Nearly scolding financial advisors for dropping the ball on their clients’ tax planning needs, financial and IRA expert Ed Slott pressed financial advisors to change their mindsets around the value of IRAs.
“For the average advisor, tax planning is kryptonite,” said Slott, president and founder of Ed Slott and Company, adding that a McKinsey study indicates that the biggest gap between what clients want from their financial advisors and what they are getting revolves around tax planning.
While most financial advisors can help their clients make money, especially in today’s market, Slott said consumers want advisors that can help them remove untaxed funds from IRAs and other investment vehicles “without being wiped out in taxes or stepping on all these landmines from all these new rules and changing rules.”
The tax expert was referring to additional changes to the Secure 2.0 Act of 2022, which took effect on Dec. 29, 2022 and aims to build on the Secure Act of 2019 by improving retirement-savings opportunities. The legislation, part of the omnibus spending bill passed in December 2022, contains more than 90 new provisions to promote savings, boost incentives for businesses to set up retirements plans and improve retirement rules.
Provisions include automatic 401(k) enrollment, an increase in the age for taking required minimum distributions, significant tax benefits for employers, and many others. Some provisions kicked in on Jan. 1, 2023, others took effect this year and others come into play in 2025 or even later.
“I never saw anything like this before, where the rules are just constantly changing. It’s not even fair, really.”
“I never saw anything like this before, where the rules are just constantly changing. It’s not even fair, really,” said Slott. “Should it be this hard to take your money out of your own IRA?”
New Regulations Offer Opportunities
Agreeing that the new rules are complex and shifting, Dave Alison, president and founding partner of C2P Enterprises, said financial advisors should look at these new regulations as opportunities to demonstrate their value to clients, especially clients with large IRA accounts.
Financial advisors can help these clients navigate their options and avoid stepping on tax landmines by considering their lifetime tax picture, not just their taxes each year.
“And as we know, these IRA taxes are not just prevalent throughout their (client’s) life. They haunt them even upon their passing,” said Alison, who is founder and CEO of Alison Wealth Management. “For the beneficiaries, the rules are even more complex than they’ve ever been.”
C2P Enterprises and its subsidiaries focus on simplifying the financial planning process for advisors and their clients.
Speaking along with Slott at an August 21 webinar to update financial advisors on the Secure Act, Alison urged financial advisors to develop their tax planning techniques, which are critical to creating successful relationships with their clients. He compared tax planning to hiring an engineer and architect when wanting to build a house. The builder is equal to the tax manager while the tax preparer is the building code official who makes sure everything is in working order.
Slott said the Secure Act, with hundreds of pages of regulations that come into play in different phases over several years, should be called the “insecure act,” as the Internal Revenue Service keeps changing provisions as it tries to interpret the “horribly written” legislation. “Congress is the worst financial planner,” he added.
Outlining how the Secure Act reduces the withdrawal period for inherited IRAs to 10 years, he urged financial advisors to ignore the complicated RMD regulations under the new 10-year rule as it applies to a client’s beneficiaries, whether the RMDs were started by the deceased or not These beneficiaries could be a child, grandchild, grandparent or anybody but a spouse.
Think Maximum, Not Minimum, Withdrawals
“This is where you come in, you have to change that whole mentality,” said Slott. “You shouldn’t be letting RMDs control the tax planning,” he said. “The tax planning should be controlling the RMDs.”
In fact, advisors and their clients should generally be thinking maximum, not minimum, withdrawals from their IRAs. Financial advisors can tap into a new pool of clients eager for sophisticated tax planning by guiding them to take advantage of the current low tax rates of 12%, 20% and 24%, even for high earners, Slott said.
The low tax rates may not last after 2025 and clients should be removing money from these investment vehicles now, Slott added. And if Congress “comes to its senses” about the debt, clients with large amounts of money stuck in IRAs and 401 (k) accounts will pay the price.
Clients should be trimming their IRAs and converting them into tax-free vehicles like Roth IRAs, permanent life insurance, cash value life insurance and even charitable planning, said Slott. He warned clients with $1 million in their IRAs that “they have a joint account with Uncle Sam.”
Financial advisors can retain clients who are becoming increasingly savvy about their finances by providing effective tax planning services. “That’s where you can provide the value,” said Slott. “Those who are most at risk are those who have saved the most.”
Acknowledging the complexity of the rules surrounding the Secure Act, Slott said, “You can’t know it all, so you have to know the people who do.”
Paula L. Green is a New York City-based freelance journalist with more than three decades of reporting and editing experience that spans coverage of international business and finance issues to murders and politics at the Jersey Shore to presidential press conferences in Argentina and Mexico. She can be contacted by plgreen12004@gmail.com.
