Protecting your income isn’t just about the numbers on your bottom line; it’s about how much of that hard-earned money you actually get to keep. As we look at long-term wealth management, one of the most effective ways to shield your earnings from "tax drag" is by utilizing tax-advantaged investment vehicles.

Whether you are working a 9-to-5 or building your own empire, I often describe the ideal investment strategy as a Champagne Tower. You start by pouring into the most efficient glass at the top, and only once that is full do you let the "wealth" spill over into the next tier. This ensures that every dollar you invest is working as hard as possible for your future self.

Here is how to structure your champagne tower for 2026 to maximize tax advantages and protect your income.

The Second Tier: Roth vs. Traditional IRA

Once you’ve secured your match or set up your business foundation, the spillover heads to an Individual Retirement Account (IRA). For 2026, the contribution limit has increased to $7,500 (plus an extra $1,100 if you’re 50 or older).

• Roth IRA: You contribute after-tax dollars now, but the investments grow tax-free, and your withdrawals in retirement are completely tax-exempt. This is a favorite for those who expect to be in a higher tax bracket later.

• Traditional IRA: Contributions are often tax-deductible now, and growth is tax-deferred. You only pay taxes when you take the money out in retirement.

The Third Tier: Maxing Out the Main Buckets

After your IRA is funded, circle back to fill the rest of your primary retirement vehicle.

• 401(k) Limits: For 2026, the employee contribution limit is $24,500.

• SEP IRA: Continue filling this until you hit that 25% or $72,000 cap.

The Fourth Tier: Education Goals (529 Plans)

If you have educational goals for your family, the 529 Plan is your next glass.

• Tax Advantage: Funds grow tax-free and are withdrawn tax-free for qualified education expenses.

• 2026 Gifting: You can contribute up to $19,000 per year (per individual) without triggering gift tax reporting. You can even "superfund" five years at once ($95,000) for an immediate tax-shielding boost.

The Overflow: Municipal Bonds

When your retirement and education buckets are full, Municipal Bonds provide an excellent "overflow" glass, especially for high-income earners.

• The Advantage: Interest is generally exempt from federal income tax (and often state/local tax if you buy in-state). They offer a lower-risk way to generate income without increasing your tax bill.

The Entrepreneur’s Level-Up: The S-Corp Election

As your business grows, there comes a point where simply choosing the right investment isn't enough—you need to choose the right business structure.

If your business is consistently profiting more than what a "reasonable salary" would be for your role, you might be overpaying in self-employment taxes. This is where an S-Corp election comes into play. By electing S-Corp status, you can pay yourself a fair salary and take the remaining profits as distributions, which are not subject to self-employment tax.

Musing Sally Tip: I generally recommend considering this transition once your business reaches a specific profit threshold. You can read my full guide on Making an S-Election here to see if you're ready to flip the switch.

Building Your Tower

Wealth management is about ensuring that as your income grows, your strategy evolves. By filling these glasses in order, you aren't just saving; you are strategically protecting your income from the eroding effects of taxes.

While this guide covers the absolute basics of structuring your "champagne tower," please remember that personal finance is never one-size-fits-all. Your unique goals, risk tolerance, and business structure all play a critical role in determining the best strategy for you.

Before making any major moves, I strongly encourage you to start a conversation with a qualified financial advisor or tax professional. They can help you look at your specific numbers and tailor a plan that ensures you are making the absolute best decisions for your financial future. Let's make sure your tower is built on a solid foundation!

A Quick Note on Where to Start

This is not an ad, but if you're looking for a user-friendly platform to begin your investment journey, I personally find Fidelity to be a great place to start. They offer a wealth of educational resources to help you learn as you go, and their low barrier to entry makes it easy to get your "champagne tower" started, even with small contributions.

If you're ready to open an account, feel free to use my referral link.