What Is Tax Planning?

By Chris Duderstadt

March 9, 2023

What Is Tax Planning?

Key Points – What Is Tax Planning?

  • Tax Planning During Tax Preparation Season
  • What Is Tax Planning and What Does It Look Like?
  • A Brief Look into Bracket Management
  • Tax Rates Are Sunsetting in 2026 … Why Does That Matter?
  • 14 Minutes to Read | 32 Minutes to Listen

What Is Tax Planning?

It’s March … and It’s Madness

Selection Sunday for the NCAA men’s and women’s basketball tournament is this Sunday, so if you’re a college basketball fan, you’re probably excited to be right in the thick of March Madness. Several of us at Modern Wealth Management are as well, but that’s not the only madness going on within the financial services industry right now. Of course, we’re in the madness of tax preparation season.

Tax Day, April 18, is always circled on our calendars. And it helped lead us to think that it would be a good idea to make a calendar that highlights the many dates, events, and milestones that can impact your retirement. That’s exactly what we did with our 2023 Retirement Planning Calendar, so make sure to download your copy below.

2023 Retirement Planning Calendar

Tax Planning During Tax Preparation Season

Our Director of Tax Corey Hulstein, CPA and the rest of our tax team are working hard to make this tax season a seamless one for our clients, but tax compliance isn’t the only thing they’re focusing on. They’re spending a lot of time doing tax planning during tax preparation season.

Even with being super busy during tax season, Corey was kind enough to take some time to join Dean Barber and Bud Kasper on America’s Wealth Management Show to help answer the question, what is tax planning?

The Definition of Tax Planning

There are a lot of misconceptions of what tax planning is. Many people think it’s a CPA’s job to focus on tax compliance, which is preparing a tax return. That’s important, but you don’t control your taxes when you’re doing tax preparation.

“A lot of people think about tax planning and how to minimize taxation every year. People who are employed just have a W-2 type compensation and think that tax planning isn’t a fit for them. They wonder how they could control their income in a given year and that tax planning is meant for businesses and self-employed people. That’s a misconception. Tax planning revolves around minimizing taxation over the course of your lifetime, not just for a single year.” – Corey Hulstein

When asking the question, what is tax planning, it’s important to think about whether to minimize taxation in the current year or to expedite some income to accelerate tax today with knowing where tax rates will be in the future. Like Corey said, the goal of tax planning is to minimize taxation over your lifetime, not just in one year.

What Is Tax Planning and What Does It Look Like?

Just about every financial decision that you make will end up on your tax return at some point. There are a lot of people who just go to their CPA during tax season, tell them what happened in the past year, and tell them to figure it out. That’s not the way to do it. You should be having conversations throughout the year with your CFP® Professional and CPA together so that your CPA can review your financial plan from a tax planning perspective.

But let’s back up a little bit. Before answering the question, what is tax planning, you need to have that financial plan completed by a CFP® Professional. If your financial plan isn’t completed and the CPA doesn’t understand your resources, income, goals, etc., there’s no way you can control your taxes over your lifetime. All you can do in that case is look at your taxes in a given year. That’s not tax planning.

“The financial plan provides context to whatever we’re going to do. We can tell what the current year’s situation is going to look like, but how do you scale that? What’s the context that you need to frame that decision? That’s where the financial plan comes into play.” – Corey Hulstein

How You Save and Where You Save Matters

Here’s another important component you need to understand when figuring out what tax planning is all about. A lot of people don’t understand that they can source their income from various places that they’d saved to. Sourcing your income at the appropriate time gives you the opportunity to lower taxes.

Roth or Traditional?

If you’re still early on in your career, a lot of your decisions are going to revolve around Roth or Traditional 401(k) or IRA savings. And just saving in general is crucial and takes a lot of discipline.

As you advance in your career, those decisions about saving start to multiply. You’re going to need to start utilizing those funds. You’ll start looking at things like distribution planning and Roth conversions.

“This is a discovery process for people. It’s part of the retirement positions that people find themselves in. The realization is that there’s a lot you can do with tax planning to minimize taxes.” – Bud Kasper

To Answer the Question, What Is Tax Planning, You Need to Answer, What Is Financial Planning?

Tax planning isn’t a one-and-done deal. It needs to become a part of your living, breathing financial plan. Again, it’s critical to talk to your CFP® Professional and CPA together at least a couple of times so that they understand your situation. They can explain to you how whatever decision you’re wanting to make can impact your taxes. You can also better understand different strategies to minimize your taxes over your lifetime by reviewing our Tax Reduction Strategies guide, which you can download below.

