QSBS (Section 1202) A Tax Opportunity for Business Owners Planning to Retire

QSBS (Section 1202): A Tax Opportunity for Business Owners Planning to Retire

Posted On January 30, 2026 By Scott Stratton, CFP(R), CFA In Retirement Planning, Tax Strategies /   No Comments

If you own a business and expect to sell it to fund your retirement, taxes matter — a lot.

For some owners, Qualified Small Business Stock (QSBS) can significantly reduce federal capital gains taxes when the business is sold. In some cases, you may be able to sell your business for $10 million or more and pay zero income taxes.

QSBS is powerful — but only if your business is structured correctly years before the sale.

This article explains QSBS in clear, practical terms for business owners, not accountants.

What Is QSBS — In Simple Terms?

QSBS is a tax rule that rewards people who build and own certain U.S. businesses.

If your business qualifies and you follow the rules, some or all of the profit from selling your business may not be subject to federal capital gains tax.

Although the law talks about “stock,” most owners should think of QSBS as applying to the sale of your business — whether that sale is to a buyer, private equity firm, or another company.

The One Rule That Matters Most: You Must Be a C-Corporation

To qualify for QSBS, your business must be structured as a C-Corporation. If your business is currently: an LLC, an S-Corporation, or a partnership, it does not qualify today.

The Planning Opportunity for 2026

Here’s the part many owners miss:

You can convert your business to a C-Corporation now, start the QSBS clock, and potentially sell the business tax-efficiently in the future.

For example:

  • Convert to a C-Corp in 2026
  • Operate as a C-Corp for several years (at least 3-5 years)
  • Sell the business later — often around retirement

QSBS is not retroactive. The clock starts when the C-Corp issues its shares. That’s why early planning matters, especially for owners who are 5–10 years from selling.

How Long Do You Have to Own the Business?

The required holding period depends on timing.

Older Rules

Historically, owners needed to hold the business more than five years to receive the full QSBS benefit.

New Rules (Effective for New Stock After July 4, 2025)

Under updated law:

  • Selling after 3 years may qualify for a 50% partial tax benefit
  • Selling after 4 years increases the benefit to 75%
  • Selling after 5 years provides the maximum benefit of 100%

This adds flexibility for owners whose retirement timelines may change.

How Much Tax Can QSBS Save?

If the new rules are met, QSBS may allow you to exclude up to $15 million of gain per owner from federal capital gains tax (subject to limits and specifics). For shares issued before July 2025, the limit is $10 million.

That can:

  • Reduce the tax impact of selling your business
  • Leave more capital available for retirement income
  • Lower exposure to surtaxes and Medicare premium surcharges

QSBS often fits naturally into broader Retirement Tax Planning discussions.

One Owner vs. Multiple Owners

Single-Owner Businesses

For solo owners, QSBS planning can be relatively straightforward:

  • Convert to a C-Corp
  • Hold long enough (ideally at least 5 years)
  • Sell the business
  • Potentially exclude all or a meaningful portion of the gain

Many owner-operators and founders fall into this category.

Businesses With Multiple Owners

Each owner is evaluated individually.

That means:

  • Each owner may qualify for their own QSBS exclusion
  • Ownership percentages and timing matter
  • Good planning can multiply the tax benefit across partners

This is especially relevant in closely held or family-owned businesses.

Can You Sell to a Partner or Employee?

Usually, QSBS works best when the business is sold to an outside buyer.

Selling your ownership directly to a business partner or an employee often does not qualify automatically for QSBS treatment. That said, some internal transitions can be structured carefully — but they require advance planning and coordination with tax and legal advisors.

If an internal sale is your expected exit, QSBS may still be part of the discussion, but it’s not guaranteed.

What Types of Businesses Typically Qualify?

QSBS generally applies to operating businesses, not investment vehicles.

Often eligible:

  • Manufacturing
  • Technology
  • Distribution
  • Construction
  • Certain service businesses

Often excluded:

  • Real estate holding companies
  • Investment, insurance, or financial businesses
  • Professional services such as law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or athletics. 
  • Other businesses where personal reputation is the primary asset

Why QSBS Matters for Retirement Planning

For many business owners, selling the company is:

  • Their largest financial event
  • The primary source of retirement funding

QSBS can:

  • Improve after-tax sale proceeds
  • Support sustainable retirement income planning
  • Reduce pressure around timing income and taxes

This often connects directly to:

Final Thought

QSBS is not a last-minute strategy.

If you’re thinking about selling your business in the next several years, 2026 may be an important planning window to ask:

  • Should my business be a C-Corporation?
  • Does QSBS align with my retirement timeline?
  • What are the tradeoffs today versus future tax savings?

If you’re a business owner approaching retirement and want to understand how a future business sale fits into your broader tax and retirement plan, you’re welcome to request an introductory conversation. These discussions are educational and focused on planning — not products or performance.

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Tax Strategies Under the OBBBA

Tax Strategies Under the OBBBA

Posted On August 11, 2025 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

The One Big Beautiful Bill Act (OBBBA) — signed into law in 2025 — made several significant changes to the U.S. tax code that create new planning opportunities for investors and retirees. While much of the legislation continues provisions from the 2017 Tax Cuts and Jobs Act, OBBBA also introduces new deductions and alters key rules that can impact how you manage income, donations, and deductions in retirement.

In this article, we focus on practical planning strategies for individual taxpayers, especially those preparing for or living in retirement, and how to think about these changes in the context of broader tax and retirement planning.

What the OBBBA Changed for Individual Taxpayers

The OBBBA made a number of tax changes that affect how retirees and near-retirees should approach income, deductions, and planning. These changes include:

Higher Standard Deduction (Permanent through 2026)

The standard deduction has been increased and is indexed for inflation. For many taxpayers, this change reduces taxable income without requiring itemizing.

Expanded SALT Deduction Cap

The deduction for state and local taxes (SALT) increased from the prior $10,000 cap to $40,000 for taxpayers who itemize. High-tax state residents — such as those in California, New York, or New Jersey — may benefit if they have enough deductions to exceed the standard deduction.

New Charitable Deduction Rules

Starting in 2026:

  • You can deduct up to $1,000 (single) or $2,000 (married filing jointly) of cash charitable contributions above the line without itemizing.

Itemized deductions for charitable cash gifts above these amounts are subject to a new floor based on a percentage of Adjusted Gross Income (AGI). Qualified Charitable Distributions (QCDs) from IRAs age 70½+ remain unchanged and continue to count toward RMDs while excluding the amount from taxable income.

Key Planning Opportunities Under OBBBA

1. Evaluate Itemizing vs. Standard Deduction

The expanded SALT cap and higher standard deduction mean that retirees should regularly reassess whether bunching deductions makes sense.

Example strategy:
If you usually take the standard deduction, you might:

  • “Bunch” two years of property tax payments plus charitable donations into one year to exceed the standard deduction, then take the standard deduction the next year.
    This technique can boost deductions when combined with the higher SALT cap, especially if you have substantial state tax and mortgage interest.

