One of the most valued services provided by a financial advisor, according to 78 percent of investors, is tax planning.¹ With the intricacies of the U.S. tax code, it’s no wonder. Around 53 percent of Americans said the complexity of the federal tax system bothers them “a lot,” a 2023 Pew Research Center poll shows.²

As we approach the end of the year, we break down tax planning considerations for financial advisors. With the 2017 tax cuts set to expire in 2025 unless extended by Congress, time is ticking to take advantage. Experts say retirees and those nearing retirement should strategize accordingly. However, all clients can benefit from some of these five strategies.

#1: Roth Conversions

If your clients are planning to convert a portion of their retirement savings to a Roth IRA, the time is now, experts say. That’s especially true if they’re pre-retirees and high earners.

This is because if the 2017 tax cuts expire in 2025, income tax brackets go back to a higher level, with the top rate set to change from 37 percent to 39.6 percent.

A Roth conversion in 2023 will come with a tax bill, but the amount will be lower than if they delay the conversion until 2026 or later. (See how My Financial Coach uses technology for tax planning, such as optimizing a Roth conversion to “fill up” a given tax bracket.)

Keep in mind that Roth conversions have a waiting period of five years before the money can be taken out tax-free, and withdrawals must be taken after age 59 ½. There are a few exceptions, however.

#2: Maxing Out Retirement Savings

Contributing the maximum allowed to a retirement plan through an employer, such as a 401(k), is something that can help clients save on their tax bill if they have the means to do it.

If they’ve hit the maximum savings on the retirement plan, consider layering on a health savings account if available for the triple tax benefits.

If the client has the option of a Roth 401(k), you might consider showing them a comparison with a traditional 401(k) in your planning software so they can make an informed decision about which to contribute to.

Don’t forget about catchup contributions for pre-retirees. You can contribute $22,500 to a 401(k), 403(b), and most 457 plans in 2023, but if you’re 50 or older you can add another $7,500 (for a total of $30,000).³ Annual contribution limits for IRAs are $6,500 for those under 50 and $7,500 for those older than 50.³

#3: QCDs and Charitable Strategies

Have charitably minded clients with IRAs who are 70½? It’s time to talk about qualified charitable distributions (QCDs). These have gained favor since the Tax Cuts and Jobs Act increased the standard deduction and made itemizing for things like gifts to charity much less common.

Investors can make up to $100,000 in QCDs from a traditional IRA (an amount that will be indexed for inflation going forward), which count toward required minimum distribution (RMD) obligations. This pre-tax donation maximizes charitable dollars while minimizing taxable income.

Starting this year, clients who are of age can direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity, per the SECURE Act 2.0. QCDs must be completed within the calendar year a client wants them to apply to.

#4: Gifting

Are there any gifts to loved ones planned for this year? If your clients anticipate a hefty estate (including the value of real estate), helping them strategize by giving to heirs while living is another way you can look out for them. Your clients should know that the federal estate tax exemption is set to be cut in half at the beginning of 2026, barring any intervening action from Congress. It’s currently a generous $12.92 million for individuals or $25.84 million per married couple.

Your clients have the option of providing gifts of up to $17,000 per individual (or $34,000 for couples) without incurring gift taxes or having it count against their gift and estate tax exemption.

Gifting to heirs has gained favor with donors as of late. A recent study showed clients are distributing 30 percent of their estate on average during their lifetimes so they can see the impact and direct where the dollars go.⁴

#5: Tax-Loss Harvesting

As we near the end of the year, it’s time to review any unrealized losses in taxable accounts. While you’re making tweaks such as rebalancing the portfolio, it may benefit your client to do a bit of tax-loss harvesting. This maneuver can help offset capital gains realized in 2023. If losses are substantial, they can be carried forward into subsequent tax years.

As always, beware of the wash sale rule when making changes to the portfolio.

Insights for Tax Planning

For more insight into what’s new in tax planning this year, watch my 2023 Secure 2.0 analysis video below. In the second half of the video, Matt Manella, CFP®, demonstrates how to apply what you’ve learned to a client’s financial plan:

Sources:

1. Cerulli Associates. “The Cerulli Edge, U.S. Asset and Wealth Management Edition,” January 2022.

2. Pew Research Center. “Top Tax Frustrations for Americans,” April 2023.

3. Internal Revenue Service. “401(k) Limit Increases to $22,500 for 2023,” October 2022.

4. Merrill Lynch / Age Wave. “Leaving a Legacy: A Lasting Gift to Loved Ones,” June 2019.

 

DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.

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