Download: Tax Reduction Strategies

Bracket Management

Another way to ask, what is tax planning, is to ask, what is bracket management? Rather than talk about your NCAA tournament bracket(s) getting busted in the next couple of weeks, we’re going to talk about tax brackets. The current tax brackets will be getting busted in 2026, so how can you go about planning for that?

We’re going to answer that, but first, you’re probably wondering why the current tax brackets are getting busted in 2026. Well, when the clock strikes midnight on December 31, 2025, the Tax Cuts and Jobs Act will sunset. So, on January 1, 2026, we’re going back to the tax rates from 2017, which are substantially higher.

We know that the tax brackets are going up in 2026, so it puts people in a position to strongly consider things like Roth conversions when they’re looking at bracket management.

The Basics of Bracket Management

We work in a marginal tax system, which means that all your income isn’t taxed the same. Whether you’re married or single, the first bucket of money is taxed at 10%. As you scale up your income, it will start to get taxed at higher rates. That first $10,000-$20,000 is always going to be taxed at 10%.

The next chunk of money is taxed at 12%. If you’re in the 12% bracket, it doesn’t mean that all your income is taxed at 12%. As you scale up to 22%, 24%, 32%—those types of rates—the marginal dollars that cross that threshold are taxed at those different rates.

“One of the big things that we want to look at when going back to the financial plan is understanding where we’re going to be at today compared to long-term. Where do we want to land when it comes to those tax rates? Are there years in the future where you know you’re going to be taxed in the 24%, 32%, or 35% tax rates? Today, we’re in a low environment. We don’t have all that income today, so let’s utilize those brackets while they’re available. Pay tax at 10%, 12%, and 22% tax rates knowing that we’ll be at much higher rates long-term.” – Corey Hulstein

An Example of How Bracket Management Makes a Big Difference

Dean was recently reminded of the importance of bracket management when he met with one of his clients and client’s daughter. Unfortunately, the client is battling lung cancer, but he wants to make sure that everything is in place financially once he passes on. Dean was talking about the SECURE Act with them and what it’s done to the beneficiaries of IRAs. Dean was talking to the daughter about how she was going to make sure to pay as little tax as possible on her father’s IRA that she was inheriting.

“He’s past the Required Beginning Date for Required Minimum Distributions, so she’s going to have RMDs. But I told her that she may want to make more than the Required Minimum Distribution depending on the tax bracket that her and her husband were in. We talked about what bracket they were in and I told her how much the RMD was going to be for her share of the IRA that she would inherit. It’s only going to be about $7,000. But based on what her income is now, I suggested to consider taking about $50,000 because that takes her to the top of the 22% bracket.” – Dean Barber

If she let all that fester in there and grow and only took out the minimum, when everything comes out at the end of 10 years, she would jump up to the 32% bracket. By taking the $50,000 instead, she could cut her taxes by a third. That’s an example of how to go about bracket management. And it hopefully helps you with answering the question, what is tax planning?

Looking Ahead to 2026

Again, we must keep 2026 in mind here. Even if we can maintain within the 22% to 24% tax bracket, does it make sense to expedite more knowing that in 2026, 22% becomes 25%? Even if you expedite all the way through the 24% bracket, you’re still saving 1%. It’s not a huge difference, but 3%, 5%, or maybe 10% tax savings are a big deal. Here’s the rundown of the differences between 2023’s brackets and 2026’s brackets.

2023 Brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%

2026 Brackets: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%

Breaking Down Some of the Key Differences Between 2023 Tax Brackets and 2026 Tax Brackets

Under the Tax Cuts and Jobs Act, those brackets expanded as well because of inflation. There’s more income in those brackets. Not only do the bracket rates go up, but the brackets will become smaller again in 2026. You expedite through those brackets much quicker.

“That break-even point happens somewhere between that 24% bracket. That’s where we see the biggest change. The 22% moves to 25%. That bracket is going to be similar in 2026 in terms of the amount of income in that bracket. But that 24% nearly gets cut in half on the level of income.” – Corey Hulstein

Dean’s response to what Corey had to say about that was simply, “Wow.” Was that your response as well? The compounded benefit on the tax savings is real money in the future. A lot of people don’t see the power of what planning can do from a compounding basis.