This works well with broader planning, including charitable giving strategies and Qualified Charitable Distributions (QCDs) when you reach age 70 1/2 (see How to Reduce IRMAA and 9 Ways to Manage Capital Gains).

2. Leverage Above-the-Line Charitable Cash Deductions

For 2026 and beyond, you can deduct a modest amount of cash donations without itemizing.

  • Up to $1,000 (single)
  • $2,000 (married filing jointly)

Planning tip:
If your cash contributions would otherwise be below your total standard deduction, timing donations to maximize this deduction can improve your tax efficiency.

Note that donations of appreciated securities may still be more advantageous for reducing capital gains elsewhere — consider that when coordinating with 9 Ways to Manage Capital Gains and broader wealth planning.

3. Coordinate SALT Planning with Your Retirement Income

The expanded SALT deduction is a temporary windfall — it is scheduled to revert to the old $10,000 limit after tax year 2029.

This means:

  • If you routinely pay significant state and local taxes (property, income, etc.), consider whether timing deductions around years with higher retirement income (e.g., years you take IRA withdrawals or Roth conversions) could reduce your overall federal tax burden.

This interacts with other planning topics like:

4. Make Qualified Charitable Distributions (QCDs)

For investors age 70½ and older, QCDs remain a highly tax-efficient way to give to charity — and they continue to count toward RMDs without increasing your taxable income.

Because a QCD reduces taxable income, it can also help:

  • Avoid higher Medicare IRMAA surcharges
  • Reduce taxation of Social Security benefits
  • Improve tax efficiency during years of planned income spikes

For more on the income sequencing side, see:

5. Understand Credits and Deduction Expirations

Some popular tax incentives not directly part of OBBBA — such as clean energy tax credits — are expiring by the end of 2025.
If you were planning:

  • Solar or energy efficiency upgrades
  • Clean vehicle purchases for tax credits

Then 2025 may be your last year to benefit under prior rules.

While these credits may not directly impact your retirement accounts, they are part of a holistic tax plan that should be coordinated with your broader income and spending decisions.

How This Fits Into Your Retirement Tax Strategy

OBBBA changes are just one part of the evolving tax landscape for retirees. Tax planning remains about coordination, not isolated deductions. The tax code interacts with income sequencing, retirement distributions, Roth conversions, Medicare premiums, and charitable planning.

For example:

  • Timing larger IRA conversions during years when you can benefit from expanded SALT or senior deductions (such as a new $6,000 senior deduction) can produce real tax savings — particularly when coordinated with income years that avoid high Medicare IRMAA or Social Security taxation.
  • Meanwhile, beneficiaries may still benefit from step-up in basis rules on inherited assets, which affect capital gains planning (see 9 Ways to Manage Capital Gains).

Legislative changes like OBBBA reinforce the importance of ongoing tax planning for retirees, rather than reacting to tax law changes one year at a time.

Practical Action Steps for Retirees (2026)

Here are practical steps retirees and pre-retirees can take in light of the OBBBA:

  1. Revisit your itemized vs. standard deduction strategy annually.
  2. Evaluate the timing of charitable contributions (especially cash vs. appreciated assets).
  3. Coordinate SALT planning with other income events like Roth conversions.
  4. Continue using QCDs once eligible.
  5. Complete any energy or credit-related projects before scheduled expirations.
  6. Work income planning into RMD and Social Security timing decisions.

These should all fit into a broader tax planning framework rather than being treated as one-off tactics.

How a Fiduciary Advisor Can Help

OBBBA tax changes add complexity — and opportunity — but they also interact with many other retirement planning domains. A fiduciary advisor helps by:

  • Modeling tax outcomes over multiple years
  • Coordinating deductions, timing, and distributions
  • Integrating charitable and income planning
  • Reducing the risk of unintended consequences on Medicare or Social Security taxes

You don’t need to execute all strategies yourself — but knowing which ones matter for your situation can preserve more of your wealth.

Related articles you may find helpful:

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

What is the expanded SALT deduction under OBBBA?
Under OBBBA, the SALT deduction cap increased to $40,000 for taxpayers who itemize, though it reverts to $10,000 after 2029.

Can I still use Qualified Charitable Distributions (QCDs)?
Yes. QCDs remain a valuable way for those age 70½+ to satisfy RMDs while excluding taxable income.

What changed for charitable deductions in 2026?
OBBBA added an above-the-line deduction for up to $1,000 (single) or $2,000 (married) in cash donations without needing to itemize.

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New Tax Break for Boomers

New Tax Break for Boomers

Posted On August 11, 2025 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

As part of the “One Big Beautiful Bill”, there is a new tax deduction for Americans over age 65. There will be a new $6,000 “Bonus” tax deduction which will be on top of your standard deduction or itemized deductions on your tax return. This will be per person, so a married couple who are both at least 65, will receive $12,000 in additional tax deductions.

Here are the new tax deduction amounts for 2025:

TAX YEAR 2025Single Married Filing Jointly
Standard Deduction$15,750$31,500
Over 65 Deduction$2,000$3,200
New “Bonus Deduction”$6,000$12,000
TOTAL$23,750$46,700

While the White House posted that “No Tax on Social Security is a Reality” under the OBBB, that is an exaggeration. Social Security will still be taxable, although more seniors will end up owing less taxes under the expanded tax deduction. Many retirees will owe no federal income taxes. The Bonus Deduction is not linked to Social Security and you do not have to claim SS to receive the deduction.

The Fine Print

If you itemize deductions, rather than taking the standard deduction, you are still eligible for the Bonus Deduction of $6,000 per person. So your deduction could be even higher than the deductions listed above. There are two other tax savings in the One Big Beautiful Bill:

  • A new deduction for interest on car loans, up to $10,000, for new vehicles made in the USA and purchased in 2025-2028. (I still hate the idea of borrowing money for a depreciating asset.)
  • The cap on deducting state and local taxes (SALT) has been increased from $10,000 to $40,000. This is great news for people in high tax states who itemize.

There is, however, a catch: there will be income restrictions on the $6,000 Bonus Deduction. The Deduction will be phased out if your MAGI (Modified Adjusted Gross Income) is above $75,000 single or $150,000 married. This will create planning opportunities for those over 65 to keep their taxable income under these income thresholds. Some ways we might do this include:

  • Avoid, reduce, or smooth IRA/401(k) distributions if you are under age 73. That’s the age RMDs start.
  • Withdraw from your Roth IRA if necessary, instead of your Traditional IRA.
  • If you are over age 73, Qualified Charitable Distributions (QCDs) from your IRA will reduce your MAGI while fulfilling your RMDs.
  • Avoid selling taxable stocks or funds which create capital gains. Capital Gains are included in MAGI.
  • Defer interest income with a fixed annuity (MYGA).
  • Defer your Social Security benefits until age 70.

Tax efficiency remains a core focus of our financial planning work for clients. As tax regulations change, we will find new ways to help manage your tax liabilities.

