Don’t assume your financial advisor does tax planning


By Robert Klein, CPA

I received the following email from a potential customer several months ago:

I was devastated when I recently discovered that our financial advisor had informed me in so many words that he did not provide tax strategy advice for our funds. It was something I took for granted and would be part of the “package”. Little did I know that it takes another layer of expertise to navigate the hard work of retirement tax strategy to reduce one’s tax burden.

Robert Klein

As an experienced financial advisor with a CPA designation who specializes in tax-conscious retirement income planning strategies, I have felt this person’s pain. I understood his frustration. I’ve been writing about this topic for years, starting with my 2010 blog post, “What tools does your financial advisor have in their toolbox?“My 2013 MarketWatch Articles,”Is your retirement linked to the biases of your advisor?” and “Your advisor’s income-retirement disconnect” also addressed this question.

Work with a financial advisor who specializes in comprehensive retirement planning

Many people who seek the services of a financial advisor are not as astute as my potential client. They don’t realize the importance of working with a financial advisor who has the expertise and experience to recommend tax-sensitive strategies as part of a comprehensive retirement income plan.

My potential client is not alone. About a month after receiving the above email, I came across the Wall Street Journal article by Glenn Ruffenach, “What to expect from a financial advisor.” Glenn pointed out that you need an advisor who specializes in retirement finances, which not all advisors do.

Derek Tharp, an assistant professor of finance at the University of Southern Maine who specializes in retirement research and featured in the article, emphasized the importance of comprehensive retirement planning. Per Derek, “That means an advisor who, in addition to your investments, will help you with Social Security, Medicare, estate planning, insurance, and long-term care.”

Importance of tax planning

Derek Tharp identified tax planning as one of the most important services a retiree needs. According to Derek, “The focus has to be on the long term. You want an advisor who thinks strategically about tools, like Roth IRA conversions, that can help reduce taxes in the future.

Derek went on to say, “A good advisor will ask for and spend a lot of time with your tax returns. If a financial planner tells you, “Talk to your CPA about taxes, that should set off some red flags.”

Tax returns are a starting point. They provide valuable historical information that can and should be used as a base year for preparing income tax projections for current and future years. Often overlooked by financial advisors, tax returns contain important carryforward items that can be used to reduce current and future years’ income tax. This includes capital losses, suspended lossesnet operating losses, non-deductible IRA contributionsand charitable contributions.

Standalone income tax planning software is essential for capturing prior year carry forwards and preparing accurate multi-year income tax projections that can be used by financial advisors to analyze and make recommendations on specific retirement income planning strategies. Most financial advisors rely on financial planning software whose tax planning capabilities are often not as robust or, in many cases, as accurate as dedicated tax planning software.

The key to the successful use of any tax planning software is the expertise and experience of the person using it. Equally important is how the advisor applies the results of the tax projections in the context of a retirement income plan. For example, many financial advisors are reluctant to recommend a staging Roth IRA conversion strategy to a client based solely on the individual’s current year marginal tax bracket.

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Don’t assume your financial advisor does tax planning

You should never assume that your financial advisor or potential financial advisor is engaged in tax planning. This is often the case if your advisor is an employee or partner of an investment management or independent life insurance company. Unless he or others in the firm have expertise, experience and access to tax planning software, the firm’s services may not include tax planning.

The compensation model used by sole proprietorships can also provide a clue as to the availability of tax planning. Firms that only charge fees for assets under management or commissions for the sale of products without also charging upfront or ongoing planning fees generally do not include tax planning among the services offered.

Because tax planning is an essential part of the retirement income planning process, it is up to you to determine whether your financial advisor or their firm provides comprehensive retirement income planning services, including tax planning. Make sure tax planning is part of your “package”. Heed Derek Tharp’s advice: “If a financial planner says to you, ‘Talk to your accountant about taxes, that should set off a red flag.’

About the Author: Robert Klein

Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. The firm’s motto is Plan, manage and protect your retirement income™. Bob is the creator of FINANCIALLY InKLEIN’d™, a YouTube channel showcasing innovative tax-informed strategies to maximize retirement income. Bob is also the author and editor of Retirement Income Visions™a blog featuring innovative strategies for creating and optimizing retirement income that Bob started in 2009.

Bob applies his unique background, experience, expertise and specialization in tax-sensitive retirement income planning strategies, including fixed income annuities, Roth IRA conversions, HECM reverse mortgages and residual trusts charities, to optimize the projected longevity of its clients. income tax and pension assets. Bob does this as an independent financial advisor using personalized holistic planning solutions determined by each client’s financial needs.


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