Financial advisors must move beyond table stakes services to help clients with advanced tax planning strategies. For example, merely constructing muni bond portfolios isn’t enough anymore. Many advisors (including those without CFP designations) already do that anyway. 

Therefore, to stand out, develop expertise in more value-additive tax bracket planning strategies and learn to coordinate these services with a client’s trusted CPA. 

Here’s an overview of what financial advisors can do. 

Pro Forma For Longer Projections
Financial advisors are best positioned to run longer-term income and tax pro forma projections. Ideally, they should cover 15- to -20-years into the client’s retirement years. Projections that run for one to two years are common and easy to do but fail to anticipate the full scope of tax mitigation options.

Longer-term projections call for an advisor to have in-depth conversations with the client to get the complete picture of their current and expected financial circumstances, covering both income and itemized expenses, as well as held-away assets. For working couples, income includes:

• Their respective salaries.

• Qualified and non-qualified investment accounts.

• Residential and commercial real estate properties.

• Any business ownership stakes. 

Break down all recurring and major expenses. Mortgage payments, homeowners’ association fees, and/or rent; groceries and restaurants; utilities, phone and internet; vehicle loans, commuter fees and trips; medical bills and elder care; education costs, including existing student loans and any upcoming payments for children; and charitable donations.  

The next step is anticipating required minimum distributions (RMDs) from qualified accounts. These could have a massive impact not only on a client’s tax exposure but also on their cash flow. 

From there, consider mitigation techniques like qualified charitable distributions (QCDs). This requires an even deeper understanding of a client’s financial plan, cash flow needs and charitable intentions. 

RMDs generally increase as people age. The IRS determines them by dividing the year-end balance of each client’s tax-deferred retirement account by a number based on their life expectancy, and other factors. So, the annual RMD per $100,000 of savings starts at approximately $3,650 at age 73 and steadily grows to roughly $10,000 at age 93. Naturally, RMDs can push retirees into higher tax brackets, often catching them off guard if they haven’t planned properly.  

One early mitigation strategy is to make QCDs, which are not taxable, starting at age 70½ as a portion or all of the RMD. With QCDs, the client’s IRA custodian must directly transfer funds to a qualified 501(c)(3) charitable organization. For tax year 2024, each person can donate as much as $105,000, including a one-time $53,000 QCD to a charitable gift annuity or charitable remainder trust, but donor-advised funds don’t apply. 

Roth Conversion Plan
Constructing a Roth conversion plan in ways that minimize the upfront federal and state tax bill can put you ahead of the vast majority of advisors. Clients may be able to reduce RMDs and their related tax obligations by rolling over assets from a tax-deferred retirement account into a Roth IRA. Although that amount will get taxed, neither the growth nor the withdrawals will be. 

To avoid penalties, the client should be 59½ or older and have held assets in the Roth IRA for at least five years. Doing a Roth conversion in the first years of retirement, before RMDs occur, may be especially advantageous. This strategy can benefit those who expect to be in higher tax brackets when they make withdrawals, as well as anyone who wants to leave tax-free assets to heirs. 

Capital Gains
Planning around capital gains and potentially other income acceleration is also crucial. For example, consider selling substantially appreciated stock or triggering employment-related benefit plan payments when a client is expected to occupy a lower bracket. Some clients might just recently have acquired company stock options that stand to rise significantly well before their peak earning years. Or perhaps stocks they inherited long ago have gained in value.

But the decision on when to execute should come from a thorough analysis of all of the above—building out 15- to 20-year pro formas, calculating RMDs and QCDs, and evaluating whether to conduct a Roth conversion.

Moving Upstream
Even financial advisors who are highly experienced in tax bracket planning strategies will need to collaborate with CPAs to create optimal client outcomes. However, just as the best advisors tend to move upstream over time in terms of their clients and centers of influence, so have many CPAs.

At the same time, the CPA landscape has changed dramatically in recent years, leaving growth-oriented financial advisors in a position to offer these value-added services to clients in alignment with a client’s CPA.

Krista Frowein is associate director of wealth management at Choreo.