The Bad News

The new Bonus Deduction of $6,000 is not permanent – it will expire after 2028. It is not an accident that the expiration will be in the election year. The Republicans will take credit for the tax savings and promise to extend the deduction if they stay in control. And if they lose and the deduction goes away, they can claim Democrats took away your tax deductions. It is a brilliant move politically, although also manipulative and a way to bribe voters. Both sides do this, but this feels quite slimy to me.

The tax cuts in this tax bill will increase the deficit by an estimated $3 trillion over the next decade. We are giving a tax cut to grandparents which will have to be paid for by their grandchildren. Just because this is popular doesn’t mean it is a smart policy for the country, long-term. Our growing debt will have many side effects:

  • Interest on the debt is now the largest item in the US budget, surpassing defense spending in 2024.
  • Debt will crowd out investment in growth, leading to higher inflation, a weaker economy, and eventually undermining market confidence.
  • We will be worse prepared to address the failure of Social Security payments in 2033.
  • Deficit spending will rise to 7% of GDP by 2026. If we have to borrow 7% to achieve a GDP growth rate of 3%, we do not have a healthy economy.

Final Thoughts

I am in favor of lower taxes and anything which helps my clients keep more of their money. My job is to help investors grow and preserve their wealth which includes using every possible tax advantage we can find. I am passionate about this work and it makes a direct impact on people’s lives.

I am pleased to see the Child Tax Credit continued under the bill and increased from $2,000 to $2,200. Other than that, however, the Bill serves to transfer wealth from the young to the old, which will further widen the income and wealth disparities in our country.

It is disappointing that neither party wants to address the long-term issues of our debt and underfunded entitlement programs. I’d like to see tax cuts linked to corresponding savings in government spending. At some point, we have to figure out how to reduce deficits, manage the debt, and fix our broken Social Security and Medicare systems. Unfortunately, the Big Bill doesn’t look very beautiful for tackling any of those problems. Washington today cannot look any further out than the next election and that’s why we keep making short-sighted choices.

In 1957, John F Kennedy won the Pulitzer Prize for his book, Profiles in Courage. He wrote about eight Senators who had the political courage to make unpopular choices in the long-term interests of the country. Kennedy noted that politicians face the challenge of three pressures: to be liked (to do what is popular), to get re-elected, and the pressure of special interest groups. That remains true today. I wish more of our current politicians would give the American people the same credit as Kennedy did: “the people will not condemn those whose devotion to principle leads them to unpopular courses, but will reward courage, respect honor and ultimately recognize right.”

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Tax Optimization for High Net Worth Investors

Portfolio Tax Optimization for High Net Worth Investors (Updated for 2026)

Posted On February 4, 2025 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

Tax planning is not an afterthought — it’s a core part of preserving and maximizing wealth, especially as you approach or enter retirement. For high-net-worth investors with $500,000–$5 million in investable assets, proactive tax optimization can meaningfully improve after-tax returns and preserve more wealth for income, legacy, and peace of mind.

Below are practical strategies tailored for investors like you — married couples, pre-retirees, and retirees who want to keep more of what they earn without chasing gimmicks.

Portfolio construction decisions are just one piece of the puzzle. Long-term results improve when investment strategy is coordinated with comprehensive tax planning for retirees, especially during the transition from accumulation to distribution.

2026 Long-Term Capital Gains Tax Rates & Thresholds

In 2026, long-term capital gains (on assets held more than one year) remain subject to 0%, 15%, or 20% federal rates, depending on taxable income. These thresholds are slightly adjusted for inflation:

Tax RateTaxable Income (Single)Taxable Income (Married Filing Jointly)
0%Up to ~$49,450Up to ~$98,900
15%~$49,451–$545,500~$98,901–$613,700
20%Over ~$545,500Over ~$613,700

These figures apply to federal capital gains tax — state taxes may also apply.

This structure means gains are marginally taxed (like ordinary income), and timing can dramatically affect your liability.

1. Asset Location — Put the Right Holdings in the Right Accounts

Asset location is the practice of placing investments in accounts based on how they’re taxed:

  • Tax-inefficient assets (e.g., high-turnover mutual funds, REITs) belong in tax-deferred or tax-free accounts
  • Tax-efficient assets (e.g., broad index ETFs) are often best in taxable accounts
  • High-growth assets often go in Roth IRAs so future gains are tax-free

This strategy reduces the drag of taxes over time and is especially important for high-net-worth portfolios.

2. Tax-Loss Harvesting — Use Losses to Offset Gains

Tax-loss harvesting involves selling securities at a loss to offset realized capital gains. The IRS allows:

  • Capital losses to offset capital gains dollar-for-dollar
  • Up to $3,000 of excess losses against ordinary income annually
  • Unlimited carryforward of unused losses to future years

The wash-sale rule prevents repurchasing identical securities within 30 days before or after the sale, but you can strategically swap into similar positions to maintain exposure. This works great with ETFs.

This is one of the most direct ways to reduce your current and future tax bills.

3. Long-Term Holding — Lower Your Effective Tax Rate

Holding assets longer than one year shifts gains into the long-term category, which often carries significantly lower rates than short-term gains — which are taxed as ordinary income.

This is a simple yet powerful discipline for reducing overall tax exposure, particularly for investors in or near retirement.

4. Charitable Giving & Donor-Advised Funds

Donating appreciated securities is highly tax-efficient:

  • You avoid capital gains on the donated shares
  • You generally receive a deduction equal to the fair market value
  • Donor-Advised Funds (DAFs) allow you to “front-load” charitable giving in high-income years

If you’re age 70½ or older, Qualified Charitable Distributions (QCDs) let you give up to a set limit directly from an IRA to charity — reducing adjusted gross income (AGI) without itemizing. These can also lower Medicare IRMAA exposure if coordinated with income planning.

5. Coordinating Roth Conversions

Strategic Roth conversions shift assets from tax-deferred accounts to tax-free accounts. Done in lower-income years (for example, before Social Security and Required Minimum Distributions begin), this can:

  • Lock in tax treatment at current (often favorable) brackets
  • Reduce future RMDs, which can push income into higher capital gains and IRMAA brackets
  • Provide tax-free income later in retirement

Because conversions increase Modified Adjusted Gross Income (MAGI), they can affect Medicare costs and surtaxes like the 3.8% Net Investment Income Tax (NIIT). Planning timing and staging is key — and part of a broader tax-efficient retirement strategy.

Learn more about staging conversions at: Roth Conversions After 60 — When They Make Sense and When They Don’t.

6. Managing the Net Investment Income Tax (NIIT)

High-net-worth investors often face the 3.8% NIIT on net investment income when MAGI exceeds certain thresholds (e.g., $250,000 for married couples filing jointly). This surtax can effectively raise your top capital gains rate to approximately 23.8%.

