Ready For Retirement
Ready For Retirement
Why $5 Million is the Tax "Danger Zone"
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Once your portfolio crosses $5 million, the game changes. Growing your money is no longer the hard part... protecting it is. Tax mistakes that used to feel like small inefficiencies can quietly turn into six-figure problems that compound throughout retirement.
This episode breaks down the tax strategies that actually matter once you’re in high-net-worth territory. With multiple account types, portfolio income pushing you into higher brackets, and large pre-tax balances creating future RMD and Medicare risks, the way you withdraw money becomes far more important than how much you’ve saved.
The focus here isn’t how to minimize taxes this year. It’s how to reduce your lifetime tax liability. James covers intentional tax-bracket filling, when Roth conversions help and when they backfire, why asset location matters more as portfolios grow, how capital gains planning really works, and how charitable strategies can dramatically improve after-tax outcomes. Doing Roth conversions the wrong way can cost nearly seven figures, shown by James' sample case study, helping you see that a disciplined approach creates meaningful long-term gains.
If you have $5 million or more invested, this is about control. Control over when you pay taxes, which accounts you pull from, and how much of your wealth you actually get to keep.
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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.
The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
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If you have$5 million or more, the goal isn't just to keep growing it like it used to be. Now the goal starts to shift to controlling it and protecting it, especially from taxes. You did the hard part. Saving is no longer the problem. The focus should now be on protection. Because those tax mistakes that used to be little inefficiencies at the edges, those now turn into six-figure problems that will compound throughout your retirement. So today we're going to walk through the tax strategies that start to matter as soon as you have crossed$5 million in your portfolio so you know what to focus on and what to ignore. So why is$5 million automatically a different game? Well, it's not automatically a different game, but here's what tends to change. You no longer have just one account type. Usually, when you're growing your portfolio, you're doing most of your investing in one single account. That could be just a brokerage account, that might be just a 401k, that might be just a Roth IRA. As your net worth grows, as your portfolio grows, you're going to have multiple different types of accounts. You might have a brokerage account for your investing over here. You might have equity compensation over there for a stock option plan through work. You maybe have a 401k, you have an HSA, you have an IRA, you have all these different types of accounts. And the real issue here, the real strategy here is the way in which you withdraw those starts to matter much more. What also happens above$5 million? Well, now all of a sudden, your portfolio income alone is going to have gains and income that could push you into higher tax brackets just by itself. So without even factoring in work income or salary, the portfolio itself can start to push you into high tax brackets if you're not careful about how you manage it. And finally, if you have more than$5 million in your account, there's a very good chance that a good chunk of that is in some type of a pre-tax account, a 401k account. Now, if you're not careful with that, that's going to turn into enormous required minimum distributions. It could trigger Irma surcharges you don't want to hit, and it could trigger all sorts of taxes that could be avoided if you know the right strategies to take. But here's the reframe I need you to make. I need you to stop thinking through how do you reduce this year's tax liability and instead think about how do you reduce your lifetime tax liability. That's what this video is going to show you how to do. So let's jump into how this works. As I mentioned before, if you have more than$5 million in your portfolio, there's a very good chance that some of that money is in a brokerage account, some of that money's in a pre-tax account, and some of that money is maybe even in a Roth account. What do you do with these? Well, taxes at this point aren't an if, it's a when. And when you're in your retirement years, your distribution years, the way in which you pull money out makes all the difference. So it's not that your net worth determines your tax bill. It's not whether you have 5 million or 10 million or 20 million. It's the way in which you pull money out of your portfolio that drives what you're going to pay in taxes. So what can you do? Well, as you can see right here, this is a copy of 2026 tax brackets. As your income starts to cross certain thresholds, you start to pay more and more in taxes. Well, here's the good news. When you're working, you can't control your tax bracket. Your wages are fully subject to ordinary income taxes. In retirement, you can. Going back to if you have multiple types of accounts, a brokerage account, a pre-tax account, an HSA, a Roth IRA, you get to decide how much you pull out and exactly