Taxes and inflation are two hazards your clients worry about if they are near or in retirement. Why? Because there are few mulligans in retirement. Once you’ve retired, you can’t go back.
I wrote recently about ways to help your clients weather inflation. I want to pivot to the other head of this retirement Hydra—taxes.
For many advisors, aiming for tax efficiency in client portfolios begins and ends with tax-loss harvesting. Certainly, that is a worthwhile practice in managing wealth. But it is insufficient by itself to maximize wealth in the accumulation phase and in the decumulation of assets in retirement.
The value of tax harvesting peaks when markets fall, and investors suffer losses or when they keep portfolios of high-turnover assets that realize many gains. Opportunities for harvesting losses depend on an investor making new contributions to a stock portfolio with an inventory of large unrealized gains.
My research over decades has led me to conclude that five essential practices can deliver “tax alpha” to investors. Each practice is necessary, but their real power is unleashed when combined and coordinated across multiple accounts and holdings.
Let’s look at each tax-alpha driver and when you can push it to the floor for your clients.
1. Tax-Smart Asset Location
Putting the best holdings in the best account registrations with taxes in mind lowers tax drag on portfolios and results in a more rapid accumulation of wealth. Period. My colleague Jack Sharry wrote about asset location last month.
It would help if you had asset location software that looks at all accounts in a household portfolio and measures and scores its overall tax efficiency. Next, the software can suggest specific trades in sequence to maximize after-tax value.
Asset location can play a surprising role in reducing taxes on individual retirement account (IRA) withdrawals in retirement when an investor holds low-return assets in traditional IRAs and high-return assets in Roth IRAs.
My research and experiences show that tax-smart asset location has the most significant impact on money available for retirement spending.