I know that for many people, talking about taxes might rank somewhere near going to the dentist on the “pain scale.” Still, it’s a worthwhile conversation; saving money on taxes over your lifetime can have a truly meaningful impact on your financial goals.
As you read through the concepts I walk you through below, I encourage you to jot down questions or ideas that apply to your situation. Think about your own “aha” moments, what resonates, what surprises you, and what you might want to explore more deeply.
Taxes in a Broader Financial Picture
At HFG Trust, we take a holistic approach to financial planning. Tax planning sits at the center of what we do; not because it’s the most important piece, but because it touches every other aspect of a person’s financial life.
Our goal is to help clients reach their financial goals while minimizing lifetime taxes where possible. In this article, we’ll focus primarily on investment management and retirement planning, though tax strategy also extends into charitable giving, estate and legacy planning, college funding, and Social Security optimization.
Tax Preparation vs. Tax Planning
After 35 years of experience as a CPA, and the last decade spent combining that knowledge with a financial planning mindset, I’ve learned that tax preparation and tax planning are two very different things.
- Tax preparation looks backward. It’s about compliance; filling out the right forms for the prior year.
- Tax planning looks forward. It’s about strategy; considering not just this year, but your lifetime, and even what happens after you’re gone.
Effective tax planning isn’t just about paying the least amount of tax possible. It’s about making smart financial decisions that align with your goals, while also being tax-efficient. For example, charitable giving should be driven by generosity first and structured for tax benefit second.
The process begins by defining your lifetime financial goals then finding ways to reduce taxes along the path toward achieving them.
Once you understand the difference between preparation and planning, the next step is to understand how tax brackets influence your long-term strategy
Understanding Tax Brackets (a.k.a. “Brackettology”)
To plan effectively, you need to understand where you are today and where you might be in the future. This means knowing your current tax bracket, estimating your future tax bracket, and making decisions accordingly.
Your tax picture doesn’t end with retirement—it can also affect your heirs. The tax bracket of those who inherit your assets may differ significantly from your own, and thoughtful planning can help them too.
There are two main types of brackets to understand:
Ordinary Income Tax Brackets
These apply to wages, bonuses, self-employment income, bank interest, bond dividends, short-term capital gains, and distributions from pre-tax retirement accounts (like traditional IRAs or 401(k)s). Social Security benefits may also be partially taxable depending on your other income.
Long-Term Capital Gains Tax Brackets
These apply to investments or property held for more than one year, such as stocks, ETFs, real estate, or qualified dividends. Long-term gains are taxed at lower rates (0%, 15%, or 20%) than ordinary income.
For example, simply holding an investment for one year and one day instead of selling it earlier can reduce your tax rate by 9% or more. Understanding this difference can have a meaningful impact over time.
Where Tax Rates Are Headed
Looking back historically, today’s tax rates are relatively low. In 1970, the top marginal rate was 70%. Today, it’s 37%. With growing government obligations such as healthcare, defense, and debt service, it’s reasonable to expect that rates will rise over time rather than fall.
That makes today’s environment an opportunity for proactive tax planning.
If you expect to be in a lower bracket in the future, it may make sense to defer taxable income. If you expect to be in a higher bracket later, consider accelerating some income and paying tax now at a lower rate. In other cases, you can even find ways to avoid tax altogether, legally, through vehicles like Health Savings Accounts (HSAs), which offer tax-free contributions, growth, and withdrawals for qualified medical expenses.
With a foundation in tax planning and an understanding of brackets, we can now look at practical ways to make your retirement savings more tax-efficient.
Strategies for Tax-Efficient Retirement Savings
When it comes to saving for retirement, start by taking advantage of your employer’s match on a 401(k) or 403(b). This is essentially free money that you don’t get unless you participate.
Once you’ve captured the full match, consider contributing to an HSA if you’re eligible. This is one of the few accounts that completely avoids taxes. Contributions, growth, and withdrawals are all tax-free when used for medical expenses.
Next, consider a Roth IRA. Contributions are made with after-tax dollars, but growth and withdrawals in retirement are tax-free. Roth IRAs also offer flexibility; you can withdraw your contributions (but not earnings) anytime without penalty.
If you’re earning more and want to save aggressively, contribute up to the maximum in your employer’s plan. In 2025, that’s $23,500 if you’re under 50, and $31,000 if you’re 50 or older.
Choosing Between Pre-Tax and Roth Contributions
Which is better: pre-tax or Roth? It depends on your tax bracket and goals:
- In a low bracket (10–12%): Prioritize Roth contributions. You’ll pay minimal tax now, and your withdrawals will be tax-free later.
- In a mid-bracket (22–24%): Consider splitting contributions between pre-tax and Roth.
- In a high bracket (32% or more): Pre-tax contributions often make sense, as you get the deduction today and may withdraw later in a lower bracket.
Understanding the Timing of Tax Planning
Tax planning opportunities often arise during life transitions, moments when your financial picture changes. Recognizing these can create “aha” moments where thoughtful planning makes a big difference:
- Significant changes in income – Starting a new job, losing a job, or having your hours cut can present both challenges and opportunities for tax planning.
- Retirement or sale of a business – These major transitions often bring significant changes in income, making careful planning critical.
- Marriage or divorce – Filing status shifts can impact your tax brackets, creating opportunities depending on the timing of the event.
- Moving to another state – State income taxes vary. For example, moving to or from Washington, which has no state income tax, can open unique planning opportunities, such as accelerating income or executing Roth conversions before relocating.
- Starting Social Security or a pension – These decisions are mostly irreversible and can significantly affect taxable income. Thoughtful timing here can maximize benefits.
- Death of a spouse – While an emotionally difficult time, planning is crucial once things settle, as there are important opportunities for the surviving spouse.
- Receiving an inheritance – Inheritances often create complex planning possibilities, each unique to the individual circumstances.
Being aware of these transitions helps plant a seed for proactive planning. The timing of tax decisions can be just as important as the strategies themselves.
Portfolio Allocation and Target-Date Funds
Asset allocation is another part of tax-smart investing. Younger investors (who have time to weather market fluctuations) can afford to be more aggressive (e.g., 80% stocks, 20% bonds). As retirement approaches, gradually shift toward a more balanced or conservative mix.
For those unsure where to start, target-date funds offer a simple, diversified option. They automatically adjust the balance of stocks and bonds as you approach retirement, reducing risk over time.
Final Thoughts
Tax planning isn’t about chasing loopholes or squeezing out every dollar; it’s about aligning your financial strategy with your life goals. Understanding how taxes intersect with your investments, retirement savings, and estate plans allows you to make informed, confident decisions.
At HFG Trust, our goal is to help clients not only reach their financial goals but do so as efficiently as possible, reducing taxes and preserving wealth across generations.
If you’d like to explore how these strategies could apply to your situation, reach out to me at any time or click here to schedule a meeting.
Educational disclaimer: This material is for informational purposes only and is not legal, tax, or investment advice. It does not constitute a recommendation or a solicitation. Consider consulting appropriate professionals regarding your specific circumstances.
About the Author
K. Paul Hansen, CFP®, CPA
A long-time Tri-Cities resident, Paul Hansen brings more than 35 years of experience in accounting and finance to his role as a Financial Advisor at HFG Trust.