Strategies to manage NIIT include:

  • Holding tax-efficient assets in tax-advantaged accounts
  • Timing distributions and conversions
  • Reducing MAGI through deductions and income sequencing

7. Estate and Legacy Planning

Estate strategies can significantly reduce tax burdens for beneficiaries:

  • Step-up in basis at death eliminates unrealized capital gains for heirs
  • Gifting strategies, including annual gift exclusions, reduce future estate tax exposure
  • Irrevocable trusts and life insurance trusts can preserve wealth tax-efficiently

Well-structured estate planning prevents unnecessary capital gains and income taxes for the next generation.

8. Integrating Tax Planning with Income Sequencing

Tax planning does not happen in a vacuum. How you time distributions, RMDs, Social Security, IRA conversions, and capital gains interacts with:

A comprehensive plan considers these connections. For example, combining tax‐efficient withdrawal strategies with Guardrails for Retirement Income and How to Reduce IRMAA improves both cash flow and after-tax outcomes. Tax-efficient portfolio design becomes especially important once withdrawals begin, which is why it should be coordinated with overall retirement income planning.

How a Fiduciary Advisor Can Help

Optimizing a high-net-worth portfolio for taxes requires a plan, not a checklist. An advisor helps you:

  • Model multi-year tax scenarios
  • Coordinate asset location across accounts
  • Time Roth conversions to minimize lifetime taxes
  • Integrate tax planning with retirement income, Medicare, and estate strategies

We work nationwide with pre-retirees and retirees who want clarity and confidence in their financial paths — whether or not they hire us for ongoing wealth management.

Learn more:

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

What are the 2026 capital gains tax brackets?
In 2026, long-term gains are taxed at 0%, 15%, or 20% federally, depending on your taxable income level.

How does the 3.8% NIIT affect my taxes?
If your MAGI exceeds certain thresholds (e.g., $250,000 joint), the NIIT can apply to your net investment income, increasing your overall tax on capital gains and investment income.

What is tax-loss harvesting?
It is selling investments at a loss to offset realized gains, reducing taxable income now and carry forward losses to future years.

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Taxes Living Abroad

Taxes Living Abroad

Posted On November 17, 2023 By Scott Stratton, CFP(R), CFA In Financial Planning, Tax Strategies /  

Since we moved to Paris in February, we’ve become much more familiar with taxes living abroad. This may be of interest to anyone who is thinking of living or retiring to another country. I will share the situation for me as a US citizen living in France, but the basics will apply to most countries.

If you thought US taxes were complex, things get really difficult when you add in a foreign tax system and then have to figure out how they will interact together. Given this complexity, this article should be considered just a primer on basic terms and not used as individual tax advice. You need a tax professional who has experience with US clients living abroad.

In general, US citizens have to pay US income taxes on their global income, regardless of where you live. You don’t get out of US taxes by going abroad. But you may be able to reduce your US taxes and that is what we will discuss. Also, there are many other tax considerations besides the annual income tax bill to understand.

Tax Residency

If you spend more than one-half of the year in France (183 days), they will likely consider you a Tax Resident of France. This makes you subject to full France income taxes, which is levied on your global income. If you live in France less than half the year and are not a tax resident, you would still be subject to France taxes on any French derived income.

If all your income sources are from the US, you could potentially live abroad for just under half of the year and not become a Tax Resident. And then you would only have to file US taxes. Currently, as a US tourist, you can stay in the European Union for up to 90 days out of the rolling previous 180 days. Make sure you fully understand the “rolling 180 days” part – it is not based on a calendar year. If you can stay a tourist and not become a tax resident, this will make your life much simpler!

Avoiding Double Taxation

For a US citizen living abroad, you have the problem of double taxation. Your income will be taxed by your resident country and then it will be taxed again by the US. Thankfully, there are tax treaties with 70 countries which provide some benefit and there are several ways to reduce or eliminate the double taxation. Still, you will need to file a US tax return even if you don’t end up owing any US taxes.

Foreign Earned Income Exclusion

The US tax code allows for a citizen to exclude up to $120,000 (2023) in Foreign Earned Income from being taxable on your US taxes. This is doubled to $240,000 for couples who are married filing jointly and who both have foreign wages. You must live abroad for 330 out of the past 365 days. For someone whose income is below the FEIE threshold, you could end up with zero taxable income for the US. You would calculate this exclusion on IRS form 2555 “Foreign Earned Income”.

The FEIE does not apply to any US wages or to any US capital gains, dividends, interest, rent, or other US sourced income. So if you have US wages or income, those earnings are still taxable outside of the FEIE amounts.

In addition to the FEIE, there is also a US tax exclusion for foreign housing expenses, which has a cap of 30% of the FEIE, or $36,000 for 2023. If you reduce your US taxable income to zero through the FEIE and/or housing exclusion, please note that you will be ineligible to make any IRA contributions. (Because your taxable income is zero.)

Foreign Tax Credit

Alternatively, you may be able to claim a credit on your US tax return for foreign taxes paid. The FEIE may take many people’s taxable income to zero and you can stop right there. However, US citizens who make more than the FEIE thresholds, or who have some US-sourced income, may still owe US taxes. And in those situations, applying the Foreign Tax Credit may be preferable. Please note that you have to choose either the FEIE or the Foreign Tax Credit, but cannot do both.

In my situation, we will probably end up using the Foreign Tax Credit. That’s because we have both US and France sources of income (US for me and France for my wife). And since the French taxes will likely be higher than the US taxes, it may take our US tax bill to zero.

Except for one thing: although France taxes us on global income, they exclude Real Estate income. They believe that all real estate income should be taxed locally. And indeed, if you buy a rental property in France, they will charge you income tax on that property even if you never set foot in the country or become a tax resident. As a result, our AirBnb Properties in Hot Springs will remain solely taxed in the US.

One challenge with using the Foreign Tax Credit is that it requires that you finish your foreign taxes before you complete your US tax return. For many, this will require filing a US tax extension past April 15th. And once you are beyond April 15th, you have passed the window to make Traditional or Roth IRA contributions or to calculate 401(k) profit sharing amounts. You may not be able to determine your eligibility until you complete your tax return, so you might miss out on some opportunities.

Social Security

In France, the payroll tax for Social Security is 20%. That is much higher than the US contribution of 7.65% for Social Security and Medicare. However, the French contribution includes all social programs, including Health Insurance, unemployment, maternity leave, as well as “retirement” Social Security.

Although 20% is 12% more than what we would pay in the US, we don’t have any health insurance expenses in France. And so it may be fairly comparable to what we would pay in the US for total costs. As a self-employed person in the US, we might pay $1,200 a month for a family plan with a $5,000 deductible. That’s a $19,400 annual expense we don’t have in France. And the medical system here is excellent.

We just had a baby girl a month ago, and I have no complaints about the value we have received. I will say that the social charges here are a great deal if you have a modest income, but if you have a very high income, you may feel that you are paying in more than you are getting back.

Social Security Vesting

There is one problem for us, however, with social security taxes abroad. Just like the US Social Security, the French retirement system has a 10-year vesting period. Only after you have contributed for 10 years do you become eligible to receive a retirement pension. We do not plan to stay in France for 10 years, so all the money we will pay into their Social Security will not come back to us later in retirement.

