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How to Show the Benefits of Tax-Smart Income Planning

August 12, 2021 Steve Zuschin By Steve Zuschin

There are many benefits to being tax-conscious when income planning for your clients, especially when it comes to creating a runway for their retirement. Taxes can be a huge detriment to the amount of income they have left after withdrawal, but it doesn’t have to break the bank. There are things you can do to ensure you are the most tax efficient with your investment accounts.

By tax efficient, we mean that you have located your clients’ assets in the right accounts to minimize taxes over the long term. This, along with a complete retirement income execution plan can help improve outcomes for investors, advisors, and your firm.

LifeYield is the optimal solution for your firm to implement tax-smart retirement income planning technology.

What is Tax-Smart Investing?

As much as you want to help your client save on the amount of taxes they pay, there is no way to escape them completely. Many clients don’t pay attention to taxes until it is time to file them. By this time, it is too late to implement a strategy to reduce the amount of overall taxes owed.

Tax-smart investing begins with auditing your client’s accounts to see if their assets are in the right accounts. We will touch more on this audit in the asset location and Taxficient Score section. Being tax-smart with a client’s investment accounts mean that you, as an advisor, need to consider all household assets and accounts before presenting your plan.

Asset Location

LifeYield created the Taxficient Score, which helps you quantify your client’s savings on a scale of 0-100. These savings are found through an audit of the accounts that your client has within their unified managed household. Here is how the score works:

You analyze your client’s portfolio before optimization and provide them with an efficiency score on a scale of 0 to 100. This number will be the “before” number – how your client’s portfolio looks right now. After you run the optimization, you will supply them with the new score, which should be closer to 100. You can also provide them with a dollar amount to quantify the benefit of tax optimization.

What is the Point of Asset Location?

Asset location helps with the following things when handling your client’s accounts:

The Three Main Types of Investment Accounts

Three primary types of investment accounts exist. These accounts consist of taxable accounts, tax-deferred accounts, and tax-exempt accounts. These accounts determine how accounts are taxed when withdrawn or contributed to.

Strategies Your Firm Can Use to Provide Tax-Efficiency

A part of being a financial services advisor is to help provide your clients with an optimal reduction in tax burden. These strategies can be approached from several different ways, and when too many are used at one time, the investment client feels out of the loop.

Today, more investment clients want to be involved with their portfolios. The problem occurs when there are multiple accounts, and the client doesn’t know what to do with them all – or they were given advice in the past that was not tax efficient. LifeYield allows your advisors to look across the unified managed household to make decisions based on what is the most tax advantageous for your clients.

What is a Unified Managed Household?

A unified managed household is a unified view (plus taking action) of all of your client’s accounts and holdings across their entire household. When looking at the accounts, LifeYield can instantly determine where withdrawals are most tax-efficient, where to locate assets to increase returns, where we can harvest gains or losses -all across multiple accounts.

A lot of your advisors will find that the hardest part of creating a tax-smart strategy is approaching the subject with the client. Being able to quantify the amount for them with the Taxficient Score can help make it more appealing for the client.

Remember: LifeYield looks at all accounts in a household to improve tax efficiency and ultimately, investment returns.

Why Getting The Strategy Right Matters

If retirement income isn’t set up correctly, it can make living comfortably almost impossible for some clients. Sadly, some investment clients don’t plan for retirement early and need to play catch up later on.

So, how can your firm improve the amount of retirement income that your client receives?

  1. Maintaining the target asset location and allocation at the household level and by locating those assets in the best accounts possible
  2. Minimizing the income taxes on income from interest and dividend income
  3. Minimizing the tax from capital gains
  4. Buying and selling assets within the most appropriate account type
  5. Implementing a tax-optimal strategy for withdrawal

Even when an investment client thinks that they have a foolproof strategy for retirement, the chances are likely that there is room for improvement. Taxes are the biggest hurdle in living out a retirement dream.

Your firm and advisors are likely well aware of the opportunities that adopting a tax-smart strategy holds for clients. LifeYield and Black Diamond have partnered together to quantify the savings that your clients could end up with. You can use LifeYield to leverage the integration that demonstrates value beyond the returns.

Using the Taxficient Score, your advisors can create proposals that also show how to implement the recommendations across multiple accounts and a variety of products. The goal is to create tax-smart retirement income using the best withdrawal strategy to maximize the benefits of taxable, tax-deferred, and tax-free income sources when assets need to be liquidated.

The Result of the Right Strategy

When a strategy is right, investment clients and advisors achieve an improved after-tax return, a more rapid accumulation of wealth, enhanced income, and the ability to demonstrate clarity of the value beyond the performance of the investments. Data shows that these all result in the retention and consolidation of assets.

Are you a forward-thinking firm? Have you poured out a lot of resources trying to solve this type of problem for your clients? You aren’t the first firm to do so. Many don’t have the tools to measure the quantifiable amount and how it benefits the unified managed household.

Tax Harvesting for Tax-Smart Income Planning

There are two forms of tax harvesting – tax-loss and tax-gain. The purpose of these sales determines the type of harvesting you are doing. Both of these harvesting strategies can be beneficial to clients, the advisors that handle their portfolio, and the firms that hire these advisors. A tax harvesting solution that goes in both directions and considers all taxable and non-taxable accounts is beneficial to all parties.

What is Tax Harvesting?

Tax harvesting is something that your client will likely know nothing about unless it is a strategy that has been used with their portfolio or unified managed household before. When handling these accounts, it is the responsibility of the advisor and the firm to do what is ethically correct for the client.

Traditional tax harvesting is a tedious process for many investors. The process usually requires the use of multiple spreadsheets for accounts and holdings, running the contents through complex formulas, and using macros to identify and organize specific trades.

The process doesn’t stop there. Your advisors also have to identify the most appreciated tax lots for gift-giving or what to sell to offset capital gains or counteract losses. Doing so across books for more than one client can be confusing and can take days or weeks to accomplish.

How LifeYield Handles Tax Harvesting For Each Tax Year

LifeYield has a proprietary tax harvesting engine that runs multiple scenarios when factoring in the losses and gains for a unified managed household. Use the harvesting tool to look at harvesting in either direction – loss or gain. Tax-loss harvesting is the one most commonly used.

The LifeYield Tax Harvesting engine also:

The Benefit of Using LifeYield’s Tax Harvesting Engine for Tax-Smart Income Planning

LifeYield can do more than just tax harvesting though. The way we’ve designed our API engine, to allow firms to:

Manage Your Wealth and Manage Your Tax-Smart Income

LifeYield makes it possible for your firm and its advisors to create the optimal strategy for tax-smart income planning. Retiring without a plan that can help increase the number of earnings within your client’s portfolios may cost them the comfortable lifestyle they were living before they began Social Security or tapping into other investment accounts.

Are you ready to try something new to help manage your client’s entire account household? LifeYield makes it possible to plan and optimize for tax efficiency, now and in the long-term status of the client’s portfolio.

Steve is the EVP of Advisor Success at LifeYield. He's responsible for leading our Direct-to-Advisor channel and always keeps up on the latest advisor technology. Steve writes about how advisors can grow their business by building stronger relationships with clients and adopting new technology.