Why taxes are a certainty you can control

Jan 29, 2014 @ 12:00 am

Runtime: 6:14

Fewer areas of financial planning offer the same predictability as taxes. Here, Alexandra Lebenthal of Lebenthal Holdings LLC and Mark Cortazzo of MACRO Consulting Group share their strategies.

Video Transcript

This week's guests are both experts in tax strategies. Alexandra Lebenthal is the President and CEO of Lebenthal Holdings, a boutique investment bank as well as an asset management and wealth management firm for high net worth individuals. It is the largest woman-owned securities firm in the business. Lebenthal is the third generation to run a Lebenthal investment firm. Mark Cortazzo is a familiar face on WealthTrack. He's founder and senior partner of the now 20+ year old wealth management firm, MACRO Consulting Group. Cortazzo has been recognized as a top adviser by Barron's Magazine for the fifth consecutive year as well as by Worth and Fortune Magazine. Investment News recently identified him as a "top transformational adviser." I began the interview by asking them how significant the topic of higher taxes has become in their conversations with clients. -Well, you can't have a conversation with somebody about their investment portfolio, their gaols (long term, short term) without factoring taxes in because that's going to be a very important factor of how much money they end up on a long-term basis. So, it's something that we address up front and certainly the threat of taxes going up is something that, as you said before, is something that everybody knows about. It's in the paper and it's no secret. It certainly does make certain classes of fixed income such as municipal bonds more attractive, so that's something that does get discussed as well. -So front and center, a new client comes in. That is one of the top topics of conversation, is how to either avoid taxes or basically reduce the tax burden. That's one of the things that we will do for you as a wealth advisor. -Yeah, I mean, I think the thing to think about when you're going to meet with somebody whether it's at a big firm or a small firm is that you don't want to have a discussion about your investments in a vacuum and be talking about one sliver. It's got to be about the whole pie. That includes taxes. That includes your retirement goals. That includes, you know, every aspect of your financial life. It can't be separate. Otherwise, you're really not looking at your whole financial life. -So how significant is the threat of higher taxes when you talk to clients? How real is that threat? -Well, taxes have always been an integral part of our conversations with clients because it's one of the few things in the planning process that you do have control over. You can control where you own what you own. You can control to a large degree when you trigger tax liabilities. So it's something that, as a planner, at the end of the day you're looking for, what is your net rate of return after fees, after taxes? What are you putting in your pocket, you know, after all costs and all of the variables that you have control over? And so, we did an analysis where we looked at just changing where someone owned what they owned. They have a million dollars inside an IRA, a million dollars outside the IRA, and we were deliberate with where we owned the different asset classes, and we were taking the same net withdraw from the portfolio. By being deliberate instead of just making it a 50/50 mix, it extended the withdraw seven years longer in retirement. So when you're talking about goals and planning for income, that gives you seven more years of net spendable money by just controlling that part of the process. -So let's talk about the location of-- -Yeah. -where you put your taxable investments and your tax-exempt investments. So what's the basic conversation that you would have with a client about that? -Well, a lot of it's driven by what the mix of the assets are: if somebody has a high concentration of their portfolio in retirements assets, 401(k)s, IRAs, they've got a shelter around that, and we have a lot more flexibility with how we manage that. We could be more tactical. We can be in more absolute driven strategies, high-yield investments, because the total return, the gross return is all that really matters for you, because when you take that out, it's all taxed the same. For people who have a large portion of their portfolio outside, that's where the types of assets that you have can be significantly impacted, and municipal bonds yields are very comparable to their taxable counterparts, and if I can get that tax free and somebody's in a high bracket, that really adds a lot of leverage, and then, you know, there are more tax-inefficient assets that you can either shelter in a non-qualified environment or you can own them within an MRI and get that return. -Right. So the basic conversation, Alexandra, that I have coming to you at Lebenthal Wealth Advisors about taxes would be, if you look at-- if I had, you know, relatively traditional portfolio of stocks, bonds, cash, you know, how are you going to allocate so that you minimize the tax burden? -Well, first of all, let me say there's never one allocation for everyone. -Right. -It's based on people's life, what they need to live on, what their goals are, how much money they're going to need at age 90, etc. -Right. -We're going to look at, you know, I think as you said before, and I do want to emphasize the retirement accounts that they have, and there is nothing like showing somebody how the compound interest works in a retirement account and how much it grows as opposed to in a taxable account, and it's great to show that to young people as well-- -Right. -because they really get how important it is to start saving. -And it's the next generation that you're dealing with as well. -Yeah. Exactly. And young people don't often understand the earlier they start, the better. So what we're going to do is we're going to, again, look at everything. We're going to figure out how much they actually need to live on and then back into their investments that way and then factor in the taxes as a part of that, and then, of course, municipal bonds are going to be a big part of that as well.


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