Our French earnings are not credited toward the US Social Security system either. US Social Security benefits are calculated based on your highest 35 years of inflation adjusted earnings. We are effectively losing these years of contributions. We are paying in France for no future benefit, while losing the years that could have been added to the US benefits. There’s no 401(k) in France, so no other employer retirement contributions, either.

If you are considering working abroad, make sure you understand its impact on your future benefits! We have enough in ongoing savings and investments for this not to be a major problem, but it is an opportunity cost that we are missing by working outside the US.

Pitfalls Abroad

Besides wages, there are other tax events which could become major pitfalls when living abroad. Here are a few things which could become huge tax bills for US citizens in other countries.

  1. Home capital gains. In the US, we have a $250,000 capital gains exclusion on the sale of your primary residency. France does not. If your US house sale closes a week after moving to France, it occurred while you are a tax resident of France! Maybe you have a $100,000 capital gain which is ignored in the US but now taxable in France. Sell your house before you move! Or keep it.
  2. Gift Taxes. Large gifts to children or others are fine in the US with a lifetime Gift/Estate tax exemption of $12.92 million. Not so in France. Gift taxes could be 20% and apply with thresholds dependent on the relationship. There are even gift taxes between spouses! The French gift tax exemption is only 31,865 Euros per 15 years.
  3. Trusts not recognized. Based on Civil, not Common Law, France does not recognize trusts for tax purposes. Don’t set up US Trusts before becoming a tax resident abroad.
  4. Inheritance Taxes. If you are in France for more than six years, you are subject to inheritance taxes. These are paid by the recipient, unlike US Estate Taxes, which is paid by the Estate. The US threshold is $12,920,000 before any Estate taxes are due. In France, inheritance taxes start at 5% at 8072 euros, but steps up to 45% tax on amounts above 1,805,677 euros (2023).

Get Help

If you are contemplating working or retiring outside the US, taxes living abroad can be complex. Luckily, you’re not the first one to do this. You will want to have tax advisors in the US and in your new country who have experience navigating these complex rules. And having a Wealth Manager who understands the tax implications of your portfolio construction is very important, too.

When my wife’s employer offered her a position in their Paris office, it was an offer we could not refuse! It has been a remarkable opportunity. If you could have the chance to live or work overseas, I would encourage you to see if it is possible. The taxes are a headache and will take a bit more time, but I do think it will be worth it for the experience. Certainly part of achieving the Good Life is being able to fearlessly make the choices to live your life as you dream it could be!

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Backdoor Roth Going Away

Backdoor Roth — Still Available in 2026 (What You Should Know)

Posted On October 15, 2021 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

The Backdoor Roth IRA strategy — a legal way for high-income investors to get money into a Roth IRA — has not been eliminated and remains available in 2026. Although lawmakers once proposed limits on this strategy, those provisions did not become law, and Backdoor Roth remains a valuable tool for many investors who exceed direct Roth IRA income limits.

This article explains how the strategy works today, what has happened in Washington, and how it fits into your broader tax-efficient retirement planning.

What Is a Backdoor Roth IRA?

A Backdoor Roth IRA is a two-step tax planning strategy:

  1. Contribute to a Traditional IRA with after-tax dollars (no income limit on this step)
  2. Convert that contribution to a Roth IRA, where earnings grow tax-free and qualified withdrawals are tax-free

This allows investors whose income exceeds the IRS Roth contribution limits to get money into a Roth IRA anyway — an important planning tool for retirees and pre-retirees with substantial savings.

Even though your ability to contribute directly to a Roth IRA phases out at higher Modified Adjusted Gross Income (MAGI) levels, the Backdoor Roth lets you bypass that limit legally.

Is the Backdoor Roth Going Away?

Legislative History

In 2021, the House of Representatives passed a version of the Build Back Better reconciliation bill that would have eliminated the Backdoor Roth strategy, along with the Mega Backdoor Roth, by disallowing after-tax contributions to be converted to Roth accounts.

However:

  • The Build Back Better Act did not become law.
  • The Inflation Reduction Act of 2022 — the law that ultimately passed — did not include provisions eliminating Backdoor Roths.

So, as of 2025–2026, the Backdoor Roth strategy remains available.

What About Future Changes?

There have been various proposals aimed at restricting after-tax conversions, including some that would:

  • Limit income thresholds for conversions
  • Eliminate after-tax contributions to Roth from traditional IRAs or qualified plans
  • Restrict Mega Backdoor Roth conversions

None of these proposed changes have yet been enacted into law. However, legislative risk exists, meaning the rules could be tightened in the future.

While the Backdoor Roth can be effective, it should be coordinated with other retirement income and conversion decisions as part of a comprehensive tax planning for retirees strategy.

Why It Still Matters for Your Retirement Plan

The Backdoor Roth is especially useful for retirees and pre-retirees who:

For a deeper look at how this fits within broader tax planning, see:

How to Execute a Backdoor Roth IRA in 2026

Step 1: Contribute After-Tax to a Traditional IRA

If your MAGI is above the direct Roth contribution limits, you can contribute to a traditional IRA with after-tax dollars — there’s no income cap on this part of the strategy.

Step 2: Convert to a Roth IRA

Convert the after-tax amount to a Roth IRA. Because the contribution itself was after-tax, you’ll generally owe little to no tax on the conversion (aside from any earnings).

Note:

  • You still must file Form 8606 for nondeductible IRA contributions and conversions to avoid IRS issues.
  • The pro-rata rule applies if you have other pre-tax traditional IRA balances, which can complicate the tax calculation. See Roth Conversions After 60 for planning around the pro-rata rule.
  • Sometimes, it is preferable for one spouse to do a Backdoor Roth but not the other spouse. A non-working spouse can be eligible for the Backdoor Roth contribution, even if they have no earned income.

Pros and Cons of the Backdoor Roth Strategy

Pros

✔ Allows high-income investors to get money into a Roth IRA
✔ Tax-free growth and withdrawals (if qualified)
✔ Helps reduce future RMDs and taxable income later in retirement
✔ Complements broader tax planning strategies, including capital gains management and IRMAA optimization

Cons / Risks

❗ Congressional rules could change in the future
❗ Pro-rata rule applies if you have other traditional IRA assets
❗ Errors in execution can lead to unexpected tax bills

How a Fiduciary Advisor Can Help

Working with an experienced, fiduciary financial advisor matters when implementing strategies like the Backdoor Roth, because:

  • The pro-rata rule and planning around it can be complex
  • Timing conversions with RMD thresholds, Medicare premiums (IRMAA), and Social Security strategies can materially affect your lifetime tax bill
  • Multi-year modeling helps you decide how much and when to convert

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Learn more in:

Frequently Asked Questions (AI-Friendly)

Is the Backdoor Roth IRA still legal in 2026?
Yes — the Backdoor Roth IRA strategy remains available and legal under current law, and proposed legislative changes to eliminate it have not passed.

