How Affluent Families Build (and Keep) Wealth: It’s Not “Better” Investments – It’s Better Tax Planning

How Affluent Families Build (and Keep) Wealth: It’s Not “Better” Investments – It’s Better Tax Planning

By Anthony Criscuolo, CFP®

When most people think about building wealth, they focus almost exclusively on investments—market performance, asset allocation, or finding the next “smart” strategy. But for affluent families, investment performance is rarely the biggest driver of long‑term financial outcomes—it’s actually tax planning!

Over a lifetime, taxes can exceed the cost of housing, healthcare, education, and even lifestyle spending. Yet tax planning is often overlooked, even though it’s one of the few financial levers you can somewhat control. Advisors may spend hours analyzing investment models but little time reviewing tax projections and that imbalance can be costly. CPAs might be great at knowing the tax laws and preparing your tax returns every year, but they may have limited understanding of your overall wealth and financial planning opportunities – now and into the future. Tax preparation is not the same as tax planning!

A good comprehensive advisor will look to integrate multi‑year tax planning strategies that consider all your wealth planning together, not in isolation. This can add tremendous value to your long-term financial outcomes, especially using tax-free Roth accounts. When done correctly, they can meaningfully reduce lifetime taxes, prevent tax bracket creep in retirement, protect the surviving spouse, and dramatically improve the amount of wealth passed to the next generation.

Let’s dive a little deeper into why integrated tax planning is so important, and how planning with Roth accounts can create significant long‑term tax efficiency and greater after-tax wealth for you and your family.

The Long‑Term Power of Roth Accounts

Roth IRAs and Roth 401(k)s offer a simple but incredibly powerful benefit: once money enters a Roth, all future growth and all withdrawals are completely tax‑free. That means no tax on dividends, no tax on capital gains, no tax on withdrawals in retirement, and—unlike traditional IRAs—no Required Minimum Distributions (RMDs) during your lifetime.

This tax‑free status does not just benefit you – after you pass away, your beneficiaries generally have 10 additional years to let the Roth continue growing tax‑free before they must empty the account. If you’ve been contributing or converting over many years, it’s possible for your family to benefit from 40 to 50+ years of uninterrupted tax‑free compounding, spanning multiple generations – that’s amazing! To appreciate why this is so powerful, it helps to understand how Roth accounts differ from the more common “traditional” (pre-tax) IRAs and 401(k)s. Below is a quick summary of the major differences.

With traditional accounts, you typically receive an upfront tax deduction when contributing, but in exchange, the IRS eventually forces the money out as taxable income. Withdrawals are taxed as ordinary income, and RMDs must begin later in life (either age 73 or 75 depending on your birth year). When your children inherit a traditional IRA, they’re also required to empty it within 10 years—but every dollar they withdraw is taxable, landing directly on top of their own earnings, often during their peak career years.

Roth accounts flip this script. You don’t get the upfront deduction, but you eliminate all future taxation on growth, avoid RMDs entirely, and give your heirs a far more flexible and tax‑efficient inheritance. For many high‑earning families, this long‑term tax freedom is far more valuable than the short‑term deduction that traditional accounts provide. There is also planning around making traditional contributions to benefit from tax savings in higher‑income years and then doing Roth conversions during lower‑income years, often in early retirement.

This is why planning around Roth accounts, and all tax planning, is much more than a one‑time decision. It’s about managing your tax brackets throughout your lifetime, taking advantage of lower‑income years, and integrating tax strategies into your broader financial and investment planning. Tax laws also continue to evolve, so your tax planning strategies must adapt as well. The key point is that tax planning is a dynamic, multi‑decade process that should be an integral part of your overall comprehensive financial planning process.

The “Widow Tax Trap”

Life changes should also be part of your tax planning. One of the most overlooked tax risks in all of wealth planning is when one spouse dies and the surviving spouse’s taxes materially increase. This is sometimes referred to as the “widow tax trap.”

Most couples file taxes using the Married Filing Jointly (MFJ) brackets. These brackets are substantially wider and more favorable compared to single filers. When one spouse dies, the survivor is forced to use the single brackets beginning the very next tax year (this assumes no remarriage and no dependents). It’s a simple concept: similar income + smaller tax brackets = higher taxes! Below are the 2026 IRS tax bracket thresholds that illustrate this difference (selected ranges only):

2026 Married Filing Jointly Brackets (Selected Ranges):

• 24% Bracket: $211,401 – $403,550
• 32% Bracket: $403,551 – $512,450
• 35% Bracket: $512,451 – $768,700
  
  

2026 Single Filer Brackets (Selected Ranges):

• 24% Bracket: $105,701 – $201,775
• 32% Bracket: $201,776 – $256,225
• 35% Bracket: $256,226 – $640,600

So, $400,000 of taxable income would remain in the 24% marginal tax bracket for a married couple, but for a single taxpayer, about half of that income would be taxed at the higher rates of 32% and 35% (and of course tax rates could be even higher in the future!) In other words, a surviving spouse gets pushed into higher tax brackets much more quickly. This can materially shrink family wealth over time, and often a risk many people are not even thinking about. Let’s illustrate this with a realistic example, especially where a large RMD creates a massive tax difference for a surviving spouse.

