Tax season may be behind us, but the opportunity to reduce next year’s bill starts now.
While taxes are an annual obligation, they’re also one of the biggest drags on long-term wealth if left unmanaged. Some may view taxes as finding the right deductions but it’s much broader than that. It requires a well-thought-out strategy.
We help people navigate the complexities of taxes, turning potential surprises into predictable outcomes.
If your investment returns look great on paper but tax bill tells a different story, this article will help. Let’s walk through some of the most common tax blind spots we see and how to approach them proactively.
Where You Hold Assets Matters: The Hidden Cost of Poor Asset Location
It’s not just what you invest in that matters, it’s where you hold it. Think of your different account types — taxable, tax-deferred, and tax-free — like different rooms in your house. You wouldn’t store your winter coats in the bathroom or keep your dishes in the garage. The same logic applies to your investments. Holding interest-generating bonds or high-turnover mutual funds in taxable accounts can create an avoidable tax drag, even if your investment strategy is otherwise sound.
By aligning the right types of investments with the right account types, we see clients improve long-term results without changing their risk level. Everything works better when it’s organized for the job at hand.
RMDs: The Retirement Reality You Can’t Ignore
Starting at age 73 (as of now), retirees must begin withdrawing from pre-tax retirement accounts like 401(k)s and IRAs whether they need the money or not. These required minimum distributions (RMDs) are taxed as ordinary income and can push your tax bill higher than expected. They can also increase how much of your Social Security is taxable and trigger higher Medicare premiums through IRMAA surcharges.
The longer your retirement accounts grow, the larger those distributions become, potentially compounding the issue over time. This is where proactive planning makes all the difference. Thoughtful strategies like Roth conversions, timing Social Security, or using qualified charitable distributions (QCDs) can reduce the impact, and in some cases, eliminate the tax entirely while supporting causes you care about.
Bonuses and Equity Compensation: Taxed When You Least Expect It
Year-end bonuses and equity compensation can feel like big wins, but they often come with bigger tax surprises than most people realize. Bonuses are typically taxed at a flat federal withholding rate based on the size, which may understate your true liability if you’re in a higher tax bracket. That means you could owe significantly more at tax time, especially if you don’t adjust your withholdings or plan ahead.
The same goes for equity compensation like restricted stock units (RSUs). RSUs are taxed as ordinary income when they vest, not when you sell the shares. And just like bonuses, companies often under-withhold, leaving you to cover the shortfall.
Planning ahead transforms these windfalls. By mapping out vesting schedules, coordinating withholding, and integrating your stock compensation into your broader tax plan, you can turn your equity into long-term wealth — not a surprise liability.
