Navigating retirement withdrawals is like playing chess with the IRS: every move counts, and strategy is everything.
With their substantial assets at stake, high-net-worth individuals (HNWIs) need more than a cookie-cutter approach to their retirement withdrawal strategy—they require highly customized plans that take advantage of all the tax code offers to help them preserve their legacy.
In this article, we unveil 10 tax-efficient tactics tailored for HNWIs. These tactics blend savvy timing, asset allocation, and lesser-known loopholes to keep more of your wealth where it belongs—in your pocket. Whether you’re eyeing philanthropy or generational wealth transfer, these strategies offer a roadmap to retire not just comfortably but triumphantly, outsmarting the tax code with every step.If you want a wealth advisor to tailor these strategies to your specific financial situation, please call ARQ Wealth at (480) 214-9572 or request a meeting for a free consultation.
Optimize Withdrawal Sequences in Retirement
Tax-efficient withdrawal strategies are critical for HNWIs to minimize taxes in retirement.
This involves carefully sequencing withdrawals from taxable accounts (e.g., brokerage accounts), tax-deferred accounts (e.g., traditional IRA or 401(k)), and tax-free accounts (e.g., Roth IRA) to manage your tax bracket and avoid additional taxes, such as the NIIT or Medicare premium surcharges.
By strategically withdrawing funds, you can avoid pushing yourself into higher tax brackets or triggering RMD-related tax spikes.
For example, withdrawing from Roth accounts during high-income years can reduce taxable income, while drawing from taxable accounts during low-income years can leverage lower capital gains rates. HNWIs with diverse income sources, such as rental income or dividends, can benefit from this tailored approach.
Key Considerations: Withdrawal strategies must account for RMDs, which begin at age 75 for traditional IRAs and 401(k)s. Failing to plan for RMDs can result in significant tax hikes. Additionally, tax laws may change, requiring ongoing adjustments to your withdrawal plan.
Leverage Roth Conversions During Low-Income Years
Converting parts of a traditional IRA or 401(k) to a Roth IRA can be a smart move for high-net-worth individuals.
Roth conversions involve transferring funds from a traditional IRA or 401(k) to a Roth IRA, paying taxes on the converted amount upfront, and allowing tax-free withdrawals later. This strategy works especially well during low-income years, such as early retirement before Social Security or required minimum distributions (RMDs) begin.
By converting strategically, you can manage your taxable income to stay within lower tax brackets.
Additionally, paying income taxes now lets you lock in current rates and avoid higher rates later. This method also helps manage RMDs because Roth IRAs aren’t subject to RMDs during your lifetime.
If you hold significant assets in traditional accounts, conversions can reduce the tax burden on your heirs, as Roth withdrawals are usually tax-free for beneficiaries. Learn more about the differences between pre-tax and Roth 401(k) to help select the best option for your portfolio.Key Consideration: The upfront tax cost of a Roth conversion can be substantial, especially for HNWIs with large account balances. Timing is critical. Converting too much in a single year could push you into a higher tax bracket or trigger additional taxes, such as the Net Investment Income Tax (NIIT). Partial conversions over multiple years can help manage the tax impact.
Utilize After-Tax 401(k) Contributions for Mega Backdoor Roth
If you have access to a 401(k) plan that allows after-tax contributions, the mega backdoor Roth strategy becomes a powerful tool.
This approach involves contributing after-tax dollars to your 401(k) beyond the pre-tax limit (up to $73,500 in 2025, including employer contributions) and then converting those funds to a Roth IRA, either through an in-service withdrawal or when leaving your employer.
The mega backdoor Roth allows you to contribute much more to a Roth IRA than the usual $7,000 annual limit (plus a $1,000 catch-up contribution if you’re over 50). After-tax contributions aren’t tax-deductible, but the earnings grow tax-free once they are converted to a Roth IRA, and qualified withdrawals are also tax-free.
This strategy is especially attractive for high-net-worth individuals who have maxed out other retirement plans and wish to grow larger tax-free savings. For more details, look into after-tax 401(k) contributions.
Key Considerations: Not all 401(k) plans allow after-tax contributions or in-service withdrawals, so you’ll need to confirm eligibility with your plan administrator. Additionally, the conversion process may generate taxable income if the after-tax contributions have earned investment gains before conversion. Proper execution is key to avoiding unexpected tax liabilities.
Minimize the Tax Impact of Required Minimum Distributions (RMDs)
RMDs, which are required from tax-deferred accounts like traditional IRAs and 401(k)s starting at age 75, can significantly boost taxable income. To reduce the tax burden, it’s wise to plan withdrawals carefully before RMDs begin. For instance, taking smaller withdrawals from these accounts early in retirement can lower the account balance that will be subject to RMDs, thereby decreasing future tax liabilities.
If you are philanthropically inclined, consider using Qualified Charitable Distributions (QCDs) to meet RMD requirements. QCDs enable you to donate up to $100,000 annually directly from your IRA to a qualified charity, excluding that amount from taxable income. This can be especially advantageous for high-net-worth individuals with philanthropic goals. A financial advisor can assist in incorporating QCDs into your retirement plan.
Optimize Your Lower Tax Brackets
Our tax system is progressive, meaning your income is taxed at lower rates first and then at higher rates. The main goal of this approach is to make the most of your lower tax brackets with your taxable income, while placing your tax-favored income in the higher brackets. Think of federal tax brackets as buckets you fill with income.
Since everyone has a standard deduction (if you don’t itemize), federal tax brackets start at 0 percent. In 2025, you won’t pay any taxes on your first $30,000 (or $15,000 for single filers). This is your first bracket, where you can place up to $30,000 of taxable income from IRA or 401(k) withdrawals.
