Tax-Efficient Strategies for High-Income Earners: Optimizing Wealth in an Evolving Tax Landscape
For today’s high-income earners, preserving wealth requires more than just earning power—it demands deliberate and strategic financial planning to minimize tax liabilities. Rising tax rates, evolving regulations, and increased scrutiny of the wealthy have made tax efficiency an essential component of financial success. This paper outlines strategies and actionable steps to help retain wealth while aligning financial decisions with long-term goals.
The Tax Landscape: Challenges and Opportunities
The current tax environment is marked by progressive tax rates that place a higher burden on the nation’s top earners. Proposals to increase taxes on high-income individuals, capital gains, and estates are a growing concern. Simultaneously, phaseouts of eligibility for certain deductions further complicate financial planning. However, opportunities still exist through tax-advantaged accounts and strategic planning to mitigate liabilities. Navigating this dual landscape of challenges and opportunities is essential for sustaining and growing wealth.
Strategies for Tax Efficiency
1. Maximizing Tax-Advantaged Retirement Contributions
High-income earners can significantly reduce taxable income by contributing to retirement accounts such as 401(k)s, SEP IRAs, or defined benefit plans. In 2025, individuals can contribute up to $23,500 (or $31,000 if aged 50 or older, with additional catch-up contributions or $11,250 for participants aged 60 to 63). These accounts have the potential to allow for substantial tax deferral while building a robust retirement portfolio.
Sample Case Study: Sophia, 29, Tech Engineer with Stock Options
Sophia earns $300,000 annually all in, including bonuses and stock options, at a fast-growing tech startup. She maximizes contributions to her 401(k) and Health Savings Account (HSA), but also works with a financial planner to establish a Mega Backdoor Roth IRA, enabling her to contribute and convert her employer plan amounts. Additionally, she leverages a Non-Qualified Deferred Compensation Plan (NQDC) offered by her employer, deferring a substantial part of her income until a lower-tax year.
2. Utilizing Defined Benefit Plans, Specifically Cash Balance Plans
Cash balance plans enable high-income earners to defer significantly larger amounts—often exceeding $100,000 annually based on age and income. These plans are particularly effective during peak earning years, allowing individuals to mitigate taxes and strategically spread the tax impact over their lifetime.
Sample Case Study: Jonathan, 55, Orthopedic Surgeon
Jonathan, earning $850,000 annually, implements a Cash Balance Plan through his private practice, allowing him to defer $250,000 per year in pre-tax contributions. To maximize benefits, he integrates this with a Personal Defined Contribution Plan, pooling his contributions with employees’ accounts to meet ERISA requirements for non-discrimination testing.
3. Roth IRA Conversions
Converting traditional IRA funds to Roth IRAs is a strategic move, especially in years of lower income or during market downturns. Taxes are paid upfront, but the accounts grow tax-free and withdrawals in retirement remain tax-free, shielding against future rate hikes. Additionally, Roth IRAs provide advantageous treatment for beneficiaries under the SECURE Act’s 10-year rule.
Case Study: Michelle, 48, Real Estate Professional
Michelle, a real estate broker earning $500,000 annually, takes advantage of a temporary income dip to convert $250,000 from her traditional IRA to a Roth IRA. To further optimize taxes, she pairs the conversion with a Charitable Lead Annuity Trust (CLAT), donating appreciated personal property to offset the taxable income. She also uses tax arbitrage, giving her control over when the taxes are realized.
4. Tax-Loss Harvesting
Selling underperforming investments to offset capital gains enables high-income earners to potentially reduce taxable income without compromising portfolio performance. This strategy facilitates portfolio rebalancing, tactical shifts, and offsets up to $3,000 of ordinary income annually, with excess losses carried forward to future years.
Case Study: Alex, 38, Marketing Executive
Alex earns $450,000 annually as a marketing executive. In a year of market volatility, he works with his financial planner to execute a direct indexing strategy, where individual stock losses in a custom index are harvested for tax purposes. The losses offset gains from the sale of highly appreciated shares in his private equity investments, enabling him to rebalance his portfolio increasing his diversification and mitigating overall risk without incurring additional taxes. Excess losses can be carried forward for future tax savings.
