How Can You Plan Beyond Next Year's Tax Bill?

MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.

This podcast focuses on decisions because decisions are important. To paraphrase Albert Camus, "Life is the sum of all your decisions." I'm not sure that's entirely true, but it sounds good and is true enough. But problems arise when we go through life making one decision or one choice at a time, and we make those decisions in isolation. Maybe they don't seem to be related, but if you believe what Camus said, they are. 

You can see this play out when you play a game of checkers with little kids. Once they learn the basic rules and start playing independently, they very much play one move at a time. Eventually, they learn to think ahead and play more strategically. They start to think about how their opponent will react to their move and how they in turn will react to the opponent's move. In other words, they start to appreciate that every move affects to some degree all other moves in the game. 

Your financial life is the same way. Don't make a decision as if it's independent of everything else going on in your life. Stop and think a bit about where you are and where you want to get to, then put together a plan to get there, and then make decisions based on that plan. This all seems obvious, but when it comes to taxes—which is what we're going to be talking about today—often, we make decisions in isolation. A lot of us avoid thinking about taxes as much as we can, but that can't go on forever. We hit a deadline like April 15th. Some of us who have a more advanced grip on our tax situation know we have to get our tax ducks in a row earlier, and we end up scrambling at the end of December. That's better, but still not great. In either case, we get really interested and make a bunch of rushed, stressed-out decisions driven by our goal to minimize how much we pay in taxes.

What's going on in many cases is we confuse filling out tax forms and hitting deadlines with tax planning. My guest today thinks we should approach taxes differently because nearly all financial decisions have tax implications. And if we keep taxes in mind when planning and investing, you're going to be better off. And as we'll hear, there's a lot you can do to help improve your tax situation. 

Hayden Adams is a director of tax planning and wealth management research at the Schwab Center for Financial Research. He's been with Schwab for more than a decade and provides insights on tax planning, tax-efficient investing, and many other tax-related topics. Hayden is a Certified Public Accountant and a CERTIFIED FINANCIAL PLANNER®.

Hayden, a lot of times we tell people on the investing side to don't just buy one security at a time. You really need to think about what you're trying to accomplish. Think about your overall portfolio. And it occurs to me that, when we start thinking about taxes, people often think about taxes as something that they just deal with once a year, and it's just kind of a pain and something they just want to get done. From a planning standpoint, what do you think about that mindset? I mean, is that a good way of approaching it, or is that overly limiting?

HAYDEN ADAMS: It's definitely an overly limiting mindset. I mean, honestly, there's just not that much you can do during tax season to reduce your taxes and do any kind of significant tax planning. I mean, yes, you can contribute to, say, an IRA account or maybe a health savings account if you have that option available to you. But other than that, there's not really a lot of options for the vast majority of people. So my recommendation is to make tax planning a long-term focus. 

Make it something that you do annually, not just during tax season. That's tax preparation. What we should be focused on is tax planning throughout the year. For example, right now we're in tax season, but you may want to be talking to your advisor right now about what can I do for 2026 to help reduce my taxes this year? Because you have a lot of options available to you right at this very moment. And that's something you should revisit annually and keep a longer-term focus, not making decisions just for today, but for your whole lifespan, during that accumulation phase, during the phase where you make distributions, and then finally, if you plan to pass on assets to your heirs or to a charity.

MARK: Yeah, if you wait until the last week of December, a lot of that flexibility you have pretty much isn't there anymore. I mean, it's tax season right now. It's really tax-filing season, but tax season is really the full year. I think that's what you're saying.

HAYDEN: Yeah, exactly. The idea here is that the more planning you can do, the more you think ahead about what your overall goals are. What are you trying to achieve? That can make your tax planning far more impactful. And the longer your point of view, the more likely you are to make better decisions.

MARK: So I think implicitly, or maybe it's just the people I hang out with, they in fact seem to focus … their objective seems to be just to focus on this year's tax bill and making that as small as possible. And your point about thinking about it throughout my entire lifespan, that doesn't seem to resonate. So why is that short-term focus so hard to shake?

HAYDEN: Well, nobody likes paying taxes. I mean, I used to be an IRS agent, and even when I was an IRS agent, I didn't like paying taxes. It's just this expense that we have to have in life. And I think a lot of people don't look at it that way. I think often people look at it as, like, it's just this thing that they don't like doing. There's no benefit to it that they can see. And the reality is that taxes actually do have a benefit to our overall society, provide for like our nation's ability to improve roads and provide infrastructure and all that kind of stuff.