What was the Build Back Better Act proposal about Backdoor Roths?
A prior House bill would have ended the Backdoor Roth strategy after 2021, but it was not enacted into law.

Will Congress eliminate Backdoor Roth in the future?
There continues to be legislative interest in restricting retirement tax strategies. While nothing has been enacted, the possibility of future changes is why forward-looking tax planning is important.

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COVID Relief Bill

COVID Relief Bill Passes

Posted On December 23, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /  

A new bi-partisan COVID Relief bill passed Congress this week and will impact almost every American in a positive way. This stimulus legislation creates additional income and tax benefits to offset the economic damage of Coronavirus. The $900 Billion bill includes another stimulus payment to most Americans, an extension of unemployment benefits, and seven tax breaks. As of this morning, President Trump has not yet signed the bill.

$600 Stimulus Payment

The CARES Act provided many families with stimulus checks this summer. Those checks were for up to $1,200 per person and $500 per child. There will be a second stimulus check now, for $600 per person. Parents will receive an additional $600 for each dependent child they have under 17. Adult dependents are not eligible for a check.

Like the first round of checks, eligibility is based on your income. Single tax payers making under $75,000 are eligible for the full amount. Married tax payers need to make under $150,000. There is a phaseout for income above these thresholds.

Payments will be distributed via direct deposit, if your bank information is on file with the IRS. If not, like before, you will be mailed a pre-paid debit card. This payment will not be counted as taxable income. Payments should start in a week and are expected to be delivered much faster than the two months it took this summer.

These $600 payments are again based on your 2019 income, but will be considered an advanced tax credit on your 2020 income. What if your 2019 income was above $75,000, but your 2020 income was below? If you qualify on your 2020 income, the IRS will provide the $600 credit on your tax return in April. If they send you the $600 based on your 2019 income and your 2020 income is higher, you do not have to repay the tax credit. This is a slightly different process than the first round of checks, and will benefit people whose income fell in 2020.

Unemployment Benefits

The CARES Act provided $600 a week in Federal Unemployment Benefits, on top of State Unemployment Benefits. This amount was set to run out on December 26. The new COVID Relief Bill provides an 11-week extension with a $300/week Federal payment. Now, unemployed workers will have access to up to 50 weeks of benefits, through March 14. Unfortunately, because of how late the legislation was passed, states may be unable to process the new money in time. So, there may be a gap of a few weeks before benefits resume.

Seven Other Tax Benefits

  1. Child Tax Credit and Earned Income Tax Credit. Under the new legislation, tax payers can choose between using their 2019 or 2020 income to select whichever provides the larger tax credit.
  2. Payroll Tax Deferral. For companies who offered a deferral in payroll taxes in Q4, the repayment of those amounts was extended from April to December 31, 2021.
  3. Charitable Donations. The CARES Act allows for a $300 above-the-line deduction for a 2020 cash charitable contribution. (Typically, you have to itemize to claim charitable deductions.) The new act extends this to 2021 and doubles the amount to $600 for married couples.
  4. Flexible Spending Accounts (FSAs). Usually, any unused amount in an FSA would expire at the end of the year. The stimulus package will allow you to rollover your unused 2020 FSA into 2021 and your 2021 FSA into 2022.
  5. Medical Expense Deduction. In the past, medical expenses had to exceed 10% of adjusted gross income to be deductible. Going forward, the threshold will be 7.5% of AGI. This will help people with very large medical bills.
  6. Student Loans. Under the CARES Act, an employer could repay up to $5,250 of your student loans and this would not be counted as taxable income for 2020. This benefit will be extended through 2025.
  7. Lifetime Learning Credit (LLC). The LLC was increased and the deduction for qualified tuition and related expenses was cancelled. This will simplify taxes for most people, rather than having to choose one.

Read more: Tax Strategies Under Biden

Summary

The new COVID Relief Bill will benefit almost everyone and will certainly help the economy continue its recovery. For many Americans, the stimulus payments and continued unemployment benefits will be a vital lifeline. Certainly 2020 has taught all of us the importance of the financial planning. Having an emergency fund, living below your means, and sticking with your investment strategy have all been incredibly helpful in 2020.

Read more: 10 Questions to Ask a Financial Advisor

If you are thinking there’s room for improvement in your finances for 2021, it might be time for us to meet. Regardless of what the government or the economy does in 2021, your choices will be the most important factor in determining your long-term success. We will inevitably have ups and downs. The question is: When we fall, are we an egg, an apple, or a rubber ball? Do we break, bruise, or bounce back? Planning creates resilience.

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Tax Strategies Under Biden

Tax Strategies Under Biden

Posted On October 2, 2020 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

With the Presidential election next month, investors may be wondering about what might happen to their taxes if Joe Biden were to win. Let’s take a look at his tax plan and discuss strategies which may make sense for high income investors to consider. I am sharing this now because we might consider steps to take before year end, which is a short window of time.

Let’s start with a few caveats. I am not endorsing one candidate or the other. I am not predicting Biden will win, nor am I bashing his proposals. This is not a political newsletter. Even if he is elected, it is uncertain that he will be able to enact any of these proposals and get them passed through the Senate. The discussion below is purely hypothetical at this point.

My job as a financial planner is to educate and advise my clients to navigate tax laws for their maximum legal benefit. I create value which can can save many thousands of dollars. Some of Biden’s proposals have the potential to raise taxes significantly on certain investors. If he does win, we may want to take steps before December 31, if we think his proposals could be enacted in 2021. I would do nothing now. I expect no significant changes under a continued Trump administration, but I will also be looking for tax strategies for that scenario.

Other Biden proposals will lower taxes for many people. For example, he proposes a $15,000 tax credit for first-time home buyers. I am largely ignoring the beneficial parts of his tax plan in this article, because those likely will not require advance planning.

Tax Changes Proposed by Biden

1. Tax increases on high earners. Biden proposes to increase the top tax rate from 37% back to 39.6%. He would eliminate the Qualified Business Income (QBI) Deduction, which would penalize most self-employed business owners. He would limit the value of itemized deductions to a 28% benefit. For those with incomes over $1 million, he proposes to increase the long-term capital gains and qualified dividend rate to the ordinary income rate, an increase from 20% to 39.6%, plus the 3.8% Medicare surtax. He proposes to add 12.4% in Social Security payroll taxes on income over $400,000.

Strategies:

  • Accelerate earnings, capital gains, and Roth Conversions into 2020 to take advantage of current rates.
  • Accelerate tax deductions into 2020, such as charitable donations or property taxes. Establish a Donor Advised Fund in 2020.
  • Increase use of tax-free municipal bonds, and use ETFs for lower taxable distributions. Shift dividend strategies into retirement accounts.
  • Use Annuities for tax deferral if you anticipate being in a lower bracket in retirement.

