Tax Strategies for High-Net-Worth Investors Video from Savant Wealth Management

 

Download our complimentary guide books, checklists, and other useful financial resources at savantwealth.com/guides. Thank you so much for joining us today. We will be discussing tax strategies for the high netw worth investor. My name is Alaina Davalos and I’m a wealth transfer advisor here in our Atlanta office. Joining me today is Joe Marmorato, a senior tax strategy advisor, and Zach Ivy, our chief investment and advice officer. Welcome, Joe and Zach. Thank you all for joining us. My name is Joe Marmorato. I am a senior tax strategy advisor coming to you from our Lancaster, Pennsylvania office. I’m glad to be joining you all from our Birmingham office. Tax decisions play a meaningful role in preserving and growing wealth, especially as complexity increases with higher net worth. Today’s discussion will focus on proactive tax strategies designed to help investors make more informed decisions and identify planning opportunities that often go overlooked.

 

Looking at today’s agenda, we’ll be discussing the role of tax strategy in wealth management along with identifying tax strategy opportunities. Then we’ll pivot to estate tax planning and proactive financial planning. Finally, we’ll finish up with adjusting your strategy and we’ll be taking some questions. Please feel free to submit your questions at the Q&A box at the bottom of your screen. And while we won’t have time for everyone’s question today, you will receive a response from a Savant team member in the next couple of days. All right, we’re going to start off today with the role of tax strategy in wealth management. So tax planning is a multi-year strategy, right? It’s not just a singleear event. Now many individuals tend to be reactive with their taxes. that happens when you filed your tax return and may have a large bill due and you start to question is there anything I could have done differently. However, it’s really important to be proactive to avoid that occurrence in future years here. So tax effective planning there’s a few components to it right first when income is recognized and timing. So for example, if you are anticipating a large bonus this year and you have a highly concentrated position of a in your stock portfolio and you want to diversify out of that, well perhaps that’s not the best year to do it because of that high bonus. You’re going to be in a high tax bracket. So perhaps it makes sense to recognize that gain in a later year. So really understanding your tax situation each and every year really helps you plan accordingly and ensure that you’re not ne unnecessarily stacking income and subjecting yourself to higher taxes. So bracket management also works the other way. So maybe in those lower income years when you’re in the 12% or 22% tax brackets, maybe you want to try to fill those up. Those might be the ideal years to recognize the capital gain or perhaps complete a Roth conversion and take advantage of those lower brackets. Now, another effective planning opportunity is preserving those future low tax windows. So, what does that mean? Well, let’s look at it this way. Many individuals when they near retirement and they are currently working are earning the highest income that they have earned to date. So upon retirement, you’re no longer going to have earned income. So perhaps that is going to be an opportunity to again consider that bracket management and take advantage of those lower brackets there. Again, looking to complete Roth conversions and such before you start maybe collecting social security before a pension kicks in or before required minimum distribution. There’s also one word here that I have flexibility. You have to be flexible with your tax plan, right? Life changes fast. It can be personal life changes whether you get married or divorced or you could have legislative changes that maybe will change tax rates down the road. So, it’s always important to be proactive when considering tax planning. So, what are some things to avoid? Well, maybe a one-year optimization that could create multi-year problems. So, as an example, when the Tax Cuts and Jobs Act passed back in 2017, many individual taxpayers could no longer itemize deductions because the threshold for the standard deduction increased so much. So, many of those taxpayers would instead bunch their charitable contributions into one tax year. That way, they could benefit from itemized deductions and fulfill their charitable needs. Well, under the new legislation, the One Big Beautiful Bill Act, they increased the state and local tax cap that was formerly $10,000 upwards to $40,000. That means many more taxpayers are now itemizing deductions. So perhaps bunching contributions doesn’t make sense because while you like to see that current year deduction and paying less taxes now, if you continue to itemize for these future years and you’re no longer making charitable contributions, you could end up putting yourself in a higher tax bracket than if you spread out those contributions over the course of a few years. So again, that one-year optimization that might feel good because you’re saving taxes in that year could end up resulting in more in the future. Also, decisions made in isolation from retirement, investing, or charitable planning. I’m going to talk about this on the next slide, but it’s really important to consider those other planning areas when considering your tax strategy. So, one planning takeaway that I have here for you, tax planning is coordination over time. It is not just a single year event. So as I mentioned on the previous slide, I want to talk a little bit about tax coordinated planning with other areas of financial planning. Let’s start off here with managing investment positions. So there’s a couple things to this. One, you can have asset location, right? So where should I have my stocks and bonds held in pre-tax accounts, taxable accounts? what is going to be most efficient at the end of the day. Also, managing investment positions. Again, maybe you have some capital gains and you have a high turnover in your portfolio. Recognizing all of those gains and taking that profit could result in tax at the end of the day. So, it’s cons important to consider the investment positions when focusing on your tax planning. We also have charitable giving approaches. Do you want to leave a legacy after your