I am of the opinion that every wealth management firm should have someone with a strong tax background – very strong! Like having a CPA or Masters of Science in Taxation (MST).
Why is tax expertise so important? Our client work is quite fluid and virtually every action we take has tax consequences. It’s impractical to get CPA-confirmation of each and every action we take. Many clients may be unaware of the need for tax-proficiency from their financial planner. I believe we should be able to deliver this at a fairly high level.
Let me give examples of how taxes permeate every facet of financial planning, and pardon the use of jargon:
- 60-40 portfolio now has 70% stock allocation and we need to “rebalance”
- Muni bonds or taxable bonds?
- Building tax-efficient portfolios
- “Asset location” in your portfolio. Should bonds go in the IRA and stocks go in your trust account and real estate in your Roth IRA? What’s the best recipe for you?
- Tax loss harvesting
- Client needs cash for a new car. “Which account(s) should I take it from?”
- Other withdrawal strategies: “I need $5,000 per month for life from my portfolio; which account(s) and how much from each?”
- “Should I pay off the mortgage or keep it for the interest deduction?”
- 401K vs. Roth 401K strategies
- Social security strategies between 62 and 70 years of age.
- IRA withdrawal strategies between ages 59 ½ and 71 ½ years of age. (Yes, I did say one year past age 70 ½; that was a test for the professionals in the audience.)
- Start IRA RMD (Required Minimum Distribution) at 70 ½ or age 71 ½ (variation of above; partial answer to the aforementioned “test”.)
- IRA RMD strategies to avoiding quarterly estimated tax payments
- IRA RMD donations to qualified charities
- Roth conversion strategies
- Back-door Roth contributions/conversions
- Low income year strategies (bring in more income, pay more taxes at low rates?)
- Loss of spouse & last year Married Filing Joint is available
- Donating appreciated stock in lieu of cash (avoiding capital gains tax)
- Many other charitable giving strategies (that’s a big discussion)
I’ve scratched the surface. Special mention goes to the ability to speak with the client’s tax professional in their own language. We see the moving parts of a client’s financial life; often they get a once-a-year snapshot. We know when to elevate the discussion and bring in your tax professional.
Tooting our own horn, we have that expertise (which is me) with over 35 years of tax & estate experience – saying that reveals our need for mentoring my replacement. Our goal is to have a staff member obtain a Masters in Taxation well before my sunset to ensure that the continuity of a high-level of tax proficiency remains in place.
And for every rule (I’m saying to have a CPA or MST on staff), there are certainly exceptions. Our financial planner doesn’t have either, and yet she has a phenomenal tax mind. (And yes, Evelyn and I do have our personal financial planner to whom we are accountable!)
Being tax-aware adds an unmeasured “alpha” to the rate of return of your portfolio and net worth. You don’t see tax savings in your portfolio’s performance reports, but rest assured that’s part of the secret sauce that we call Inspired Financial.