It’s natural to focus on returns.
Portfolio performance is visible and easy to track. It’s often the number that greets you in bold green or red as soon as you log into a brokerage app.
That oversight can have meaningful consequences over time.
Two investors can own identical portfolios, earn the same returns, take the same amount of risk, and stay invested for the same length of time. Yet one may retire with substantially more spendable wealth than the other.
One important difference can be tax strategy.
There’s a term often used to describe the value created by managing those dynamics well: tax alpha. While investment alpha generally refers to returns above a benchmark, tax alpha describes the potential after-tax value created through thoughtful planning around income, investments, and timing.
For high earners, tax planning is one area where thoughtful decisions may improve after-tax outcomes without requiring a prediction about what markets will do next.
Let’s explore four potential sources of tax alpha: strategic asset location, Roth IRA conversions, tax-loss harvesting and gain timing, and philanthropic planning. Used together, these tax planning strategies may help improve long-term after-tax wealth.
Why Tax Alpha Matters More as Wealth Grows
Early in your career, tax planning can be relatively straightforward. Income comes primarily from a paycheck, retirement contributions are automated, and investment balances may not generate significant taxable income.
As wealth grows, so does complexity.
You might accumulate assets across taxable brokerage accounts, 401(k)s, IRAs, Roth accounts, deferred compensation plans, and company stock. Then, retirement planning shifts from accumulation to distribution.
At that point, wealth management involves looking beyond gross returns to consider after-tax outcomes as well. The larger the portfolio, the greater the potential for small tax efficiencies to compound over time.
Pillar #1: Strategic Asset Location
Investors are typically familiar with asset allocation. Asset location receives far less attention.
Asset allocation determines what you own. Asset location determines where you own it.
High earners typically hold assets across several account types: taxable brokerage accounts, traditional IRAs, Roth IRAs, 401(k)s, HSAs, and so on. Each has a very different relationship with the IRS. Strategic asset location is the process of matching investments to the accounts where they can be held most efficiently.
The Three Buckets
Broadly speaking, most investment accounts fall into one of three categories.
- Taxable accounts (your brokerage or revocable trust) are subject to ongoing taxation on dividends, interest, and realized gains. However, long-term gains may receive preferential tax treatment, losses may be available to offset certain gains or income, and many assets may receive a step-up in basis at death.
- Tax-deferred accounts (traditional IRAs, 401(k)s, and SEP-IRAs) allow investments to grow without annual taxation, but taxable withdrawals are generally taxed as ordinary income. There’s no step-up in basis, no loss harvesting, and eventually, required minimum distributions (RMDs) generally begin once applicable age requirements are reached.
- Tax-free accounts (Roth IRAs and Health Savings Accounts) are funded with after-tax contributions, but qualified withdrawals can be federal income tax-free. Roths are not subject to RMDs during the original owner’s lifetime. An HSA, used strategically, offers a rare triple benefit: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.
What Goes Where and Why
The principle is simple: match the tax character of an investment to the tax character of the account.
Bonds, REITs, and high-turnover actively managed funds may generate income that is taxed at ordinary income rates. Depending on an investor’s circumstances, holding less tax-efficient investments within tax-deferred accounts such as IRAs and 401(k)s may reduce the annual tax drag on the portfolio.
Broad-market equity index funds can be relatively tax-efficient because of their generally lower turnover and potential for long-term capital gains treatment. That can make taxable brokerage accounts one potential location for these investments, depending on the investor’s broader portfolio and tax situation.
Assets with greater expected long-term appreciation may be candidates for Roth accounts, where qualified future withdrawals can be tax-free.
Pillar #2: The Roth Conversion Window
Roth conversions seem, at first glance, like a strategy for people with modest incomes. You convert money from a traditional IRA to a Roth, recognize taxable income on the conversion today in exchange for the potential for future qualified withdrawals to be tax-free. The obvious question for a high earner is: why would I pay now when I might pay less later?
The answer depends on the individual’s current and expected future tax situation.
Here’s the trap: decades of 401(k) contributions and IRA rollovers accumulate into a large pre-tax balance. Once RMDs begin, the IRS mandates withdrawals based on account balance and life expectancy. For those who have saved diligently, those distributions may increase taxable income in retirement alongside Social Security, pension income and investment earnings. Those distributions can create unenviable tax bills.
A Roth conversion may allow investors to address part of that future tax liability on their own timetable.
When the Window Opens
Certain periods may create opportunities for Roth conversions. For high earners, that might include:
- Lower-income years (e.g., sabbatical, medical leave, or job transition)
- An early retirement period, before Social Security and RMDs begin
- A year with significant business deductions or losses that compress taxable income
- A year in which a large charitable contribution (via a donor-advised fund, discussed below) may provide a charitable deduction in the same year as a conversion
During these lower-income periods, it may be possible to move money into a Roth while paying taxes at a lower rate than would otherwise apply later in retirement. One approach is to convert strategically over multiple years, filling tax brackets deliberately rather than triggering a spike.
Consider a couple who retires at age 62 and delays Social Security until age 70. For nearly a decade, they may have substantial assets but relatively modest taxable income. Strategic Roth conversions during that period may reduce future required distributions, increase tax-free retirement assets, and provide greater flexibility later in life.
I’ve worked with clients who have relocated to Arizona from higher-tax states such as California and New York. A change in state residency can be another factor to consider when evaluating the timing of a Roth conversion, since state income tax treatment varies.
Pillar #3: Tax-Loss Harvesting and Gain Timing
Markets aren’t linear. While most investors view market declines as setbacks, tax-aware investors recognize that downturns can also surface opportunities.
