The Benefits of Having an RIA in Your Corner: Tax Planning for High-Income Individuals
Understand The Benefits of Hiring an RIA
Many people consider tax planning an afterthought in the financial planning process. People are so focused on their career goals and accumulation of money for retirement that taxes are usually the furthest thing from their minds. If not planned for, taxes can eat away at your hard-earned cash. That is why it is imperative that at every step in the financial planning process, tax ramifications and strategies are considered. Here at Rhame and Gorrell Wealth Management, we have a robust tax team to help you minimize how much of your hard-earned cash Uncle Sam takes away. Below are some of the standard “tools” we use to help people reduce the taxes they pay over their lifetime:
- Full Financial Picture Analysis
- Tax Projections
- Asset Allocation
- Distribution Planning
- Tax Loss Harvesting
- Roth Conversions
- Backdoor Roth Conversions
- Mega Backdoor Roth Conversions
Complete Financial Picture Analysis:
The first step to good tax planning is understanding your scenario. This means creating a unique financial plan that incorporates your goals and desires. Then after analyzing your current financial scenario, we can incorporate tax planning strategies to help you achieve your goals with the lowest tax liability. As an RIA here at Rhame and Gorrell, we are a fee-only business. This means that the only income we earn is a fee based on your assets under management with us.
In most cases, the savings we provide are more significant than our management fees, fully offsetting the cost of our services. This tax planning can come in many different shapes and sizes. It could be us recommending slight changes to your current plan to have significant tax savings in certain years, changes that slightly lower your tax bill every year, accumulating considerable tax savings over time, or it could be that a plan is created for you to pay more taxes in the current year to reap larger tax savings in future years. Whatever your goals, we are here to help you best achieve them while minimizing the amount paid in taxes.
Tax Projections:
One of the easiest ways to determine your tax scenario and estimated taxes in the current or near future is through tax projections. This is a tax “tool” where we estimate your tax liability in the year to find credits, deductions, and strategies to help you in your scenario and save money in the short and long term. We accomplish this by working with you to understand your yearly cash inflows and outflows and what income will be taxable. We can also work with you to estimate uncertain cash flows or expenses that might arise from business opportunities or certain life events. We commonly use your prior year’s tax returns and past tax situations paired with current knowledge to find the tax impact of different opportunities and purchases you would like to make.
Asset Allocation:
Asset Allocation is a big part of financial and tax planning. While there are many non-tax elements to consider when discussing your asset allocation, it should not be devoid from the conversation. Your asset allocation should match your risk tolerance and investment goals. Having an RIA with a tax planning mind can also cut down on your yearly tax liability by investing in funds with low capital gains distributions and/or funds with low dividend rates that must be reported in the year they are earned. This helps you not feel stressed when you receive your 1099-DIV the following year. The worst feeling is to believe you have made all the necessary tax payments only to have a higher tax bill due to thousands of dollars of capital gains distributions from an investment.
Distribution Planning:
As you go through your career, you might accumulate different types of retirement and investment accounts. Whether it be IRAs, 401Ks, Trusts, or Brokerage accounts, each is taxed differently when money is put in and pulled out. The last thing you would want is to pay more taxes simply by putting money into or pulling money out of the wrong account. We work with clients to identify which accounts to draw funds from in any given year to create the lowest tax liability and give you the most significant lifetime tax savings.
Tax Loss Harvesting:
Tax Loss Harvesting is a tax tool financial advisors use to capture capital losses to lower taxes in the current year. At Rhame and Gorrell, we comb through your portfolio and find positions eligible for tax loss harvesting. In tax loss harvesting, we look for investments to sell at a loss and diversify into other assets. This strategically places you in a position to pay less taxes in the current year and invest in assets that have more potential upside.
Roth Conversions:
A strategy that many people do not think about is Roth Conversions. This strategy is best suited for people who have already retired, have large Traditional IRA balances, low anticipated taxable income, and are not yet RMD (Required Minimum Distribution) age. There are a couple of calculations that need to be made to check the viability of this strategy. This is where it is essential to have a savvy tax planner. Our tax planners will be able to work with you to calculate your estimated tax bill for the year, find how much is available to convert, and the amount of taxes you will save when you reach RMD age.
Backdoor Roth Conversions:
Backdoor Roth Conversions is a simple way to move money into a Roth IRA every year. This tax strategy involves making a nondeductible contribution of the annual limit of $6,000 ($7,000 if you are over 50) to a Traditional IRA account and then converting these funds to a Roth IRA. In the Roth IRA, the money will be able to grow and be distributed tax-free. When performing this conversion, it is essential to have a competent tax team to ensure the transaction keeps its tax-free nature and the proper tax forms are filed. Adequate communication between financial planners and tax preparers is essential as many people who pursue this tax strategy forget to file Form 8606 with their tax returns the following year.
Mega Backdoor Roth Conversions:
While Mega Backdoor Roth Conversions are only available to certain people, they are an extremely beneficial tax planning tool. To utilize this tax planning strategy, a person must still be working, their company must allow for After-Tax contributions to an employee’s 401K, and the 401K must allow for in-service distributions. The strategy enables high-income individuals to put money into their after-tax 401K up to the annual IRS limit and then roll that amount into a Roth IRA in the same year. This transaction, if done correctly, will allow the employee to put more money than the IRS limit of $6,000 ($7,000 if over 50) into their Roth IRA. This transaction creates minimal to no taxes in the year it is performed and allows high-income earning individuals to shift more money into Roth IRAs, where it can grow and be distributed tax-free. It is essential to know that this can be done in tandem with Roth Conversions, so both may be utilized in the same year. This strategy is very complex, and here at Rhame and Gorrell, we walk with our clients through the process step by step to ensure it is carried out correctly. We also do an extensive follow-up to ensure the transaction is captured correctly on our client’s tax forms and returns.
Here at Rhame and Gorrell Wealth Management, we want to serve you and your specific tax needs. This means considering the financial or tax savings and your non-financial goals or desires. We look to give you the financial stability and peace of mind you need when thinking about accumulating and distributing your hard-earned assets. We look at your lifetime tax situation, and through tax planning and implementing some of the tax “tools” described above, we help mitigate this lifetime tax burden. We will work alongside you or your CPA to lower your audit risk and properly document transactions so that you will no longer have to stay up at night fearing the IRS.
The Rhame & Gorrell Team is pleased to provide complimentary retirement planning sessions geared towards helping you make the best of your pension. Given the fluctuating situation with the pension, we will help you assess your ideal retirement date so that you enter retirement in the most advantageous financial position.
Need Some Help?
If you’d like some help from a CERTIFIED FINANCIAL PLANNER (CFP®) advisor, the Rhame & Gorrell Wealth Management team is here to help.
Our experienced Wealth Managers can help you review your financial and tax situation and come up with a custom tax optimization strategy going forward – all at no cost to you!
Feel free to contact us at (832) 789-1100, [email protected], or click the button below to schedule your complimentary in-person or virtual strategy session today.