lifetime or do you want to fulfill that charitable need and give while you are currently alive? There are many different vehicles available by the IRS for giving to charity. You can make a qualified charitable distribution that allows you once you’re attaining age 70 and a half to donate to charities directly from your IRA. That can help reduce taxable income. Perhaps you want to establish a donor advised fund. And again, maybe that bunching contribution will work for you and be beneficial. There’s a lot of different aspects for charitable giving approaches that impact taxes. So, it’s important to consider everything. Also, you have retirement and account coordination. So in those lower tax windows, right, that might be a key opportunity to complete some Roth conversions because you need to start focusing on in on when do I begin collecting social security? When do I when am I subject to required minimum distributions? Once you turn both of those on, you really can’t turn them off. So you’re already increasing your taxable income during those years. So again, it’s important to consider those low tax windows and take advantage of them when they’re available to you. It’s also important to coordinate what account you’re going to be withdrawing money from, right? So cash flow and withholding efficiency here. So you don’t want to just pull all of your money from your taxable IRA account because that could be subject to ordinary income. So it’s really managing all of your different buckets and accounts here effectively. We also have estate and wealth transfer. So I have been talking a lot about income taxes, but it’s important to consider estate taxes as well. The one big beautiful bill act that passed last year increased the estate exemption up to $15 million. So any individuals with assets above that may be subject to the estate tax, which is up to 40%. So it’s important to have a solid estate plan in place. And there’s other considerations as well for those individuals not subject to the estate tax. There’s that step up in basis provision where upon your passing any taxable asset that you have the basis will step up to the fair market value allowing the heirs to sell them essentially tax-free. Finally here we have business owners and succession planning. What entity structure is appropriate for your business? What’s going to provide the most liability protection to you? What could possibly min minimize your taxes through self-employment taxes and succession planning? Many business owners need a solid succession plan. Upon selling your business, that can result in some significant capital gains. It may also result in some ordinary income as well. So, managing around that and planning for that transaction is critical. So, I’m going to talk a little bit now about some strategies to consider for these various planning areas. identifying tax strategy opportunities, strategic conversations to have. So, I want to highlight three key strategies here. First, Roth conversions. Then, we’re going to talk about capital gain and loss planning. And finally, we’re going to touch on some charitable strategies. So, to start off with Roth conversions, we can view them as a tax, estate, and legacy planning tool. So, we’re going to start off in this first column here, the traditional IRA. So, just to recap here, traditional IRA generally allows you to make a contribution to this retirement account and receive a tax deduction because you received that tax deduction. The account grows tax deferred, but upon withdrawals, well, they’re subject to taxes because you received the benefit when you made that initial contribution. So with these traditional IAS, they work similar in ways to maybe a 401k that you have through your employer or a 403b account where upon attaining age 73 under current law, you’re subject to required minimum distributions where you have to start taking that money out. Well, it’s grown tax deferred over all of these years. So likely these accounts can be quite significant resulting in some large taxable distribution. So right now required minimum distribution age is 73. for those individuals born 1960 and later that will increase to age 75. So now that you have this large traditional IRA account that could be subject to taxes upon withdrawal. If something were to happen to you and you pass away and that account were to be passed on to your heirs, well they’re subject to different distribution rules. So many times for non-spousal beneficiaries, , they are subject to the 10-year window, basically meaning that they must take your entire IRA account and liquidate it within 10 years. That’s now a condensed period of time, likely resulting in these larger distributions that are going to be subject to higher tax rates than if you lived a longer life expectancy and were able to stretch those distributions out over a longer period of time. So, when does a traditional IRA really make sense? Well, maybe in a shorter horizon. Maybe if you are in that top tax rate right now and you can make that contribution and receive that pre-tax deduction or in lower years, maybe it makes sense to take that IRA and convert it to a Roth. So, let’s focus on that column there, the second one, Roth IRA post conversion. So if you were to contribute to a Roth IRA, that is another type of retirement account, we’re making a contribution to it. You don’t get a tax deduction. However, the account can grow tax-free. Now, if you take your traditional IRA account and convert it, remember, you previously received a deduction for the traditional IRA. Now you’re moving those monies to a Roth IRA. That is subject to tax. However, a Roth IRA still allows for tax-free growth in qualified distributions there. So, a key benefit of a Roth IRA is there is no required minimum distribution for the original owner. So, upon attaining age 73 or 75, you don’t have to take that money out. It can continue to grow tax-free indefinitely for your lifetime. So, why is that good? Well, it’s especially good for heirs here, right? because upon your passing, if an heir were to inherit a Roth IRA, those distributions are generally tax-free. Now, they’re still subject to that 10-year window under most circumstances there, but again, it can continue to grow for those 10 years and then be pulled out and perhaps put in a taxable brokerage account. So, best strategic use for a Roth IRA, consider long-term growth and legacy planning.