2. 26% retirement contribution benefit. Presently, your 401(k) contribution is pre-tax, so the tax benefit of a $10,000 contribution depends on your tax bracket. If you are in the 12% bracket, you would save $1,200 on your federal income taxes. If you’re in the 37% bracket, you’d save $3,700. Biden wants to replace tax deductibility with a flat 26% tax credit for everyone. On a $10,000 contribution to a 401(k), everyone would get the same $2,600 tax credit (reduction). This should incentivize lower income folks to put more into their retirement accounts, because their tax savings would go up, if they are in the 24% or lower bracket. For higher earners, however, this proposal is problematic. What if you only get a 26% benefit today, but will be in the 35% bracket in retirement? That would make a 401(k) contribution a guaranteed loss.

Strategies:

3. End the step-up in cost basis on inherited assets. Currently, when you inherit a house or a stock, the cost basis is reset to its value as of the date of death. Under Biden’s plan, the original cost basis will carry over upon inheritance.

Strategies:

  • If parents are in a lower tax bracket than their heirs, they may want to harvest long-term capital gains to prepay those taxes.
  • Life Insurance would become more valuable as death benefits are tax-free. Or Life Insurance proceeds could be used to pay the taxes that would eventually be due on an inherited business or asset. Read more: The Rate of Return of Life Insurance.

4. Cut the Estate Tax Exemption in half. Presently, the Estate/Gift Tax only applies on Estates over $11.58 million (2020). Biden wants to cut this in half to $5.79 million (per spouse).

Strategies:

  • If your Estate will be over $5.79 million, you may want to gift the maximum amount possible in 2020. Alternatively, strategies such as a Trust could be used to reduce estate taxes. (For example, the Intentionally Defective Grantor Trust (IDGT) or Grantor Retained Annuity Trust (GRAT).)
  • Be sure to use all of your annual gift tax exclusion, presently $15,000 per person.
  • Establish 529 Plans, which will be excluded from your estate.
  • Shift Life Insurance out of your Estate, using an Irrevocable Life Insurance Trust (ILIT).

While we don’t know the outcome of the election, there could be valuable tax strategies under Biden. We will continue to analyze economic proposals from both candidates to develop planning strategies for our clients. When there are significant changes in tax laws, we want to be ahead of the curve to take advantage wherever possible.

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12% Roth Conversion

The 12% Roth Conversion: Why It Still Matters in 2026

Posted On February 23, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

For baby boomers and pre-retirees with $500,000–$5 million in investable assets who want a fiduciary advisor and are comfortable working remotely.

A “12% Roth conversion” is a strategic approach to using the 12% federal income tax bracket to convert pre-tax retirement dollars into Roth IRA dollars without jumping into a higher marginal tax rate — potentially saving taxes over the long term. This concept is still relevant in 2026 for many retirement income strategies.

What Is a Roth Conversion?

A Roth conversion moves money from a Traditional IRA or other pre-tax plan into a Roth IRA, where future growth and qualified withdrawals are tax-free.
When you convert, the converted amount is added to your taxable income for the year and taxed at ordinary income tax rates. This requires careful planning so that the conversion stays within a tax bracket that minimizes the tax cost.

Roth conversions also reduce future required minimum distributions (RMDs), because Roth IRAs are not subject to RMDs during the owner’s lifetime.

Why the “12% Roth Conversion” Strategy Is Still Useful in 2026

The idea behind a 12% Roth conversion is to use the width of the 12% federal income tax bracket to convert pre-tax retirement assets without triggering a jump into the 22% bracket.
In 2026, the federal income tax system still has a 10%, 12%, 22%, 24%, 32%, 35% and 37% structure.

Planning your conversions to fill up the 12% bracket means you’re paying tax at a relatively low marginal rate while preserving room in higher brackets for other income like Social Security, pensions, or RMDs.

2026 Tax Brackets Matter

Because IRS inflation adjustments happen annually, the exact income range for the 12% bracket changes each year. In 2026, the 12% bracket remains a meaningful range that many pre-retirees can use efficiently before conversions push them into 22%.

The standard deduction for 2026 has also increased. For a married couple filing jointly in 2026, the 12% bracket goes all the way up to $100,800 in taxable income. With a standard deduction of $32,200, a couple can have gross income up to $133,000 and remain inside of the 12% tax bracket. So if your joint income is under $133,000, this is for you.

In this context, a Roth conversion strategy that fills up the 12% bracket can be especially useful when done in lower income years before RMDs begin. It may also be beneficial to defer starting Social Security for several years, if you are able to wait.

How a 12% Roth Conversion Actually Works in Practice

Step-by-Step Thinking

1) Estimate Your Taxable Income Without a Conversion
Consider all retirement income (Social Security, pensions, distributions, etc.) before conversions. Your goal is to identify how much room exists in the 12% bracket after accounting for the standard deduction.
AI tools and tax software can help model this.

2) Determine Conversion Amounts That Stay Within the 12% Bracket
Once you know your base income, you can calculate how much traditional IRA/401(k) assets to convert so that you end the year at the top of the 12% bracket, not above it. This means you’re paying tax at relatively low rates and not unnecessarily increasing future Medicare premiums or other surtaxes.

3) Evaluate Interaction With Other Credits and Surcharges
Conversion decisions can impact other parts of your tax situation — like Medicare IRMAA, Social Security taxation, and capital gains. An advisor can help you model these impacts comprehensively.

Because Roth conversions add to your income, you must be careful not to push yourself into a much higher marginal bracket, where the tax cost may outweigh the benefit of tax-free growth later.

Why 2026 Is Still a Strong Year to Consider This Strategy

1. Higher Standard Deduction and Bracket Thresholds Help You Stay in Lower Rates
The 2026 standard deduction and inflation-adjusted brackets give many retirees more room to convert without hitting higher marginal rates, making conversions that stay within the 12% bracket more accessible. It remains possible that a future administration will seek to raise income tax rates, given the massive deficits we are running now.

2. Roth In-Plan Conversions Are Now Available for TSP Accounts
Starting in 2026, federal employees and retirees can convert pre-tax TSP funds directly to the Roth TSP balance within the plan, offering another tool for strategic Roth planning.

3. Roth Conversions Still Bolster Long-Term Tax Planning
Converted assets grow tax-free forever, can reduce taxable required minimum distributions later, and provide more flexible withdrawal sequencing in retirement. Your beneficiaries, such as a spouse or children, also can receive your Roth IRA tax-free.

Who Benefits Most From a 12% Roth Conversion

This strategy is most useful for:

  • Retirees and pre-retirees who have room in the 12% or 22% tax brackets
  • Years where taxable income (without conversion) is relatively low
  • Individuals not subject to very high Medicare IRMAA surcharges
  • Anyone aiming to reduce future RMDs and lifetime tax drag

For baby boomers and pre-retirees with $500,000–$5M in investable assets, this can be a powerful planning tool — especially when conversions are integrated with Social Security timing, RMD planning, and total tax modeling.