5. Charitable Contributions
Philanthropy delivers dual benefits: advancing personal values and providing significant tax deductions. Donating appreciated assets, such as stocks, avoids capital gains taxes and allows deductions at the full market value. Utilizing donor-advised funds has the potential to streamline philanthropic efforts while maximizing tax benefits.
Case Study: Dr. Olivia, 64, Retired Academic
Dr. Olivia, a retired professor with $1.2 million in annual income, establishes a Charitable Remainder Unitrust (CRUT) funded with $1 million in highly appreciated real estate. This strategy avoids immediate capital gains taxes, has the potential to provide a lifetime income stream, and may generate a significant charitable deduction. She also uses a Donor-Advised Fund (DAF) for ongoing philanthropy, enabling her to group donations for maximum tax benefit in high-income years while allowing her to support causes that are important to her.
6. Investing in Tax-Efficient Vehicles
Municipal bonds provide tax-free interest income, while exchange-traded funds (ETFs) minimize taxable events through lower turnover and capital gains distributions compared to mutual funds. Understanding how investments are taxed and what triggers taxable events is crucial, and discussions with a financial advisor can optimize this aspect of planning.
Case Study: Ethan, 42, Small Business Owner
Ethan, earning $600,000 annually, restructures his investment portfolio to focus on tax efficiency. He
invests in Qualified Opportunity Zones (QOZs), deferring capital gains from the sale of his business stock while earning tax-free appreciation on the QOZ investments. He also transitions part of his portfolio to Municipal Bonds of his home state which provide both federal and state tax exempt income.
7. Estate and Gift Tax Planning
High-net-worth individuals can potentially reduce estate taxes by employing gifting strategies, establishing trusts, and making charitable bequests. In 2025, the annual gift exclusion rises to $19,000 per recipient, offering an effective method of wealth transfer without triggering tax liabilities.
Case Study: Carol, 70, Retired Business Owner Carol, a retired business owner with a $15 million estate, employs Spousal Lifetime Access Trusts (SLATs) to transfer $3 million to her children while retaining indirect access to the funds through her spouse. She also creates a Grantor Retained Annuity Trust (GRAT) to shift an additional $5 million of assets to her heirs at minimal tax cost, leveraging discounted valuations and projected asset growth.
8. Limited Partnerships as a Wealth Transfer Strategy
Limited partnerships (LPs) can be a powerful tool for transferring wealth while maintaining control. LPs allow the original owner to retain management authority while transferring ownership to heirs or other recipients at discounted valuations. This approach combines asset protection with tax efficiency in wealth distribution.
Case Study: William, 67, Private Investor William, a private investor with a $25 million portfolio, establishes a Family Limited Partnership (FLP), transferring $10 million of closely held business interests to his heirs at a 30% discounted valuation for estate tax purposes. This enables him to transfer wealth generationally while he is still not only living, but also controlling the business asset. To further enhance tax efficiency, he integrates the FLP with an Intentionally Defective Grantor Trust (IDGT), freezing the value of his estate while allowing assets to appreciate outside of it. The structure has the potential to provide creditor protection and family governance benefits.
In Closing
In today’s complex tax environment, high-income earners cannot afford to remain passive. Thoughtfully executed tax-efficient strategies have the potential to preserve wealth, optimize investment returns, and maintain financial independence. By leveraging tools such as retirement accounts, tax-loss harvesting, charitable contributions, and advanced planning techniques like cash balance plans and LPs, individuals can confidently navigate the shifting tax landscape. With proactive planning and informed decisions, high-income earners can mitigate tax liabilities and help build their ideal financial future.
If you would like more information about the terms and strategies discussed in this guide, or if you’re ready to explore how they apply to your specific situation, contact Waverly Advisors. With experience working with individuals, families, and executives managing significant wealth, we specialize in creating tailored strategies with the goal to help you grow, protect, and transfer your assets effectively.
MEET THE AUTHOR
Sean Lacey, CFP®, CIMA®, CRPC ™
Wealth Advisor
Sean Lacey joined Waverly Advisors in August of 2024. He serves as a Wealth Advisor at the firm. Sean began his career working in retail banking. In his role he helped his clients navigate a variety of financial scenarios to achieve their long and short-term financial goals… Learn More
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