Money at every level: what changes as the numbers grow, from a first paycheck to a hundred million

One line through the whole ladder

A friend who does taxes for people at every level once told me the job is the same at the bottom and the top, and only the tools change. The line is this. Money is taxed hardest in the year it arrives as income, at rates that climb with the amount. Money that has already been turned into wealth is taxed only when it moves, when something is sold, given, or inherited, and at lower rates or sometimes not at all. So a person who earned a million this year and a person who saved a million a year ago are in different worlds, even though the number is the same. The first is standing in the path of the highest rates. The second is standing next to them. Nearly every tool on this page, from the saver's credit to the dynasty trust, is a way of getting money from the first place to the second with as little lost on the way as the law allows. That is not a loophole. It is the code doing what it was written to do, and the only difference between the wealthy and everyone else is that someone told them.

A first paycheck to about the median

At this level the largest money is not in investing; it is in what is left unclaimed. The Earned Income Tax Credit pays real cash to working people with modest incomes, more with children, and a large share of the people who qualify never file for it. The saver's credit returns a portion of retirement contributions to people below an income line, which means a contribution can cost less than its face value. Health insurance through the marketplace is priced by income, and the subsidy can be worth thousands. A workplace match at this level is money the employer has already set aside, and it pays a return the day it lands that nothing on a market does. And there are cliffs: some benefits end sharply at an income line, so an extra thousand dollars of pay can cost more than a thousand in lost help, which is a thing to know before saying yes to overtime in December. The tools here are a tax return filed carefully, a match claimed, a Roth account because the rate now is likely the lowest it will ever be, and a cushion so nothing has to be borrowed at card rates.

The middle

From the median to roughly two hundred thousand, the rules most people have heard of are the ones that matter, and most people still leave money on the table. The full match. The traditional or Roth choice, which is decided by the rate now against the rate later. The health savings account for anyone with a qualifying plan, because three tax breaks on one account exists nowhere else. The fee on every fund, in dollars over decades. A dependent care account if there are children, a commuter benefit, an employee stock purchase discount if the employer offers one, each a benefit the employer already pays for. Term life insurance sized to the years someone depends on you. And the first version of a question that grows with income: is any of this money sitting in a taxable account when a sheltered account still has room?

Two hundred thousand to a million a year

Here the accounts fill up, the phase outs arrive, and the question changes from which account to which door is still open. The Roth IRA closes above an income line, and the backdoor, contributing to a traditional IRA and converting, reopens it, with a rule about existing IRA balances that has to be respected. Some workplace plans allow after tax contributions far above the normal limit that can be converted, the mega backdoor, which is the largest sheltered room most high earners never hear about. The net investment income tax adds a surcharge on investment income above a threshold, and the alternative minimum tax can appear, especially for people exercising stock options. Deferred compensation lets an executive push income into later, lower earning years, at the price of becoming an unsecured creditor of the employer. Charitable giving stops being reactive: gifts of appreciated stock avoid the gain entirely, a donor advised fund lets a person bunch several years of giving into one for the deduction and give from it slowly, and both are ordinary and well documented. Tax loss harvesting in a taxable account turns a bad year into a deduction. And for anyone with a large share of their wealth in one employer's stock, the concentration question arrives: how to reduce a position without a tax bill that swallows the reason for reducing it.

A million a year

At a million a year the biggest decisions are not about funds. They are about the shape of the earning. Whether income flows through an entity, and which one, because an owner can pay themselves in salary and distributions in ways an employee cannot, and can open retirement plans, a solo 401(k), a cash balance plan, that shelter several times what a workplace plan allows. Which state is home, because the difference between a state with no income tax and one with a high one is a figure that dwarfs any fund fee at this level, and the rules about establishing residence are strict and audited. How and when things are sold, because a founder's stock may qualify for an exclusion from federal tax on a large part of the gain if it meets a set of conditions about the company and the holding period, and a person who sells one year too early has paid for the mistake in millions. How concentrated stock is handled: a written selling plan under a rule that lets insiders sell on a schedule set in advance, a collar that caps loss and gain with options, an exchange fund that swaps one stock for a diversified pool without a sale, each with costs. And giving with structure: a charitable remainder trust that sells an appreciated asset without immediate tax and pays the donor an income for life with the remainder going to charity, which is a real tool and also a common thing sold to people who do not need it.

A hundred million

At this level the tools have names most people never hear and a whole industry exists to sell them. The federal estate tax applies above an exemption that the law sets and changes, and everything past that line is taxed at a high rate at death, so the work becomes moving growth out of the estate while alive. A grantor retained annuity trust moves the growth of an asset to heirs while the original value returns to the giver, and it works best on things expected to rise. A dynasty trust holds wealth for generations under state laws that allow it. Gifts up to the yearly exclusion to each child and grandchild, and payments made directly to schools and hospitals, leave the estate without touching the exemption at all. Borrowing against assets instead of selling them means living on loans that are not income and are not taxed, with the assets passing to heirs at a stepped up basis, which is the buy, borrow, die pattern that the newspapers describe and the code allows. Private placement life insurance wraps investments in a policy so growth is not taxed, for people whose numbers make the costs small. A family office, a few employees whose only job is this family's money, becomes cheaper than the fees it replaces somewhere around this level. Direct indexing, holding the individual stocks of an index so losses can be harvested one by one, replaces the fund. Municipal bonds pay interest free of federal tax, which matters most at the top rate. And a private foundation turns giving into an institution with its own rules, its own board, and its own reporting.

The rules that stop these tools have names too. Trusts that keep the giver too much control are pulled back into the estate. Plans that exist only to avoid tax can be set aside. Residency claimed on paper and not in fact is audited. Every one of these tools is legal when used as written, and every one has been used badly by someone who is now in the news. That is why at this level the first hire is never an investment manager; it is a tax lawyer and an accountant who talk to each other.

The same fraction at every rung

Here is what does not change. A person with a hundred million who spends three million a year on a life is spending three percent of their wealth and will be wealthy forever. A person with a million who spends three hundred thousand a year is spending thirty percent and will be rich for three years. The tools get grander as the numbers grow, and the arithmetic underneath them stays the same fraction: what you spend divided by what you hold, and what you keep of what arrives divided by what arrived. The saver's credit and the dynasty trust are the same idea wearing different clothes.

Questions to answer before you leave this page

Which rung are you on this year, by income, and which by wealth? Those can be different rungs, and the tools differ for each. What credits, benefits, or accounts at your rung have you never claimed? Which doors close above your income, and which reopen through a rule you have not used? If more than a fifth of what you hold is one thing, what does reducing it cost, and what does not reducing it risk? And whoever helps you with this, how are they paid, and do the lawyer and the accountant talk to each other?