The Downside of Tax Minimization: Why Paying Taxes Can Be a Winning Strategy
Episode 16
The Downside of Tax Minimization: Why Paying Taxes Can Be a Winning Strategy
Published on December 17th, 2025
Episode 16 of Retirement Tax Matters tackles the financial psychology of tax aversion—the emotional resistance high-net-worth retirees often feel toward paying taxes, even when it might be the most strategic move. We explore why successful savers, who built wealth by minimizing costs, often struggle to execute strategies like Roth conversions or selling highly appreciated stock because they view paying tax dollars as a loss of capital. Drawing on Garrett’s evolution from a calculator mindset to a holistic planner, we discuss how focusing solely on avoiding taxes can inadvertently introduce greater risks, such as concentrated stock positions or leaving a complex tax burden for heirs. We use the cautionary tale of Sears stock to illustrate how holding an asset purely to avoid capital gains tax can backfire if the underlying business fails to adapt. Ultimately, the conversation shifts the focus from purely minimizing taxes today to optimizing for simplicity and risk reduction in the future.
Key Tax Planning Questions
Click Below To See The Answer
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Like many complex financial planning scenarios, the honest answer is: It depends.
This dilemma most often impacts High-Net-Worth retirees who purchased individual stocks or ETFs decades ago. You may have bought $100,000 of a blue-chip stock in the 90s, and today it is worth $400,000. To sell that position and diversify now would trigger taxes on $300,000 of gain—a bill that could range from 0% to 23.8% at the federal level, plus applicable state taxes, which in some could push your total liability higher. I often tell clients that buying individual stocks in a taxable brokerage account is like a marriage: it’s easy to get into, but if you decide to go a different direction later, it can be a painful, tax-filled divorce.
So, do you stay married to the stock to save on taxes, or do you file for divorce (sell) to reduce risk? The biggest incentive to hold is the step-up in basis. Under current tax law, if you hold an asset until death, your heirs receive it with a cost basis adjusted to the fair market value on the date of your death. Using our example, if you hold that $100K basis stock position until it grows to $1 million, your heirs could inherit it at that value and sell it the next day owing $0 in capital gains tax. This benefit is even more powerful if you live in a community property state where you might receive step-up in basis on the death of the first spouse—a big planning opportunity that shouldn't be overlooked.
However, relying entirely on this tax break requires major gambles: that the tax law won’t change (Congress has floated ending the step-up loophole many times), and that the single company will survive and thrive for decades. This is where concentration risk and tax drag become formidable adversaries. Large companies, like Apple, can decline due to innovation or mismanagement. Furthermore, a legacy stock might only yield 1% in dividends, whereas a diversified value ETF might yield 2%+.
When navigating this decision, we move beyond the binary SELL IT ALL vs. NEVER SELL thinking and evaluate three critical factors:
Life Expectancy vs. Timeline: If you are 90, the value of the step-up is high and imminent; waiting is often the prudent mathematical choice. If you are 65, a 20-year holding period could be too long to wait on a single stock's survival just to avoid a long-term capital gain tax bill.
Strategic Partial Selling: We rarely sell everything at once. Instead, we can sell to the top of your current tax bracket or up to a Medicare IRMAA threshold, while also paying attention to the Net Investment Income tax thresholds.
Risk Capacity: Does this position represent 5% of your net worth or 50%? If a permanent 40% drop in this stock would ruin your retirement plan, you cannot afford to keep it, regardless of the tax consequences.
If a highly appreciated position represents a large risk to your plan, the tax bill is simply the price of purchasing peace of mind.
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This is a very common scenario for the high-net-worth retiree falling in the $2 million to $8 million range that this blog focuses on.
You likely have a taxable brokerage account that has ballooned into a size you could not have predicted many years ago, and now you are beginning to become uncomfortable with the concentration risk. If you have Social Security, Required Minimum Distributions, and perhaps a pension or other guaranteed income source covering your daily living needs, this account essentially becomes a legacy bucket for your heirs.
You might feel stuck because you do not want to sell and trigger a capital gains tax bill, but you also worry that a single corporate failure or broad market decline could erase the inheritance you are trying to protect.
For a thorough breakdown of the psychology behind holding versus selling, I recommend reviewing my answer to the previous question above on this page "Should I sell stock now or wait for the step-up in basis?". However, if you are looking for specific strategies to manage this risk without selling everything, here are two areas that come up fairly often.