And so I totally understand why people have this short-term focus because they're like, well, all it is is a huge expense that I have to pay annually. But I think what we need to do is reframe that and say that, OK, yes, taxes annually can be painful, but it is something that we're going to have to face for our entire lives. And so rather than thinking about it just annually, let's look at it long-term. Let's look over our whole lifespan. Because again, the goal here shouldn't be to reduce taxes to zero because that's just not possible. Right?

The idea here is to maximize your overall after-tax wealth for your lifetime. And that requires extensive planning and revisiting on an annual basis with your advisor to figure out, hey, my situation has changed, should my tax plans change based on that?

MARK: Yeah, I think I've heard you tell me in the past that if you really want to minimize your taxes, just don't have any capital gains, don't have any income. That's the best way to do that. Of course, that's probably not really what people are hoping to accomplish, right?

HAYDEN: Exactly. I mean, the simplest way to pay no taxes would be just don't make money and/or just give all your money away, which, you know, great. If you want to give all your money away, that's wonderful. But you also need to think about yourself, and do you have the money to pay for your living expenses, your goals, the needs of your family? 

The idea here is that, yes, tax planning is not glamorous. It's not a sexy thing to do. But in the end, tax planning can provide a great amount of boost to your wealth. It's not going to create new wealth, but it'll help you keep more of the money that you've earned in your pocket. And if we do that with a longer-term focus, we're more likely to succeed at that goal rather than trying to do something today that maybe reduces our taxes in the short term but maybe harms us in the long run.

MARK: So Hayden, a lot of different account types that are out there, and for various reasons, I think some people just look at a lot of those accounts as interchangeable, and it doesn't matter so much which account you use, as you mentioned, as long as you're saving. But from a tax perspective, it seems like that could be a costly assumption. So talk to me a little bit about that.

HAYDEN: Oh, I definitely agree with you, Mark. A lot of people just … they don't understand the nuances of the differences between each of these accounts. They each have their pros and their cons. The idea here is, yes, save as much as you can, but the important thing is also to save in the right account for what your current situation is. 

Now, generally speaking, tax-deferred accounts like a traditional IRA and a Roth IRA, they actually are equally tax efficient overall. So if you're in the same tax bracket today as you are in the future, both accounts will provide you with a generally similar outcome when it comes to taxes. But the reality is that most people aren't going to be in that situation where they're have the same tax rate today as they will in the future. Sometimes you're going to have a lower tax rate today, and you might have a higher tax rate in the future, or vice versa. And that's where making the right decision about account type really comes into play here.

And it's not just about tax rates. It's also about, well, do you need the money? Because if you need the money in the short run, maybe a tax-advantaged account, yeah, it's great because it has all kinds of advantages to protect your wealth to grow compounded tax free. But if you need that money before you're 59 and a half, you're not going to be able to access it without penalties. And that's where a taxable account can also be very beneficial. Now on face value, a taxable account is not tax sheltered. It's not as tax efficient, but there are strategies we can use to actually make it tax efficient.

MARK: I hope you're feeling more informed about taxes in your financial life. Hayden has more to share, but right now we're going to look into a phenomenon known as tax aversion. I don't know many people who love taxes, but I can think of a few who suffer from tax aversion. 

The definition of tax aversion is that it's a systematic tendency for people to dislike paying taxes more than they dislike paying equivalent non-tax costs. In other words, if you have to pay $10, and that $10 is labeled as a tax, it's more psychologically painful than if that same $10 is labeled as a price, a fee, or a cost. A favorite study of mine on tax aversion is called "Axe the Tax: Taxes Are Disliked More Than Equivalent Costs."[1] Researchers did several experiments, and here are a couple of them. 

In one, participants were asked to consider buying a new TV that was available at two stores. The first store was five minutes away. The second store was 30 minutes away and said the cost of the television was tax free. Here's the kicker. If you bought the TV at the first store, you'd save 9% off the regular price. If you bought the TV at the second store, you'd save only 8% because that was the amount of the sales tax. But because the second store framed the 8% savings as a no-tax savings, more people chose to go there. This was especially surprising because the second store is 30 minutes away instead of five, and the TV costs more than at the first store that was nearby. 

Another experiment asked participants to imagine they're shopping for the same jacket at two stores near each other in a shopping mall. One store had the jacket immediately available. The other had an "Axe the Tax" sale, but you had to wait in line to buy the jacket. Participants said they would wait longer for the jacket with the Axe the Tax discount than they would for the exact same discount that was not related to taxes. 

