Why We Sometimes Deliberately Pay More in Taxes
Sometimes the best medicine is a little bitter.
As the year draws to a close, we spend a great deal of time finalizing tax planning for clients. That usually means looking for opportunities to reduce taxes.
But not always.
In fact, sometimes we are deliberately trying to increase a client’s tax bill.
That may sound counterintuitive—especially coming from a financial planning firm—but in the right circumstances, paying more tax today can meaningfully reduce taxes over time and avoid far more painful outcomes later.
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When “Tax-Efficient” Misses the Bigger Picture
Many clients come to us because they want investments and taxes to actually work together. I have lost count of how many people have reached out frustrated because their prior advisor—human or algorithm—focused only on pre-tax returns, without considering the downstream tax consequences.
Higher Medicare premiums.
Unintended jumps into higher tax brackets.
Phasing out of the enhanced senior deduction and other tax credits.
That disconnect is often most visible in one of the most overlooked areas of tax planning: inherited retirement accounts.
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Inherited Retirement Accounts: Where Timing Matters Most
Inherited IRAs and 401(k)s are one of the few places where we may deliberately pay more tax in a single year—or even across several years—to avoid paying much more overall.
They are also one of the most confusing areas of the tax code.
After several years of delayed enforcement (because even the IRS acknowledged how complex the rules were), most beneficiaries of newly inherited retirement accounts are now required to take distributions every year, and to fully empty the account by the end of the tenth year after the original owner’s death.
Each distribution is taxed as ordinary income.
Here’s the catch: if the account is invested and growing, modest annual withdrawals often leave a very large balance sitting in year ten—resulting in a massive final distribution and a sharp spike in taxable income.
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A Real-World Example
Let’s use a real client’s situation–we will refer to her as Julia here.
Julia inherited an IRA worth $500,000 after her mother passed away last year. Her mother was 82. Julia is 60.
Under current rules, Julia must take an annual distribution. This year, that amount is about $18,450, all taxable income.
For many people, that doesn’t feel too painful. For someone in the 22% tax bracket, that is roughly $4,000 in additional tax. Not ideal—but manageable.
The problem isn’t year one.
Assuming a 7% rate of return and only taking the required minimum distributions each year, by year ten the account is still larger than when Julia first inherited it. In that final year, Julia would be forced to take a distribution of roughly $675,000—all taxable in one year.
For a couple with a normal taxable income of $150,000, that single event could trigger well over $250,000 in additional income taxes and push a significant portion of their income into the highest tax brackets.
This is where the IRS quietly wins—and where thoughtful planning matters.
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Why Paying More Earlier Can Mean Paying Less Overall
This is why, for some clients, we intentionally pay more tax earlier.
Instead of letting income pile up and explode in year ten, we may:
- Spread distributions more evenly across years
- Take larger withdrawals during lower-income years
- Time withdrawals around business losses, charitable giving, or medical expenses
In some cases, we even respond to market volatility. If markets decline meaningfully, we may take larger distributions while account values are temporarily lower—allowing future growth to occur after income taxes have already been paid.
Paying tax isn’t the goal. Paying the least tax over time is.
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Why This Requires Real Financial Planning
Once you layer inherited accounts on top of Social Security, your own required distributions, investment income, capital gains, Medicare premium thresholds, and multi-year projections, this quickly becomes too complex to solve with rules of thumb.
This is where comprehensive financial planning and proactive tax planning earn their keep.
For Julia—and many others—we take complex, intimidating decisions and turn them into a clear, coordinated strategy.
Inherited retirement accounts are just one example. The same approach applies to:
- Selling real estate
- Exercising stock options
- Structuring deferred compensation
- Reducing concentrated stock positions
- Gifting assets to family or charities
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The Value of a Team That’s Aligned
Clients often tell us they value our coordination just as much as the strategy itself.
They don’t want disconnected advice. They want collaboration—between us, their CPA, and their attorney—to ensure everyone is working toward the same outcome.
And that is where something interesting happens.
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Where Peace Enters the Picture
Can you remember a time you delivered peace to someone you love?
Or even to yourself?
It’s a powerful feeling.
We see it happen with clients at different moments. Sometimes it arrives when a confusing decision finally clicks. Sometimes it comes after everything is implemented and they know there is a plan in place.
But most often—especially as wealth grows—peace shows up when clients realize they are no longer carrying the weight alone. They have a team behind them, aligned, capable, and deeply attentive to what matters most to them.That is the work we love doing.
The best medicine may be a little bitter, but we hope to be the Mary Poppins with a spoonful of sugar to help the medicine go down.
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