While investors often associate wealth management with growth strategies, there’s another important piece to the equation—protecting the earnings you’ve worked so hard to grow. Taxes are an inevitability, but that doesn’t mean you should pay more than you have to. California residents, especially, are hit with some of the highest taxes in the country—making it all the more important you consider implementing a proactive, multi-year tax strategy that can help protect more of your wealth from Uncle Sam.
Let’s take a look at some ways Pasadena residents can take a more proactive approach to tax planning.
A Quick Look at California’s Tax Landscape
California follows a progressive tax system (similar to the federal tax system), with a top tax rate of 13.3%, notably the highest in the country.1 While real estate taxes vary by region, the average effective property tax rate in California is 0.71%.2
Notably, California is notorious for maintaining a tight tax grip on past and part-time residents. If you’re a resident part of the year in California, you’ll owe state income tax on any income received while residing in the state, as well as income received from California-based employers or other sources—even if you’re a nonresident.
Those who opt to leave California for (presumably) less expensive states may still be required to pay California tax on profits earned from selling a non-California based property. This is known as the California Clawback Provision, and it applies to those who sell their California-based property, use a 1031 exchange and reinvest the profits in property outside the state.
Take Advantage of Employer Benefits
Most employers offer employees opportunities to save and invest, typically through an employer-sponsored retirement plan or health savings account (HSA).
If you’re offered a 401(k) or similar plan, you should be contributing to it—no ifs, ands, or buts about it. Better yet, your contributions should be increasing each year as you earn cost-of-living adjustments or merit-based raises.
Always contribute at least what your employer is willing to match, with the goal of meeting the annual contribution ceiling set by the IRS. If you aren’t at least contributing to your employer’s matching limit, you’re leaving free money on the table. Those are dollars that could be compounding over time to tens of thousands extra for retirement.
Remember, contributions to tax-deferred accounts like 401(k)s, HSAs, and IRAs can be immediately deducted from your tax return. The funds in the account grow tax-deferred until withdrawals are made. In the case of HSAs, withdrawals used for qualifying medical expenses are tax-free as well—making it one of the few accounts with a triple tax-advantage.
Do You Earn Equity Compensation?
Equity compensation is practically synonymous with start-ups in California, and now more than ever, large corporations are getting in on the equity comp action as well.
While equity compensation is an effective tool for building significant wealth in a relatively short amount of time, it also requires diligent tax planning.
Depending on your type of equity comp (RSUs, ISOs, NQSOs, or something else), you may experience a taxable event when your shares vest or are exercised—and almost always when they’re sold for a profit.
Careful planning and paying close attention to your vesting schedule are key to making the most of your equity comp and ensuring it aligns with your greater tax strategy and long-term goals.
Identify Tax-Efficient Investing Opportunities
It’s important to diversify the tax-treatment of your investments, especially as you continue preparing for retirement. For the purposes of tax diversification, people tend to accumulate assets in three separate tax buckets:
Taxable: Traditional brokerage accounts are the most common form of taxable account. While they don’t come with any special tax incentives, these accounts have no withdrawal limitations (as is the case with 401(k)s, IRAs, and HSAs). In general, they offer investors the most flexibility. These can be especially helpful if you’re looking to retire before traditional retirement age or fund another long-term goal, like homebuying.
Tax-advantaged: 401(k)s and IRAs are considered tax advantaged accounts, since the contributions are tax deductible and earnings grow tax deferred. The trade-off, however, is that you can’t access the funds until age 59.5, and you’ll be subject to required minimum distributions in retirement.
Tax free: Just as it sounds, earnings from these accounts (think Roth IRAs and Roth 401(k)s) are not taxed. Municipal bonds (or munis, for short) typically fall in the tax-free bucket as well. For example, California residents may enjoy federal and state tax-free income when investing in the The Tax-Exempt Fund of California® (TAFTX) which is used to primarily fund public services and projects in the state of California.
If you find you’re too concentrated in one tax area, you may want to consider focusing more of your funds in the others to help balance things out. For example, you could consider doing a Roth conversion with some or all of your 401(k) or IRA if you’re still five years or more away from retirement.
Reduce Your Tax Bill Through Charitable Giving
If you’re interested in incorporating philanthropy into your financial plan, talk to your advisor about tax-efficient strategies for giving back.
Keep in mind charitable deductions are only allowed if you itemize your deductions, meaning your total deductions for the tax year (including charitable donations) will need to exceed the standard deduction. In 2025, the standard deduction is $30,000 for joint filers, $15,000 for single filers.
For those who are serious about giving and would like to incorporate it into their financial plan, some common tax-focused charitable giving strategies include:
- Donor-advised funds (DAF)
- Making qualified charitable distributions from your IRA
- Donating appreciated securities and other assets
- “Bunching” multiple years’ worth of donations together to maximize the annual deduction
Proactive Tax Planning for Pasadena Residents
When it comes to building a savvy tax plan, we’re really just touching the tip of the iceberg here. In reality, your financial situation is unique, and there are likely additional opportunities for minimizing both your immediate and future tax liabilities.
If you’d like to discuss your current tax concerns and see what’s possible when you make a proactive, multi-year tax plan, we encourage you to reach out to our team today. Feel free to schedule a call at your convenience, and we look forward to speaking with you soon.
Sources:
1https://taxfoundation.org/data/all/state/state-income-tax-rates/
2https://taxfoundation.org/data/all/state/property-taxes-by-state-county/
