Most financial advisors understand a good retirement plan will require adjustments. They realize your investment allocations, risk tolerance, healthcare needs, and other financial strategies need to be monitored and tweaked regularly, but do they know that tax strategies require the same attention to detail? Do they even suggest tax saving strategies when you discuss your retirement plans with them?
“The average advisor thinks only about returns, they just don’t think at all about tax strategy,” said Ed Slott, one of this country’s leading experts on IRAs, retirement planning, and tax strategy. Slott has written several books about financial planning and has appeared on national TV specials on the subject. He also has his own business, Ed Slott and Company, which offers IRA and retirement planning advice, as well as training for financial advisors. We have great respect for Ed at Hilltop Wealth Solutions.
“Ninety nine percent of people lose money because they don’t think about tax strategy and 99 percent of advisors are not trained on this issue,” he said.
Erik Brenner, owner of Hilltop Wealth Solutions in Mishawaka, IN, says most advisors don’t even ask to see their clients’ tax returns. He has invested in tax strategy training for himself and advisors on his team. Brenner says Hilltop Wealth Solutions spent more than $50 thousand on various training and educational programs this past year. Almost all of Hilltop’s financial advisors have earned the status of Elite Advisors through Ed Slott and Company’s training program. It’s a status that only about 400 of the approximate 300 thousand plus financial advisors across the United States can claim.
“It’s very important ongoing education for us,” said Brenner. “You can’t give good advice without the training. We are always proactive with our clients when it comes to taxes. Too many people say ‘my taxes are my taxes’ and they don’t think about how they could save money by making some adjustments. We always make those suggestions to our clients”
Slott believes strongly that the lack of tax planning and strategy is a serious problem for people when they put together their retirement plans. He also believes it is a more serious situation right now because taxes are inevitably going to go up and people need to consider ways to take advantage of the current low rates before they go away.
The United States has enjoyed historically low tax rates in recent years but despite a thriving economy before the COVID-19 Pandemic the national debt has increased significantly. The recent CARES Act passed by Congress to help Americans through the pandemic added $3.2 trillion to the national debt. According to the Congressional Budget Office the federal budget deficit for the first nine months of the 2020 fiscal year was $2.7 trillion. The CBO says the federal budget deficit in June of 2020 alone was $863 billion. The national debt, according to the CBO, is now more than $26 trillion. Almost all economists and financial professionals believe taxes will have to increase soon, no matter who wins the upcoming election in November.
“Now is the time to act,” said Slott. “People need to eliminate tax risk in everything they do. Taxes are the single biggest expense in retirement.”
Some advisors would argue that healthcare is the biggest expense for retirees, but they all agree taxes are a huge retirement expense. Slott, Brenner, and other financial advisors believe now is the time to act because you can adjust your retirement plan to take advantage of the current low tax rates before taxes increase.
“People should consider converting their regular 401ks to Roth IRAs,” said Slott. “You pay a little tax upfront at the current low rates and then you save significantly when you need the money and don’t have to pay any taxes on it.”
Basically, when you convert a traditional IRA to a Roth, you will have to pay taxes on the amount of money in the traditional IRA that would have been taxed upon withdrawal. That amount includes any tax-deductible contributions you may have made to the account. It also includes tax-deferred earnings that grew in the account over the years. All of that money would be taxed as income for the year in which you make the conversion. So, you would pay that one-time tax bill at the current low rate, but then when you make withdrawals during retirement you don’t pay any taxes. Also, with a Roth, you don’t have to take minimum required distributions. That can be very important, especially if you want to leave the money to a family member or someone else.
Private wealth advisor Bill Davis of Hilltop Wealth Solutions also believes people should make moves soon to save on taxes.
“Would you rather pay a tax rate that is low and you know exactly how much it is or wait and pay a rate that is going to go up and you’re not sure how much?,” said Davis.
Davis says every situation is different and there are a lot of factors to consider when putting together a plan, but people often overlook the potential for tax savings, including Roth allocations.
Tax planning is multi-faceted and there are many options for people to consider. Brenner says good advisors understand those options and have the knowledge to offer good advice. He says many advisors just don’t invest the time and money it takes to get the training necessary to be able to provide good advice about tax strategy. Brenner says there is just so much advisors need to know, including an understanding of the difference between marginal and effective tax rates.
An effective tax rate is really a more accurate figure than a marginal tax rate. A marginal rate is typically based on the highest tax bracket someone’s income falls. In the United State there is a progressive tax system in which tax rates increase as income increases and reaches certain levels. However, even though a person’s income reaches a certain level and tax rate that doesn’t mean all of their income is taxed at that rate. Most of their income is usually taxed at a lower rate. The effective tax rate is an average of the taxes someone pays on all income sources. It provides people with a better understanding of the taxes they are actually paying and therefore a better understanding of ways they might be able to save.
“Retirement planning is like a football game,” said Slott. “There are two halves and the score at the end of the game is what counts. The first half is the accumulation of wealth and most advisors are good at that. The second half is about protecting money and preserving it. The I-R-S often wins because they’re playing the second half against nobody.”
Slott repeated many times how important he thinks this issue is when it comes to retirement planning. He urged people to make sure their advisors understand tax strategy. He said it’s especially important for people in the so called “sweet spot” between the ages of 59 and a half and 72. Those folks have all the options on the table, but they need to know their options.
Hilltop Wealth Solutions (“Company”) is an SEC registered investment adviser located in Mishawaka, IN with branch office located in MI and other locations throughout IN. The Company may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. The Company’s web site is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Company’s web site on the Internet should not be construed by any consumer and/or prospective client as the Company’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Any subsequent, direct communication by the Company with a prospective client shall be conducted by a representative that is either registered or qualified for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of the Company, please contact the SEC or the state securities regulators for those states in which the Company maintains a notice filing. A copy of the Company’s current written disclosure statement discussing Company business operations, services, and fees is available by going online via the SEC’s Investment Advisers Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using SEC #801-115255.
The Company does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to the Company web site or incorporated herein and takes no responsibility, therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by the Company, will be profitable or equal any historical performance level(s).
Certain portions of Company web site (i.e. newsletters, articles, commentaries, etc.) may contain a discussion of, and/or provide access to, the Company (and those of other investment and noninvestment professionals) positions and/or recommendations as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from the Company, or from any other investment professional.
The Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice.
Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if the Company is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of the Company by any of its clients. Rankings published by magazines and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers.
To the extent that any client or prospective client utilizes any economic calculator or similar interactive device contained within or linked to the Company web site, the client and/or prospective client acknowledges and understands that the information resulting from the use of any such calculator/device, is not, and should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from the Company, or from any other investment professional.
Each client and prospective client agrees, as a condition precedent to his/her/its access to the Company web site, to release and hold harmless the Company, its officers, directors, owners, employees and agents from any and all adverse consequences resulting from any of his/her/its actions and/or omissions which are independent of his/her/its receipt of personalized individual advice from the Company.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.