Tax Alpha: How to save on taxes with multi-year tax planning

Eric’s Note: Be sure to read part two for additional tax planning ideas
Originally published at

Alpha refers to the extra return that an active investment manager adds beyond what you’d normally receive by using prudent asset class investments, re-balancing periodically, and staying globally diversified. In other words, it’s the possible extra return (or loss…) that’s achievable when you reach beyond prudent investing. As you’ve probably guessed, we advocate an evidenced based, prudent approach to money management.

However, we do think that strategic tax planning can produce “Tax-Alpha” for a portfolio. By keeping more of your money out of the hands of the tax collector, you can enhance returns and have more wealth for retirement and legacy goals.

Let me caution you that there are no silver bullets. It’s important to use a combination of strategies year after year so you grab all the “alpha” there is.

As we create financial plans, we have the following strategic goals when reviewing your tax situation:

  • Smooth out income before, during, and after retirement by either driving income down (or up) in certain years to take advantage of different tax brackets.
  • Fully utilize legal tax shelters. Statutory tax shelters allow for tremendous wealth accumulation when used effectively.
  • Consider income and taxation over a multi-year time frame.

Thinking about your tax moves for this year and the next are important and may have immediate tax benefits. Thinking about the taxes you’ll pay over the next 10-15 years allows for strategic thinking about gifting, IRA withdrawals, when to start receiving Social Security benefits, and so on.

Here’s a short checklist of tax items for you to think about both in a tactical sense (do it now!) and more strategically.

  • Boosting your income so that it at least equals your itemized deductions and personal exemptions, otherwise you lose these tax benefits.
  • Consider increasing your income to the top of the 15% bracket by using Roth conversions and gain harvesting to pay taxes at this low rate.
  • If you are in a 10% or 15% tax bracket, consider harvesting gains (creating income) since these are taxed at 0%, you essentially receive a tax-free step-up in basis.
  • Careful! increasing your income could cause Social Security benefits to become taxable and if pushed high enough, could increase Medicare part B & D premiums.
  • Consider bunching multiple years worth of gifts into one year, if you are otherwise making gifts but don’t have enough deductions to exceed the statutory standard deduction.

Generally speaking, if you are in a high income bracket you’ll want to harvest losses. The opposite is true if you are in a low income tax bracket. Gain harvesting may be a better strategy. Don’t forget that losses die with the account holder so develop a plan to use these up sooner rather than later.


A Roth account(s) is one of the most powerful tax tools available to you. While you don’t receive an immediate tax benefit for contributions or conversions, there are no required distributions and all future growth it tax-free when withdrawn

Roth’s are a crucial tax bucket for retirement. Coupled with 401k and 403b retirement accounts, traditional and rollover IRAs and regular brokerage account you have three distinct tax buckets from which to plan retirement withdrawals.

  • Roth accounts are completely separate from 401k and Roth 401k accounts. With earned income you can contribute up to $5500 per person or $6500 per person if over age 50.
  • If your income is over $181,000 (married filing jointly) or $114,000 (single filer), consider making contributions to a non-deductible IRA. Later, you can convert these non-deductible contributions to a Roth account but would pay not tax on the “basis” contributions. This strategy is often referred to as a back-door Roth contribution. (Caveat: This strategy is only available in special circumstances when there are no pre-tax IRA amounts. We have encountered situations where we can create these circumstances. Ask us for a review of your situation to see if this strategy can be employed.)
  • You can convert Traditional or Rollover IRA dollars to Roth IRA’s in partial amounts to reduce the size of an estate or income taxes paid by future beneficiaries. This is in itself a taxable event, but we can sometimes reduce or eliminate the additional taxes by incorporating other planning techniques.
  • Roth conversions can help you fill up income in a lower bracket and reduce future required minimum distributions out of traditional and rollover IRA’s.
  • You can convert on a per investment basis so long as each investment goes into a separate Roth IRA account. Doing so allows you to re-characterize (that is, undo the conversion) within a specified time frame. The benefit is that if an asset declines in value, it may make sense to re-characterize it rather than pay tax on the amount you converted because it’s now declined in value. Instead you re-characterize (undo the conversion) and queue it up for another conversion down the road. Clear as mud! If you do a Roth conversion and then re-characterize (undo it), you’ll have a different waiting period before you can convert the IRA again. This only applies to the accounts you’ve performed the conversion on…tread carefully in this area to avoid an inadvertent result.
  • Consider paying investment advisory fees for Roth accounts using outside assets. This in effect becomes another Roth contribution. On the other hand consider paying traditional and Rollover IRAs from within the account. These are small, but tax savvy, moves you can make.
  • Because future growth and eventual withdrawals are tax-free, consider holding your highest growth investments inside your Roth IRA. Consider placing income investments inside traditional and rollover IRAs. Since withdrawals from these accounts are taxable we want less growth versus the Roth money.
  • Roth’s are excellent accounts to leave for beneficiaries

Note: Roth 401ks DO have required minimum distributions, but these can be removed by moving transferring these assets to a Roth IRA before age 70 1/2.

About the author

Eric J. McClain, CFP®


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