Client accounts are likely down right now, creating a unique set of opportunities for financial advisors. The challenge with market downturns is not knowing when they will end. Sometimes there will be multiple points that'll seem like the bottom. Given the market volatility, there are a few tax situations to watch out for.
Concentrated Low Basis Positions
It's common to see highly concentrated low-basis positions that people have held for a long time. For instance, you may have a client with a portfolio that includes one of the tech giants they bought 20 years ago and haven’t wanted to sell due to the capital gains tax impact. These concentrated low-basis positions can be risky, considering their impact on the overall financial plan.
Poor or No Asset Location
A second challenge advisors may see is poor or no asset location. For example, let's say your clients are married and have the simplest account structure possible. Each household member has an IRA and a Roth, and they have a joint non-qualified account. They have the same portfolio across all five accounts, or worse, they have all their lower return potential assets like bonds or annuities in their Roth and higher potential return stock positions in their IRAs. Creating a strategy for which account to hold their different investments in can help them in the long run.
Investments Mis-aligned with Risk Tolerance
A third tax challenge is investments that are misaligned with a client’s risk tolerance. In a highly valued market, it's challenging to undo an investment that needs to be correctly aligned with the client's risk tolerance. You want to avoid taking a big tax hit to get them where they should have been in the first place. Ideally, you would manage the correction over time and create a multiple tax-year transition plan to get them where they need to be.
Poor or No Planned Harvesting Pattern
A fourth tax challenge is a poor or no planned harvesting pattern. A harvesting pattern is an overall structure of which accounts the client plans to use at which points in retirement for retirement income. A good harvesting pattern makes asset location much easier by accounting for the client's different assets and how long they expect to hold them.
Excessive 401(k) Balance Relative to Need
You may encounter a situation where your client has saved almost exclusively in 401(k) assets, and they don't have a high income need to live the lifestyle they want to live. So, when required minimum distributions begin, their withdrawals are far more than they need from the IRA. As a result, we have a situation where they're paying a much higher rate than they should have paid had they planned for it in advance.
Software for Financial Advisors
These challenging tax situations may appear overwhelming initially, but our retirement income planning platform, Income InSight®, makes it easy to address these challenges head-on. See all the client's assets in one place. Create smart retirement income withdrawal patterns to help clients determine which account to use and when. Develop a multi-year tax plan to get clients to a place where they are more comfortable–without taking a tax hit. Use Income InSight to create high-quality retirement income strategies that can be quickly and easily adjusted to help your clients endure hard economic times. Demonstrate your value and instill confidence even during market chaos.