which account you pull from. So when I'm looking over here at these tax brackets, I can be very intentional about do I pull some for my pre-tax accounts to fill up a certain tax bracket? Do I pull some from my HSA to pay for medical expenses? Do I pull some for my brokerage account to take advantage of the lower tax brackets associated with that? Do I even pull some from my Roth account? Whatever the strategy ends up being, you're gonna pull money to intentionally fill up the tax bracket you want to fill up and not go into the tax brackets you don't want to fill up. Because again, this is not like your working years. This is not like if you're making$400,000 in your working years, all that is subject to ordinary income taxes. You get to manufacture your income. You get to create your income. But as a reminder, stop focusing just on this year and say what strategy? Well, yes, ideally keep taxes low this year, but most importantly, keep them lows for as long as possible. So pull the right amounts of money from the right accounts to intentionally fill up the right tax brackets while simultaneously avoiding going into tax brackets you don't want to be in. Strategy number two is intentional Roth conversions. So why do I say intentional? Well, everyone just says Roth conversions. Do it. You're retired, do it. That's not the right strategy. Roth conversions require that you have an understanding of what tax bracket are you in today, but more importantly, what tax bracket will you be in in the future? I'm gonna show you a quick case study in just one minute to illustrate what I mean by this. But your tax bracket today, you know what that's gonna be. I know, if I do the analysis, what$1 of conversions from my IRA to my Roth IRA will lead to in taxes today. That alone is not enough to solve the equation. To solve the equation, I need to compare this to what will that tax bracket be if I convert in the future. Converting in the future is a function of two things. It's a function of where will US taxes be as a whole. But number two, and more importantly, what will my taxable income be in that year? Sure, everyone says yes, taxes are probably going up. That may or may not be true, but here's the thing: it's irrelevant. It's irrelevant in some cases because what I need to know is what will your tax bracket do? If I'm making a million dollars today and I'm paying taxes at the highest rate, and taxes go up in the future, it doesn't automatically mean I'm gonna pay taxes at a higher rate in the future. Because maybe in the future I'm retired. Maybe in the future I've done good tax planning. So I have a lot of my money in Roth accounts, HSAs, brokerage accounts, and I can pull that money out in a tax-preferred way. So, yes, understand where tax brackets will be in the future, but most importantly, understand what your mix of income will look like so you know your personal tax bracket, not just federal brackets or state brackets, and assuming that's equal to everyone. Let me show you a quick example of what I mean by this. This is Eric and Donna. Eric and Donna are not real people, but I'm gonna illustrate this point to you. They have about$7.5 million here in investments. And if you look at their income today, just plug the numbers in, they make a million dollars. So they're looking at this and saying, we are in the top income tax bracket, we have over$7 million, we need to protect against taxes. And by the way, we think taxes are going up in the future. That's perfectly fine. Believe that, but let's look at this. Let's not just look at where you think taxes will be in the future. What this screen shows us right here is this is showing us where will their taxable income be. So you can see it's quite high today. They're making a million dollars combined. You can see it will be quite high in the future when required distributions kick in and push their income above certain tax brackets, even if they don't need to spend it. Where it's not high though is in these valley years. This is typically thought of as that tax planning window, the time between when you retire and when required distributions kick in, when your income, your taxable income, is typically at its lowest. Because here's the mistake you could make. If you look at this and say, okay, I'm making a lot of money today, I know I'm gonna have RMDs, I know taxes are going up. If this is you and you say, you know what, I'm gonna fully fill up the 35% tax bracket, meaning I'm gonna convert enough money from my IRAs each year to fully fill up the 35% tax bracket because 37 is the top. And if I'm gonna be in the top tax bracket, I'll do anything to pay taxes at a lower rate, even if it means fully filling up every bracket, including the 35% bracket leading up to it. Well, if you were to do that, and if you were to run this, you can see that just cost you almost a million dollars. This is why I say missed tax opportunities. When you have this level of a portfolio, these aren't just little mistakes that you can get away with. These are six-figure, almost seven-figure mistakes in this case that will cost you dearly, that will prevent you from being able to do what you could have done if you'd implemented the right tax strategy. So instead, what should Mark and Donna have done? Well, we can see here there's a sweet spot here. For them, it's going to be somewhere around the 22% tax bracket. For you, it