One example is tax-loss harvesting.
Harvesting Losses
Tax-loss harvesting involves selling an investment that has declined in value and using the realized loss to offset taxable gains elsewhere in the portfolio. If losses exceed gains, up to $3,000 of the excess can offset ordinary income each year, with unused losses generally carried forward to future tax years.
Suppose an investor sells a concentrated stock position and realizes a $60,000 gain. Elsewhere in the portfolio sits an investment with a $30,000 unrealized loss.
Harvesting that loss could offset $30,000 of capital gains, subject to applicable tax rules.
The portfolio can then be reinvested in a similar — but not substantially identical — investment so that market exposure remains largely unchanged while the tax bill is reduced.
There are rules involved, most notably the wash-sale rule. Investors generally cannot claim a loss if they repurchase a substantially identical security within thirty days before or after the sale.
At higher income levels, long-term capital gains may be subject to a 20% federal rate. Some taxpayers may also be subject to the 3.8% Net Investment Income Tax (NIIT), depending on their income and the nature of the gain.
Gain Timing: The Other Side of the Equation
Tax-loss harvesting manages the loss side of your portfolio. Gain timing focuses on the gains themselves, specifically, when you choose to realize them. Being flexible in this area can reduce capital gains taxes, NIIT exposure, and even Medicare premium surcharges.
Depending on their circumstances, high earners may consider:
- Deferring large gains into years of lower income, or when harvested losses are available to offset them
- Accelerating gains in unusually low-income years to take advantage of a 15% or even 0% long-term rate
- Coordinating with income events such as bonuses, RSU vesting, and business distributions, when evaluating the timing of gains
Pillar #4: Philanthropy as a Tax Strategy
Many high earners give generously to charity throughout their lives. As wealth grows, there may be opportunities to coordinate charitable giving with broader tax planning.
Charitable Bunching: Giving the Same Amount, Deducting More
Taxpayers generally receive a federal tax benefit from charitable deductions only to the extent they qualify under the applicable deduction rules. For some households, grouping multiple years of planned charitable giving into a single year may increase the amount that is deductible.
Imagine a couple that donates $30,000 annually to charity. If their total itemized deductions only modestly exceed the standard deduction, much of that charitable giving may generate little additional tax value.
Charitable bunching addresses this by concentrating several years of planned giving into a single tax year.
Rather than donating $30,000 annually for five years, they contribute $150,000 in one year. Total planned giving is unchanged, but concentrating the contributions in one year may produce a larger charitable deduction than making the same gifts annually, depending on the taxpayer’s circumstances.
This strategy may be worth considering following events such as a large bonus, significant equity compensation, a business sale, or a year with substantial capital gains.
The Donor-Advised Fund: Solving the Timing Problem
The challenge with bunching is that your favorite charities still need annual support. A donor-advised fund (DAF) helps solve this problem.
A donor-advised fund (DAF), available through a number of charitable organizations, allows donors to make an irrevocable charitable contribution in one year and recommend grants to eligible charities over time. The initial contribution may qualify for a charitable deduction, subject to applicable tax rules and limitations. The deduction occurs once assets enter the fund, while charitable distributions can follow whatever schedule you choose.
Starting in 2026, the One Big Beautiful Bill introduced a 0.5% of adjusted gross income (AGI) floor on charitable deductions, meaning only contributions above that threshold qualify. For a couple earning $800,000, the first $4,000 of giving is no longer deductible. This new floor may make the timing of charitable contributions an even more important planning consideration.
Bringing It Together: An Example
Each of these four strategies may affect an investor’s after-tax outcome. But the potential benefits of tax alpha may be greatest when they are used together and coordinated across the same tax year.
Consider an executive who converts $200,000 from a traditional IRA to a Roth in the same year she contributes $150,000 to a donor-advised fund. The conversion adds $200,000 of taxable income. The DAF contribution produces a $150,000 deduction. The net income impact of both moves is only $50,000 — and she has permanently shifted $200,000 into a tax-free account while banking a charitable deduction in her highest-earning years. Neither move is as powerful individually as they are together.
Or consider a business owner who realizes capital gains from selling an investment or other capital asset during a volatile market year. Harvesting losses elsewhere in the portfolio may offset some of those capital gains, while unused losses may be available for future years, subject to applicable tax rules.
This type of planning may benefit from coordination among a financial advisor, accountant and, when appropriate, estate planning attorney, each working from a shared understanding of the client’s income, assets, goals and timeline.
The Discipline to Call the Plays
Potential tax efficiencies often come from a series of coordinated decisions over time.
Depending on individual circumstances, these strategies may be available to high earners who plan ahead, evaluate opportunities before year-end, and coordinate decisions across multiple areas of their financial lives.
A coordinated tax strategy won’t eliminate uncertainty, but it can help investors make decisions with a clearer understanding of their potential after-tax impact.
At TCI Wealth Advisors, I work with high-income earners and professionals with equity compensation to coordinate investment decisions with tax planning throughout the year. By looking at asset location, Roth conversions, tax-loss harvesting, charitable giving and other planning opportunities together, we can help clients understand how today’s decisions may affect their broader financial plan.
TCI Wealth Advisors, Inc. is an SEC registered investment advisor. This material is provided for informational purposes only and should not be construed as investment advice or a recommendation. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. TCI is neither a law firm nor a certified public accounting firm, and this material should not be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if TCI is engaged, or continues to be engaged, to provide investment advisory services.
The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.
