4 Important Tax Prep Aspects to Consider in a Retirement Plan

T.S. Eliot wrote in The Waste Land that “April is the cruelest month,” and right around the 15th, you might be inclined to agree. The American tax code can be a byzantine and confusing system, which means your clients will likely come to you with questions.

By the time your clients are nearing retirement age, however, they’ll have more tax concerns than a 1040. A number of divergent portfolios, overlapping 401(k)s, investment wants and shifting retirement needs could complicate their tax obligations beyond what they alone can handle. Here are a few segments of typical retirement plans which could face complications from taxes — and which you can help them navigate.

Income Planning

Income planning is the most basic part of a client’s retirement plan. How much money do they need in retirement, and when will they need it?

What they might not realize is how much of their intended retirement income could be taken up by unanticipated taxes. Whether it’s moving into a higher bracket, changes in the federal tax code, or other mitigating circumstances in their lives, a shift in tax position could have an adverse effect on retirement goals and realities.

Be thorough with your clients about how their income or withdrawals might be affected by their tax burden. Odds are, they’ll have no idea that a seemingly simple move can have far-reaching tax implications which will eat into their principle.

Investment Strategies

As a financial advisor, basic investment strategies are likely already part of your client discussions. What’s their risk tolerance? Do they mind exposing their portfolios to higher risks for potentially higher returns, or do they prefer a more conservative approach to maintain their principle?

In these discussions, you need to outline how each level of investment could affect their tax burden. Is a higher tax bracket suitable for the retirement they envision? Or should you help them pursue a strategy that keeps tax obligations at a minimum?

You should also keep in mind that clients might have specific investments in mind. Some may want to orient their portfolios toward investment in tech, while others may want to focus on environmentally minded companies. These kinds of paths might have their own tax advantages which could put their overall portfolio in a better position than the typical path.

Legacy Planning

Odds are that your clients have a specific destination in mind when it comes to their assets. Whether it’s property, heirlooms, or simple, cold, hard, cash, they’d rather it wind up in one place — or with one person — over any other. But passing assets along isn’t necessarily done with a handshake. Depending on what’s being transferred and how, your clients could face additional taxes.

Whatever they want leave for heirs, they probably don’t want abridged by an unexpected tax bill. Consult local statues or partner with an estate lawyer in the community to determine how a client can best pass along their assets.

Charitable Giving

Many of your clients would like their money to go to good causes after they’re gone. Depending on the type of charity or how they choose to donate, they could face a unique tax bill that dulls their good intentions. In reviewing a client’s charity wishes, consider how they might be affected by taxes and whether that affects the size and type of donation. Conversely, you can also review how a charitable donation could be leveraged into a lighter tax burden.

A retiree’s questions probably don’t stop at taxes. If you’re looking for more top-tier info about running your practice, subscribe to our YouTube channel and get all our tips about crafting your client’s optimal retirement plan.