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Four Tax Tip Reminders For Advisors To Help Their Clients



Sorry, financial advisors, the U.S. tax code won’t get any easier. It’s now about 4 million words, or about 74,000 pages long, according to one estimate.

President Barack Obama has proposed new taxes, along with new spending, so it’s likely that the tax code, also known as 26 U.S.C, or Title 26 of the United States Code, won’t get any shorter. What’s an advisor to do?

Pick your battles.

There are any number of ways to proceed with regard to sound financial approaches involving 26 U.S.C. But for the purposes of this year’s tax-filing deadline Tuesday, April 15, let’s stick with 401(k)s and individual retirement accounts (IRAs).

We’re sticking with 401(k)s because they are the easiest retirement vehicle for middle-market investors. The volume of assets contained in 401(k)s, other defined contribution plans and IRAs has reached $11.8 trillion at last count, according to the Investment Company Institute.

Strategy No. 1, a move to consider for high net worth investors, is to move assets into a traditional IRA and then move the assets into a Roth IRA.

The strategy, said Larry Rosenthal, a Virginia-based retirement coach with ING Financial Services, is known as “backdooring” into a Roth IRA.

“Savings are at the end because you withdraw them tax-free,” Rosenthal said in an interview with InsuranceNewsNet.

Strategy No. 2 is for advisors to suggest their clients refinance their mortgages as interest rates are still low.

Workers one or two years away from retirement and who have seven or eight years left on their $1,500-a-month mortgage may want to think about refinancing for another 30 years, drop the payment to, say, $700 a month, and take advantage of the tax-deductible interest.

“That’s a niche game plan,” Rosenthal said.

Strategy No. 3: No matter where investors are in their lifecycles or how much they earn, it’s always a good idea to sock away more money into their employer-sponsored or their personal retirement plans, he added.

“Every time the calendar year turns over, save 10 or 20 bucks,” he said. “That will help outpace inflation.”

It’s true that many people even have trouble doing that, if we take retirement surveys at their word. But it’s just as true that everyone can withhold one week’s worth of doughnut-shop coffee.

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Saving more money is the quintessential example of how investing small quantities make a lot of difference over long periods. The longer the money is stashed away, the more time it has to grow and the bigger the difference.

All advisors have to do, said Rosenthal, is tell their clients to spend $2,500 instead of $3,000 a year dining out and put the rest aside. Advisors aren’t asking investors to deprive themselves of what they want, just to indulge in a bit less of it.

It’s good training, too. If advisors don’t set expectations about how tight a retirement budget some of their clients will face, those investors are in for a nasty surprise. “Most people are going to have change forced on them,” he said.

The only question is whether investors want to make those changes now – in very small increments – or whether they want to get hit with big, nasty changes later.

For one client who always put money aside after taxes, that pre-tax strategy turned into an “aha moment,” Rosenthal said. Taking advantage of pretax savings vehicles like an employer-sponsored 401(k) automatically lowers taxable income.

It’s an easy one, but the number of workers who don’t take advantage of it is astounding.

Strategy No. 4 concerns the taxable arena where product selection can increase or minimize taxes, Rosenthal said. Turnover rates of exchange-traded funds and mutual funds made a difference when it comes to taxes.

Tax allocation strategies alone demand a separate world of financial expertise to help investors navigate the shoals of what is taxable, tax-deductible, nondeductible, tax deferred or tax exempt.

Especially with Congress looking to raise revenue over the next 30 years, and tens of millions of baby boomers looking to live off the income from their assets, “we want to think about the net income perspective,” he said.

With all the details spelled out in a 74,000-page tax code, even filling out a beneficiary form incorrectly has important tax implications for heirs, Rosenthal said.

“There’s a lot to be learned and discussed in this arena,” he said. “Taxes are the most expensive thing in any investment. We want to have a proper tax strategy.”

is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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