Now we’re going to talk a little bit about capital gain planning. So many high- netw worth individuals have some concentrated positions in their portfolio, right? And capital gain tax can present a challenge to those indiv individual investors because well when you’re a high net worth individual perhaps you’re subject to that highest capital gains tax rate of 20%. In addition you might be subject to that 3.8% net investment income. So if you were to sell that position, you’re paying upwards of 23.8% in federal taxes. That doesn’t even consider any state taxes that might be applicable. So due to that tax burden, it might cause some investors to delay reducing concentration risk in a portfolio. So here’s a graph and an example here with some assumptions. Say you have a $10 million concentrated stock position with zero cost basis. Now taxes are paid at inception at that 23.8% rate and again that includes that 3.8% net investment income tax and it grows 7% over the span of 20 years. Well, you could see there in the graph you lose out on a big chunk of it in the beginning, right? That 23.8% and as it continues to grow over time over 20 years in this example that’s about a $10 million loss in the overall asset there. So, there’s some considerations here with these concentrated positions. Are there any tax loss harvesting opportunities in your portfolio that can help you offset some of that gain and help you diversify? Perhaps considering a long short equity strategy to really help harvest some losses against that position to again help you diversify. Another consideration is if you feel charitably inclined to perhaps donate a portion of that stock or all of it to a charity and that’s what I’m going to talk about on the next slide here. Donating a highly appreciated security in lie of cash. So many individual taxpayers like to give to charity and hand out cash or write checks. Sometimes that’s beneficial. Other times there are more strategic giving methods available. So for this instance again donating highly appreciated security accomplishes the same goal at the end of the day of giving to your charity but it might allow you additional tax benefits. So in this example here we have some assumptions. Say you have a fair market value of ABC stock for $50,000. Your cost basis of the stock is 5 grand. Now you’re in the 15% capital gain tax bracket this year and your ordinary income is 24%. That’s your ordinary rate, right? Different rates for ordinary income versus capital gain. So in this first column here, option one, if you wanted to give to your charity and say you had this position and you just sold it and wanted to give them the cash, well upon selling that position, you’re going to pay 15% capital gains rate on. So, you’re going to pay total taxes there of $6,700. That leaves you with $43,250 to give to your charity, whereas you could have given $50,000 if you just gave the stock outright to them. So, now you’re giving the charity a little less than you may have hoped for. Now, the tax savings on that cash contribution is going to be about 24%. Right? That’s your ordinary tax rate, and that’s the benefit you’ll receive. However, you previously paid $6,700 of long-term capital gains on it. So, really, your net tax benefit for doing that is really only around $3,600. Not too significant. Now, while you may have fulfilled your philanthropic needs, there may be a better option. Look at option two here. Contribute ABC stock directly to charity. So, many times charities accept marketable securities. So, if you just gave that $50,000 of stock to a charity, you don’t pay any long-term capital gain, that all goes away for federal purposes. So, that’s a that’s a big benefit there. The charitable deduction that you get is upwards of $50,000. Now, that again does not consider any limitations that there may be regarding your adjusted gross income and so on. I’m not getting into the specifics here, keeping this very high level. If you then get a $50,000 deduction and you’re in that 24% ordinary bracket, that could be a tax savings of upwards of $12,000, right? You’re receiving that immediate tax deduction and avoiding the capital gain on the position. So, contributing highly appreciated stock is a really beneficial way to give to your charities and fulfill your philanthropic needs.

