The Value of Tax and Retirement Planning Trumps Investment Management
Published by Robert J Falcon, CFP®, CPA/PFS, CCFC®, MBA
In Part 1 of this blog, I made the case (with specific examples) that you are not getting value from your financial advisor if you they are simply managing your money. Many Big Box financial firms who advertise on TV fall into this category. They are corporate giants with significant brand recognition and marketing prowess. But when it comes to the services they offer, they are an empty suit.
If you are client of one of these “Big Name” firms, you are missing out on money saving services, including tax, retirement, and college financial planning.
In this Part 2 of 2 blogs, you will read additional examples where I utilized an assortment of techniques and (mostly) tax planning strategies to save my clients significant dollars. How many of these services are you receiving from your “Big Box” advisor?
Saving Families Thousands on the Cost of College
One middle income family received a sizable gift from a grandparent 18 months before their oldest child was about to start college. Holding this $150,000 of cash would have decreased needs-based aid by up to $8,000 per year. My goal was to ethically optimize this family’s FAFSA filing to maximize financial aid while keeping the cash available for college.
Since the couple was not fully funded for retirement, I suggested that they fully fund Roth IRAs in the Fall of the student’s senior year and again in early January (totaling $27,000). Why a Roth? Because you can always withdraw your Roth IRA contributions (not the earnings) tax and penalty free at any time. Therefore, they could use these Roth contributions for college. I also had the parents pay off $50,000 of car loans and their own graduate school debt which freed up over $700/month for college. Since Pennsylvania residents get a state tax deduction (3.07% tax rate), I had them shift the rest of the cash they were going to use for college into a PA 529.
Turning Client Mistakes Into a Windfall
A new client had been making the maximum Roth IRA contributions for he and his wife for the past few years, but was not aware that his 2020 income made them ineligible to make 2020 Roth contributions. Big Box advisors take the path of least resistance (for them) to “fix” this problem. They withdraw the excess contributions plus any appreciation on the excess prior to the following October 15 to avoid a 6% penalty.
The downside of this “easy fix” is that the client would have to pay income taxes (and an additional 10% penalty if under 59-1/2) on the withdrawn earnings. In this particular instance, the excess Roth contributions (totaling $13,000) were deposited in March 2020 and grew by over $8,000. Therefore, withdrawing the $13,000 prior to October 15 would save the client the 6% excise tax ($780), but the income tax (and penalty) on the $8,000 of earnings would have exceeded $2,300. Further, once withdrawn, the $8,000 of earnings would not compound tax free forever inside the Roth IRA.
By waiting until after October 15, 2021 to pay the 6% excise tax and withdraw the $13,000 excess, I saved this client a net $1,500 in taxes, plus they have an extra $8,000 in their Roth IRAs to compound tax free forever.
New Client Missing Small Business Tax Benefits
I recently began working with a young entrepreneur who started a business with an associate 5 years earlier. While his partnership K-1 for the past 5 years reflected tax losses, he had failed to report the losses on his self-prepared tax returns. Although he would not have been entitled to tax deductions in the years the losses were incurred (basis limitations), he was entitled to carry the losses forward to offset his partnership income when the venture turned positive.
By amending the returns to report the deferred losses, I saved this client $14,000 – $19,000 in (future) federal taxes. Big Box advisors would never see the client’s tax returns and would not have known to suggest these changes.
Helping Clients through Layoffs
I assisted two clients over 55 who were laid off to negotiate better severance packages after they were terminated. I reviewed their severance letters, benchmarked their severance terms and duration to those at a similar level at competing companies in their industries. One client received an extra 3 month’s severance as a result of these negotiations.
Tax loss harvesting
Each December, I review the year-to-date capital gains and losses incurred by my clients, then look into their portfolios for opportunities to minimize their tax liability. If a client has excessive gains, I look for unrealized losses in their portfolios to offset them. If a client has net capital loss, I will take advantage of the situation and appreciated securities at a gain to offset the losses. The portfolio then will be re-balanced and I may repurchase the sold securities while keeping aware of the wash sale rules. Most Big Box advisors make their trades while ignoring tax rules because (well) they are not tax advisors.
Pension Lump Sum vs Payout Analysis
Back in 2015, Pfizer was offering early lump sum payouts of its pension plan to certain ex-Wyeth employees. I analyzed (pro bono) this analysis for many of my former colleges, informing them of the pros (steady income for life of employee and spouse) vs the cons (risk of inflation lowering value of payments, early death, company defaulting on pension plan, inability to pass pension on to heirs, etc) as well as calculating the rate of return inherent in the pension payments.
Mortgage Refinancing – I helped one client to analyze his refinancing options after introducing him to a number of reputable mortgage brokers. The analysis included the impact of refinancing to a jumbo vs traditional mortgage and the impact of “paying down” his existing jumbo to get a traditional mortgage. This family ended up saving $7,800 per year on principal and interest.
Property and Casualty Insurance Review – I encourage my clients to have their home and auto insurance policies reviewed by a number of independent agents with whom I work to see if we can lower their annual cost. I provide an introduction to multiple independent agents to make it easier on my clients and help them review their policy options once the quotes come in. Savings of $1,000 on a bundled home and auto policy are not uncommon.
Estate (Wills and Powers of Attorney) Update – Most importantly, I make it a priority to be sure that my clients’ estate documents are up to date and that beneficiary designations are current on their investment accounts. Younger families with minors may not be aware of the 10-year distribution rules now in place for inherited IRAs. I work with a number of local estate attorneys to be sure these important documents are current and in place.
I hope I have opened your eyes to how a qualified financial advisor can help you beyond basic investment management provided by other advisors. Please reach out to me at Bob@FalconWealthManagers.com or call me a 484-528-0201 if you have questions or would like to see how I can help you.