How Do Financial Advisors Help With Tax Planning?

calculator-428294_960_7206 Lifetime Tax Strategies that can make all the difference!

About 10 years ago I was having a first meeting with a person who was referred to me. It was our normal “get to know each other” first appointment. At one point she pulled out an account statement summarizing most of her investments. I asked her how she decided what investments to buy and she said she had an investment manager “back east” that she really liked. I asked what she liked about her and the response was, “she returns my calls” and “”She doesn’t charge me that much”. Well, I took a look and her account was being traded like crazy. Her portfolio was being turned over more than 100% per year. I took a look at her tax return and there were a lot of gains listed attributable to this trading. That was the good news.

The bad news was that, in addition to the 2% annual fee she was paying, the amount of tax she had paid took another 3% off her gain! Since her gross return was about 7%, she was netting only 2% when all the costs were factored in! Once I had pointed this out, she contacted her investment person and got this reply back, “It is my job to create a tax problem for you”! I had heard that excuse back during my brief career as a broker; it was a way of avoiding responsibility and keeping the client’s eyes off the bottom line.

At the end of the day, it isn’t how much you earn, or how much your portfolio is worth, it is HOW MUCH OF YOUR MONEY YOU GET TO SPEND!!

What if I have a Million Saved for Retirement??

This is an issue that I see all the time, clients come in and say, “I have saved $1,000,000 for my retirement” and I have to point out that nearly all of that money is in a 401k, IRA or other qualified “retirement account”. It is amazing to me how many owners of these accounts don’t realize that the money will be taxed when it is taken from the account and for most folks, the tax rate they will be paying is 25 -50% or more!! What that means is that they don’t have $1m to spend, only $750,000. This is because they don’t have a plan to offset the taxes upon withdrawal.

Now I don’t know if taxes will be higher or lower 20 or 30 years from now (I have a pretty good idea and likely so do you), but I can guarantee they will be different than they are today. Congress can’t stop messing with the tax code, and I don’t ever expect that to stop.

As we travel through our financial life, I encourage people to think of how and when they will be accessing their accumulated wealth to support their lifestyle over the entire duration of their lifetime. At GFIS, we always look to when and where we are going to consume assets when creating wealth accumulation strategies.

Here are the issues that must be addressed in your financial plan in order to give yourself the opportunity to enjoy as much of your wealth as possible in support your future lifestyle:

  1. Do you have tax qualified plans? You need an exit strategy. It is easy to get money into one of these plans, not so much on the way out. Failure to have a tax strategy can result in your withdrawals being taxed at rates as high as 50% or more (state, federal, Medicare, ACA)!
  2. Have you included tax free resources into your planning? Having a source of tax free income available can make a world of difference in maximizing net spendable income.
  3. Are you diversified under the tax code? We know change is coming, just not where and when. There are many kinds of income, understand how each is taxed. You diversify your investments; you should diversify your tax exposure. This will provide you with flexibility to react as congress changes the tax code in the future.
  4. Are you clear on which assets are for which purpose? An example is your IRA’s. These are terrible legacy assets to leave to folks other than your spouse. Often, they are taxed at even higher rates than if you spent them. Some other assets get big tax breaks when left to heirs.
  5. Is your current income subject to Alternative Minimum Tax (AMT)? More and more of us are being trapped by this tax. Careful planning can help many avoid being subjected to AMT.
  6. Do you have a plan for which assets are consumed when? Knowing what income falls into which bracket can help you navigate which taxes you will be subject to and what tax rates you will ultimately pay.

As you formulate your financial strategies, ignore taxes at your own risk! Failure to consider the impact of taxes on your financial future can have a very negative impact on your lifestyle and financial security. As I have said many times, it doesn’t matter if you earn an extra 1, 2 or even 5% on average, if taxes go up by a third that alone will wipe out most if not all of those excess gains. If you would like to discuss how having a global, holistic tax plan in place will improve your financial security, contact us and we can help you understand this important topic and its impact on your situation.

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