Thank you, Joe, for that information. I want to switch topics and look at a different area of tax planning that we can have a real impact on with some good planning, and that is estate taxes.

Now, estate taxes are not as commonly discussed as income taxes, and that’s because they generally don’t apply to as many people. Federal estate taxes are only levied against estates. So someone’s collective wealth once they’ve passed away. If the total value of the estate exceeds the estate tax exemption threshold, then estate taxes will be paid. What you see on the chart here is the history of the federal estate tax exemption amount and what we expected to happen at the end of 2025. However, beginning in 2026 with the passage of the one big beautiful bill act, the current estate tax exemption amount is historically high. That amount is going to be $15 million per person. And you’ll hear me reiterate that number a lot. So currently for your estate to owe federal estate taxes, your combined wealth, so your qualified accounts, your brokerage, your real estate, the death benefit of your life insurance policy, anything that someone is going to inherit from you that has value, you take that combined amount and if it’s greater than $15 million this year or if it’s changed with inflation, Whatever year you do pass away, if your state exceeds that amount, then your estate will owe estate taxes. However, that’s just you personally. If you’re married, your spouse has another estate tax exemption of again this year $15 million. So typically for married couples, this federal tax only applies to estates worth more than $30 million. I wish all of our clients an estate tax problem. You know, it’s a good problem to have. But on the flip side, the federal estate tax rate is really high. So it’s about 40% or 40% 40 cents of any dollar. So, if you have any amount exceeding that $15 million if you’re single or $30 million if you’re married, your beneficiaries will receive a 40% haircut on that gift because the state taxes would have to be paid.

But – another but, there’s also state estate taxes as well. State estate taxes generally have lower estate tax rates, but they do kip typically kick in sooner, meaning they kick in at a lower amount. For example, the Oregon state estate tax exemption is $1 million. So that impacts a lot more people. Illinois is 4 million. New York State is just over 7 million. So this state estate tax can apply to more people and these are just as important to plan for if you live in one of these states that you see in blue here. The states that are in yellow, those are inheritance taxes. And inheritance taxes are a little bit different. The estate tax is calculated based on the deedent, the person that died, on their collective estate, and estate taxes are paid before assets are distributed to beneficiaries. Inheritance taxes are payable by the estate beneficiary themsel. So, they’ll pay it based on how much they’ve inherited. Typically there are personal family beneficiary relationships. So you know a child may pay a different inheritance tax than let’s say a niece or nephew something like that. So, if you live in one of those states that you see highlighted in yellow, it’s very important to talk to your professionals to see what your inheritance tax could be if you plan on receiving an inheritance. This presentation includes hypothetical examples for educational purposes only. These examples that I’m about to give are not based on any specific client. They don’t reflect any actual client outcomes and they’re not indicative of the results any individual may achieve. Assumptions that we use may not reflect real world conditions. A lot of estate planning outcomes depend on individual circumstances, applicable law, and future changes in tax rules. Simant does not guarantee any particular result with these planning tips.

All right. So, what do you do if you have a taxable estate and are facing those federal estate tax liabilities that you would rather not pay or you don’t really want your estate to have to pay, what we start talking about is doing lifetime gifting. So that federal exemption amount, you know, that magical $15 million marker that kicks in either at death or during life. So you can leave $15 million to anyone you want at death and pay zero taxes, or you can give someone today $15 million and pay zero taxes on that transfer. However, once you exceed the lifetime gift amount, any other transfer above that, you will have to pay those transfer taxes on. So, you couldn’t, for example, give $15 million this year and $15 million if you died next year. It’s a collective effort. how much money you have.

It’s an amount that you either use during life or use at death. And the IRS does keep track of those lifetime gifts via a 709 gift tax return that is due with your income tax return the year after you’ve made a gift. So, let’s say I were to give Zach $10 million today. I would have to report that on a 709 gift tax return, and then I would only have $5 million of estate tax exemption left, either to gift next year or to gift at my death. My kids might have a problem with that, though, so I probably won’t be doing that. Sorry, Zach. So, why would we do this? you know, how does gifting away and to who you know, your hard-earned assets benefit you in any way? I know it seems crazy and it always is an odd concept that you’ve worked so hard your entire life, you’re told to save, you’re told to preserve, and then we start talking about just handing everything away. But when we’re when we start talking about gifting, you know, we’re not just looking at the assets themselves, you know, we’re also looking at the future growth potential they have. Zach and Joe are going to talk about proactive planning. You know, this is our proactive approach from a wealth transfer perspective. So, let’s take a look. This is a hypothetical plan for illustrative purposes only. So keep that in mind.

This example highlights planning concepts only. Whether these strategies make sense depends entirely on individual circumstances and implementation requires coordinate coordination with legal and tax professionals. So, if you decide to do any of these tactics, make sure you’re involving your lawyer and CPA.

In this example that I’ve given just exceeded the federal estate tax exemption amount, they are young, they are in their mid4s, they’re very successful, they have two wellto-do kids, you know, the whole nine yards. But the problem is that they have federal estate tax exposure. Thankfully, they live in a state without state estate taxes, so we don’t have to take that into concern. And they’ve also had their core estate planning done. So, they’ve got their wills, their powers of attorney, all that. They’re good to go in that regard. But look down at that little gray box in the corner. Look at the estimates for their future estate tax liability. That tax bill grows very high very quickly. You know, we go from about $1 million of federal state tax liability today to more than three in 10 years, more than 12 in 20 years, and almost 20 in about 30 years. So, that’s a really high tax bill that a lot of clients don’t want to pay. you know, if tax planning is their goal, we’ve got to do something about this. So, what can we do? So, the first issue that this family faces, like I just mentioned, is that estate tax exposure. Because they are so young, their estate has so many years of growth potential. That’s when we start to look at their net worth and see if they have any easy assets to transfer and to have $4.5 million in life insurance and they also have a closely held business that they have full control over. So once we start looking at those assets, you know, that’s when we start thinking about who do we give to and how ideally for a married couple, we would like to give to the spouse. Mr. Allen would like to benefit Mrs. Allen before all others. Hopefully that’s the case. In this hypothetical scenario, it is. Second question then how with gifting either during life or at death you have two options in trust or outright. When working with high netw worth families a lot of times trusts have more appeal because the trust protects the assets from creditors and future estate taxes. So, it makes more sense to use a trust vehicle than to make an outright gift, especially when gifting to spouses. If Mr. Allen transferred his small business interest, for example, to Mrs. Allen, that’s still in their collective taxable estate. That doesn’t do any planning. That doesn’t help with any of their estate tax exposure. So in this case with $4.5 million of life insurance, you know, we start to look at a life insurance trust. , sometimes this is called an irrevocable life insurance trust, an eyelet. Mr. Allen creates this irrevocable trust as grtor. He gifts the life insurance policies on his life to Mrs. Allen as trustee. When Mr. Allen passes away, the death benefit from those policies will first benefit Mrs. Allen, then their children. So, same effect as if he had them in his name, but by transferring them to a life insurance trust, that death benefit policy is outside of his taxable estate. A lot of people are under the assumption that life insurance is not taxable. The correct statement, the correct way to put it is that life insurance is not income taxable. The death benefit is however considered as part of your taxable estate for estate tax purposes. By gifting that policy to a life insurance trust, you can take the death benefit out of your taxable estate but still leave those proceed policies for your loved ones. Life insurance policy gifts are also very beneficial because the cost to you, meaning how much of your lifetime exemption you use to transfer these policies can be as little as the annual premium of the policy. So, if it’s a term policy that Mr. Allen here transferred with, let’s say, a $15,000 a year premium payment. He can use his annual gift exclusion amount to make that gift to the life insurance trust. Well, that’s right. There is a little exception to that $15 million transfer amount, and that is the annual gift exclusion amount. You can make gifts up to $19,000 per person per year without eating into that lifetime exemption. So if the term policy premium is low, you may not use any of your lifetime exemption to remove this policy from your taxable estate. Life insurance policies and life insurance pro trusts are usually, you know, they’re pretty lowhanging fruit when it comes to estate tax planning because you can get a really big benefit with very little cost.