might be lower. For you, it might be higher. The point is you need to find something that's based upon your specific mix of assets, income sources, expenses, and overall retirement picture. For them, if they implement the right Roth conversion strategy, that's almost a quarter million dollars tax adjusted savings that they would get simply by following the right tax strategy. So you can see the swing here, the delta here is almost a seven-figure loss if you do this right, versus a multi-six-figure win when done correctly. That's because they've built significant assets in their pre-tax accounts. So if that's you, if you're that investor with$5 million or more in your portfolio, and you have a big mix of pre-tax accounts, after-tax accounts, this strategy cannot be overstated. You need to make sure you're at least considering it. Not every single person is gonna move forward with something just like this, but at a minimum, you need to be able to see does this work based on my specific situation? And by the way, this is one of the biggest reasons people reach out to us. So many people talk about, okay, comprehensive planning. What does comprehensive planning actually mean? Well, to us, it means one of the things it means at least is we're not telling you go ask your CPA if you have a tax question. If you have a tax question about Roth conversions, about tax gain harvesting, about something that's going to meaningfully drive your strategy forward, that is absolutely what your advisor should be doing. So, yes, there's investment planning, there's insurance review, there's estate planning, there's retirement planning, but tax planning should be a very, very critical piece of all that. If you're looking for that and not getting that, reach out to us. Here's a QR code. You can reach out to us here at Root Financial. This is what we do for clients. So Roth conversions should absolutely be something you are considering if you have a$5 million plus dollar portfolio in your retirement years. The third strategy that you need to make sure you're implementing correctly, if you have more than$5 million in your portfolio, is called asset location. So asset allocation is different than asset location. Asset allocation says what assets are you allocating to? Do you have US stocks or international stocks? Do you have small cap stocks or large cap stocks, real estate or bonds? And to what degree do you have each of those? Asset allocation says where are those actually held. Let me give you an example where I see this go wrong. Many people, especially once they've built larger portfolios, they love real estate stocks. Why do they love real estate stocks? Well, these stocks, they're generating 5%, 6%, sometimes even more, in dividends. So if you put a million dollars in a REA stock and you're getting a 6% dividend yield, that's$60,000 of passive income. Now that looks awesome. Who wouldn't want that? Well, here's who wouldn't want that. You. You, high income, high net worth investor, don't want that in your brokerage account. Real estate stocks, the income you're receiving typically is not very tax efficient. So sure, you're receiving 6%, but if that is happening in a brokerage account, you might only be keeping 3% if you live in a high income tax state like California. Why is that? Well, that income is subject to the highest federal income tax brackets as well as the full California tax brackets of 13 plus percent. When you combine those two things, you're not keeping very much of your actual investment. Here's what asset location does. Asset location doesn't say you need to change that stock, it says you need to change where that stock is held. Maybe you take that stock and own it in your IRA. Maybe you own it in your Roth IRA. It may be a more tax-efficient investment, those previous in your IRA. Let's put that in your brokerage account. So while asset location, that's going to be the driver of what you can expect your returns to be long term. Asset location tells you how much of those returns are you going to keep after taxes. The larger your portfolio, the more money you have, the more important this becomes. Because it's no longer your returns that matter, it's your after-tax returns that matter. Asset location is one of the biggest things that you can do to very quickly increase what those after-tax returns can be. The fourth strategy that you can implement, if you have more than$5 million in your portfolio, is capital gain and charitable planning. So capital gain planning. If you have an unrealized gain in one of your investments, and if this investment is outside of a retirement account, you get to pay tax preferential tax rates on the gains of that. You need to have owned the investment for a year or more, but if you do so, your tax rates are lower than if you had earned that via ordinary income or if it had been a short-term gain, so a year or less of holding that investment. Here's what you can do. If you have an investment with large embedded gains, you can, number one, take advantage potentially of the 0% capital gain threshold. For 2026, if you're married finally and jointly, not until your taxable income exceeds$98,900, do you pay any taxes on long-term capital gains? So call that$99,000. That doesn't actually mean$99,000 of income. That means$99,000 of taxable income. Your taxable income is your adjusted gross income. So the