The O in N.O.W. | Optimized Tax Strategy
Here’s a question most people never think to ask their financial advisor: “What is my tax strategy?”
Not “how do I file my taxes” that’s what accountants are for. But rather: “How are the financial decisions we’re making today being optimized to reduce what I owe over the long run?” There’s a big difference between the two.
The O in our N.O.W. Framework stands for Optimized Tax Strategy – and it’s one of the most powerful, and most underutilized, advantages available to long-term investors. The premise is simple: every financial decision has a tax implication, and every tax implication is an opportunity. The question is whether someone is paying attention.
We are.
Taxes Are a Feature of Your Plan – Not an Afterthought
For many investors, taxes are something that happen to them at the end of the year. They get a form, they hand it to their accountant, and they find out what they owe. There’s very little control in that process, because by the time tax season arrives, most of the decisions that drove the bill have already been made.
We flip that model entirely. Rather than reacting to the tax return at year-end, we plan toward it throughout the year and throughout your lifetime. Every investment decision, every withdrawal, every account contribution, every Roth conversion is evaluated not just for its financial merit in isolation, but for how it flows to your tax return.
That shift in mindset, from reactive to proactive, is the foundation of everything in this pillar. And when it’s done consistently, year after year, the cumulative effect on your wealth is remarkable.
Asset Location: Putting the Right Investments in the Right Accounts
Most investors know the importance of asset allocation – the mix of stocks, bonds, and other investments in their portfolio. Far fewer think about asset location: which investments live in which types of accounts.
This distinction matters because not all accounts are taxed the same way. You likely hold some combination of taxable brokerage accounts, tax-deferred accounts like a traditional IRA or 401(k), and tax-free accounts like a Roth IRA. Each one plays a different role, and placing the right investments in each type of account can meaningfully reduce your lifetime tax bill without changing your overall investment strategy at all.
Here’s how we think about it:
- Taxable brokerage accounts: Best for tax-efficient investments like broad index funds and municipal bonds. Long-term capital gains receive preferential tax rates, and low-turnover funds generate minimal taxable events along the way.
- Tax-deferred accounts (Traditional IRA, 401(k)): Well-suited for investments that generate ordinary income where you want to defer taxes on distributions until withdrawal.
- Tax-free accounts (Roth IRA, Roth 401(k)): Ideal for your highest-growth assets. Because qualified withdrawals from Roth accounts are tax-free, the more these accounts grow, the better – you’ll never pay taxes on that growth.
Strategic asset location doesn’t require changing what you own, just where you own it. Done thoughtfully, it can produce meaningful tax savings year after year with no additional risk to your portfolio.
Tax-Loss and Tax-Gain Harvesting: Turning Market Moves Into Tax Opportunities
Market volatility tends to feel like the enemy. But within a well-managed portfolio, it also creates opportunities, specifically, the chance to harvest gains and losses in ways that work in your favor at tax time.
Tax-Loss Harvesting
When investments in a taxable account decline in value, there’s an opportunity to sell them, realize the loss, and immediately reinvest in a similar (but not identical) holding to maintain your market exposure. That harvested loss can then be used to offset capital gains elsewhere in your portfolio, or, if losses exceed gains, up to $3,000 of ordinary income per year, with the remainder carried forward to future years.
This strategy doesn’t require betting against the market or sitting on the sidelines. You stay invested, maintain your intended allocation, and simply capture a tax benefit from a temporary dip. Over time, the savings add up significantly.
Tax-Gain Harvesting
Less well-known, but equally powerful in the right circumstances, is tax-gain harvesting. In years when your taxable income falls into the 0% long-term capital gains bracket (which applies to many retirees in the early years of retirement), you may be able to sell appreciated investments, lock in gains completely tax-free, and reset your cost basis at a higher level. That’s a future tax liability eliminated at zero cost.
Both strategies require careful coordination with your overall income picture, because what works in one year can backfire if it pushes you into a higher bracket or triggers other income-related thresholds like IRMAA Medicare surcharges. This is exactly the kind of nuance that gets missed when tax planning and investment management operate in separate silos.
Roth Conversions: Paying Taxes on Your Terms
If there’s one tax planning strategy that has the potential to reshape the entire trajectory of your retirement finances, it’s the Roth conversion – and it’s one of the most underused tools in the planning toolkit.
A Roth conversion involves moving money from a traditional IRA or 401(k), where contributions went in pre-tax and growth is tax-deferred, into a Roth IRA, where future growth and qualified withdrawals are completely tax-free. You pay taxes on the converted amount in the year of conversion, but all growth after that is free and clear.
The strategic window for Roth conversions often opens in the years between retirement and age 73, when Required Minimum Distributions begin. During this period, many retirees find themselves in an unusually low income tax bracket – no longer earning a salary, not yet forced to take RMDs, and perhaps delaying Social Security. That window is a golden opportunity to convert pre-tax dollars at today’s lower rates before the potentially higher rates when taking RMDs.
Beyond the individual tax benefit, Roth conversions also create advantages for your heirs. Inherited Roth IRAs allow beneficiaries to withdraw funds tax-free, making them one of the most tax-efficient assets you can pass on. For clients who care about legacy planning, this is a meaningful piece of the conversation.
