3 Practical Ways to Minimize Your Lifetime Tax Bill
Minimizing your lifetime tax bill is not about one clever move or one tax year. It is about making a series of smart decisions at different stages in your life, early career, peak earning years, and retirement. The goal is steady progress over decades, not perfection in any single year.
1 Start Strong
You have graduated, landed your first job and things are looking up. This is where time is on your side. Make the most of it. Before diving into investments, let us talk about something more important, taking action. Remember, plans without action do not mean anything.
Cash Reserve Fund
Your first move will be to set up your cash reserve fund. This is not for when something might go wrong.
It is for when something will go wrong.
Stuff happens. Your car breaks down. A large medical bill catches you off guard. You get the idea. Sometimes things go sideways. These surprises can derail your progress if you are not prepared.
Most commentators would suggest having 3-6 months of living expenses in your cash reserves. However, just start where you are. Slowly build up your cash reserve fund over time. In addition to being prepared for when life throws you a curveball, having a cash reserve fund will decrease stress around your finances.
Roth 401(k) Plan
To start strong, you need to be contributing to your employer sponsored 401(k) plan. In 2026, you can contribute up to $24,500. Either way, contribute what you need to contribute to get the employer match.
However, at your station in life, you should strongly consider contributing to the Roth 401(k) plan if your employer offers it. Over 95% of employers offer a Roth 401(k) plan. 1)
Traditional 401(k) plan contributions are made pre-tax and grow tax deferred. Roth 401(k) plan contributions are made after tax, but if the account has been opened for at least five years and you are over 59 ½ or older, qualified distributions are tax-free. Repeat:
All the distributions are tax free!
Typically, when you are just starting out in your career, your income is more modest. With a modest income you will be in a modest tax bracket. When your tax bracket is modest, the tax you pay will be low. This is the ideal time to contribute to your Roth 401(k).
Watch Out for the Auto Enrollment Plan
Many employers now automatically enroll new employees into the 401(k) plan unless you actively opt out. With auto enrollment, the employer automatically deducts the default percentage from the employee’s paycheck and remits it to the retirement account. As mentioned above, tax deferred income is worth a lot less when you are in a lower income tax bracket.
If you have been auto enrolled in the 401(k) plan, make the adjustment to enroll in the Roth 401(k) plan. Additionally, carefully review the mutual fund options offered on the menu. The target date funds may or may not be for you.
Roth IRA
In addition to contributing to your Roth 401(k) plan at work, you may also be eligible to fund a Roth IRA. To be eligible in 2026, a single taxpayer must have a Modified Adjusted Gross Income (MAGI) under $153,000. If the MAGI is $168,000 or more, you are not eligible. MAGI between these amounts allows a partial contribution. For a married couple filing jointly to be eligible, they must have MAGI of under $242,000. If the MAGI is $252,000 or more, you are not eligible. MAGI between these amounts allows a partial contribution.
If you are eligible, you can contribute up to $7,500 to your Roth IRA. For your 2026 contribution, you have until April 15, 2027, to make your contribution.
We wrote about this in detail here: 3 Easy Reasons to Fund a Roth IRA.
Health Savings Account (HSA)
If you are eligible, consider funding an HSA. To be eligible to fund an HSA, you will need to have a High-Deductible Health Plan (HDHP). If you are eligible, in 2026, a single individual can contribute up to $4,400, a married couple filing a joint income tax return can contribute up to $8,750.
Like the Roth IRA mentioned above, for your 2026 HSA contribution, you have until April 15, 2027, to make your contribution.
For more details, check out our post: 3 Great Reasons You Should Fund an HSA.
Estimated Income Taxes
If you have a side gig / hustle, you will need to pay quarterly estimated taxes. The U.S. tax system is a pay as you go system. For people that are employees, they have their taxes deducted from their paycheck. For the self-employed they must pay estimated taxes quarterly. These taxes are due on April 15th, June 15th, September 15th, and January 15th.