One area is: do you currently do any charitable giving? If you are giving to a church or supporting other qualified charitable organizations by writing checks from your bank account, you have may have opportunity to leverage a Donor Advised Fund (DAF). Instead of giving cash, you can donate your highly appreciated shares directly to the DAF. You receive a fair market value tax deduction, and the charity receives the full value plus getting to avoid the associated long term capital gains tax.
The key to de-risking, however, is what you do next. You take the cash from your bank you would have given to the charity and use it to purchase a more diversified ETF in your brokerage account. Effectively, you are swapping a risky, low-basis single stock for a diversified, high-basis fund. This is a simple, repeatable move that can lessen your concentrated security risk over time.
If charity is not part of your plan, you could be pitched by complex investment products designed to hedge downside risk, such as options strategies. While there is certainly room at the financial planning table for these tools, I often find that they introduce a level of complexity and hassle that may be counterproductive to your goals. These hedges are not free; they carry an ongoing cost that can create a drag on your returns. More importantly, if you do not fully understand the mechanics of the strategy, does it actually provide you with peace of mind?
This brings us to a final thought on the tax aversion hurdle. We can easily get so hung up on avoiding a tax bill that we lose sight of the bigger picture. In many cases, paying the capital gains tax is actually the strategic decision that puts you in a better position to achieve your goals. If selling a concentrated position allows you to sleep better at night, that tax bill might simply be the necessary cost to get you where you want to be.
Full Episode Transcript
Adam: Good morning and welcome to Retirement Tax Matters. I'm Adam Reed. This is Garrett Crawford. Good morning, our resident CFP. How are you feeling this morning?
Garrett: Doing pretty good. Another week, another tax planning podcast. The highlight of our week, right?
Adam: I know! And it's nice to be back in the saddle. We took a week off for Thanksgiving and other things here and there, so we're getting back into our flow. It is funny, we were just joking that Christmas falls on a Thursday, and we record these on Thursday morning. So I said, "Bring your gifts and cup of coffee, and we'll unwrap gifts together and record an episode live stream."
Garrett: From our living rooms!
Adam: Yeah, exactly. Well, on our website, we have some categories or "buckets" where we normally drop different topics. Our goal is to fill those out as we build a Rolodex of information on financial planning for DIYers, people working with a financial advisor, or even our clients to be educated on. Our bucket that we haven't dropped anything in yet is financial psychology. So, if you're watching at home, go ahead and lay out on your bed, look up at the ceiling, do some visualization, and come along for the ride.
Garrett: It's funny. I was going to say, "Save the best for last," but I just thought about how much of our job is really about money and emotions. The way we feel about money is honestly probably more than half of what we do as advisors. We can lean toward technical topics all day, but how we feel about money is really important.
Adam: Yes. A married couple with very different upbringings and different perspectives coming together to talk about one of, I think, the top three topics that lead to divorce. We get put in the middle a lot, and it's, "How do we navigate this conversation? How do we help people think through those things?"
Garrett: Just the other day, I was in an appointment, and the parents brought a child in with them. The child said, "Now, can this turn into a marriage counseling appointment?" Everybody was in a great mood, but it just goes to show it's a very real part of planning for the future.
Adam: Absolutely. So we won't dive into anything too crazy today, but we did want to talk about this because, with the end of the year, we've been doing a lot of these year-end tax projections. We talk about it almost every episode. We've been helping people do Roth conversions. We have a lot of clients that are in this high-net-worth space. They have a lot of cash on hand and a lot of investments. Even though these people are well-off and have substantial resources, tax aversion—not tax evasion, but tax aversion—has impacted a lot of the conversations we've had this year on how we're going to pay the tax bill for Roth conversions and other things we might be doing. Give me some insight on what you're seeing as we encounter more people saying, "I just don't want to pay the tax" to do what might be the most financially prudent decision.
