A Financial Advisor’s Role in Tax Planning
When you think about tax season, the first person who comes to mind is probably your accountant or tax preparer, but don’t forget about financial advisors who monitor the impact of taxes on their clients’ portfolios all year long. Understanding the role of a financial advisor in tax planning can help you make more informed financial decisions. Because taxes and investments go hand in hand, fiduciary advisors often assist clients with strategies at each life stage to help minimize taxes and stay on track to pursue their financial goals.
How Does Tax Planning Work?
Investopedia defines tax planning as the analysis of a financial situation or plan to help ensure that all elements work together to help an individual to pay the lowest taxes possible. Financial advisors incorporate tax planning to help clients identify tax-efficient strategies that may help reduce their tax liability and support long-term financial goals. This approach reflects how financial advisor tax planning supports long-term financial outcomes.
Your advisor’s recommended tax planning strategies may differ depending on where you are in your journey toward your financial goals. Your financial advisor considers things like the timing of your income and purchases, your future expenses, and the types of investments or retirement plans you have when developing strategies for your situation.
Financial Advisor Evaluation Checklist
Whether you are seeking the services of a financial advisor for the first time or comparing your advisor to someone new, it’s important to ask questions to help ensure the firm you choose fits your needs.
Tax Planning Strategies Before Retirement
While you’re working, your tax planning strategy may include investing in a tax-deferred retirement plan that helps reduce your taxable income. This may be effective if you have a high income now but anticipate potentially being in a lower tax bracket in retirement. Younger adults may find it effective to invest in a Roth IRA, which uses after-tax dollars, because they may be in a lower tax bracket now than they will be in retirement. Also, Roth IRAs enable the account holder to withdraw contributions (but not earnings) anytime without taxes or penalties, which may come in handy if the money is needed sooner.
Another popular option for high-income earners involves making “backdoor” Roth IRA contributions. In this situation, the taxpayer contributes to a traditional IRA first and then converts the contribution to a Roth IRA. This may allow certain individuals to accumulate assets within a Roth IRA where future qualified distributions may be tax free, subject to applicable IRS rules and requirements; however, income tax will be due on the conversion right away. These types of strategies are often used as part of tax planning strategies for investors looking to reduce taxable income over time. Be sure to consult with your financial advisor or tax preparer about your unique situation before implementing any changes. This strategy may be useful for those who anticipate an increase in tax rates.
Tax Planning Strategies After Retirement
Tax planning is also important as you withdraw your assets in retirement. To help manage the tax impact of retirement withdrawals and consider Medicare and Social Security planning opportunities, your advisor may prioritize which assets you should tap first, help you plan for long-term care, or recommend a transfer of your required minimum distributions (RMDs) to your favorite charity (subject to IRS limitations) to help reduce your taxes.
Once you retire, your advisor may also consider altering your investment strategy to help minimize taxes further, reduce risk as needed, and help support your long-term financial objectives. These decisions are an important part of tax-efficient financial planning in retirement.
Other Ways Financial Advisors Help Reduce Taxes
In addition to helping you devise a tax-efficient investment strategy or manage withdrawals in retirement, financial advisors often help clients understand the tax implications of the decisions they make. This is an important part of how to reduce taxes with a financial advisor. For example, if you decide to sell stock to fund a major purchase, your advisor can help you determine how much capital gains tax you might owe. If you have underperforming investments, your advisor can help you with tax-loss harvesting – a tactic used to potentially offset any capital gains as you rebalance your portfolio.
Finally, tax planning is important, not just to benefit you during your lifetime, but also to benefit your heirs. Financial advisors often work with estate planning attorneys to help clients structure tax-favorable wealth transfer strategies, with the goal of implementing tax-aware wealth transfer strategies aligned with a client’s estate planning objectives.
At Savant, we have in-house teams of tax professionals and estate planning attorneys who monitor the complexities of our tax laws and changing regulatory landscape, supporting Savant’s financial advisors with information and strategies to help clients pursue their long-term financial goals and help make tax season easier. Schedule an introductory call with a Savant financial advisor today to build a tax strategy aligned with your long-term goals.
Frequently Asked Questions About A Financial Advisor’s Role in Tax Planning:
What is tax planning and why is it important?
Tax planning is the process of organizing your finances to minimize tax liability. It helps you to potentially keep more of your money while supporting long-term financial goals.
How can a financial advisor help with tax planning?
A financial advisor helps with tax planning by recommending tax-efficient strategies, managing investments, and guiding decisions to potentially reduce taxes over time.
What are common tax planning strategies for investors?
Common strategies include tax-loss harvesting, using tax-advantaged accounts, timing income and withdrawals, and diversifying investment types.
When should you start tax planning?
Tax planning should begin as early as possible. Starting early may allow you to take advantage of long-term strategies that might reduce taxes over your lifetime.
Is tax planning different before and after retirement?
Yes, tax planning strategies change over time. Before retirement, the focus is on reducing taxable income, while after retirement it shifts to managing withdrawals efficiently.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.