In the good old days, wealthy taxpayers turned to accountants to manage their investments in a tax-efficient manner, but today they are likely to expect some help from their financial advisers, too.
“If you get the structure of their portfolio right, you can create lower tax opportunities,” said Robert S. Keebler of Keebler & Associates LLP, a financial planner and tax adviser.
Especially with the coming tax law changes, it is more important than ever to begin tax planning even before drawing up an asset allocation plan.
Accounting firms aren't directing their upcoming talent to focus on tax issues, which creates an advice gap that advisers are filling, Mr. Keebler said, speaking Tuesday at the InvestmentNews 2012 Retirement Income Summit in Chicago.
The types of accounts investors use, asset classes and withdrawal strategies can make a substantial difference in the amount of income tax they will pay, he said.
To start, wealthy investors should have some of their money in each of the three main types of retirement accounts, he said. Taxable brokerage accounts, tax-deferred investment accounts and tax-free accounts such as Roth IRAs, and life insurance all play a role during retirement to minimize the amount of income tax retirees end up paying, he said.
One sure thing for virtually all investors is to do a Roth conversion this year, keeping in mind that October 15 is the deadline to re-characterize the conversions if investment values drop.
Mr. Keebler's twist is to convert each asset class into a separate account, fixed income in one account, equities in another, and so on.
“The ones that go up, you keep; the ones that don't, you re-characterize,” he said.
Capital gains taxes could be set to rise in 2013, as well as a new 3.8% surcharge on gains for those whose income is above $250,000.
Advisers who are considering harvesting some investment gains before the end of the year should do it in the next two or three months to avoid what may become a surge in tax-harvesting-driven selling in the last month of the year, Mr. Keebler said. “If everyone sells in December, it will hurt,” he said.
As to the uncertainty of what will happen with the tax code after the 2012 elections, Mr. Keebler recalled 1986, when tax reform drastically changed tax rates and deductions. He said he spent hundreds of hours in all-night sessions going through all the changes.
“And that was before Red Bull,” Mr. Keebler said. “That is what this could be like” once lawmakers get down to business after the election, he said.