Key takeaways:
- Current favorable tax rates mean clients have opportunities right now to build tax diversification into their future financial plans.
- Roth accounts can offer significant benefits for both managing future income and potentially minimizing taxes for beneficiaries.
- Higher earning clients may benefit from leveraging non-qualified annuities to delay the recognition of investment or interest income into retirement.
- High-income and retired clients can manage their tax liability through deductions such as the temporary senior deduction and higher state and local tax (SALT) deduction.
03/02/2026 — Most clients have taxes on their minds right now as they prepare their 2025 returns. That makes this an ideal time to engage with clients about tax planning, when they have most of the year to implement tax-saving strategies for 2026.
The passage of H.R.1—referred to by many as the “One Big Beautiful Bill” last summer—was significant in that the new law made permanent the high standard deduction and more generous tax brackets of the Tax Cuts and Jobs Act. The legislation also introduced new provisions like the temporary senior deduction and increased the deduction for state and local taxes (SALT), but these provisions expire in 2028 and 2029, respectively.
As you start tax planning conversations with clients, one theme to consider is that for many, current tax rates are favorable. Workers are looking at potentially low effective or average tax rates. Retirees may be able to protect more of their income from taxes.
The current favorable tax rates mean clients have opportunities right now to build tax diversification into their financial plans, benefiting them not only for retirement but also when they leave assets to their beneficiaries.
Here are some ideas for tax-focused conversations to have with clients right now, starting with those who are still working and not yet retired. As always, advise your clients to discuss any tax moves with a qualified tax professional before implementing any strategy.
For non-retired clients, consider the Roth option
When it comes to retirement plans, the types of accounts clients contribute to are just as important as how much they contribute. Many workers have much of their savings in tax-deferred retirement accounts, which can create significant tax exposure down the road. Leveraging designated Roth accounts can help build tax diversification for later during retirement.
Higher-income workers may be restricted in how much they can contribute to a Roth IRA. But there are no income restrictions to designated Roth account contributions, meaning that all clients are eligible to direct all their salary deferral to a designated Roth account should they choose.
Keep in mind that while elective deferrals can typically be directed to a traditional pre-tax account, Roth account, or split between both, under SECURE 2.0, if your prior-year wages exceed $150,000, catch-up contributions to qualified plans must go into Roth accounts.
Secure Act 2.0 also made it easier for plan sponsors to add protected income options to defined contribution plans, which can offer participants annuity like protections. You may want to check with clients to see if their workplace plan offers a protected income option.
Defer taxes on non-qualified cash using annuities
Many clients who are saving cash outside of retirement accounts—in money markets, CDs, and other fixed-income investments—are earning higher rates of interest today than they were a few years ago. These payments are typically taxed as ordinary income and can create current income tax liability at the client’s top marginal tax rate. Some clients with large cash savings may even be making quarterly estimated tax payments just to keep up.
One way clients can manage these tax liabilities is by using non-qualified annuities, which allow earnings to grow tax-deferred until withdrawal. Fixed annuities can offer similar rates of returns to CDs, while other annuity offerings (e.g., fixed indexed or registered index linked annuities) can offer a potentially higher rate of returns while still offering principal protection.
Be aware that annuities are longer-term investments and often have liquidity restrictions. While contributions to non-qualified annuities are not deductible, they can still help clients avoid paying taxes at higher marginal rates during their working years by deferring the recognition of that income into retirement, when their marginal tax rate may be lower.
A higher SALT deduction may benefit high earners
Higher-income clients in high tax states with expensive homes may benefit from the increased state and local tax (“SALT”) deduction under H.R.1.
Deductible state and local taxes generally include state income taxes (or sales taxes, but not both) and property taxes paid. The cap on the SALT deduction rises to $40,400 in 2026 (from $10,000 previously) but begins to phase out at modified adjusted gross income of $505,000.
High earning clients with itemized deductions more than their standard deduction (SALT and home mortgage interest are often the largest such deductions) may want to consider options such as non-qualified deferred compensation plans, maximizing pre-tax retirement plan contributions or even charitable contributions to keep their income below the phase-out range to preserve the SALT deduction.