Garrett: We could talk a long time about that, but I would start with the revolution of financial planners doing tax planning. It has not been a forever thing. You could go back and watch our very first podcast, and I talk a lot about that. I think what I've found, the more that I do tax planning for the niche of this podcast—which is high-net-worth retirees, somewhere in that $2 to $8 million range—is that I come across people more and more regularly that just hate paying taxes. Maybe five, six, seven, eight years ago, that didn't come up as often, but as I've begun to work with higher and higher net worth retirees, the people that have saved the most are usually the most averse to paying taxes, or at least there's a high correlation factor. I've thought about this a lot: Why is that? How do you pierce that kind of thick skin of people who are against paying taxes? They're not against paying taxes; it just kind of hurts them to write a check to the IRS. I would say if you lined up 10 different financial advisors, they might give you different answers to this. My short response is: it's not because they lack intelligence. It's not because somebody is "dumb" that they don't want to pay taxes. In fact, the people I'm working with who don't want to pay taxes have often had very successful careers. They've been calculated; they know really well what they're doing. What I would say is—and this could be categorized as economics or business development—I think people that have been successful investors really value having capital. Meaning, if you pay taxes, you are giving up money to the IRS that can no longer work for you. I think people realize that when you pay that money to the IRS, it goes to taxes; it's not like you get more interest off that money. So, I think there's a pretty common sentiment among high-net-worth retirees that every dollar I don't have to pay in taxes means that's another dollar that's working in my favor. And I totally agree with that; I think that is true. There's something out there called tax drag. The more taxes you pay, it reduces portfolio returns, and the less often you have to pay taxes, maybe the better. But I think that idea—what got you to be a successful retired person with a lot of money saved—that myopic view of it being hurtful, an aversion to paying taxes, I think it can be difficult to push through. We might hit this later in the conversation, but you can be lured into this false sense that taxes are minimal and that you don't have to pay for it. I think somebody down the road ends up having to pay those taxes. It might not be you, but it could be a beneficiary or a loved one that lives longer than you.
Adam: I think with anything like this, it's interesting to see people's stories and transformations. You've kind of had a psychological reformation, maybe, that you've gone through over the years. You cut your teeth with an engineering degree; you were thinking about going into that world. For people that know the story, you married Paul, the owner here, his daughter, and got "sucked" into the financial industry. You were a math guy, you were Xs and Os, but as you've progressed in your career, almost 13 or 14 years into it now, maybe you're more open to some of these things that 10 years ago you would have said, "No, I want the calculator to be right." So, what changed there, and what are some things that you've thought through that might help somebody at home who has the calculator out, going crazy, saying, "I don't know about the Roth conversion?" What could help them think through some of the things you've thought through?
Garrett: When I came into the industry, I think youth actually plays a big part in this. It's like the expectation that life is going to go a certain way: you're going to live until you're 85 or 90; there aren't going to be any hiccups; your investment accounts just go up and to the right; you make money. You kind of have this idea that life can throw you curveballs, but it just really hasn't sunk home yet that life is unpredictable and you're not guaranteed tomorrow. So, I think part of this is that when I came into the industry, I was young, and I thought life was predictable. The more that I've been in the industry, you realize sickness happens, death happens, divorce happens, job loss happens, disabilities happen. Not to be a worrywart—there are a lot of people who do live expected lives, and nothing terrible happens along the way that causes their financial course to be derailed. But I just feel that when I first started, life was kind of inside a calculator. I would read all these other authors and people in our industry that would say, "You know, Roth conversions are alluring. They're great, tax-free growth, but you really have to pay attention to the benefits of a Traditional IRA where you can take that tax deduction. Why would you do a Roth conversion in the 32% tax bracket or a 24% tax bracket if you don't expect to have high income in retirement and your retirement bracket is going to be lower?" This is me maybe five to seven years ago, where for a lot of people we were helping, it was like, "If you're in that 12 or 15% tax bracket, a Roth conversion can be a great idea. If you are in the 32 and above, maybe it's a lot harder of a case to say that a Roth conversion is great." But even in that 22 and 24, I was more skittish years ago at whether or not that was going to work out, because I lived inside of a calculator. I was thinking, "What result nets the most amount of money by a client reaching age 95?" If a Roth conversion didn't net out a positive ROI by age 92 or 93, why in the world would you do it? I think the older that I've gotten and the more that I've done it—you know, this isn't a black or white world—but there are just compelling benefits of doing Roth conversions, even in a high tax bracket or even in those 22 and 24% brackets. You can be simplifying a beneficiary's life; you can lock in taxes now; you have more peace of mind. It's kind of like paying off the mortgage of your house. Sometimes it mathematically doesn't make sense to do that, but people still do it. Why? Because they love being debt-free. Everybody's a little bit different, but living life inside of a calculator and this aversion to paying taxes—sometimes it helps to zoom out and see the big picture. Maybe ROI isn't the final goal; instead, maybe it's simplicity.
