Speaking at the virtual 2021 PLANADVISER National Conference (PANC), Keith Gredys, chairman and CEO of Kidder Advisers Inc., said that although there are dividing lines in financial planning because every adviser has his own expertise, tax planning needs to be factored into financial planning. “A person can have the most efficient financial plan but it might not be the most effective for reaching their goals if it doesn’t include tax planning,” he said.
Dave Alison, chief operating officer (COO) and founding partner at C2P Enterprises, said consumers expect to receive financial advice separate from tax advice, but his company earns new business these days by offering customers one place to get all aspects of financial planning. Alison contended that advisers are not meeting the best interest standard if they are not at least coordinating with other professionals for holistic financial advice. “Tax planning and financial planning is pairing good, modern nutrition to get an optimal outcome,” he said.
Keith Huber, investment adviser, retirement services, with Fiduciary Plan Advisors, a OneDigital company, said if there is a fence that divides good financial advice and tax planning, it needs to be torn down.
When talking about tax-efficient investing to a client, advisers should explain not just how he should allocate his retirement savings, but what vehicles to invest in, including Roth and pre-tax, Huber said.
“We need tax diversification. We have to prepare for inevitable changes and prepare for unknowns,” Huber said. “We know what taxes are going to be in the next several years, but clients need different vehicles to be prepared for age 65 and beyond.”
Michael Webb, senior financial adviser at CAPTRUST and the panel’s moderator, said, “If someone has all their savings in pre-tax accounts, they’re making a bet, and if everything is in Roth accounts, they’re making a bet. Account diversification is hedging bets.”
Gredys suggested that retirement savers need to build a plan that is flexible because they don’t know what the future holds. “Tax planning is a different form of diversification,” he said. “Everyone will have their own design based on what they want to be done.”
Tax planning is complex because there is no one-size-fits-all solution, Alison noted. When deciding whether to save in a Roth account or a pre-tax account, clients should consider their goals for future generations, among other factors, he added.
Alison said the conversation about Roth versus pre-tax centers not on a client’s tax bracket, but on their marginal tax rate. As an example, he said a married client filing jointly currently could have $81,000 in taxable income before they move from a 12% to a 22% tax bracket. Roth creates an opportunity because if that couple has $70,000 in taxable income, they have $11,000 in taxable income to go before they move into a higher tax bracket. Alison said it makes sense to take the $11,000 and pay 12% in taxes today before moving into a higher tax bracket.
Alison added that another time when “Roth shines” is when thinking about taxes on a spousal beneficiary.
“People don’t understand how taxes go up on the spouse of a deceased person; taxes go up exponentially,” he said. “Having savings in a Roth is incredibly helpful in that situation. We can also think about whether children or grandchildren are in a higher or lower tax bracket than the client. That’s where an adviser helps; when thinking of the client’s long-term goals and objectives.”
When considering Roth conversions for clients, Alison said the best time to pay taxes is when they are low, and right now taxes are low with government debt rising, so they will probably increase in the future. He said it might not make sense to convert all savings to a Roth account, but it might make sense to convert some.
“If the client’s capacity is for a 22% or 24% tax bracket, it makes sense to convert some savings to a Roth account, but unless they are going to be in a high tax bracket for rest of their life, they shouldn’t covert all,” he explained.
Considerations for RMDs
Retirement income planning must also take into consideration required minimum distributions (RMDs), the panel experts agreed. Webb noted that the RMD age has increased from 70.5 to 72 and is confusing to many people. Meanwhile, legislation has been introduced to move it gradually to age 75.
Alison said he thinks RMDs should go away. “The reality is that most people don’t save enough for retirement and will need distributions,” he said.
However, when helping clients with RMD planning, Alison suggested advisers determine which account they’ll draw from. “We suggest clients never take RMDs out of growth accounts because we want to lower sequence of return risk,” he explained.
Huber said many people don’t do financial planning because they don’t realize what they don’t know, and he is in favor of forced RMDs for this reason. “People miss RMDs because they aren’t aware of the rules,” he said. “Advisers can turn on this service for individual and plan sponsor clients.”Gredys noted that retirement plan participants may have money in individual retirement accounts (IRAs) as well as more traditional retirement plans, so advisers can help them pull everything together. He added that stretch IRAs are no longer allowed, so some people will need help with estate planning. Advisers can help them check whether the language in their wills and trusts complies with the new rules.