If these estimated income taxes are not paid timely, interest and penalty will be assessed. Currently, the interest rate with the Internal Revenue Service (IRS) is 7% annually, compounded daily. This means you are paying interest on the interest, which is extremely expensive.
The failure to pay penalty starts out at 0.05% percent per month and over time goes up to 25%.
2 Peak Earnings: Precision Matters
You are hitting your stride in your career now. Excellent income, just not enough savings. This is what can happen when income rises faster than structure. Set up the systems. Systems yield much more than your huge intentions.
First, now it is time to take advantage of the catch-up contributions you can make to your 401(k) or Roth 401(k). In 2026, taxpayers aged 50 or older, if their plan allows, they can contribute an additional $8,000 for a total of $32,500. Also in 2026, for taxpayers aged 60-63, if their plan allows, they can make a super catch-up contribution of $11,250 for a total of $35,750.
Second, there is also a catch-up contribution for both the traditional IRA and Roth IRA. In 2026, for taxpayers age 50 and older, they can make a catch-up contribution of $1,100, making their total contribution $8,600.
Third, there is also a catch-up contribution for the HSA. In 2026, for taxpayers aged 55 and older, they can make an additional catch-up contribution of $1,000.
Many pre-retirees underestimate what they will need for retirement. For a broader framework, take a look at our post Practical Reasons Why “You’re Gonna Need a Bigger Boat.”
This is also an excellent time to play defense. Hopefully, you already have your estate plan set up. If so, great. It is time to update it. If not, it is time to get on it. You (and your spouse, if you have one) will need to have a Will, Power of Attorney and Health Care Proxy. Make an appointment with an estate planning attorney to draft these documents if you do not have them. If you do already have them, review them to see if they need to be updated.
3 Take Control in Retirement
You are a pre-retiree and looking forward to retirement. Hopefully, you have done some good planning and acted accordingly.
Now it is time to finish strong.
Think Long Term
When do you think about income tax planning? If you do tax planning, it is typically done in late fall. This provides you with the time to make any moves that need to be done by the end of the year. For folks that did not do any tax planning in late fall, the next time they think about it is when they are preparing their income tax return. Preparing and filing your return makes your taxes very visible. However, it is often too late to do much of anything about it.
This is because individual taxpayers are typically filing on a cash basis. This means whatever taxable income you received and whatever tax deductions you paid they are taken in the tax year that ends on December 31st.
Sure, there are steps you can take on your return before the due date, April 15th, which may apply to you. This would include funding a traditional IRA, or Roth IRA and an HSA. Here are 7 Practical Steps to File Your 2025 Income Tax Return.
If you are doing year-end tax planning, the challenge is you may only be tax planning for the current year. As you know, we cannot predict the future. And, as Yogi Berra said, “It’s tough to make predictions, especially about the future.”
Having said that, we are recommending that you look at your income taxes going forward for over the next decade.
Naturally, you will need to make some assumptions about the future. For example:
- What will income tax rates be?
- What will inflation be?
- What will interest rates be?
- What will the rates of return be in the markets?
Recognizing Capital Gains
Short-term capital gains, for capital assets that are held one year or less, are taxed as ordinary income. The highest ordinary income tax rate is 37%.
Long-term capital gains, for capital assets that are held more than a year, there are three rates. For lower income earners the rate is 0%, middle income earners 15% and higher income earners are 20%. Naturally, the lower long-term capital gain rate is preferable over the ordinary income tax brackets.
However, the timing of recognizing long-term capital gains should be an investment decision first, tax decision second. In other words:
Do Not Let the Tax Tail Wag the Dog.
Estimated Income Taxes (Again)
Just like the young bucks mentioned above, retirees may have to pay estimated income taxes. This is due to having withdrawals from tax-deferred accounts like traditional IRA’s and 401(k)s and capital gains from stock and mutual fund sales. It is also due to collecting Social Security Benefits without having any voluntary income tax withholding from it.
