– Tax planning should be a year-round consideration for high net worth clients to maximize savings.
– High net worth individuals often overlook opportunities to minimize their taxes due to time constraints or lack of strategic tax advisory teams.
– Investment advisers and wealth managers can add significant value by considering fees, expenses, tax costs, and long-term returns when advising clients.
– The US tax code has undergone numerous revisions, necessitating constant tax planning.
– Maximize employer benefits, such as mega-backdoor Roth options and health savings accounts, to accumulate tax-free savings.
– Leverage charitable gift planning options, including appreciated securities and donor-advised funds, to optimize deductions and save on taxes.
– Take advantage of tax loss harvesting in down markets to offset capital gains and generate tax benefits.
– Convert pre-tax IRAs to Roth IRAs during low-income years to minimize overall taxes paid on distributions.
– Coordinate estate planning and income tax planning by gifting income-producing assets and assets with unrealized gains to family members in lower tax brackets.
– Tailored tax planning and strategies can help clients minimize taxes and maximize their savings.
Tax season shouldn’t be the only time high net worth clients think about their taxes. There are year-round tax planning and saving strategies that can help maximize savings for these individuals. Many high net worth individuals fail to minimize their taxes due to time constraints or lack of a strategic tax advisory team. However, investment advisers and wealth managers can add significant value by considering fees, expenses, tax costs, and long-term returns when advising clients.
The US tax code has been revised numerous times since 2001, making tax planning an ongoing and vital consideration. For example, the Tax Cuts and Jobs Act, passed in 2017, is the largest revision of the tax code in 30 years. In addition, the SECURE Act and proposed SECURE Act 2.0 bring further complexity to retirement plan rules. With constant changes in tax laws, it is crucial for advisers to stay updated and provide clients with relevant tax planning strategies.
One strategy to maximize savings is to take full advantage of employer benefits, such as mega-backdoor Roth options and health savings accounts (HSAs). Contributing the maximum amount to an HSA each year can result in substantial savings over time. If the funds are not used for medical expenses, they can be distributed penalty-free after age 65, although they will be subject to standard income tax. Clients can save a significant amount on income taxes by spending the funds on assisted living, unreimbursed medical bills, or other health care expenses.
Another tax-saving strategy is to leverage charitable gift planning options. Instead of using cash, clients can donate appreciated, long-term securities, such as stocks, to charities. By doing so, they can avoid recognizing capital gains and time the income tax deduction to occur in a high-tax-rate year. This strategy can result in significant tax savings, especially when combined with bunching charitable contributions into a high-tax-rate year.
Tax loss harvesting is a strategy that involves selling investments with unrealized losses to generate a capital loss and offset capital gains. By doing so, clients can access the related tax benefits and reduce their overall tax liability. Capital losses can be carried forward indefinitely, making this strategy valuable even if subsequent gains are not expected for many years.
Converting pre-tax IRAs to Roth IRAs during down markets and low-income years can also minimize taxes paid on distributions. Roth IRAs provide tax-free growth and distributions, while pre-tax IRAs provide an upfront tax benefit but are taxable when distributed. By carefully planning the conversion based on the current value, clients can pay lower taxes at the time of conversion and potentially benefit from tax-free growth in the future.
Coordinating estate planning and income tax planning is another effective tax-saving strategy. Clients can consider gifting income-producing assets and assets with unrealized gains to family members in lower tax brackets. By doing so, they can transfer assets to their heirs while minimizing the tax impact. However, it is essential to consider the “kiddie tax” rules, which apply to children who are subject to higher tax rates on unearned income.
By offering tailored tax planning and implementing these strategies, advisers can help high net worth clients minimize their taxes and optimize their savings. It is crucial to stay informed about tax laws and regulations to provide the most effective advice.
