A Financial Advisor’s Role in Tax Planning

When you think about tax season, the first person who comes to mind is probably your accountant or tax preparer, don’t forget about financial advisors who monitor the impact of taxes on their clients’ portfolios all year long. Because taxes and investments go hand in hand, fiduciary advisors often assist clients with strategies at each life stage to help minimize taxes and stay on track to achieve their financial goals.

How Does Tax Planning Work?

Investopedia defines tax planning as the analysis of a financial situation or plan to ensure that all elements work together to allow an individual to pay the lowest taxes possible. Financial advisors incorporate tax planning to help clients reduce their tax liability so they can invest as much as possible for the future.

Your advisor’s recommended tax planning strategies may differ depending on where you are in your journey toward your financial goals. Your financial advisor considers things like the timing of your income and purchases, your future expenses, and the types of investments or retirement plans you have when developing strategies for your situation.

Before Retirement

While you’re working, your tax planning strategy may include investing in a tax-deferred retirement plan that reduces your taxable income. This can be effective if you have a high income now, but anticipate potentially being in a lower tax bracket in retirement. Younger adults may find it effective to invest in a Roth IRA, which uses after-tax dollars, for a couple of reasons: For example, you may be in a lower tax bracket now than you will be in retirement. Also, Roth IRAs also enable the account holder to withdraw contributions (but not earnings) anytime without taxes or penalties, which may come in handy if you need the money sooner.

Another popular option for high-income earners involves making “backdoor” Roth IRA contributions. In this situation, the taxpayer contributes to a traditional IRA account first, and then converts the contribution to a Roth IRA. This enables an individual to bypass IRS income limits and grow the converted assets tax free; however, income tax will be due on the conversion right away, as well as on any investment gains. Be sure to consult with your financial advisor or tax preparer about your unique situation before implementing any changes. This strategy may be useful for those who anticipate an increase in tax rates. (Right now, many of the temporary changes for individual tax payers could sunset on Dec. 31, 2025.)

After Retirement

Tax planning is also important as you withdraw your assets in retirement. To make sure you stay in a beneficial tax bracket and optimize your Medicare and Social Security benefits, your advisor may prioritize which assets you should tap first, help you plan for long-term care, or recommend a transfer of your required minimum distributions (RMDs) to your favorite charity (subject to IRS limitations) to help reduce your taxes.

Once you retire, your advisor may also consider altering your investment strategy to minimize taxes further, reduce risk as needed, and help you maximize your nest egg for the long term.

Other Ways Advisors Can Help with Tax Planning

In addition to helping you devise a tax-efficient investment strategy, or manage withdrawals in retirement, financial advisors often help clients understand the tax implications of the decisions they make. For example, if you decide to sell stock to help fund a major purchase, your advisor can help you determine how much in capital gains tax you might owe. If you have underperforming investments, your advisor can help you with tax-loss harvesting – a tactic used to help offset any capital gains as you rebalance your portfolio.

Finally, tax planning is important, not just to benefit you during your lifetime, but also to benefit your heirs. Financial advisors often work with estate planning attorneys to help clients structure tax-favorable wealth transfer strategies, with the goal of enabling clients to leave more assets to their children or a charitable organization.

At Savant, we have in-house teams of tax professionals and estate planning attorneys who monitor the complexities of our tax laws and changing regulatory landscape, supporting Savant’s financial advisors with information and strategies to help clients pursue their long-term financial goals AND help make tax season easier.