Here's another study from different authors, and it's about an aspect of tax aversion called the loss-aversion bias. We've talked about loss aversion on this podcast before. To review, the loss-aversion bias drives us to prioritize avoiding losses over earning gains.[2] And we do this because we feel the pain of a loss much more acutely than we feel the pleasure from a gain of the same size. A study of 3.6 million taxpayers in Sweden[3] found that people were more likely to claim a deduction if they owe taxes than if they were entitled to a refund. Of course, what makes this interesting is that claiming the deduction will make the refund larger for those in that situation, but fewer people actually took advantage of that. 

What we're trying to point out here is that tax aversion can make us do dumb things. We're more likely to behave in irrational ways just because of the word "tax." If you think you're prone to tax aversion when you're faced with a tax, take a moment to do the math. Look at the situation logically. Don't follow your gut; follow the numbers. And now we'll get back to my conversation with Hayden. He's got more ideas on how to improve your tax planning and tax strategies.

Hayden, in taxable accounts, taxes, you know, they erode returns over time because the earnings and the income being distributed from those accounts are going to be taxed. What are some of the common mistakes that investors make because maybe that isn't as visible to them, and maybe it's not as obvious to them, and therefore they fall into some traps?

HAYDEN: I think the most common traps people fall into with the taxable account is they know that the taxable account is going to be taxed, but they don't realize that there's some simple strategies you can use in order to help minimize or avoid some of those taxes. And I think the thing that I see most often where people kind of hurt themselves a little bit is through over-trading. So you see a lot of people who are, for example, day traders or somebody who are actively trading their account. And there's not necessarily anything wrong with that. If you're good at trading, if you're good at stock picking, more power to you.

But the thing is, is that you have to not measure your performance based on the return you got before taxes. What you need to measure it on is your return after taxes. Because if you're actively trading like that, and you're not holding the assets for the long term, you're going to be taxed at your ordinary income tax rates, which takes a pretty big haircut off of your returns. And you need to factor that into your trading formula. 

Really, there's just a handful of things you need to do to make your taxable account tax efficient. The first one I'd recommend is to hold assets for the long term. If you hold it for more than a year and a day, then you get a much lower, long-term capital gains tax rate. Also, if you look for assets that pay qualified dividends, they get the same long-term capital gains tax rates. Or if you're wealthy enough, there's kind of a cutoff point where municipal bonds can also provide actually a better after-tax return than normal corporate bonds because they don't get taxed at the federal level. And if you live in that exact same state as where the bond was issued, you also won't have state taxes.

There's a lot of little decisions you can make, even something as simple as whether or not you use an ETF or a mutual fund within your brokerage account. Because if you hold an ETF, they tend to generate a little bit less tax than mutual funds, simply based on the overall structure of the entity that they're using to hold those assets in.

MARK: And as people approach retirement, the mindset shifts a little bit because no longer is the focus exclusively on just accumulating assets. You're at the point, particularly after you've retired, you're going to need to start pulling assets out of those accounts to fund your living expenses. So tell me about how tax planning needs to change at that particular point, given the change in focus.

HAYDEN: That's a great point about, in retirement, things definitely do change for the vast majority of people. One of the big things that actually generally happens to people in retirement is a lot of them, their tax bracket will drop by one or two tax brackets because, again, they're not earning wages anymore. For the vast majority of people, they're going to see their income take a pretty good dip, which means their taxes will also dip. 

But the idea in retirement is that most of us don't have enough money just to live off of interest and dividends alone. What's going to end up happening is you're probably going to have to dip into the principal of your assets. You're going to have to sell assets and potentially recognize gains of your selling assets in your brokerage account. And you might have to like sell assets within tax-deferred accounts and take distributions from those, which will create income.

And so when it comes to tax planning and retirement, what we have to do is factor in how do we take these distributions in such a way as to smooth out our taxes over the entire retirement? Because if we just tried, for example, to reduce taxes in one year, well that's kind of an easy thing to do. You just use all the Roth assets, right? But generally speaking, that could be a bad decision in the long run because what your Roth assets need is more time to grow because you pay taxes upfront. 

And so generally speaking, what we say is, hey, don't take anything from your Roth accounts until the very end. Let those assets keep growing, right? Use taxable account assets or a combination of taxable account and tax-deferred assets early in your retirement. And that creates more tax. So the idea here is that, yes, it creates a little bit more tax early on, but you're allowing more growth of those Roth assets to benefit from tax-free distributions in the future. 

