The team that surrounds each client at Carlson Capital Management takes a highly strategic approach to wealth management—one that integrates the disciplines of investment, tax, retirement, estate, insurance, and philanthropic planning. Our affiliated firm, CCM Tax & Trust Administration, prepares over 1,400 tax returns each year, but we deliver the most value to our clients when working in collaboration with colleagues across the firm to provide proactive, comprehensive tax planning. Time and time again, our clients derive significant value in our tax bracket management planning—especially in the years leading up to retirement through the point where required distributions (RMDs) from tax deferred retirement accounts begin (at age 73 or up to age 75, depending upon birth date).

 What is Tax Bracket Management?

At its core, tax bracket management it is about minimizing tax liabilities over a lifetime to maximize after-tax returns, which become available for your recurring spending needs or to pass along to your heirs. With a robust knowledge of tax law and the depth of the tax brackets, along with a keen understanding of our clients’ cash flow, estate, and philanthropic goals, we’re able to recommend strategies that best support their goals, while smoothing out and minimizing their lifetime tax experience by moving income from higher income years to lower income years, and deductions from lower income years to higher income years.

A Tax Bracket Management Case Study

The chart below represents a common example of an opportunity available when a client retires and, due to their age, isn’t yet required to take Social Security or RMDs. During these years (2024-2027 in the example), there is a significant tax opportunity to accelerate some income to take full advantage of lower tax rates.

In this example, it’s determined through tax planning and coordination with our integrated team that executing a Roth conversion will be advantageous—in other words, taking a distribution from a traditional IRA and rolling it over to a Roth IRA to create a taxable event. By accelerating income in lower income years, and paying taxes at a lower rate, we’re able to flatten out peak tax years, paying less in overall lifetime taxes.

Although the strategy itself is fairly straightforward, it must be thoughtfully considered for each client’s unique circumstances. Considerations must include the tax rate differential, the effective rate of paying for a Roth conversion now versus what it might be in the future, as well as the time horizon for tax-free growth of the Roth IRA. Our team is here to provide customized recommendations in partnership with your primary advisor at CCM, and we look forward to those conversations.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.