Adam: Well, I kind of introduced the topic talking about Roth conversions. You touched on those as well, but I think you and I both agree that maybe the place where tax aversion can most sizably impact somebody is a non-qualified or taxable account. We've actually seen that a couple of times this year with potential clients who kind of wanted to come on board, but whether it was an emotional attachment to maybe some stocks they had or just the thought of "I don't know about paying a tax bill right now." Walk me through that, and how that actually hurts you more down the road having that tax aversion now. With Roth conversions, we have workarounds. We can do tax withholding things. But in that world, if you aren't willing to pay the sticker price and go through the sticker shock of that, you just kind of get stuck.
Garrett: And instead of framing it as right versus wrong, I'd go back to what I said at the beginning. I think these people that are avoidant—that have an avoidance to selling things because it's going to generate taxes—it starts with: "If I sell something, I'm going to have to pay taxes. That means I'm going to have less money. I'd rather this thing just work for me the rest of my life." The other one is they've heard people say, "Successful investors are the people that can hold onto a stock and never sell." Again, I agree with both of those sentiments, but the challenge is anytime we take an idea or two that are very good—and this happens a lot in life—we can follow those two good ideas maybe at an unhealthy level to a little bit too far extreme.
Adam: You always say, "Rules of thumb are great, but they apply to no one."
Garrett: Yeah. So this idea that "never sell a stock, that's how you become a successful investor." Yes, that's great. But there are reasons why you'll hit a point in your life where maybe the risk and the leverage that you're creating by not selling outweighs the tax implications of you paying. I've used this example a lot through the years, and I think a lot of people tuning into this would remember Sears as the "Amazon" of your generation. Sears was an amazing company. They did all kinds of stuff; you bought everything from Sears: car stuff, clothing, electronics. I think I read one place one time you could buy a house through Sears. That seems wild to me. But anyway, Sears was an amazing company. Had you bought Sears stock early in your life, you would've seen it balloon. It would've been one of the best stocks that you owned. You would've loved Sears. But all it took was a company that decided, "Hey, we're going to sell things online." In the internet age, Sears could not adapt quick enough. Amazon came in and just destroyed the Sears business model. So for somebody who maybe in their early years would've bought Sears stock and then saw it shoot up like crazy, make a lot of money, if you would've had an aversion to paying the taxes on that Sears stock in a brokerage account, you could have ended up losing a lot of money because their business model didn't succeed in your lifetime. I say all that: "Never selling a stock" is a good idea. It's how successful investors make money when other people lose money. But when you hold onto that philosophy for too long in a situation like a single security that's highly appreciated, you're introducing increased risk. You have to see the increased risk, and then you have to view: "Is selling that stock, doing something that you don't want to do—paying taxes—is that actually worth it in light of reducing risk of those highly concentrated positions?" It's kind of an extreme example, but I would just say anything that you're doing financially where you're trying to defer taxes into the future, you have to ask: Is that avoidance mentality of taxes causing risk to pop up in other ways?
Adam: Yeah, and I think we've seen it in other ways, too. We checked yesterday at Cracker Barrel—one marketing decision, that thing went downhill quick. In the modern age we live in, look at Tesla. What if our CEO randomly becomes this high government official and makes decisions some people don't like? That thing went on a rollercoaster. You know, so I think in this day and age with the access to media and news, you are one poor decision away from that company from it not being so favorable, not being so profitable. But there also are a lot of great things out there that are positioned well for the future and to take advantage of AI. So, not to say that everything needs to be sold, but it is good to weigh the pros and the cons and say, "Hey, is it worth paying the tax bill now to position myself better for the future?" We agree. We like to encourage other people to look into that and obviously help our clients think through those things. Tax aversion, I think, like you said, we could probably talk about this all day long, and different cases where we've had clients in here. But I think that's kind of a good place to stop for the day. I look forward to our next time we get to drop another financial psychology topic in the bucket for everybody listening.
Garrett: This is fun. Stay tuned.
Adam: Yeah. So, thank you all for tuning in. Check us out on YouTube, like, subscribe. Follow us on Spotify. Check us out on Apple Podcasts. Feel free to come hang out. We'll have episodes coming out through the end of the year, and maybe we'll try to double up so that for Christmas we can have an episode ready to go for you.
Garrett: A double Christmas episode drop, double special!
Adam: There you go, exactly. Well, thank you all for hanging out. I'm Adam Reed. This is Garrett Crawford. It's Retirement Tax Matters. All right.