Tax Efficient Strategies For High Net-worth Individuals

Tax financial situations and higher tax liabilities, high-net-worth individuals (HNWIs) should employ tax strategies to help preserve and grow their wealth. HNWIs have substantial holdings and at least $1 million in liquid or investible assets, including cash, stocks, bonds, mutual funds, real estate, and business investments. By leveraging trusts, charitable giving, and other proactive tax planning techniques, HNWIs can manage their tax responsibility on diverse income streams and estates. A financial advisor with a keen understanding of tax codes and implications can help HNWIs maximize the advantages and minimize the risk of their assets. Here are some ways HNWIs can potentially reduce taxes, promote financial growth, and effectively pass on their wealth to future generations.

Maximize Contributions to Tax-Advantaged Retirement Accounts

Digital wealth management company, Empower, reported that millionaires have more than half of their total net worth in retirement accounts. Tax-advantaged retirement accounts like 401(k)s and Individual Retirement Accounts (IRAs) allow interest to compound while gains are deferred. The pre-tax contributions that fund these accounts also reduce taxable income. While tax applies to withdrawals from these accounts, typically, withdrawals happen in retirement when a lower tax bracket applies. The Internal Revenue Service (IRS) retirement contribution limits for 2025 are $23,500 for 401(k) plans, an additional $7,500 catch-up contribution for individuals ages 50 and above, and $7,000 for IRAs. The catch up could be $11,250 instead of $7,500 for individuals 60-63 if their plan allows it.

Roth IRA conversions are a strategy many investors use to plan for taxes in retirement. By transferring money from a traditional retirement account to a Roth IRA, individuals can pay taxes on the conversion amount the year of the transfer and add it to their taxable income. For HNWIs, this would ideally happen when they are in a lower tax bracket. Roth IRA funds then grow tax-free, and qualified retirement withdrawals are exempt from taxes assuming all qualifications are met. However, because of Roth IRA income limitations, HNWIs cannot typically contribute directly to them. With that said, there are a few other ways to build Roth dollars. Examples include a “Backdoor” Roth IRA strategy or Roth 401k contributions for those that have access. 

Invest in Municipal Bonds

HNWIs seeking tax-efficient income streams may choose to invest in municipal bonds or Municipal Bond funds. Also called “tax-exempt” bonds, these financial instruments generate interest income that is generally spared from federal income taxes and in certain situations, state and local taxes.

Utilize Trusts for Asset Protection and Tax Minimization

Trusts offer HNWIs a strategic way to safeguard assets against lawsuits, creditors, and estate taxes. Irrevocable trusts remove assets from an individual’s taxable estate, reducing tax exposure. Other trusts with tax advantages include grantor-retained annuity trusts (GRATs), charitable trusts, and dynasty trusts. HNWIs can benefit from trusts in the following scenarios: estate planning, business succession, philanthropic efforts, and asset protection. Trusts can avoid probate and smoothly usher assets to beneficiaries and future generations with minimal tax liabilities.

Engage in Strategic Charitable Giving

Charitable contributions allow HNWIs to align their philanthropic goals with prudent, tax-savvy financial planning. Qualified charitable contributions (QCDs), donor-advised funds (DAFs), and charitable remainder trusts (CRTs) can provide tax deductions and lower taxable income. QCDs permit direct transfers from retirement accounts to charities, and they can satisfy required minimum distributions (RMDs) without increasing taxable income. DAFs allow donors to distribute funds over time but grant immediate tax relief. CRTs initially generate income for benefactors or their beneficiaries and eventually sponsor charitable organizations.

Implement Tax-Loss Harvesting

Selling investments at a loss to offset capital gains elsewhere in a portfolio decreases taxable income. HNWIs can use this strategy, known as tax-loss harvesting, for tax relief and enhanced after-tax returns. If one’s capital losses exceed the gains, they can deduct up to $3,000 from other income. Remaining losses can be carried forward indefinitely to offset future gains. Individuals can delay tax payments by strategically realizing losses while deferring gains, allowing deferred amounts to compound with future investments. Using this strategy, individuals can earn returns on funds that otherwise would have been used to pay taxes. Certain restrictions apply, such as the wash-sale rule, which prohibits a loss deduction with a repurchase of the same or “substantially similar” security within 30 days before or after the sale.

Consider Separately Managed Accounts (SMAs)

SMAs are professionally managed portfolios of individual securities which can potentially benefit HNWIs. They offer direct ownership, flexible investment strategies, and potential tax benefits. Because top-tier investment professionals often oversee SMAs, HWNIs can receive high-quality portfolio management tailored to their needs and goals. For example, a wealthy investor seeking steady income and long-term appreciation might open a dividend growth SMA, focused on dividend-paying stocks.

Work With a Financial Advisor

Many HNWIs already have financial advisors to help them oversee their considerable assets, but their value cannot be overstated. Financial advisors help HNWIs optimize their portfolios and help preserve their wealth with managed risk and tax burden. They can assist with offsetting capital gains tax rates, employing overlay strategies, and many other tax-planning practices.

HNWIs rely on tax planning and investment strategies to continue to grow their fortune and nurture their long-term goals for themselves, their beneficiaries, and their legacy. Financial and tax professionals can provide customized strategies for individual circumstances in compliance with today’s tax laws. If you are an HNWI with questions about your portfolio, contact an SHP Financial advisor today for a complimentary review of your finances.