And so it's a little counterintuitive sometimes. Sometimes people want to just, like you were saying earlier, reduce their taxes today, but that could be at the cost of paying more taxes down the road. The idea here is just do a holistic plan when it comes to retirement distributions. And that's actually something we can do here at Schwab. We have tools that can model out distributions through your entire retirement and kind of show you that if you use this method, here's the probable outcomes. But if you use this other method of distributions, your outcomes can significantly improve. And again, there's no guarantees. There's a lot of assumptions being made because your retirement could be like 30 or 40 years. But the idea here is if you plan out that whole process over time, you're more likely to succeed at your goals.

MARK: Hayden, last question for you. We always like to talk about some cognitive and emotional decision-making biases that people have. So what's one blind spot you see repeatedly that prevents otherwise disciplined investors from being more tax aware?

HAYDEN: I think the one thing that really stands out to me for most people is that they get overly focused on taxes. Taxes are obviously an important part of investing. It's important part of your wealth management, but it shouldn't be the primary driver for any of your decisions. For the vast majority of your decisions, taxes are an aspect that you need to consider, but it's in consideration of your overall goals, your overall wealth management plan. And I think the best example I can give you of where taxes can sometimes be a stumbling block for people is when they have a concentrated position.

So I see this a lot when I go out there in the field, and I'm meeting people at branches and different events, is that a lot of our clients will have made some great investment selections, and that investment has risen, like, sometimes 500%. And now it accounts for a huge portion of their wealth. So they've got this stock that might account for anywhere from like 50 to 90% of their wealth. So they have huge amount of their wealth concentrated into one stock. 

And then where taxes kind of comes in and becomes a stumbling block for them is that they don't want to sell that position. And they really don't want to sell it because they don't want to pay the taxes because they're afraid of the known, which is that they're going to have to pay a 20% tax rate plus the net investment income tax of like 3.8%. And that's going to result in a massive haircut from taxes. And that becomes so much of their focus that they don't actually see the other big issue that could potentially be waiting for them off in the sidelines, which is that they are subject now to the market whims.

That stock or group of stocks could potentially be volatile over time. And maybe it was good to them in the growth phase, but companies change over time. And that stock could maybe have a new competitor hit the market with a better product. And suddenly that stock drops by 50%. And if that happens when you actually need that money to live on to provide for your living expenses, well, imagine a situation where you had $30 million in that stock and now it's only $15 million. You're still going to have to sell assets to pay for your needs, and you're still going to have to pay the 23.8% in taxes. 

So the idea here is that don't let taxes overwhelm your decision-making process. They're something you should consider. They're something that's important. And there are tools we can use to help mitigate some of the taxes and to divest some of those positions that were over-concentrated. But the idea here is that the primary driver should be wealth protection and wealth preservation, not tax avoidance.

MARK: Hayden Adams is a director of wealth management research here at the Schwab Center for Finance Research. Hayden, thanks for being here today.

HAYDEN: Thanks for having me, Mark.

MARK: Thanks again to Hayden for all that great information. Obviously, tax planning is a wide-ranging topic, and you might have more questions. Schwab has a lot of resources, with many of Hayden's articles available online at schwab.com/learn. There's a whole section called "Tax Basics: How to Plan Year-Round," and we'll have links in the show notes. 

That's a wrap on this episode and this season of Financial Decoder. Thanks for listening. I'll be back with new episodes in June. If you don't want to wait that long, we've got plenty of past episodes in the archives. If you'd like to hear more from me in the meantime, you can follow me on my LinkedIn page or at X @MarkRiepe. That's M-A-R-K-R-I-E-P-E. As always, we'd appreciate it if you gave us a rating or review on Apple Podcasts or comment on the show if you listen to it on Spotify. Or tell a friend or a few friends about us. We always like new listeners, so if you know someone who might like the show, please let them know and how they can follow us for free in their favorite podcasting app.

For important disclosures, see the show notes and schwab.com/FinancialDecoder.
 

[1] Abigail B. Sussman and Christopher Y. Olivola, "Axe the Tax: Taxes Are Disliked More than Equivalent Costs," Journal of Marketing Research, VO. 48, --. S91-S101, 2011, Axe the Tax: Taxes Are Disliked More than Equivalent Costs on JSTOR

[2] "Loss aversion bias," Schwab Asset Management, Charles Schwab, accessed April 9, 2026, https://www.schwabassetmanagement.com/content/loss-aversion-bias

[3] Engström, Per, Katarina Nordblom, Henry Ohlsson and Annika Persson. 2015. "Tax Compliance and Loss Aversion." American Economic Journal: Economic Policy, 7 (4): 132–64.