Conversion strategy isn’t a one-size-fits-all calculation. The right amount to convert each year depends on your current bracket, projected future income, Social Security timing, state taxes, Medicare premiums, and your broader estate goals. We model it carefully to make sure you’re capturing the opportunity without crossing into territory where it stops making sense.
Tax-Efficient Withdrawal Strategies: Sequence Matters More Than You Think
Accumulating wealth is one challenge. Withdrawing it efficiently is another, and it’s one that gets far less attention than it deserves.
The order in which you draw from your various accounts in retirement can have a dramatic effect on how long your money lasts and how much you ultimately pay in taxes. The conventional wisdom, draw from taxable accounts first, then tax-deferred, then Roth, is a reasonable starting point, but it’s not always optimal. The right sequence depends on your specific tax picture, income sources, and goals in a given year.
A few of the considerations we navigate:
- Bracket management: In lower-income years, we may pull more from tax-deferred accounts to fill up a lower bracket, reducing the size of future RMDs and spreading the tax bill more evenly over time.
- Social Security coordination: How and when you claim Social Security affects how much of your benefit is taxable and how it interacts with your other income sources. We model different claiming ages alongside your withdrawal strategy to find the most tax-efficient combination.
- IRMAA awareness: Medicare Part B and D premiums are income-tested. Crossing certain income thresholds can trigger surcharges that cost thousands of dollars per year. We factor these thresholds into withdrawal planning to avoid unpleasant surprises.
- Required Minimum Distributions: Starting at age 73 (moving to 75 in 2033), the IRS requires withdrawals from traditional IRAs and 401(k)s whether you need the income or not. Without planning, large RMDs can push you into higher brackets and increase the taxability of Social Security. We address this proactively through conversions and strategic drawdowns.
The goal isn’t to pay zero taxes, that’s rarely realistic. The goal is to pay the right taxes at the right time, in the right amounts, and in the most controllable way possible.
Beyond the Basics: Other Tax Levers We Pull
The strategies above form the core of most clients’ tax plans — but they’re far from the whole picture. Depending on your situation, there are additional opportunities we explore:
- Qualified Charitable Distributions (QCDs): For clients over 70½ who are charitably inclined, QCDs allow up to $111,000 per year to be transferred directly from an IRA to a qualified charity, satisfying RMD requirements while keeping that income off your tax return entirely.
- Step-up in basis planning: Assets held in taxable accounts receive a step-up in cost basis at death, potentially eliminating years of embedded capital gains. For clients with estate planning considerations, this affects which assets to hold, gift, or convert.
Why Taxes Can’t Live in a Silo
Here’s the challenge with tax planning: it doesn’t work in isolation. A Roth conversion that looks brilliant in isolation might push you over an IRMAA threshold or increase the taxability of your Social Security. A tax-loss harvest that generates a large carryforward might interact in unexpected ways with a future year’s capital gain distributions. Every lever connects to every other lever.
That’s why we don’t treat tax strategy as a separate service bolted onto the side of your financial plan. We weave tax strategy into your Never-Worry Retirement Plan from the very beginning, coordinate it with your portfolio management, and review it continuously as tax laws, your income, and your life evolve.
We also work closely alongside your CPA or tax preparer — not to do their job, but to ensure that the planning we’re doing throughout the year shows up correctly on the return at year-end. The advisor, the planner, and the tax preparer all need to be working from the same playbook. When they are, the results speak for themselves.
What Optimized Tax Strategy Looks Like Over a Lifetime
Here’s a simplified picture of how tax strategy might evolve across the key phases of a client’s financial life:
- Accumulation years: Maximize tax-advantaged contributions, build the right account mix, and use asset location to minimize drag on taxable accounts.
- Pre-retirement transition: Begin modeling the optimal retirement date, Social Security claiming age, and early Roth conversion windows. Harvest gains in low-income years.
- Early retirement (before RMDs): The golden window for Roth conversions. Manage withdrawals to keep income in lower brackets, delay Social Security where beneficial, and continue tax-loss harvesting.
- RMD years: Coordinate RMDs with Social Security, manage IRMAA exposure, and use QCDs for charitable giving to keep taxable income in check.
- Legacy and estate planning: Evaluate step-up in basis opportunities, optimize the inheritance of Roth vs. traditional assets, and coordinate with estate documents to minimize the tax burden passed to heirs.
The Bottom Line: The Best Return Is the One You Don’t Give to the IRS
There’s a reason the most sophisticated investors in the world spend enormous energy on tax efficiency. It’s not because they’re trying to game the system. It’s because taxes are one of the only major variables in your financial life that you can meaningfully control. And, every dollar saved in taxes is a dollar that stays in your portfolio, compounds over time, and ultimately shows up in your retirement.
The O in N.O.W. is our commitment to making sure every financial decision we make together has been examined through a tax lens. Not once a year at filing time, but every step of the way, because that’s what optimized really means.
Want to find out how much your current strategy might be leaving on the table? Let’s take a closer look together.
This is part of the Addis Hill N.O.W. Framework series — Never-Worry Retirement Planning | Optimized Tax Strategy | Wise Portfolio Management