The tax rates for the next two brackets—10% and 12%—are still low, so they can also be filled with taxable income. If you have income from a Roth IRA, it could fill the two brackets up to $96,950 and result in paying zero taxes on that amount.
If you have a taxable investment account, your threshold for capital gains taxes is $94,050 (for joint filers), meaning you can earn up to that amount before your gains are taxed. Above that amount, the capital gains tax rate is 15%, which is still a favorable rate.
So, conceivably, with the standard deduction ($30,000) and the 0% capital gains threshold ($94,050), a married couple could have up to $124,050 in income with no federal income taxes, assuming all income above the deduction comes from long-term capital gains or qualified dividends.
Harvest Capital Losses to Offset Gains
Tax-loss harvesting involves selling underperforming investments in taxable accounts to realize losses, which can offset capital gains and up to $3,000 of ordinary income each year. For high-net-worth individuals with large investment portfolios, this strategy can lower taxes on withdrawals from taxable accounts, especially when combined with gains from appreciated assets.
Key Considerations: Be aware of the IRS wash-sale rules, which can disqualify your loss from being used as an offset if you buy the same or identical security within 30 days after selling it. You can reinvest the proceeds from sold assets into similar (but not identical) investments to keep your portfolio balanced while still securing tax benefits.
Use Health Savings Accounts (HSAs) for Medical Expenses
With its unmatched tax advantages—tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses—a Health Savings Account (HSA) can act as a hidden retirement fund. For HNWIs facing high healthcare costs in retirement, HSAs offer tax-free funds for medical expenses, keeping other retirement accounts available for different needs.
However, once you turn 65, you can withdraw funds for non-medical expenses without penalty, but you will owe taxes on the withdrawals. In essence, an HSA invested in a diversified portfolio also functions as a stealth retirement savings account.
Key Considerations: To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP). It is essential to weigh the trade-offs of an HDHP, such as higher out-of-pocket costs, against the tax benefits of an HSA. Additionally, it’s essential to keep accurate records to document qualified medical expenses for tax-free withdrawals.
Use Charitable Giving to Reduce Taxable Income
Strategic charitable giving is a tax-efficient way to reduce taxable income while supporting causes you value.
Options include donating appreciated securities, establishing a donor-advised fund (DAF), or setting up a charitable remainder trust (CRT). Donating long-term appreciated assets, such as stocks or real estate, allows you to avoid capital gains taxes and claim a charitable deduction based on the asset’s fair market value.
Charitable contributions can lower taxable income, especially during high-income years like after selling a business or realizing substantial investment gains.
A DAF enables you to “bunch” donations into one year for a larger deduction while spreading out charitable gifts over multiple years.
A CRT provides income during your lifetime and a charitable deduction, with the remaining assets going to charity after your death.
These strategies can also help reduce exposure to the NIIT and lower your AGI, potentially unlocking other tax benefits.
Key Considerations: Charitable giving strategies need careful planning to maximize tax benefits while maintaining your financial security. For example, DAFs are irrevocable, so you must be okay with giving up control of the donated funds. CRTs involve complex setup and ongoing management costs.
Explore Cash Value Life Insurance as a Tax-Efficient Vehicle
Cash value life insurance policies, such as whole life or universal life, can serve as a tax-advantaged savings vehicle for HNWIs. Premiums paid into these policies grow tax-deferred, and policy loans or withdrawals can provide tax-free income in retirement.
Additionally, the death benefit can be a valuable tool for estate planning.
If you’ve maxed out other retirement accounts, cash value life insurance provides a flexible way to grow tax-advantaged wealth.
Policy loans are not taxed as income, offering liquidity during retirement. The death benefit can also help reduce estate taxes for heirs, making this a dual-purpose strategy for retirement and legacy planning.
Key Considerations: Cash value life insurance policies often come with high fees and require a long-term commitment to realize significant benefits. It’s essential to carefully evaluate the costs versus the tax advantages and make sure the policy aligns with their overall financial plan.
Coordinate Withdrawals with Social Security Timing
When you begin receiving Social Security, it may affect how your retirement withdrawals are taxed. Up to 85% of your benefits might be taxable if your total income exceeds $44,000 (for joint filers).
However, you can improve your tax efficiency by delaying benefits until age 70 to boost your lifetime payout and using withdrawals from your taxable or tax-deferred accounts to cover expenses early in retirement.
After your benefits begin, you can withdraw from your tax-free accounts (such as Roth or life insurance cash value) since they won’t count towards the Social Security tax.
Also, by tapping your tax-deferred funds (IRA, 401k) early, you can reduce the impact of RMDs when they start at age 75.
You Don’t Have to Go It Alone
Each of these tax-efficient retirement strategies requires careful planning to align with your income, assets, and long-term objectives. A financial advisor can:
- Model withdrawal scenarios to minimize taxes.
- Coordinate savings and withdrawal strategies to optimize growth and tax efficiency.
- Navigate complex tax laws, including those related to RMDs, Roth conversions, and state taxes.
- Integrate estate planning to ensure wealth preservation for heirs.
Without professional guidance, you risk overpaying taxes or depleting retirement funds prematurely. Schedule a consultation with a financial advisor to customize these strategies to your unique financial profile.
Bottom Line
For high-net-worth individuals, tax-efficient retirement withdrawal strategies are essential for preserving wealth and securing a financially stable retirement. These strategies provide effective tools to reduce income taxes. However, due to the complexities of tax laws and the significant stakes involved in managing large amounts of wealth, working with a wealth advisor is indispensable.
A professional can help you navigate the complexities of pre-tax vs. after-tax decisions, optimize retirement savings, and craft a withdrawal strategy that aligns with your lifestyle and legacy goals. Start the conversation with an ARQ Wealth advisor today to build a tax-efficient retirement plan that secures your financial future.