How These Real Financial Advisors Talk Tax-Planning with Clients

26 Mar 2024

1040 tax forms

Tax planning is a critical component of financial planning. By incorporating it, advisors can elevate their practices while curbing the tax liabilities of their clients through astute tax-friendly strategies. This article explores the tactics used by two real financial advisors in client conversations. Our own Alexus Rogers, Customer Relationship Lead, hosted the conversation during a recent webinar. Watch the full panel on our YouTube channel or catch some lightly edited clips below.

Our esteemed panelists were Warren Duthie of Duthie Financial Group and Derek Mazzarella of Gateway Financial Partners. Both have shared their success stories with us before, Warren admitting that he was embarrassed of his software before switching to RightCapital and Derek sharing how he gains clients by easily demonstrating potential tax-savings.

Bear in mind that the insights shared by Derek and Warren draw from their individual experiences as advisors. Should you consider incorporating tax-planning into your practice, it's always prudent to seek advice from a compliance expert to guarantee adherence to all essential rules and regulations.

With no further ado, here’s how Derek and Warren navigate tax-planning discussions with their clients in a manner that is easily understandable and empowers them to make tax-smart decisions:

Establish the basics

Explain the different tax buckets

Derek advocates for a strong understanding of fundamentals before diving deeper. To explain the three different tax buckets (tax-deferred, tax-free, after-tax) to clients who may not be financial professionals, he employs an analogy. He likens these buckets to garages, where the investment is the car. The car, he explains, can park in any garage, but the difference is how it's taxed when it enters and exits.

Show effective tax rates over time

Warren uses RightCapital’s Tax Estimate and Distribution and Conversion visuals to illustrate how tax rates can vary over their lifetime. He graphically depicts how tax rates will be different when clients are working a steady job vs. early retirement before Social Security kicks in vs. when they do start collecting benefits. During periods when tax rates are typically the lowest, Warren highlights opportunities such as Roth conversion or other tax-smart savings mechanisms that could fill up the tax brackets. He shared the charts and sliders he uses to explore these opportunities with clients in real-time:

Assess the impact of taxes on the next generation

Warren highlighted the necessity for clients to comprehend the tax consequences for their successors, demonstrating how he utilizes RightCapital for this purpose. Using the Distribution and Contribution component in RightCapital, he presents graphs indicating the percentage and value of their assets that are tax-deferred, encouraging them to explore Roth conversions for the assets they might pass on to their heirs. Moreover, he pointed out that it's an effective strategy to engage with the next generation to help establish a relationship for their own financial planning needs.

Demonstrate different scenarios visually

Consider certain tax law situations

Tax laws change often depending on the current administration, which means a wide range of scenarios are possible in the future. Derek touched upon the prospective advantages of accomplishing Roth conversions ahead of the potential sunset in 2026 of the Tax Cuts and Jobs Act of 2017. He illustrated how these savings can be visually represented within RightCapital:

Dive deeper for more tax-savings opportunities

While RightCapital can automatically fill up the tax brackets, Derek recommended venturing further with clients. He showed how advisors can play around with the specific timing of Roth conversions to explore possibilities for additional tax savings:

Consider the full plan

Derek noted that all planning is related and whatever we do impacts other parts of the plan. This is all easily identified and presented in RightCapital. As an example, aggressive Roth conversions during periods of lower tax rates might inadvertently escalate future healthcare costs. “Even if you go up just two Medicare brackets, your premium is doubling.” With RightCapital, advisors have the ability to specify a desire to remain within the current Medicare premium tax bracket while discussing a potential distribution strategy. Paying attention to such intricate details can increase the clients' trust in you as an advisor and in their plans.

Help clients prep for tax season

Bring a CPA or accountant into the conversation

Both Derek and Warren stressed that financial planners should focus on tax planning, not tax advice. They underlined the importance of reminding clients that they are not CPAs and suggested the inclusion of a CPA or accountant in discussions with clients when necessary. Derek explained the distinction, “Planning is more of a ‘what if we did this scenario…what if this vs. this,’ showing the potential outcomes vs. ‘hey you should do this specific thing, and take this money out of this account when’—that’s the real difference.” Warren added on that he'd be happy to get on a call with the client and their CPA. He often tells them, "In order for me to be a great advisor to you, I have to know how taxes work."

Set clients up for success

In order to ensure a more outgoing than incoming communication, Derek emails clients in January, explaining the 1099s dispatch schedule. He also integrates a tax checklist in his January newsletter, highlighting some frequently overlooked pieces such as daycare expenses, prompting clients to keep track of such expenses. Derek reviews who could still make contributions or execute any last-minute tax moves from the previous year.

Warren follows a similar approach, setting a deadline in Q4 to determine if any of his clients are interested in actions like Roth conversions or additional 401k contributions. He has also adopted a proactive method (similar to Derek) to inform clients about the timing of the 1099s.

Want to learn more about how to use RightCapital for your own tax-planning discussions? Schedule a demo today!