Taxes are a matter of fact, but you can control your taxes. And the easiest time to control your taxes is in retirement. Dean touched on that and much more about the SECURE Act and SECURE 2.0 with America’s IRA Expert Ed Slott. You can also catch their conversation about Understanding the SECURE Act 2.0 on March 14 on The Guided Retirement Show.

Feeling Insecure About the SECURE Act

A lot of the problems that stem from trying to inherit or pass on money to the next generation are because of the rules of the SECURE Act. Some of those rules changed again with the SECURE Act 2.0, but there are still a lot of questions left unanswered.

The Three Beneficiaries

While there were a few exciting changes—specifically with increased retirement plan contribution limits—in SECURE 2.0, there was one thing in particular that didn’t change that is rather frustrating. The three beneficiaries outlined in the SECURE Act are still the same, so they’re still as complicated as ever. There are non-eligible beneficiaries, non-eligible designated beneficiaries, and eligible designated beneficiaries.

“The thing to remember is that an individual is a non-eligible designated beneficiary or an eligible designated beneficiary. In most cases, you’ll be a non-eligible designated beneficiary, which means you have a 10-year window to take the money out. Beyond that, we’ve received a little more clarity on whether there are RMDs in the first nine years. The RMD part of it was really what the SECURE Act 2.0 was trying to clarify.” – Corey Hulstein

Even if you’re a non-eligible designated beneficiary, you may not need to take any distributions in that first nine years, but you need to have everything out in 10 years. However, you can be a non-eligible designated beneficiary that’s required to take RMDs every year and still have everything out in 10 years.

How Do You Know What Rules to Follow?

So, that’s an important distinction. But how are you supposed to know whether you need to take RMDs each year or not? You need to look at the age of the person who passed away. If that person reached their Required Beginning Date, which is April 1 of the year after they started RMDs, RMDs need to be taken in Years 1 through 9.

The RMD age just changed from 72 to 73 in SECURE 2.0. So, for example, if someone turned 73 on January 1, 2023, their Required Beginning Date isn’t until April 1, 2024. So, if you’re inheriting an IRA from someone who passed away that was 73 or 74, you’ll need to carefully look at what rules that you’re needing to follow.

There’s also a Year 0 that comes into play with RMDs as well. If someone passes away today (March 9), have they already taken their RMD for their current year? That’s Year 0. If that person didn’t meet their RMD already this year, the beneficiary must take that RMD by the end of 2023. But it doesn’t count toward the 10-year clock.

Another Hypothetical RMD Scenario

Let’s say that someone turned 73 in 2022. They haven’t hit their Required Beginning Date yet because it’s not until April 1, 2023. If they die in March, they weren’t required to take an RMD yet. But here’s another catch. If you wait until April 1 of the year after you turn 73 to take RMDs, you must take two RMDs in that year.

So, if someone passes away on April 2, 2023, at the age of 73, they would’ve had to take one RMD by April 1 and the beneficiary would need to take an RMD in Year 0.

“It’s ludicrous how complicated the RMD status is from the IRS with the SECURE Act and SECURE Act 2.0. It’s insane.” – Dean Barber

We don’t want you to be assessed penalties for missed RMDs, so it’s critical to understand these complicated rules. As always, don’t hesitate to reach out to us if you do have any questions or clarifications.

The Three Tax Buckets

As we continue to answer the question, what is tax planning, there is one more play on words with basketball that we want to mention. When you’re playing basketball, you’re trying to score in your opponent’s bucket. Now, when you’re preparing and saving for retirement, what bucket do you want your money to go in to? If you answered tax-free, you just scored. That’s your Roth money.

The Rothification of Retirement Accounts

The SECURE Act 2.0 is creating the Rothification of retirement accounts. Why would you want to put your money in a Roth?

“There are a lot of answers to that question. We’re looking for growth in the account. The Roth account is going to grow tax-free. Once you get to retirement, you can access any of the money and the growth tax-free. That affects things like Social Security and wealth distribution upon our passing. We’re looking for tax-free savings.” – Corey Hulstein  

If you put money into a Roth IRA, you’re paying tax on it before it goes in. So, would you not be better off getting a tax deduction today rather than paying taxes and getting tax-free growth? There are some situations where that might be the case. If you’re a high-income earner and know in the future that the bracket won’t be as high as where you’re at today, that’s a great landing spot at that time.

But one of the things that you need to think about is what kind of growth you’re getting on the account. If you’re 70, that’s a different conversation than if you’re 40 because you’ve got an extra 30 years of growth. If that account doubles, triples, quadruples over that duration, what’s the effective rate you paid on that money? The tax has already been paid even though the account grew.

