With the top income tax rate at 39.6 percent, advisors need to be savvy about the tax-saving strategies they utilize for their high net-worth-clients.
Given the income tax rate, tax bracket management is increasingly important, Bob Keebler, a Green Bay, Wisc.-based CPA, told attendees at the 2015 AICPA Personal Financial Planning Conference. In many ways, he said, finding a tax edge for clients in higher brackets—particularly the 35 percent, 33 percent and 28 percent brackets—is increasingly difficult.
"Good money managers may be able to find tax alpha," Keebler said. "But year-over-year, it’s difficult to create."
His two biggest suggestions for advisors? Utilize Roth conversions where applicable and don't shy away from life insurance as a tax-savings plan.
Roth IRAs: Pay Attention to State Laws
If you're up against estate taxes, Roth IRAs can be more efficient and are great options for many clients, Keebler said. But, it's important to pay attention to state income tax laws when converting—especially when clients plan on moving for their retirement.
"When you're thinking Roth conversions, most of our thinking and writing has stopped at federal law," he said. "That's wrong.
"We have to look at estate tax, federal and state estate tax, and we have to look at the dynamics of the state income tax," he added.
For example, he suggested: If your client is living in Nevada but planning on moving to California, convert in Nevada to avoid having the client owe the 13.3 percent California state income tax.
Keebler also stresses the importance of separating Roth conversions. If a client approaches you about switching to a Roth, emphasize the importance of moving assets gradually over a longer period of time. The right question to ask, he said: "Should you do one, two, three, four, five, six, seven conversions?"
Maintaining separate Roth accounts can create greater flexibility— and if each is invested in a different asset class, it gives you more opportunity to recharacterize if that asset underperforms.
Consider Putting Wealth in Life Insurance
"Life insurance is a phenomenal tax shelter," said Keebler. "It's a viable tax savings plan for taxpayers in the 28 percent, 33 percent and 35 percent brackets," he added.
Why? Wealth invested in an IRA, Roth IRA or life insurance policy are all statutory tax shelters, Keebler said—and life insurance policies have the same income tax advantages as the Roth if certain requirements are met. That doesn't help your client, but it will help your client's heirs—because death benefits generally don't get taxed as income to the beneficiary.
If you are in a state that has estate tax and have clients who don't need their IRA money in an IRA after RMDs start, "pay your tax and drop the money into a life insurance account," Keebler said.
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