I don’t know about you folks, but I see a crap ton of reels and posts from all sorts of companies and advisors offering “tax planning.”
I know many of you joined PMG, at least in part, because you wanted to learn more about tax planning. So let’s talk about what tax planning really means from a practice-management perspective—and, more importantly, how you can use it in your own practice.
First and foremost, talking about tax planning does not mean you have to be a tax-planning expert.
I’ve said it a thousand times: you just need to be one paragraph ahead of your prospect. That’s it.
And second, tax planning is not just about converting IRAs to Roth IRAs. Roth conversions are an important part of tax planning, but they are only one piece of the puzzle. At this point, EVERYBODY talks about Roth conversions. So if that’s all you’re talking about, I’m not sure it differentiates you from anyone else.
Where You Talk About It Matters
Tax planning should show up everywhere:
- Radio
- TV
- Podcasts
- Reels
- Social media posts
- Workshops and seminars
- Prospect meetings
- Client conversations
- Pretty much all of your marketing
Why?
Because tax planning attracts high-net-worth prospects.
Over the next few weeks, we’re going to dig deeper into tax planning and, more importantly, how to have these conversations with prospects and clients.
Let’s start with the easy one:
Converting to a Roth IRA
Make sure you understand when and why a Roth conversion makes sense.
At our meeting last month, I presented a scenario to the group and asked whether it made sense to do a conversion. The consensus was yes.
But when we actually broke down the numbers, anyone who recommended the conversion without digging deeper would probably be dealing with a complaint in the not-too-distant future.
That’s why you need to understand the basics of when and why a conversion makes sense.
The simple approach is to estimate the tax bracket they will be in while doing the conversion and compare it to the tax bracket they are likely to be in when they are required to take RMDs.
And remember: if they need their IRA money to live on and are currently using those funds, a Roth conversion may not make sense.
You generally don’t want to convert money at a higher tax rate today if you expect that money to be taxed at a lower rate later.
If they can pay the tax on the conversion with non-qualified money, the break-even period is roughly 12 years, assuming they don’t take withdrawals.
If they have to use qualified money to pay the tax, the break-even period is closer to 16 years.
So the question becomes:
Do they have enough time for the conversion to make sense?
Don’t Forget the Kids
You also need to look at the impact on their estate and their children.
More likely than not, a Roth conversion that isn’t particularly attractive for the client could be very attractive for their kids.
Why?
Their kids are likely to inherit that qualified money during their peak earning years. Most people inherit money from their parents when they are in their 50s—often when they are earning some of the highest salaries of their lives.
That means the taxes associated with distributing inherited qualified money over the 10-year period can be significant.
So don’t just look at what the conversion does for the client.
Look at what the legacy looks like with and without tax planning.
You Don’t Have to Convert Everything
And remember, most advisors are telling their clients to convert 100% of their IRAs to Roths.
That may not be necessary.
For many clients, consider leaving something like $200,000 in IRAs for a single taxpayer and roughly $300,000 for a married couple filing jointly.
The RMDs generated by those amounts may be small enough that they don’t create significant additional taxable income or cause more Social Security benefits to become taxable.
If Social Security isn’t taxable, that can also affect the taxation of their capital gains. The standard deduction may absorb the remaining RMD income and any small amount of Social Security that becomes taxable.
The point is simple:
Don’t automatically convert everything just because you can.
Look at the Tax Return
And before making a Roth conversion recommendation, look at their tax return.
Are they charitable-minded?
If so, DO NOT recommend converting money that could otherwise be distributed through QCDs.
There may be a much better strategy available.
You Don’t Have to Know Everything
Finally, don’t be afraid to have these conversations simply because you don’t know as much as you think you need to know.
You don’t need to be a tax attorney.
You don’t need a master’s degree in taxation.
You don’t need to be a CPA or EA.
You need to have the same confidence you have when you’re talking about your investment or annuity services.
This isn’t a “fake it until you make it” statement.
It’s a “be one paragraph ahead” statement.
Your prospects will ask follow-up questions. That’s fine.
Don’t fake the answer.
If you don’t know, simply say:
“As we begin to implement the plan, we’ll flesh out those details.”
Or:
“We’ll do a deep dive into the specifics as we implement the strategies.”
Then pick up the phone and call us!