Many retirees underestimate how much flexibility they have by adjusting withholding instead of paying quarterly estimated taxes.
If you do have to pay estimated income taxes, see above for the specifics. If you do not want the hassle of paying estimated income taxes, adjust your withholding. You can do this by changing your withholding on your pension, 401(k), or IRA. Additionally, you can elect to have voluntary federal income tax withheld on your Social Security Benefits.
Consider Partial Annual Roth Conversions
When the facts point in the right direction, partial annual Roth conversions can make a lot of sense. The sweet spot for these folks that have larger Traditional IRAs or 401(k) plans and lower income.
For a deeper dive into this strategy, check out our full post: Practical Reasons for a Partial Annual Roth Conversion.
Take a look at our post: Why Getting Old is the New Normal. It explains the mindset shift behind these moves and when it pays to act.
Taking Your Required Minimum Distribution
You took advantage of the tax deferred accounts during your career. Now it is time to start to access these. This is known as your Required Minimum Distribution (RMD). For taxpayers that are aged 73 or older, they must begin to take distributions from their Traditional IRA and 401(k) account. This amount starts at about 4% of the prior December 31st market value. As the IRS uses a life expectancy table, this percentage goes up annually.
The taxpayer that has Traditional IRA and or a 401(k) plan is responsible for taking their RMD. The custodian will tell you how much to take but it is your responsibility to take out your RMD.
Failure to take out your RMD will result in a penalty of 25% of the amount that should have been taken out. The penalty can be reduced to 10% if corrected within two years. It is hard for me to believe but investors lost $1.7 billion dollars in penalties in 2024 for failure to take their RMD. 2)
Either way, that is expensive!
Maximize Charitable Donations
As a former practicing CPA for over 40 years, I was always amazed how generous our clients were when making donations to charity. Hats off to them.
However, we had to educate them on the most tax effective ways to do this.
It is easy to write the check. The odds of the charity cashing it the day they receive it is only 100%.
However, we would suggest the following.
First, consider giving appreciated securities instead of writing a check. Appreciated securities are securities that are worth more than your cost basis. Your cost basis is what you paid for the security. If you own mutual funds and reinvest the dividends and capital gain distributions, these are also added to your cost basis.
If you donate appreciated securities, you can get an income tax deduction for the fair market value of the stock or mutual fund given away.
This makes a lot more sense than selling the positions, paying the tax and donating what is left over.
Second, consider a Donor Advised Fund. For a deeper dive into why this strategy works, check out our post: 3 Simple Reasons You Need A Donor Advised Fund for 2025.
Qualified Charitable Donations
If you are age 70 ½ and older, consider making a Qualified Charitable Distribution (QCD). This is where you donate to a qualified charity directly out of your traditional IRA to the charity.
You are not allowed a tax deduction for this. However, and more importantly, the distribution is not included in your income. In 2026, everyone can donate up to $111,000 from their traditional IRA. For a married couple filing jointly, each spouse can donate up to $111,000 from their traditional IRA.
For step-by-step guidance, see our full post: IRA Giving After Age 70 ½: How to Make a Qualified Charitable Distribution.
Conclusion
Minimizing Your Lifetime Tax Bill is important. This starts from the day you entered the workforce. This carries on throughout your career and deep into your retirement.
If you need help with 3 Practical Ways to Minimize Your Lifetime Tax Bill, give Thomas F. Scanlon, CFP®, CPA a call at (860) 645 1515 or email at Thomas.scanlon@raymondjames.com.
This is original content written by Manchester, CT Financial Advisor Thomas F. Scanlon, CFP®, CPA.
- FA-Mag.com – November 14, 2025
- Corporate.Vanguard.com – December 17, 2025
Changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax filing status, and other factors. Withdrawal of pre-tax contributions and / or earnings will be subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a10% federal tax penalty.
Like traditional IRA’s, contribution limits may apply to Roth IRA. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted.