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Don’t Assume Your Financial Advisor Does Tax Planning

Work with an adviser who, in addition to your investments, will help you with Social Security, Medicare, estate planning, insurance and long-term care... and tax planning!

By Robert Klein, CPA

I received the following email from a potential client several months ago:

I was unsettled when I found out only recently that our financial adviser informed me in so many words that he does not give tax strategy advice for our funds. It was something that I just took for granted that would be part of the “package.” Little did I realize that it takes another layer of expertise to navigate the daunting work of retirement taxation strategy to reduce one’s tax burden.

Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. The firm’s motto is Planning, Managing, and Protecting Your Retirement Income™. Bob is the creator of FINANCIALLY InKLEIN’d™, a YouTube channel featuring tax-sensitive, innovative strategies for optimizing retirement income. Bob is also the writer and publisher of Retirement Income Visions™, a blog featuring innovative strategies for creating and optimizing retirement income that Bob began in 2009.

Robert Klein

As an experienced financial adviser with a CPA designation who specializes in tax-sensitive retirement income planning strategies, I felt this individual’s pain. I understood his frustration. I have been writing about this topic for years, beginning with my 2010 blog post, “What Tools Does Your Financial Advisor Have in His or Her Toolbox?” My 2013 MarketWatch articles, “Is Your Retirement Tied to Your Adviser’s Bias?” and “Your Adviser’s Retirement-Income Disconnect” also discussed this issue.

Work With a Financial Adviser Who Specializes in Comprehensive Retirement Planning

Many individuals who seek the services of a financial adviser aren’t as astute as my potential client. They don’t realize the importance of working with a financial adviser who has the expertise and experience to recommend tax-sensitive strategies as part of a holistic retirement income plan.

My potential client isn’t alone. About a month after receiving the above email, I came across Glenn Ruffenach’s Wall Street Journal article, “What You Should Expect From a Financial Adviser.” Glenn made the point that you need an adviser who specializes in retirement finances, which not all advisers do.

Derek Tharp, an assistant professor of finance at the University of Southern Maine who specializes in retirement research and was featured in the article, emphasized the importance of comprehensive retirement planning. Per Derek, “That means an adviser who, in addition to your investments, will help you with Social Security, Medicare, estate planning, insurance and long-term care.”

Importance of Tax Planning

Derek Tharp singled out tax planning as among the most important services a retiree needs. According to Derek, “The focus should be on the long term. You want an adviser who is thinking strategically about tools, like Roth IRA conversions, that can help reduce taxes in the future.”

Derek went on to say, “a good adviser will ask for, and spend a healthy amount of time with, your tax returns. If a financial planner is telling you, ‘Talk to your CPA about taxes, that should raise a red flag.’”

Tax returns are a starting point. They provide valuable historical information that can and should be used as the base year for preparation of current and future years’ income tax projections. Often overlooked by financial advisors, tax returns contain important carry forward items that can be used to reduce income tax liability in current and future years. This includes capital losses, suspended losses, net operating losses, nondeductible IRA contributions, and charitable contributions.

Stand-alone income tax planning software is essential for capturing prior year carry forwards and preparing accurate multi-year income tax projections that can be used by financial advisers to analyze and make recommendations of specific retirement income planning strategies. Most financial advisors rely on financial planning software whose tax planning capabilities often aren’t as robust nor, in many cases, as accurate as dedicated income tax planning software.

The key to the successful use of any tax planning software is the expertise and experience of the individual using it. Equally important is how the adviser applies tax projection results within the context of a retirement income plan. As an example, many financial advisers are reluctant to recommend a staged Roth IRA conversion strategy to a client solely based on the individual’s current year marginal tax bracket.


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Don’t Assume Your Financial Adviser Does Tax Planning

You should never assume that your financial adviser or potential financial adviser does tax planning. This is often the case if your adviser is employed by, or is a partner with, a stand-alone investment management or life insurance firm. Unless he/she or other individuals in the firm have expertise, experience and access to tax planning software, the firm’s services may not include tax planning.

The compensation model used by individual firms can also provide a clue as to availability of tax planning. Firms that only charge fees for assets under management or commissions for the sale of products without also charging initial or ongoing planning fees generally don’t include tax planning as one of the services offered.

Given the fact that income tax planning is an essential part of the retirement income planning process, it behooves you to determine if your financial adviser or his/her firm provides comprehensive retirement income planning services, including tax planning. Make sure that tax planning is part of your “package.” Heed Derek Tharp’s advice: “If a financial planner is telling you, ‘Talk to your CPA about taxes, that should raise a red flag.’”

About the author: Robert Klein


Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. The firm’s motto is Planning, Managing, and Protecting Your Retirement Income™. Bob is the creator of FINANCIALLY InKLEIN’d™, a YouTube channel featuring tax-sensitive, innovative strategies for optimizing retirement income. Bob is also the writer and publisher of Retirement Income Visions™, a blog featuring innovative strategies for creating and optimizing retirement income that Bob began in 2009.

Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies, including fixed income annuities, Roth IRA conversions, HECM reverse mortgages, and charitable remainder trusts, to optimize the projected longevity of his clients’ after-tax retirement income and assets. Bob does this as an independent financial advisor using customized holistic planning solutions determined by each client’s financial needs.