Tax-efficient withdrawal strategies can help high-net-worth families manage taxes, avoid Medicare surcharges, and support long-term legacy planning.
How retirees withdraw from their accounts can significantly influence long-term tax exposure, Medicare premiums, and legacy planning. Poor planning can create unnecessary costs and limit flexibility later in life. Some of the risks include:
A methodical approach to withdrawals in retirement can help cover spending needs while maintaining tax awareness. Below are some key strategies that affluent families often consider when designing a withdrawal plan.
Every withdrawal from a retirement account can push taxable income higher, and certain income thresholds can make those withdrawals far more expensive than expected. High-net-worth families need to be aware of three main “tripwires” before deciding how much to take out each year:
Required Minimum Distributions (RMDs): Under the SECURE 2.0 Act, retirees must begin taking mandatory withdrawals from traditional IRAs and 401(k)s at age 73 (rising to 75 for those born in 1960 or later). These withdrawals are taxed as ordinary income with amounts based on the total value of your retirement accounts, with larger balances leading to larger distributions. Planning withdrawals before required minimum distributions begin can help spread income more evenly across your lifetime. Taking large RMDs later in life can push income into higher tax brackets, while missing an RMD comes with stiff penalties.
Medicare premium surcharges (IRMAA): Medicare uses modified adjusted gross income (MAGI) to calculate Part B and Part D premiums. If income crosses certain thresholds, premiums jump sharply, not gradually. Going even one dollar over a threshold can result in hundreds or thousands of dollars in extra annual premiums. This makes it important to model how IRA withdrawals, capital gains, or Roth conversions will affect MAGI before taking action.
Net Investment Income Tax (NIIT): For households with significant taxable investments, the NIIT adds an extra 3.8% surtax on investment income when MAGI exceeds $200,000 for single filers or $250,000 for married couples filing jointly. Withdrawals from retirement accounts can push income over those thresholds, which in turn can make dividends, interest, and capital gains subject to the surtax.
Traditional guidance often suggests drawing first from taxable accounts, then tax-deferred, and leaving Roth accounts for last. While this provides a starting point, affluent families often benefit from a more flexible approach focused on reducing projected lifetime tax liability rather than simply minimizing taxes in any one year.
A common baseline includes:
The key is to revisit the withdrawal schedule annually, adjusting based on income, tax thresholds, and market conditions. A too-rigid approach can lead to avoidable surcharges or missed opportunities for lower-bracket withdrawals.
The years between retirement and the start of RMDs or Social Security often create an opportunity for Roth conversions. Converting during these years allows retirees to “fill” lower tax brackets with voluntary withdrawals, reducing the size of future RMDs and keeping later income levels more manageable.
Conversions must be approached carefully. Each dollar converted is treated as ordinary income, which can inadvertently push MAGI above IRMAA or NIIT thresholds. Running projections in advance — ideally looking at multiple years, not just the current one — helps retirees see whether a conversion will save taxes long-term or create unintended costs in the short-term.
Taxable accounts add another layer of complexity. Selling appreciated investments creates capital gains, which flow into MAGI calculations and can trigger both higher brackets and NIIT exposure.
One way to offset realized gains and keep income in check is through tax-loss harvesting. This involves selling investments that have declined in value to create realized losses, which can then be used to offset realized gains elsewhere in the portfolio. If losses exceed gains, up to $3,000 can be used to offset ordinary income each year, with the remainder carried forward indefinitely. This strategy helps reduce taxable income and may keep MAGI below critical thresholds.
Asset location also plays a role. Higher income producing investments, such as bonds, can be placed in retirement accounts where current income is not immediately taxable. More growth-oriented investments, such as equites, can be placed in taxable accounts, where gains can qualify for more favorable capital gains tax treatment. Roth accounts may also be reserved for growth-oriented assets, where tax-free compounding has the greatest impact.
By coordinating taxable withdrawals with asset allocation decisions, families can better manage tax implications while supporting spending needs and longer-term legacy objectives.
For charitably inclined families, QCDs provide a direct way to reduce taxable income. Starting at age 70½, an individual can donate up to $111,000 per year directly from an IRA to qualified charities. These distributions do not appear in AGI (Adjusted Gross Income) and can count toward satisfying RMDs once they begin.
Because QCDs lower AGI, they may also help limit exposure to IRMAA and NIIT, especially for families already giving to charity through other means. Unlike itemized deductions, which do not lower AGI and may not always produce a tax benefit, QCDs result in a direct exclusion of income from tax.
Some strategies apply specifically to retirees with significant assets in certain types of accounts.
Employer stock and Net Unrealized Appreciation (NUA): If company stock is held inside a workplace, there may be an opportunity to treat the growth in that stock differently for tax purposes. Normally, when funds are withdrawn from a traditional retirement account, the entire distribution is taxed as ordinary income at the retiree’s marginal tax rate. With NUA treatment, the original cost basis of the stock is taxed as ordinary income, but the appreciation that occurred while the stock was held inside the plan can be taxed later at long-term capital gains rates when the stock is sold. Since capital gains rates are often lower than ordinary income tax rates, this can reduce overall taxes on the shares. However, if the stock is rolled into an IRA, this option is lost, so timing and planning are critical.
Inherited IRAs: Rules around inherited retirement accounts have shifted under the SECURE Act. Most non-spouse heirs must now deplete inherited IRAs within 10 years, rather than stretching distributions across their lifetime. This change can create larger tax bills if withdrawals coincide with heirs’ peak earning years. Families may wish to consider which accounts — Roth or traditional — are most efficient to pass on, depending on heirs’ likely income levels and tax brackets.
Withdrawal planning is not a one-time exercise. Each year, families can project MAGI across all income sources — Social Security, pensions, dividends, and retirement withdrawals — and then compare those projections against bracket thresholds, IRMAA surcharges, and NIIT.
From there, they can decide how much to withdraw from IRAs or convert to Roth accounts, whether to harvest gains or losses in taxable accounts, and how to sequence distributions. Families who are charitably inclined may choose to execute QCDs early in the year to lower AGI before taking other withdrawals.
This “annual tax map” approach recognizes that circumstances change. Markets move, laws evolve, and family needs shift. Revisiting withdrawal decisions each year with a CPA, a tax planner, and a financial advisor helps keep the plan aligned with current realities.
Even families with well-structured portfolios can undermine their goals if withdrawal strategies are mishandled. Common pitfalls include:
Withdrawal planning involves weaving together tax brackets, Medicare thresholds, investment income, charitable goals, and legacy planning. For high-net-worth families, the stakes are particularly high because even small missteps can result in large, avoidable costs over time.
At EP Wealth, advisors who specialize in retirement planning can model projected income, test scenarios for Roth conversions, and weigh the impact of withdrawals against future RMDs and inheritance structures. They can also coordinate charitable giving strategies, evaluate employer stock treatment, and help align annual decisions with longer-term family goals.
Professional guidance can help families approach withdrawals with clarity and adapt to changes in tax law or personal circumstances. Contact an advisor near you to start the conversation.
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