For retired clients, take advantage of the temporary senior deduction
Taxpayers over age 65 do very well under H.R.1. They start with the $16,100 standard deduction, then get an additional standard deduction for everyone aged 65 and over (an additional $2,050 for single filers, $1,650 each for married couples). Some will be now eligible for a temporary senior deduction of up to $6,000 per person ($12,000 for couples) through 2028.
This temporary senior deduction begins to phase out at a modified adjusted gross income of just $75,000 for single filers and $150,000 for married couples filing jointly. (It doesn’t fully phase out until $175,000 for single filers and $250,000 for married couples filing jointly). Keeping MAGI below the phaseout can help retirees maximize this benefit.
Here’s a rule of thumb to remember: If your client can limit ordinary income (such as taxable Social Security, pensions, and distributions from tax deferred retirement accounts) to about $12,000 per month for married filers and $6,000 per month for single filers, they should easily qualify for the full temporary senior deduction.
For clients who have additional income needs, consider non-taxable distributions, such as Roth distributions or tax-free distributions or policy loans from the cash value of life insurance policies, to maintain eligibility for the temporary senior deduction.
Married retirees should make the most of their joint filing status
Married retirees who file joint tax returns are often in a great position to get more money out of tax deferred accounts at a lower tax rate than single filers.
A married couple (both 65+) who qualify for the temporary senior deduction in 2026 won’t pay a penny of federal income tax until their gross income exceeds $47,500. Single filers, assuming they qualify for the $6,000 temporary senior deduction, start paying taxes at just $24,150 of gross income. Single filers may also have a harder time qualifying for the full temporary senior deduction as it starts phasing out at just $75,000.
Tax brackets exacerbate the problem. Married filers are allowed twice as much income before they bump into the next bracket. But this is an opportunity for married clients. One strategy to consider is taking distributions from tax deferred accounts to get to the top of the 12% bracket (about $148,300 for 2026). Even if they don’t need that money, their effective federal tax rate on this income will be less than 8%.
Income above living expenses can be directed to Roth conversions or simply reinvested in a taxable account. These distributions can reduce future Required Minimum Distributions later in retirement and help build tax diversification.
Start building tax diversification for wealth transfer
It’s likely your clients don’t want their beneficiaries to lose a big chunk of their inheritance to taxes. Planning for wealth transfer is an opportunity to engage with your clients, along with their beneficiaries who may present opportunities to add to your book of business.
Most non-spouse beneficiaries now have only 10 years to take distributions and pay taxes on inherited retirement accounts. If beneficiaries are still working, it could mean those distributions are taxed at the beneficiaries’ highest marginal income tax rates.
Retirees in lower tax brackets may be able to do annual Roth conversions at a lower tax rate than their beneficiaries would pay on distributions. This strategy can be very effective for wealth transfer as Roth IRAs aren’t subject to RMDs while the owner is alive. Beneficiaries, while still subject to the 10-year rule for inherited accounts, receive distributions income tax-free.
Non-qualified annuities can also offer wealth transfer advantages. While growth in a non-qualified annuity contract is ultimately taxable as ordinary income, beneficiaries have favorable distribution options. An inheriting spouse can take ownership of an inherited non-qualified annuity, meaning there are no required minimum distributions during the inheriting spouse’s lifetime. Non-spouse beneficiaries can take life expectancy distributions, potentially spreading the taxes over a long period.
Finally, don’t overlook the importance of life insurance. Life insurance that accumulates cash value not only provides retirees with a source of tax-free distributions or loans in retirement but also pays a tax-free death benefits to beneficiaries. This makes life insurance a powerful planning tool for both spouses and non-spouses alike.
Don’t miss the tax-saving opportunity
This year, as you engaging with clients on taxes, the goal should be to make sure they are taking full advantage of the opportunities presented by H.R.1, especially in leveraging lower tax rates now to build tax diversification for the future.
Tax planning can help clients better navigate potentially higher tax rates in the future and may allow a more tax efficient transfer of assets to beneficiaries. It also helps you fully demonstrate your value as a trusted financial professional not just to the client, but to their family as well.
