Tax Planning
It’s Not Just What You Make. It’s What You Keep.
There is a silent partner in your retirement plan and you did not invite them. But every time you make a financial decision from selling a stock, withdrawing from an IRA or even passing money to your children this partner steps in and demands a cut.
That partner is the IRS. Most investors spend their working lives obsessed with "The Number" - the rate of return on their investments. They watch the markets, check the S&P 500 and celebrate when their portfolio hits a new high. But they often miss the leak in the bucket. They focus entirely on growing the pile, ignoring the fact that a significant portion of that pile may never actually belong to them.
At Baxter & Associates, our philosophy is clear: We want your holdings to grow, but we don’t want you to pay for it in unnecessary taxes.
Wealth management is not just about investment selection. It is about tax efficiency and creating a blueprint that allows you to control when and how you pay taxes, rather than letting the government dictate those terms for you.
Here is how we approach tax planning, and why it is a critical pillar of your financial home.
The Difference Between Tax Prep and Tax Planning
Before we look at the strategies, we need to make an important distinction. Many new clients tell us, "I don't need tax help; I have a great CPA who does my taxes every April." We have great respect for CPAs but there is a fundamental difference between what they do and what we do.
Tax Preparation is about history. It is recording what happened last year. It is compliance. You hand over your proof of income and receipts and the CPA tells you what you owe based on decisions you have already made. By April 15th, the damage is done.
Tax Planning is about the future. It is looking at the windshield, not the rearview mirror. It involves making strategic decisions today - about which account to pull money from, which assets to sell and how to structure your income to minimize the bill you will receive three, five, or ten years from now.
You need both. But you cannot rely on a tax return to solve a tax problem. You need a plan.
The Three Buckets: Understanding Asset Location
In real estate, the three rules are "Location, Location, Location." The same is true for your money.
Many investors treat all their accounts the same. They buy the same mutual funds in their IRA, their 401(k) and their brokerage account. From a tax perspective, this is inefficient. Different accounts have different tax rules and placing the right asset in the right "bucket" can save you thousands over your lifetime. We organize your wealth into three distinct categories:
The Taxable Bucket (Brokerage Accounts)
This is money you have already paid income tax on. You put it in the bank or a brokerage account.
The Rules: You pay taxes annually on interest and dividends. When you sell an asset for a profit, you pay Capital Gains tax.
The Strategy: This is often the best place for "efficient" investments - stocks that don't pay high dividends but grow over time. Why? Because you only pay tax when you sell. It gives you control. It is also where we look for "Step-Up in Basis" opportunities for your heirs.
The Tax-Deferred Bucket (Traditional IRAs, 401(k)s)
This is where most Americans have the bulk of their wealth. You got a tax break when you put the money in.
The Rules: The money grows tax-free for now. But there is a catch. When you take the money out, every single dollar is taxed as Ordinary Income - the highest tax rates in the code.
The Strategy: This bucket is a ticking clock. The government eventually forces you to take this money out (Required Minimum Distributions). Our goal here is often to manage the size of this bucket so it doesn't push you into a higher tax bracket later in life.
The Tax-Free Bucket (Roth IRAs, Roth 401(k)s)
This is the gold standard. You paid tax before the money went in.
The Rules: It grows tax-free. You take it out tax-free. The IRS gets nothing.
The Strategy: We want to maximize this bucket whenever possible. It provides a hedge against future tax rate increases. If taxes go up in 10 years, your Roth IRA doesn't care.
IRA Planning: Managing the "Tax Time Bomb"
For many successful savers, the Tax-Deferred bucket (Traditional IRA/401k) becomes a problem. It sounds strange to call a large retirement account a "problem," but structurally, it can be.
Imagine you have saved $2 million in your 401(k). You retire. You also have Social Security and perhaps a pension.
At age 73, the IRS mandates Required Minimum Distributions (RMDs). You must withdraw a percentage of that account, whether you need the cash or not. That withdrawal is added to your Social Security and pension. Suddenly, your taxable income spikes.
This can trigger a domino effect:
It pushes you into a higher marginal tax bracket.
It can cause your Social Security benefits to be taxed at a higher rate.
It can trigger "IRMAA" surcharges, doubling or tripling your Medicare premiums.
This is the "Tax Torpedo." At Baxter & Associates, we look at these years in advance. We might recommend several options including Roth Conversions.
