Tax, Income & Estate Planning for Pre-Retirees with Significant Wealth

A centuries-old proverb that begins, “For the want of a nail,” illustrates how a seemingly minor act or oversight can set off a chain reaction, resulting in unexpected, life-altering consequences: “For the want of a nail, the shoe was lost. For the want of a shoe, the horse was lost,” etc. The progression ultimately leads to the loss of a kingdom.

The same principle applies to high-net-worth (HNW) individuals with substantial wealth, who overlook the importance of a comprehensive financial strategy. Significant assets demand a sophisticated approach that combines tax planning, legal tools, and long-term goals. As HNW individuals near retirement, they must carefully consider how taxes, income timing, and legacy transfer methods intersect. This interconnected planning is essential for safeguarding wealth and ensuring future wishes are met. Through income, withdrawal, tax, and gifting strategies, as well as financial tools like Roth accounts and trusts, HNW individuals can help protect their wealth and efficiently transfer it.

Tax-Smart Retirement Income Strategy

Tax exposure can erode the savings of even the wealthiest households. A well-structured income plan helps manage both current and future tax exposure. In retirement, income shifts from salary to portfolio distributions, which may include distributions from tax-deferred accounts. HNW individuals may earn additional income from post-tax investments, businesses, and/or real estate. Tax brackets can change. Here are a few ways HNW households can manage income and tax bracket shift.

• Consider tax diversification when withdrawing to avoid unnecessary income bumps. Understand the short- and long-term impact of distributions from tax-deferred IRAs, Roth accounts, and taxable brokerage accounts.
• Explore income strategies such as Municipal bonds that can increase the tax efficiency of your portfolio.

• Plan for required minimum distributions (RMDs). A surge in required withdrawals can increase taxable income.  

Wealthy pre-retirees should model their income over several years, tracking state tax exposure, investment growth, and how tax brackets might evolve. Elevated foresight helps to manage taxes regardless of the future tax regime.

Roth Conversions: A Powerful, But Nuanced Tool

Converting tax-deferred retirement assets into a tax-free Roth account can be highly beneficial. Roth conversions allow individuals to pay tax today and then benefit from tax-free growth and withdrawals later. However, the results depend on smart timing and thoughtful tax-bracket management.

Wealthy pre-retirees often hold large tax-deferred accounts that could push heirs into much higher tax brackets under the SECURE Act’s 10-year distribution rule. A Roth conversion can shift assets into a more tax-efficient legacy vehicle by lowering future taxable income and aiding multi-generational wealth transfer. While paying tax upfront may seem costly, doing so ensures heirs receive Roth distributions tax-free, increasing the long-term, after-tax value of inherited assets.

Legislative changes also influence strategy. Beginning Jan. 1, 2026, under SECURE 2.0, high-income employees over 50 must make certain catch-up contributions on a Roth (after-tax) basis. Direct Roth IRA contributions remain subject to income phase-out limits. For HNW clients, these thresholds typically necessitate careful planning for conversions rather than direct contributions.

Other considerations:

• To maximize efficiency, it is often beneficial to pay the conversion tax with non-retirement assets. This can preserve portfolio value and avoid tax bracket shift.
• Monitor income events such as business sales, property transactions, or large capital gains, which can impact taxation.
• Recognize that conversion timelines and withdrawal rules (including the five-year rule) still apply and should fit into a coordinated plan.

Implementing conversions gradually through a multi-year strategy can help control taxes today, reduce large future taxable distributions, and increase flexibility in both income planning and wealth transfer.

Income Bracket Management and Withdrawal Sequencing

HNW clients must pay special attention to how withdrawals, asset sales, and distributions interact with tax brackets, Medicare surtaxes, and other tax buckets. Here are some important action points:

• Monitor the progression of income placement. HNW clients who fail to fill lower brackets can face much higher taxes later.
• Consider the sequence: Understand the impact of tapping into taxable account assets first, compared to tax-deferred, and preserving Roth funds for later flexibility. Please note that the ideal withdrawal sequence varies from person to person.
• Analyze other triggers: A large business or real estate sale, or a one-time capital gain, may cause an income spike and impact tax rates and/or Medicare surcharges.

Pre-retirees with significant taxable income streams (dividends, business income, rental properties), who are proactive about withdrawals and conversions, can often preserve more after-tax wealth.

Gifting, Trusts, and Estate Transfer for Legacy Goals

Wealthy individuals looking to transfer assets to heirs or charitable causes should align their legal, tax, and generational planning with their intended legacy. The following approaches can support a more efficient and intentional transfer strategy.

• Gifting: Gifting early removes future appreciation from an individual’s estate, allowing tax-efficient growth. For 2025 and 2026, the annual gift exclusion is $19,000 per recipient ($38,000 for married couples). The lifetime gift and tax exemption for 2025 stands at about $13.99 million ($15 million in 2026) per individual (indexed).
• Trusts and Legal Structures: Irrevocable trusts (such as a spousal lifetime access trust (SLAT), or an ILIT) give a benefactor control over distribution timing and asset use, while removing assets from their taxable estate.
• Estate Tax Awareness: The top federal estate tax rate is currently 40% above the exemption. Only a small percentage of estates pay federal tax (the top 10% of earners pay about 90% of estate tax). However, individuals with significant asset bases cannot ignore the exposure. The exemption levels may change in the future, so protective planning is essential.

For HNW individuals, a robust financial plan is the proverbial nail that will save the kingdom. This includes a thoughtful income-tax strategy that considers the timing and mechanics of conversions and withdrawals. An integrated approach to tax, legal, and successor-generation planning can help protect your legacy while preserving flexibility. For more information on the SHP Retirement Road Map® and how to apply these strategies to your situation, contact an SHP Financial advisor today for a complimentary review of your portfolio.