And unto the feature presentation!

For investors with substantial retirement accounts, taxable investments, real estate, business interests, and other assets, tax planning should be part of the overall financial plan—not something considered after an investment decision has already been made.

Here are several strategies high-net-worth investors can consider.

1. Look at your entire tax picture—not just this year's tax return

One of the biggest mistakes I see is focusing exclusively on the current year's tax bill.

Your current tax bracket matters, but so does what your tax situation could look like five, ten, or twenty years from now.

For example, someone approaching retirement may have a period of relatively low taxable income after leaving the workforce but before required distributions and Social Security become significant.

That window can create opportunities for strategic tax planning.

Instead of asking, "How do I reduce my taxes this year?" it can be more useful to ask:

"How do I manage my taxes over my lifetime?"

That change in perspective can lead to very different decisions.

2. Consider whether Roth conversions make sense

For high-net-worth investors with substantial traditional IRAs or 401(k)s, Roth conversions can be an important part of long-term tax planning.

A Roth conversion generally involves moving money from a traditional retirement account into a Roth account and paying income tax on the converted amount.

That tax bill may not sound attractive.

But the potential benefit is that future qualified Roth withdrawals can be tax-free, and Roth accounts do not have the same required minimum distribution rules that apply to traditional retirement accounts.

The key is not simply deciding whether Roth conversions are "good" or "bad."

The important question is:

How much should you convert, and when?

Converting too much in one year can unnecessarily push income into higher tax brackets. Converting too little may leave you with a large traditional retirement account that creates substantial taxable income later.

This is where tax planning and investment planning need to work together.

3. Be strategic about which accounts you withdraw from

High-net-worth investors often have several different types of accounts:

• Traditional IRAs and 401(k)s

• Roth IRAs

• Taxable investment accounts

• Cash and money market accounts

• Trust accounts

• Business interests

• Real estate

There is no universal rule that says you should always withdraw from one account before another.

The order in which you use your assets can affect your taxable income, capital gains, Medicare-related costs, estate planning, and the longevity of your portfolio.

For example, selling investments from a taxable account may create capital gains, while withdrawing from a traditional IRA generally creates ordinary income.

Those differences matter.

Your withdrawal strategy should be coordinated with your broader tax situation rather than determined simply by which account has the most money in it.

4. Don't ignore capital gains

High-net-worth investors frequently have substantial taxable investment portfolios.

That can create another tax-planning opportunity.

Selling an investment with a large unrealized gain may create a significant capital gains tax liability. But that does not necessarily mean you should never sell it.

Sometimes paying the tax is the right decision.

The goal is to understand when to realize gains, how much to realize, and how those gains interact with your other income.

Tax-loss harvesting can also potentially help offset capital gains by realizing losses on investments that no longer fit your portfolio.

Again, the goal isn't to avoid taxes at all costs.

The goal is to make investment decisions with the tax consequences in mind.

5. Think about charitable giving strategically

If charitable giving is already important to you, there may be more tax-efficient ways to accomplish your goals than simply writing a check.

Depending on your circumstances, donating appreciated investments may be worth considering.

Instead of selling an appreciated investment, paying capital gains tax, and then donating the remaining cash, a charitable strategy may allow you to contribute an appreciated asset directly.

For high-net-worth investors who give substantial amounts to charity, these decisions can become an important part of overall tax planning.

The important thing is to start with the charitable goal and then determine which strategy best supports it.

6. Don't let taxes dictate every investment decision

There is a difference between being tax-aware and being tax-obsessed.

I've seen investors hold onto an investment they no longer want simply because selling it would create a tax bill.

But a tax bill is not necessarily a reason to keep an unsuitable investment.

If an investment no longer fits your risk tolerance, financial plan, or goals, it may still make sense to sell it.

The question becomes whether the tax cost can be managed thoughtfully.

Sometimes the best financial decision involves paying taxes.

That may sound counterintuitive, but avoiding a $50,000 tax bill by making a $200,000 investment mistake isn't really tax planning.

7. Coordinate your retirement income strategy

For affluent retirees, taxes don't exist in isolation.

Your retirement income may come from several sources at once:

• Social Security

• Pension income

• IRA distributions

• Roth accounts

• Taxable investments

• Business income

• Real estate

• Other sources of cash flow

The interaction between these income sources can have meaningful tax consequences.

This is why retirement planning should go beyond determining whether you have "enough money."

A good retirement plan should also consider how you will take money out of your portfolio and what those withdrawals could mean for your taxes.

8. Start planning before you need the strategy

Tax planning is generally most valuable when there is still time to make decisions.

Waiting until the end of the year—or until retirement is already underway—can limit your options.

For high-net-worth investors, tax planning should ideally be an ongoing process.

Your investment portfolio, retirement accounts, charitable giving, estate plan, business interests, and income needs can all change over time.

Your tax strategy should change with them.

The goal isn't to pay zero taxes

For high-net-worth investors, the objective shouldn't necessarily be to eliminate taxes.

That's often unrealistic—and sometimes trying too hard to avoid taxes can lead to poor financial decisions.

Instead, the goal is to avoid an unnecessarily large tax bill while making decisions that support your long-term financial goals.

That requires looking beyond a single tax return and thinking about how today's decisions could affect your taxes years from now.

Roth conversions, investment gains, charitable giving, account withdrawals, and retirement income can all be pieces of the same puzzle.

The most effective tax strategy is often not one clever move. It's the coordination of many decisions over time.

If you have accumulated significant wealth, your financial plan should answer more than "Can I afford to retire?" It should also address how efficiently you can turn that wealth into the income and lifestyle you want—while being thoughtful about the taxes along the way.

My name is Charlie Horonzy, CFP®, CPA. I help pre-retirees, retirees, and affluent families in Chicago, throughout Chicagoland, and across the country create tax-efficient financial plans.

You’ve worked hard for your retirement.

Don’t let poor planning send more of it to Uncle Sam than necessary.

Stay Focused!

This article is for general educational purposes only and is not individualized tax, investment, or financial advice. Your appropriate tax strategy depends on your individual circumstances.