This involves voluntarily moving money from the Tax-Deferred bucket to the Tax-Free (Roth) bucket in years where your income is lower (perhaps after you retire but before Social Security kicks in). Yes, you pay tax on the conversion now. But you pay it at a known, lower rate today to avoid being forced into a massive tax bill at age 75. We are essentially "filling up" your lower tax brackets to defuse the tax time bomb.
Low-Burden Tax Categories: Not All Income is Created Equal
If you earn a dollar from a paycheck, the IRS might take 37 cents. If you earn a dollar from a long-term investment, the IRS might only take 15 or 20 cents. Understanding this distinction is key to preserving wealth.
Ordinary Income: This is wages, interest from bonds, and withdrawals from Traditional IRAs. These are taxed at your marginal rate, which can be high.
Long-Term Capital Gains: This is profit from selling an asset (like a stock or real estate) held for more than a year. The U.S. tax code incentivizes investment, so these rates are significantly lower (0%, 15%, or 20%).
The Strategy: We structure your "Taxable Holdings" to generate Capital Gains rather than Ordinary Income.
For example, if we buy a corporate bond in your brokerage account, the interest is taxed at your highest rate. That is inefficient. We might move that bond to your IRA (where the tax is deferred) and buy a growth stock index in your brokerage account. If the stock grows and we sell it later then you pay the lower Capital Gains rate.
By simply swapping the location of those two assets, we haven't changed your risk or your return potential but we have significantly increased your after-tax return.
Tax-Loss Harvesting
Even in a great investment plan, markets can go down. Some investments will lose value. In a taxable account, a loss is an asset if you know how to use it.
Through Tax-Loss Harvesting, we can sell an investment that is down to realize a "capital loss." We then immediately replace it with a similar (but not identical) investment to keep your market exposure the same.
Why do this?
1) You can use that loss to offset other capital gains (canceling out taxes on winners).
2) If you have more losses than gains, you can use up to $3,000 of the loss to offset your Ordinary Income (your wages or IRA withdrawals).
3) Unused losses carry forward to future years.
It is a way of using market volatility to lower your tax bill. It requires active management and careful monitoring of "wash sale" rules, which is why it is difficult for the average investor to execute correctly on their own.
Legacy Planning: The Rules Have Changed
Most of our clients want to leave something behind. Whether it is for children, grandchildren or charity, you want your legacy to be a blessing, not a burden.
Recent legislation, specifically the SECURE Act, has fundamentally changed how you pass money to the next generation. The "Stretch IRA" is effectively dead.
Previously, if you left a $1 million IRA to your daughter, she could take small distributions over her lifetime, letting the account grow tax-deferred for decades. Now, most non-spouse heirs must drain that entire account within 10 years.
If your daughter is in her peak earning years (ages 40-60) when she inherits, adding a huge IRA distribution on top of her salary could push her into the highest tax bracket. She could lose 40% or more of your legacy to federal and state taxes.
The Solution: Strategic Asset Placement
We look at which assets you leave to whom.
Step-Up in Basis: Assets in your Taxable Bucket (brokerage/real estate) receive a "step-up" at death. If you bought a stock for $10 and it's worth $100 when you die, your heir's cost basis becomes $100. They can sell it immediately and pay zero capital gains tax. This is often the best money to leave to individuals.
Charitable Intent: Charities do not pay taxes. If you leave your IRA to a charity, they get 100 cents on the dollar. If you leave the IRA to your kids, they might get 60 cents on the dollar.
We help you map out your beneficiaries to ensure the most tax-efficient assets go to your family, and the most tax-heavy assets go to entities that are exempt.
Why Professional Guidance is Essential
You might be thinking, "This sounds logical. Can't I just use software to do this?" Tax software is great for filling out forms.
It is terrible for complex decision-making. Software does not know that your daughter is planning to start a business next year and will have a low-income year ideal for inheriting IRA money. It doesn't know that you plan to move to a state with no income tax in five years, making it smarter to delay realizing gains until then.
Tax planning is not a math problem; it is a life problem involving moving parts that change every year.
At Baxter & Associates, we work in tandem with your CPA. We speak their language and we advocate for your future. We provide the pro-active strategy - the Roth conversions, the harvesting, the asset location that ensures when tax season arrives, you are in the strongest possible position.
Your Next Step
If you are looking at your retirement accounts and wondering if you are sitting on a future tax liability, let's have a conversation. You can call our offices today to schedule a time to meet! You worked hard for your money. Don't leave a tip for the IRS.