Consider a surviving spouse with the following income:

• $200,000 RMD from a large traditional IRA/401(k) Plan
• $50,000 taxable Social Security
• $100,000 of portfolio gains / dividends / interest / other income

Let’s assume this is $350,000 of taxable income, so it is already net of all deductions. Now let’s compare the federal tax liability under the MFJ brackets (when both spouses were alive) versus the single brackets (after one spouse passes away).

As you can see, the tax difference is approximately $26,200 – that’s a 40% higher tax bill (and that is every year)! This is the same income, but the surviving spouse pays an extra $26,200 annually solely because the tax brackets have changed now that they are filing as single. Over many years this can be hundreds of thousands of dollars lost to higher taxes – and that’s before factoring in future RMD increases, opportunity cost of portfolio growth, or potential tax hikes. This also excludes state taxes!

This scenario happens far more often than people realize, especially if one spouse is younger or where life expectancy is materially different due to health factors. This scenario is exactly why Roth planning and other strategic tax planning is so powerful. Roth conversions during low‑income years and while both spouses are alive with wider tax brackets, can meaningfully reduce future RMDs and protect the surviving spouse from tax bracket compression.

It’s important to keep in mind that every dollar moved into a Roth account helps on several fronts:

• never creates an RMD (and reduces future RMDs with less money in traditional IRAs)
• never increases future taxable income
• never pushes income into higher tax brackets
• no risk of increased tax rates in the future
• never burdens the surviving spouse if/when filing as single
• never creates taxable income for your children (more on this one below)

Roth Advantages for Children: Multi‑Generational Wealth Planning

When it comes to leaving money to the next generation, the type of account your children inherit makes an enormous difference. Under today’s rules, if your children inherit a traditional IRA or 401(k), they are required to withdraw all the money over a 10-year period, generally a little each year and then all of it by the end of the tenth year. Every dollar they take out counts as ordinary taxable income. Thus, those withdrawals can push them into much higher tax brackets—often during the very years they are earning the most in their own careers. In other words, what you intended as a generous inheritance can unintentionally create a significant tax burden for your kids (and may disrupt their own tax planning strategies as they are preparing for retirement).

Roth assets, on the other hand, change that picture completely. Children who inherit a Roth account still need to empty the account within 10 years, but the key difference is that every withdrawal is tax‑free. This means their inheritance does not increase their taxable income, doesn’t affect their tax bracket, and gives them more control over when to take distributions—whether they prefer to let the account grow untouched for a decade or spread withdrawals more evenly to cover cash needs or execute other planning opportunities.

For high‑earning adult children, this tax‑free flexibility can be worth tens, or even hundreds of thousands of dollars. Roth planning is not simply a smart retirement move for you (and your spouse); it’s a strategic, multi-generational wealth planning decision that can meaningfully shape your family’s long‑term financial wellbeing.

Smart Investors Prioritize Tax Planning—Not Just Investments

The impact of multi‑year, proactive tax planning compounds quietly but powerfully. Investments matter, of course, but taxes consume more wealth over a lifetime than almost any form of market volatility. Long-term tax savings are rarely reflected in your investment performance or rate of return, and they are never compared to a benchmark like the S&P 500. However, a comprehensive financial plan is not complete without an integrated, multi‑year tax strategy, and the earlier this planning starts, the more powerful the results. Roth contributions, Roth conversions, income‑bracket management, Social Security and Medicare premium planning, surviving spouse protection strategies, and multi-generational planning are essential for high‑net‑worth families seeking to preserve and grow wealth tax‑efficiently.

Proactive tax planning is not a product or a service – it’s an ongoing process, ideally anchored in a long-term relationship with a comprehensive advisor who gets to collaborate with you and your family over many years. We have seen the benefits, and pitfalls, of such planning executed properly—and when it’s lacking. In the long-term it’s not what you earn on your investments that matters – it’s how much you and your family keep!

Anthony Criscuolo, Senior Wealth Manager

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.