actual big number, the actual total income that you're receiving, minus any deductions, either itemized deductions or standard deductions, gets you your taxable income. So even if you have a large portfolio, let's assume the entirety of that for simplicity is in one individual stock. You pick the best stock, that stock grew, you have a large amount of gains, and that's the only thing that you're gonna live on. So you pull out$100,000 per year. Let's assume of that$100,000,$10,000 is just a return of principal. That's what you initially put into the stock, and$90,000 is gains. Well, typically those gains, you're looking at that and saying, okay, what am I gonna pay in taxes here? Well, at the state level, it depends on what state you live in, but at the federal level, if that's truly your only income source, and let's assume that you're married here, you aren't gonna pay any taxes on that. Because that$90,000, you're gonna back out your standard deduction. So now your actual taxable income is less than$60,000. That taxable income is well below the 0% long-term capital gain threshold. As a reminder, that's$98,900, which actually tells us that if that is you, this is a unique example, not only will that be tax-free, the amount that you pulled out of your stock, but you could realize even more in gains. Even if you turned it right back around and repurchased your stock, what you're doing is you're increasing your cost basis every time you do that. So make sure you're taking advantage of capital gain planning because you can do this every single year. Now, you the flip side to this is how long do you want to stay fully invested in that single stock or in whatever that investment is? There's investment considerations as well. But understanding this, you can take advantage of lower capital gains taxes by understanding how this works. Now the other thing you can do is charitable planning. If you're doing charitable planning, don't just give cash. If you gift cash, that's great, but it's probably far more effective to do other strategies. Those other strategies are number one, either gift highly appreciated stock. You purchased Apple stock for$1,000, now it's worth$20,000. Well, that$20,000 to you might only be worth about$15,000 after taxes. Well, to the charity, that$20,000 is worth a full$20,000. So instead of gifting$20,000 to a charity, gift that Apple stock. In doing so, you get the full$20,000 deduction, and that would only be worth$15,000 to you. Now the$20,000 of cash you otherwise would have made the donation with, you can go rebuy Apple if you want to. And now your cost basis is$20,000 on that instead of$1,000 on that, or do something else with it. But by gifting highly appreciated securities, you are getting a tax benefit. The charity is not paying taxes, and you're still getting the full deduction amount. Take this one step further. You can gift to a donor-advised fund. What if you want to gift$20,000, but not just this year? You want to do it every year for the next 10 years. Well, in this case, you could give$200,000 of highly appreciated stock to the donor-advised fund. Same thing applies. You're not paying taxes on that because it's a gift to a charity. You could spread out the donations year after year. So the$200,000 is in a donor-advised fund, but you can spread out when those gifts are actually made. The charity is getting the full amount, and you get one massive deduction today. Now, to take this one step further, what if you combine that massive deduction today with a Roth conversion strategy, like we just talked about? Now all of a sudden you can convert more because you have more of a deduction to offset it with. And then finally, if you're over 70 and a half, you can use your traditional IRA to do what are called qualified charitable distributions. Gift directly to the charity from your IRA. You don't pay taxes on IRA distribution. The charity doesn't pay taxes, it reduces your required minimum distribution. Everybody wins. So when you start to understand the different strategies available to you, these strategies are available to everybody, but they typically become more valuable once you have$5 million or more in your portfolio. And that's why this video is specifically concentrated on that. But as we start to wrap this video up, the real risk here isn't paying taxes, it's paying them at the wrong time. Because paying them at the wrong time also means paying more than you otherwise needed to. So when you have the right strategy that factors in where should withdrawals come from, should you implement a Roth conversion? How do you factor in charitable giving strategies or capital gain strategies? So once you start to do all these things, you can start to protect against the downside, which enables you to fully enjoy the upside. If you need help with this, if you need a strategy that factors in all these things, reach out to us here at Root Financial. This is exactly what we do. Tax planning is a huge piece of anybody's retirement plan. So if you have a financial plan that doesn't include taxes in it, you don't really have a financial plan. Reach out to us here, watch these videos, reach out to your advisor. But whatever you do, make sure that these are the types of strategies that you are employing in your plan to make sure that you are minimizing taxes and enjoying the freedom that retirement has to offer you.
