Smart Advice. Simply. Clearly.

Are you losing money because of poor tax planning?
(You can’t spend what you don’t keep)

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.

This article was researched and written by the staff of Hilltop Wealth Solutions. It is one of many that are published on our website at hilltopwealthsolutions.com.

For more information on this article contact
Tim Ceravolo at 574-675-9277 or 574-889-7526

574.889.7526 | toll free: 833.889.7526
fax: 574.889.5392

email: info@HilltopWealthSolutions.com www.HilltopWealthSolutions.com

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