Okay, so let’s look back. I know there’s a lot going on here. Let’s though look at the progress we’ve made with the Allens. Look at that gray box now. big change. But what else can we do? You know, the tax bill is still there and is still growing. So what now? A lot of the issues we run into with this sort of planning is that clients are unwilling to give up control over their assets, usually rightfully so, especially if it’s small businesses that they’ve built from the ground up. in this case have a construction business that has done very well, supports their livelihood, but again, it’s growing. They’ve also got different liquid assets, different accounts. They’ve got a lot of stuff going on. So, how do we move some of these assets, take it out of the right hand side of their chart in red and move it over to the yellow side outside their taxable estate, but still trying to retain as much control and access as the IRS and the tax code allow for.

Go meet the SLAT, the spousal lifetime access trust. A trust that Mr. Allen sets up for Mrs. Allen’s benefit that he then gifts to. Mrs. Allen sets up a trust for Mr. Allen’s benefit that she then gifts to. At the second death, assets go to their kids, paralleling their core estate plan. These trusts cannot be reciprocal, meaning they cannot be the exact same document with the exact same terms, conditions, beneficiaries, assets. You know, there has to be some differences. Also, setting up the slats is based on state law. So, do make sure that if you’re considering this, make sure you work with a qualified attorney to set up trust like this. Also make sure that your financial planner and your CPA are aware of what you’re doing. You know, SLAP planning definitely takes a team effort. So you set up trust like this. Then we go back and we look at the net worth statement again and we say, “Hey, what are good assets to gift to these trusts?” We want assets that have a high basis and are highly appreciating. Sometimes we want assets that are hard to value. So for the Allens, what makes sense? You know, we suggest Mr. Allen moves his construction business and his miscellaneous companies to the slat he created for Mrs. Allen. We then suggest Mrs. Allen move her schwab account, vacation home, and some other properties to the slat she establishes for Mr. Allen. With the slat set up for Mrs. Allen, she is the trustee. If the construction business makes a distribution, they would make it to Mrs. Allen as trustee of the slat. She is also the beneficiary. she can then choose to distribute those trust funds to herself. Same with vice versa. If for example the Schwab account puts out dividends, different income, things like that, they can either stay in trust or they could be distributed to Mr. Allen as trust beneficiary. Spouses like this type of planning because they still have a lot of access in their household. Some assets, however, cannot be gifted, such as the primary residence and the qualified accounts. the IRS looks at your primary residence and says, “If you’ve gifted that to an irrevocable trust and you’re still living there, tisk, no, no, that’s not going to work.” qualified accounts, we don’t usually move those either because once they come out of the original account holder’s name, they no longer have those income tax beneficiaries or those income tax qualifications and they could actually create a lot of income tax problems for you. So qualified accounts stay with Mr. and Mrs. Allen. the primary residence stays with them as well. Also, because those assets you see are on the right hand side, they’re in red. Those are the assets that we expect the Allens to continue to live on. They will live in their home. They will take RMDs for their lifestyle. , they have those are the spendable assets. Those stay in the taxable estate. The assets that we’ve moved outside of the taxable estate, things like the business, the Schwab accounts, those are assets that we hope to appreciate in the Allen’s trust outside of their taxable estate. The taxable estate will continue to grow, but hopefully not as quickly as what has been moved outside of it. So red taxable spending, yellow, not subject to estate taxes, hopefully growing quicker, hopefully your last bucket for spending available but not ideal. But one more thing, one more big thing. Look at that little gray box down in the corner. Again, this illustration shows how these strategies could reduce projected estate tax exposure under certain assumptions. These figures are estimates based on simplifying assumptions and are not guarantees of any results. And even if you don’t think your net worth is high enough to owe those taxes this year, remember assets are hopefully growing about 7 to 8% a year, whereas that federal estate tax exemption is only growing at around 2% a year. So odds are high that you’ll outpace it sooner rather than later. It’s always better to do this sort of planning earlier. And let me just finish by saying, you know, does it look complicated? Does this seem like a lot? Yes and yes. And that’s why it’s very important to have a team of support if you do decide to do transactions like this. Thanks. That is some great information. You all know the tax implications of various retirement buckets. In a trust or taxable accounts, interest and short-term capital gains are taxed as ordinary income, while dividends and long-term capital gains are taxed at a more preferential rate, sometimes 50%. Now, qualified plans like 401ks and in IRA, there’s no tax whatsoever until the money is distributed from the plan and then everything is taxed as ordinary income. Now, in the Roth bucket, both consisting of Roth IRA and Roth 401ks, after tax dollars are invested, so there’s no tax on earnings or accumulation even when it’s distributed. In short, we like to allocate funds at the household level, not at the account level, because it allows us to save money by locating assets in the most taxefficient account type. We estimate that our implementation of this asset location creates added value of about a third of a percent. Now, some examples would be like REITs and bonds. They belong in IAS because they’re taxed at ordinary income. So, you want to defer the ordinary income tax and put those assets in the type of account that’s also taxed as ordinary income. Now, things like individual stocks, they belong in taxable accounts where your beneficiaries can get a step up in cost basis. But keep in mind, international stocks are better off not in an IRA because there’s no foreign tax credit in IAS. And finally, kind of the highest growth potential items should be placed in a Roth where the appreciation will not be taxed. Another example that comes up regularly at retirement, take someone who made about 250,000 or more per year and then retired. Say they came to us with individual municipal bonds in their taxable account, which with the newly retired person’s lower income just doesn’t make sense anymore. So what we’ll do is let those municipal bonds mature or possibly sell them in the taxable account, then replace them with corporate bonds and put it in the IRA. Stocks will be held in their taxable account instead of the emissiles because of the preferential rate for capital gains and qualified dividends. This is a simple example of asset location and keeping more of the returns you earn.