Relating Roth IRAs to Farming

Shortly after Dean and Bud joined Ed Slott’s Elite IRA Advisor GroupSM in 2005, Ed told them to think of a Roth IRA like a farmer. With a traditional IRA, a farmer gets a tax deduction for their crops before they plant them. Then, when their crops grow, they must pay taxes on the entire harvest. The Roth IRA is the opposite. The farmer pays tax on the seed. Then, when their crops grow, they get the harvest tax-free.

“If a farmer could choose which option they want to do, every farmer in the United States is going to pay taxes on the seed so they can get their harvest tax-free. That’s exactly what the Roth IRA does.” – Dean Barber

The Other Buckets

The tax-free Roth bucket is one of three buckets that you can save to. You also have a taxable bucket, which is like a joint, single, or trust account. You pay taxes on that taxable money before it goes into the bucket and you’ll pay taxes as it earns interest, dividends, or capital gains.

Then, your other bucket is a tax-deferred bucket. It’s your traditional IRA or 401(k) or non-qualified annuity. With a traditional IRA or 401(k), you get a tax break or deduction before you put your money in. It grows tax-deferred, but when it comes out, it’s all taxable as ordinary income. Hopefully, that helps to further explain why the tax-free Roth bucket is the main bucket you want to save to.

What Is the Impact of the Roth Match on Tax Planning?

The SECURE Act 2.0 added another benefit to the Roth as well. SECURE 2.0 made it so that corporations can now do a Roth 401(k) match with tax-free money rather than taxable money. However, people need to be patient with this. Since this just went into effect in 2023, it will take some time for it to be written into 401(k) plans. Still, this is something to be excited about.

“I’ll be shocked if more than 5-10% of companies have that available by January 1, 2024. It’s going to be an overhaul of the plan document before the companies to offer the Roth match.” – Dean Barber

One thing that remains unclear in SECURE 2.0 is if there’s a tax advantage for the company to do that with getting a tax deduction corporately. The corporation will want that deduction because the current system will allow them to deduct it as a form of compensation. The employer doesn’t want to give up that benefit by matching the contributions to the employee.

“Likely where this ends up is that the employer will still take a deduction. It will be treated as a form of compensation. So, the employer match at the employee level, whatever the employer puts into your Roth 401(k) would likely be more taxable compensation to you.” – Corey Hulstein

An Example of the Roth Match

For example, let’s say you have an employer that’s doing a dollar-for-dollar and the employee put $10,000 into the Roth. If the employer puts $10,000 into the Roth, that $10,000 would be a deduction for the employer, but show up as taxable income to the employee. So, they would need to pay tax on money that they didn’t get. That’s likely where this ends up, but it’s not clear as it’s written in the SECURE Act 2.0.

We’ll make sure to let you know once there are any updates on that. The main takeaway here, though, is that this makes planning that much more important.

“There aren’t a lot of places that are doing the Roth match yet at this point. But if you have any pull with your employer, make sure that conversation about the Roth match is taking place if that interests you.” – Corey Hulstein

What Is Tax Planning? It’s a Necessity

You probably don’t need us to tell you how complicated taxes can be, but hopefully this has helped you to understand how tax planning is critical in minimizing taxes over your lifetime. But before you start looking into what tax planning strategies might work best for you, you need a financial plan.

If you don’t have a financial plan or have questions about your plan, we have a few more resources that might be beneficial to you. First, you can begin to create your own plan with our industry-leading financial planning tool. It’s the same tool that our CFP® Professionals use with our clients, and you can use it from the comfort of your own home. And at no cost or obligation. You can get the ball rolling with your plan by clicking the “Start Planning” button below.


Our CFP® Professionals also welcome the opportunity to meet with you so that you can ask questions as you create your plan (or about your plan if you already have one). You can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals by clicking here. One of our CPAs can meet with you as well if you have some tax-specific questions. You can meet with us in person, by phone, or virtually depending on what’s most convenient. We hope this has helped answer the question of “what is tax planning” and look forward to providing you more education on tax planning and financial planning in general.

What Is Tax Planning? | Watch Guide

Introduction: 00:00
Defining Tax Planning: 01:47
How You Save and Where You Save Matters: 05:36
Bracket Management: 06:55
The Three Tax Buckets: 16:03
SECURE Act Woes: 22:01
Conclusion: 30:22

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.