Financial advisors need to pay more attention to strategic tax planning. In my experience, too many clients are leaving money on the table because their advisor is overlooking opportunities to maximize tax savings in clients’ portfolios.

How do I know this? I see it more often than I’d like when reviewing a potential new client’s investments.

I have been a wealth manager for over 18 years. I am experienced in financial coaching, investing and wealth management. But the area of financial advice that I have the most respect for is one that is often overlooked and underused by many financial advisors to the detriment of their clients—strategic tax planning

Clients should expect and receive advice that goes beyond investment selection and monitoring. Tax considerations should be top of mind when determining in what accounts investments are held. It seems obvious, but tax-deferred accounts are often not leveraged as much as possible through a strategic use of the Internal Revenue Code.

Here’s an example of a real-life situation that I encountered when evaluating a prospect’s portfolio. The couple’s name is fictionalized.

The Sullivans are a married couple, both 51 years of age and in the 35% tax bracket. They were already using an advisor but came to me for a second opinion. They wanted to make sure their money was working as hard as possible for them.

They had an investment net worth of $5 million.

— $2,586,000 in a non-qualified (taxable) brokerage account

— $2,265,000 in qualified (tax-deferred) IRAs

— $434,000 in Roth Ira accounts funded with pre-tax dollars (no future tax consequence upon withdrawal) and Cash Value Life Insurance

The taxable brokerage account had annual capital gains of $168,000 plus $38,000 of dividend income, for a total gain of $206,000. Of the $206,000 gain, $11,500 was taxed as ordinary income generated by about $2,500 of non-qualified (taxable) dividends and $9,000 of short-term capital gains. Because these profits were taxed as ordinary income, the Sullivans owed an ordinary income tax bill of $4,025 on top of the capital gains taxes they would owe.

If the Sullivans had instead held the stocks that paid out taxable non-qualified dividends in a retirement account such as a traditional IRA, while making sure their advisor did not buy or sell investments in their non-qualifed account that created this short-term capital gain, they would had saved approximately $4,025 in taxes.

That may not sound like a lot based on the overall size of their portfolio, but what if the Sullivans’ advisor could invest their yearly savings and put it towards their retirement for the next 20 years?

Most investors, and many advisors, don’t realize how important strategic tax planning is to maximizing investment portfolio returns. I believe it is actually the most important way to maximize income from retirement and other assets.

I am always happy to take a look at an investor’s portfolio and point out where I see opportunities to save on taxes. Please contact me if you’d like me to review yours.


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