How to save your clients’ ‘Benjamins’

How to save your clients’ ‘Benjamins’


Does anybody out there remember taxes? You know, those things that Benjamin Franklin said were one of life’s two certainties, along with death.

Well, if they don’t ring a bell, you may want to start paying more attention in the second half.

“2023 is ripe with shiny objects to distract advisors: inflation, debt ceiling, recession, artificial intelligence. No one is talking about taxes,” said Robert Pearl, wealth advisor at SageView Advisory Group.

Several major provisions of the Tax Cuts and Jobs Act of 2017 will sunset by the end of 2025. Tack that uncertainty onto next year’s presidential election and the market has no idea what personal income taxes will look like in the next few years.

“I’m not a tax alarmist. I do not believe taxes will skyrocket in the future. I just find it hard to believe that taxes will be lower in the future than they are today,” Pearl said. “The old saying, a bird in the hand is worth two in the bush, comes to mind with our current tax structure.”

Pearl’s not alone in his ornithological outlook. Retirement expert Ed Slott is also urging advisors and their clients to start scooping up those proverbial birds with both hands instead of waiting for the tax man to come around.

In Slott’s view, changes ushered in by the SECURE Act have diminished the value of individual retirement accounts for passing a nest egg to the next generation. The bill set a time limit of 10 years for most beneficiaries to liquidate an inherited IRA, causing IRAs to “stink” (to use Slott’s highly technical vernacular) as a way to transfer wealth.

The new time limit not only undermines IRAs’ usefulness for estate planning, it also causes inheritors to incur unwanted tax hits when they take required minimum distributions. The money was originally put into IRAs on a tax-deferred basis, so the government will get its share when the funds are withdrawn, and most likely at a higher rate, Slott said.

“Get it out at the lowest tax rate,” he said. “It’s a bargain now. Taxes are on sale.”

Slott recommends pulling money from traditional IRAs and allocating it to a Roth IRA or life insurance, where it can grow until being withdrawn tax-free.

The threat of higher taxes ahead also figures into Social Security guru Mary Beth Franklin’s suggestion that advisors might want to do some stress testing of their clients’ accounts sometime in the second half in case Uncle Sam is forced to do some budget balancing.

“With clients who are 55 and younger, advisors may want to stress-test their retirement income plan by calculating what a 20% cut in Social Security benefits might do to their overall retirement income plan,” said Franklin (no relation to the founding father).

For the record, Franklin doesn’t believe current and near-retirees will suffer benefit cuts. The more likely result, in her view, is that more of their Social Security benefits will become subject to income taxes or that the government will alter the way cost-of-living adjustments are calculated.

Seriously, folks, listen up if you know what’s good for you and your clients.

You know what they say: A Franklin saved is a Franklin earned.

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