He isn’t critical of the accountant. He noted that professionals tend to focus on their own area of expertise. The lesson learned, he said, is there is a benefit to taking a broader view of how a decision affects a client overall.
Collaborating with other trusted professionals (such as CPAs, estate planning attorneys and business valuation experts) provides more opportunities to collect multiple viewpoints on an issue, figure out how to help clients more efficiently reach their goals and ultimately get clients to where they want to go, he said.
“At the end of the day, it doesn’t matter if we’re orchestrating it or someone else is orchestrating it, as long as we’re being collaborative,” said Newman. “I’ve never seen anything bad come out of collaborating on behalf of a client.”
According to Newman, Roof Advisory Group communicates with the CPAs of about 90% of its clients.
Split Decisions
Newman also suggests that clients who are retired take a mix of distributions from their qualified investments (pretax IRAs and 401(k) retirement savings plans) and nonqualified investments (after-tax savings accounts, brokerage accounts and mutual fund accounts). This helps preserve some after-tax money for down the road, he said. He collaborates with clients’ accountants to determine the best blend of distributions.
If 100% of a client’s annual distribution comes from an IRA, it could be taxed at about 30%. If the distribution is split 50-50 between an IRA and an after-tax joint account, the client’s earned income is halved and the tax rate would theoretically be about half that or 15%, he said, “although the math won’t work out exactly.”
The key is to start communicating with clients many years in advance of retirement to help them determine how much money they should be saving in pre-tax versus post-tax accounts, said Newman. This involves financial planning work and modeling, he said.
“We’ve been conditioned all of our lives to defer, defer, defer, defer,” he said, “so you’re not paying taxes on the earnings that year.” After-tax income “gets a little bit of a bad rap,” he said, because people want to get a tax deduction today and they want deferred growth and income.
Clients with “a more blended ratio of qualified versus nonqualified dollars will ultimately have to save less money because it’s going to be taxed more gently,” said Newman. “I don’t think people really think about that until they get to the doorstep of retirement.”