While many investors understand the importance of asset allocation, meaning how much you have in stocks versus bonds versus other things, many overlook the benefits of this asset location, locating these assets based on their tax characteristics. Now, we start by reviewing kind of the default tax rates over time. We then implement this asset location strategy and figure out how to best create a taxefficient cash flow for retirement. As Joe mentioned, we’ll consider Roth conversions, see if they might be beneficial for a client. And most importantly, what we’re seeking to do is to smooth the tax rate over time, not just in one year. As you know, when traveling long distances or in this case, planning over long time frames, things happen and it’s important to adjust your strategy along the way. A few things that might impact your tax that can make it beneficial to revisit your tax strategy are life events, you know, like having children, experiencing a divorce or even, you know, a death of a spouse. Likewise, markets can change, both positive market changes or negative market changes, and that can warrant a change in strategy. Now, very obviously, if the tax laws change, we need to understand how those changes might affect you. And then liquidity events like a business or a real estate sale. And finally, an inheritance that, you know, if it’s a large inheritance, this can often change your tax. So, I want to be clear. It’s not just about reacting to when these events happen, but to start to plan. If you anticipate one of these life events coming up in the next year or two or three, the more proactive versus reactive planning we can do, the better. Now, there are many things to consider when proactive planning with an eye towards taxes. We can think about sort of paying the tax today versus deferring it. We often weigh, you know, current efficiency versus having future flexibility. And then very honestly, you know, simplicity versus optimization. There’s a trade-off there. So having a holistic view of your finances and your goals, that’s the guide to help us to make these decisions. There are these trade-offs, but when viewing taxes within the framework of an overall financial plan, it becomes much clearer which decision can be right for your particular situation. Now, another key takeaway is the idea of tax strategy as an ongoing part of your planning and not just this one-time act. We often to help, you know, manage concentrated stock positions and tax efficiently reduce this risk over time. Other portfolio considerations are you know when do we recognize the capital gain or when is optimal to shift the portfolio to maybe a more income orientation. The ongoing nature of tax planning is in part because Congress can and does change the rules. So weighing tradeoffs in light of what we know today versus kind of the unknown of the future. Now, in the investment world, we often say, “Don’t let the tax tail wag the dog.” Meaning, taxes are important, but we must put them into perspective and think about the investment merits first. Now, this is absolutely true, but for high netw worth investors, we must absolutely include taxes in any investment decision because, as they say, it’s it’s not what you make, it’s what you keep. Now, we would love the opportunity to explore how we might help you. If you will, please click on the link in the chat box to schedule an introductory call to see how we can help with your unique circumstances.

All right. So, now we’re going to take a few questions here from the audience. So, first one here, is contributing highly appreciated stock more beneficial than making a qualified charitable distribution? Good question, but really depends on each individual’s particular situation, right? So, qualified charitable distributions or QCDs, well, they allow taxpayers ages 70 and a half to contribute to charity directly from your IRA, reducing that taxable income. And that’s important because as it reduces your adjusted gross income there, that may allow you to take advantage of certain other deductions that might otherwise be phased out once your income exceeds a certain threshold. But keep in mind, not all taxpayers can make QCDs. You have to be age 70 and a half. So sometimes contributing highly appreciated stock can be better suited for accomplishing a taxpayers’s charitable goals and helping diversify their portfolio.

