How Tax Planning Can Accelerate Wealth Building

Proactive tax planning can help you build wealth faster, allowing you to keep more of what you earn. Strategically using tax-advantaged accounts, meanwhile, can help secure a successful retirement. And when it’s time to leave a legacy for the next generation, tax optimization can make your estate plan more effective.

At Badgley Phelps, we are not tax professionals. However, our wealth managers and financial planners can help ensure that tax optimization is integrated with your long-term financial strategy by working in partnership with your CPA.

Our team can offer tax insight into four key areas: retirement accounts, investment strategies, philanthropic goals, and estate planning. In this article, we’ll discuss each of these, looking at actionable strategies that may benefit your tax situation.

Retirement Accounts: Optimizing Contributions & Withdrawals 

Tax-advantaged retirement accounts can be powerful tools to help build long-term wealth. Haphazard planning, however, can blunt their effectiveness. To avoid missing out on potential savings, a comprehensive retirement account strategy that covers contributions and withdrawals is key.

In your contributing years, deciding between traditional accounts (funded with pre-tax dollars) and Roth accounts (post-tax) depends on several variables. To weigh the trade-offs, our financial planners work with clients to evaluate factors like current tax rates, expected future tax rates, and income needs in retirement. While Roth IRAs typically come with income limits, certain strategies may allow you to contribute at any earning level.

During retirement, active tax planning can help optimize your withdrawals from these accounts. Roth conversions from a traditional IRA account to a Roth IRA, for instance, can ‘lock in’ tax payments during the beginning years of retirement when often, tax brackets are lower. Doing so can also help avoid unneeded Required Minimum Distributions (RMDs) in the future.

Finally, the advantages of Health Savings Accounts (HSAs) as a tax-advantaged account are often overlooked. Funds in a HSA come with a rare triple tax benefit if used to pay for qualified medical expenses: pre-tax contribution, tax-free growth, and tax-free withdrawal. Moreover, you can use HSAs to reimburse yourself decades into the future—just make sure to save your receipts. 

Investments: Tax-Smart Strategies 

Investors often prioritize their portfolio’s top-line returns, but what really impacts your bottom line are the returns you retain after taxes. Municipal bonds can be a tax-advantaged way to supplement your fixed-income allocation. Since these securities are issued by state and local governments, they are typically exempt from federal taxes. Depending on your tax rate, the lower headline yields on municipal bonds can potentially result in a superior post-tax return.

An asset’s post-tax return can also be impacted by the account that it’s held in, a concept known as ‘asset location.’ For instance, high cash-flowing investments are generally best held in a qualified retirement account, which does not owe taxes on interest or dividend income. Similarly, it can be possible to hold shares of high-growth investments in a Roth IRA, potentially reducing your future tax liability substantially.

Within taxable investment accounts, strategies like tax loss harvesting can help minimize your tax burden. By selling shares of poorly performing assets, investors can accumulate capital losses that can be carried forward indefinitely to offset future gains. Moreover, the sale proceeds can be reinvested into similar (but not identical) assets to keep your portfolio properly allocated. 

Philanthropy: Maximizing Your Impact

Clients often have the admirable goal of giving back through philanthropy. Tax planning can be an invaluable tool in this process, aligning your charitable giving with your income while maximizing the impact of your donations.

Gifting appreciated stock to a charity, for example, is often a more optimal choice than gifting cash directly. Non-profit organizations that qualify as a 501(c)(3) can sell stock without incurring capital gains tax. As a result, this strategy can increase your overall gift by way of avoiding a personal tax liability upon selling shares if the qualified charity you are donating to accepts shares in kind.

For individuals who plan to give charitably over many years, vehicles like a donor-advised fund (DAF) can potentially offer significant tax benefits. By establishing a DAF, donors can claim a substantial tax deduction in the current year, while either deciding upon who to donate funds to over time, or spreading donations across many years. Given the historically high standard deduction level in recent years, this allows individuals to “bundle” multiple years of gifting into a single year to maximize their charitable deductions. 

Finally, charitable giving can also be an effective tool to offset Required Minimum Distributions (RMDs) from an IRA. Over the age of 70 ½, the IRS allows you to make Qualified Charitable Distributions (QCDs) directly from your IRA to a qualified charity (up to an annual limit of $108,000 in 2025). Once you are required to make distributions from an IRA after attaining age 73, if you don’t need to use these funds to pay for living expenses, philanthropy can help give something back to your community while also easing your tax burden. Any amount given to charity as a QCD can be excluded from your ordinary income.

Estate Planning: Leaving a Legacy

Tax planning isn’t just about building wealth; it’s also about preserving that wealth for the next generation. While we encourage clients to speak with tax professionals and estate attorneys to establish a formal estate plan, Badgley Phelps can provide insight on tax optimization of the inheritance process.

Aside from pure tax considerations, it is important to start the estate planning process with a long-term financial plan that can inform various estate and gifting strategies. A comprehensive financial plan can help clients determine what amounts they can realistically gift to their heirs or to charity and what they may seek to shelter from unnecessary taxes. While lifetime giving can be an effective strategy, it can also derail retirement plans if mismanaged.

In addition to Federal Estate taxes, certain states impose their own estate tax, which may require additional planning. For example, Washington State imposes estate tax on individuals with estates exceeding $2,193,000 in 2025. While strategies such as lifetime gifting or certain trust structures can reduce an individuals’ estate, it’s important to implement careful planning as to not jeopardize one’s own lifestyle or retirement.  

Where it is recommended, many clients also prefer to give to heirs during their lifetime. There are a myriad of tax-efficient strategies to help optimize this process, from gifting appreciated stock to children to front-loading a 529 plan with up to five years of contributions. Because increased gift tax exemptions are currently set to expire at the end of 2025, we encourage clients to reach out soon to discuss lifetime giving strategies.

Conclusion: An Ounce of Planning

These strategies reflect just a small sample of the tax optimization work Badgley Phelps provides for our clients. In conjunction with a client’s tax professionals, we strive to integrate tax planning across all facets of wealth management. With tax rules constantly evolving in the current political environment, we stay at the forefront of these changes so that our clients don’t have to.

Tax planning is a long-term process, and it can often fall by the wayside due to day-to-day concerns. But when it comes to building long-term wealth, effective tax planning is one of the best investments you can make. By starting this process early, you can avoid unnecessary headaches and complexity years in the future. 

If you’re a current client interested in discussing tax strategies tailored to your goals, we invite you to contact your relationship manager. For prospective clients curious to learn more about Badgley Phelp’s full suite of capabilities, we encourage you to contact us today.