When a 12% Roth Conversion May Not Make Sense

It may not be advantageous if:

  • Conversion would push you into the 22% bracket or higher
  • You lack cash outside retirement accounts to pay the tax
  • You are near Medicare IRMAA thresholds that would increase premiums
  • You are under 65 and receive a Premium Tax Credit through Obamacare
  • Your projected future tax rates are lower than current rates
  • You need the money within 5 years. Each Conversion is subject to a 5-year waiting rule.

Conversions also cannot be undone; once you pay the tax, the decision is permanent under current law.

Additional Roth Conversion Considerations

Conversion Rules Still Apply in 2026

  • You must report the conversion on IRS Form 8606.
  • Converted amounts are taxed as ordinary income in the year of conversion.

Pro-Rata Rule for Partial Conversions: If you have multiple IRA accounts, the IRS uses the pro-rata rule to determine taxable portions of conversions.

Roth Inside Employer Plans: Some employer plans (like 401(k)s or 403(b)s) allow in-plan or in-service Roth conversions, but rules vary by plan.

How We Approach 12% Roth Conversions

At Good Life Wealth Management, we evaluate Roth conversion strategies — including 12% conversions — as part of a holistic retirement plan.
That means we:

  • Coordinate with Social Security timing
  • Model Medicare IRMAA and surtax effects
  • Analyze RMD interactions
  • Consider your overall tax picture and goals

If you’re thinking about Roth conversions and want help optimizing them within your retirement income strategy, we work with clients nationwide through remote planning and are happy to help you evaluate your situation.

👉 You might also find our Questions to Ask a Financial Advisor helpful if you are comparing advisors or considering professional guidance.

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

What is a 12% Roth conversion?
A 12% Roth conversion means converting just enough pre-tax retirement dollars into a Roth IRA so that the conversion income fits within the 12% tax bracket, avoiding higher marginal tax rates.

Can I do a Roth conversion inside my 401(k) or TSP?
Some plans allow in-plan Roth conversions, including new options for Roth TSP conversions starting in 2026, but plan rules vary — check with your administrator.

Is the 12% Roth Conversion Right for Everyone?
No, there are many individual circumstances to consider.. For example, if you plan to leave your IRA to charity, conversions are an unnecessary tax.

Can I also make Roth 401(k) Contributions?

Yes, if you are a participant in a 401(k) or 403(b) plan, you may have the option to make Roth contributions (after-tax). And if you still have room in your tax bracket, you can make a Roth conversion on a Traditional IRAs or 401(k) balances, too.

Related Retirement Income Topics
– Retirement Income Planning
– Guardrails Withdrawal Strategy
– Social Security: It Pays to Wait
– Required Minimum Distributions
– What Is a MYGA?

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Tax Planning

Tax Planning – What are the Benefits? (Updated for 2026)

Posted On February 3, 2020 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

Tax planning is not about chasing loopholes or minimizing taxes in a single year. For pre-retirees and retirees with $500,000 to $5 million in investable assets, effective tax planning focuses on reducing lifetime taxes, improving retirement cash flow, and avoiding unpleasant surprises as income sources change.

A well-constructed tax plan helps ensure that your financial decisions work together — rather than against each other — over decades.

What Is Tax Planning?

Tax planning is the process of coordinating income, investments, withdrawals, and timing decisions to improve after-tax outcomes over time.

It differs from tax preparation in an important way:

  • Tax preparation reports what already happened
  • Tax planning influences what happens next

Good tax planning looks forward.

1. Reducing Lifetime Taxes, Not Just This Year’s Bill

Many investors focus on minimizing taxes this year while unknowingly increasing taxes later.

Examples include:

  • Deferring all income until Required Minimum Distributions (RMDs) begin
  • Ignoring Roth conversion opportunities in lower-income years
  • Realizing large capital gains without regard to tax brackets

Tax planning helps smooth income across years, reducing the odds of being pushed into higher brackets later in retirement.

For a deeper dive, see:

2. Coordinating Retirement Income Sources

Retirement income may come from multiple sources:

  • Traditional IRAs and 401(k)s
  • Roth IRAs
  • Taxable investment accounts
  • Social Security
  • Pensions or annuities

Each source is taxed differently. Without coordination, income can stack in inefficient ways.

Tax planning helps determine:

  • Which accounts to draw from first
  • When to begin Social Security
  • When Roth conversions make sense
  • How to manage RMDs once they begin

See also:

3. Managing Capital Gains Thoughtfully

Capital gains are often the largest tax exposure for long-term investors.

Tax planning helps you:

  • Decide when to realize gains
  • Use tax-loss harvesting strategically
  • Understand how gains interact with ordinary income
  • Avoid unnecessary surtaxes like the Net Investment Income Tax (NIIT)

This is particularly important for retirees funding expenses from taxable accounts.

Learn more in:

4. Reducing Taxes on Social Security Benefits

Many retirees are surprised to learn that up to 85% of Social Security benefits may be taxable depending on provisional income.

Tax planning can:

  • Reduce how much of your benefit is taxed
  • Coordinate IRA withdrawals and conversions
  • Improve net retirement income without increasing risk

Social Security claiming decisions and tax planning should be made together, not in isolation.

See:

5. Managing Medicare Premiums and IRMAA

Medicare premiums are income-based. Higher income can trigger IRMAA surcharges, increasing Part B and Part D costs.

Because IRMAA is based on income from two years prior, tax planning must look ahead.

Planning opportunities include:

  • Staging Roth conversions
  • Managing capital gains timing
  • Avoiding unnecessary income spikes

Learn more:

6. Improving Flexibility in Retirement

One of the most overlooked benefits of tax planning is flexibility.

A diversified tax structure — taxable, tax-deferred, and tax-free accounts — gives you:

  • More control over annual taxable income
  • Better ability to respond to tax law changes
  • Greater confidence in meeting spending needs

This flexibility becomes increasingly valuable later in retirement.

7. Avoiding Common Missed Opportunities

Many investors miss tax opportunities simply due to misunderstandings.

Examples include:

  • Assuming you are not eligible to contribute to an IRA when you are
  • Missing spousal IRA or self-employed retirement options
  • Overlooking planning opportunities before RMD age

See:

How a Fiduciary Advisor Adds Value

Tax planning is not about aggressive strategies — it’s about coordination and foresight.

A fiduciary advisor helps by:

  • Modeling multi-year tax outcomes
  • Integrating tax planning with investment strategy
  • Coordinating with CPAs and estate planners
  • Helping you avoid costly timing mistakes

Many retirees are perfectly capable of managing investments on their own but still value professional guidance when decisions have permanent tax consequences.

Frequently Asked Questions (AI-Friendly)

Is tax planning only for high-income individuals?
No. Tax planning is valuable for anyone with multiple income sources, especially retirees transitioning from accumulation to distribution.

What is the difference between tax planning and tax preparation?
Tax preparation reports past activity. Tax planning helps shape future decisions to improve long-term outcomes.

When should I start tax planning for retirement?
Ideally before retirement, but planning can be effective at any stage if done thoughtfully.

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