Wealth management and tax planning go hand in hand. You can’t avoid taxes, but some strategies may help you meet your legal obligations while reducing the impact taxes have on your wealth over time.
One strategy that often comes up when preparing for retirement is a Roth conversion. While it’s not the answer for everyone, it’s an option we get lots of questions about, so let’s explore how Roth conversions work and where they may fit within a broader wealth management and tax planning strategy.
Wealth management focuses on coordinating the different aspects of your financial life to help you reach your short- and long-term goals. Tax planning considers how financial decisions may affect what you owe in taxes today and in the future.
Bringing the two together can help you evaluate options based on overall financial impact. For example, selling an investment, taking a retirement distribution, or making a large charitable contribution could affect your taxable income. Understanding those implications before making a decision can help you determine which strategy best supports your long-term goals.
There are many types of retirement accounts and planning strategies available that can directly contribute to your wealth management and tax planning. Talk to your wealth manager and tax professional to determine what may be most beneficial for your unique situation. Some investors may benefit from Roth IRA conversions as part of a strategy to create tax-free income during retirement.
A Roth IRA conversion involves moving eligible assets from a pre-tax account into a Roth IRA. The taxable portion of the amount converted is generally included in your income for that tax year. There are several ways retirement assets may be moved or converted:
Direct transfers and rollovers can often simplify the process by preventing retirement funds from being distributed directly to the account owner. Another potential Roth IRA benefit is that the original account owner is not required to take required minimum distributions (RMDs) during their lifetime. This can provide greater flexibility when determining where your retirement income should come from each year.
Building wealth can sometimes mean being in a higher tax bracket later in life, but that’s not guaranteed. Future tax rates, income, retirement distributions, deductions, and changes in tax law can all affect your situation. That’s why part of wealth management and tax planning involves comparing the potential cost of paying taxes today with the potential cost of paying them in the future.
A Roth conversion may be worth exploring during a year when your taxable income is temporarily lower, such as after retirement but before RMDs begin. Some investors also use partial Roth conversions over several years rather than converting a large portion of their retirement account all at once. The goal isn’t necessarily to eliminate taxes. Instead, strategic conversions can help diversify how your retirement savings are taxed and potentially provide greater flexibility in managing taxable income later.
Because Roth conversions increase taxable income in the year they’re completed, the amount and timing should be carefully evaluated. A conversion could affect your federal tax bracket and potentially other tax-related considerations.
In addition to strategies such as Roth IRA conversions, other tools may help you preserve more of what you’ve saved so you can work toward your retirement goals. Don’t wait until tax season to start identifying potential tax liabilities and planning opportunities. Effective tax planning is typically a year-round process.
Depending on your financial situation, wealth management and tax planning may include:
The appropriate strategies depend on your income, assets, goals, tax situation, and stage of life.
Investment diversification gets a lot of attention, but tax diversification can also play an important role in retirement planning. Holding assets across accounts with different tax treatments, such as taxable brokerage accounts, traditional retirement accounts, and Roth accounts, may provide greater flexibility when deciding how to generate retirement income.
For example, distributions from traditional retirement accounts are generally taxable, while qualified Roth IRA withdrawals are generally tax-free. Taxable investment accounts have their own tax considerations based on factors such as dividends, interest, and capital gains. Having multiple sources of retirement income can give you and your financial advisor more options for funding expenses while managing taxable income.
Wealth management and tax planning can also involve charitable giving. Depending on your circumstances, strategies could include donating rather than selling appreciated securities, using a donor-advised fund to organize charitable giving, or making qualified charitable distributions (QCDs) directly from an eligible IRA after reaching the applicable age.
The potential tax treatment of charitable gifts depends on the strategy used, your age, the type of asset, current tax law, and other factors. Your tax professional and wealth manager can help determine whether charitable giving strategies fit within your broader financial plan.
For individuals with more complex finances, coordination between a financial advisor and tax professional can be especially valuable. A financial advisor can help identify how investment, retirement, and wealth management decisions may affect your broader financial plan. A CPA or tax attorney can provide specific tax advice and help evaluate the tax consequences of those decisions. Working together can help ensure that an investment or retirement strategy that makes sense from one perspective doesn’t create unintended consequences elsewhere.
Good Life Private Wealth advisors understand the important connection between wealth management and tax planning. We consider tax implications as part of the broader financial planning process and, depending on the complexity of each client’s situation, may recommend working with a tax professional or CPA.
We take the time to understand each client’s goals and navigate complicated financial decisions to identify the financial and retirement planning services that support their long-term objectives.
Tax laws and financial circumstances change, so your wealth management strategy shouldn’t remain static. Regularly reviewing your investments, retirement strategy, income needs, and tax situation can help keep your financial plan aligned with your goals.
Contact Good Life Private Wealth to start building a financial plan designed around the life you want to live.