All right, let’s go with another question here. Does Congress intend to pass any other tax legislation in the near term? Another good question. So, with the midterm election coming up, there are a lot of tax proposals being presented at the moment, but we had significant tax legislation passed last year under the one big beautiful bill act. So, nothing is being proposed that would necessarily overhaul the current tax system at this point in time. but there are some other proposals out there. So, one of them, for example, that was just recently introduced was going to repeal the estate tax. , another one was looking to index cost basis for inflation. I think that includes here securities. It also includes real estate as well. So, if you were to sell your primary residence, that can help you avoid a potential gain. , there’s also other provisions, too, looking to bring back some of the energy efficient tax incentives that were repealed under the recent tax bill. So, there’s a lot going on in Congress. , so we just have to wait and see what actually comes to fruition here. So here’s a question. If you use alternative investments, where is best to locate those assets? Great question. , first, it depends on the alternative investments. , for instance, , something like private equity investments or real estate, these are often good to locate in taxable accounts. They are pretty taxefficient investments. , but something like that generates ordinary income like a hedge fund that has active trading with short-term gains or maybe private equity that generates ordinary income. These would be best to locate in a qualified account like an IRA.

Here’s another question. what exactly is tax lost harvesting? It sounds like you want to have losses. What am I missing? Yeah. So, that’s that’s a great question. You’re right. It sounds like that. So, let’s start with a simple explanation. the IRS allows you to sell an investment that has lost money and create or what we kind of call bank a loss for tax purposes. This can then be used to offset capital gains in the future. In many cases, you know, we don’t want to we don’t want losses, but markets, you know, go down from time to time. And when they do, we sort of seek to le to make lemonade out of lemons. So, we’ll sell investments and taxable accounts that are at a loss and replace those securities with another investment. We can then use that loss to offset future gains and other investments or even in that investment. any losses that aren’t used in a given year can be carried forward to future years and this is a you know very powerful tax planning tool. Now there are investment strategies out there from custom indexing to long short separately managed accounts and these are really designed to utilize tax harvesting in a greater way to increase the after tax outcomes. Okay. So, we’ll take another question here. You talked a lot about Roth conversions and how beneficial they can be. When do they not make sense? That’s a good question here. So, Roth conversions generally don’t make sense if you’re currently in a high tax bracket and you expect to be in a lower one in the near future, right? So, why pay taxes, higher taxes now if you can pay less later? , it also might not make sense if you don’t have the cash to pay the tax on the Roth conversion. So, think about it this way. If you were to withhold taxes on the Roth conversion, that means that the net proceeds from the conversion get funded into the Roth IRA. So, you’re paying tax on the full amount, but only the net amount gets to be funded in the Roth IRA. So, it’s typically best to be able to use outside funds to pay the taxes so that you get the benefit of the full Roth conversion in that account there. So, here’s another question. You mentioned asset location. So, does that mean that each of your accounts looks very differently? , exactly. This is often the case and it’s a hurdle for many people to get used to. So for a simple example, let’s kind of take the case of someone who has let’s say three account types. A taxable account, a regular IRA, and a Roth. So let’s say they’re targeting a portfolio that has like 60% in stocks, 20% in bonds, and 20% in alternatives. So in a in a case like this, their taxable account may have some US and international large stocks. the bonds and alternatives may be mostly all in the IRA and then small companies and emerging market stocks kind of what we expect to be the fastest growing those would be in the Roth. So the end result is a very taxefficient and portfolio, but each account on a standalone basis does look very differently. That’s all the time we have for questions, but if your specific question was not answered, please add that into the survey that will pop up after this webinar and someone will contact you shortly. If at any time you’re looking for more information about Savant and what we do, I invite you to go to savantwealth.com to learn more and schedule that 15minute complimentary call with us. Thanks again and have a great day. Thank you everyone. Take care. Thank you. If you enjoyed this webinar, visit savantwealth.com/guides and download our complimentary guide books, checklists, and other useful financial resources.