Taking the grunt work and the guesswork out of retirement-account tax management could be right around the corner, assuming a new product from LifeYield LLC can live up to the hype building around it.
The Boston-based firm, formed a year ago by a team of highly regarded tax optimization wonks, is developing an overlay software program to flesh out the tax advantages of a client's entire household portfolio — including taxable and qualified accounts, as well as regular or extraordinary retirement income distributions.
The LifeYield product, which has received support and financial backing from SunTrust Banks Inc. in Atlanta, could be launched as early as April and is being regarded as key mechanism for pushing the development of the so-called unified managed household, which integrates all of a household's accounts and assets.
Such an account, considered the next stage of evolution beyond the unified managed account, helps an adviser manage all aspects of a client's finances.
"It's not hard to take money out of an account, but it's hard to take money out in the most tax-efficient way," said Leonard Reinhart, president of Reinhart Consulting Group in West Chester, Pa.
He is also a member of the LifeYield advisory board.
Mr. Reinhart, a managed accounts industry veteran who retired in 2007 as president of Lockwood Advisors, a Malvern, Pa.-based affiliate of Pershing LLC in Jersey City, N.J., said he realized the challenges of retirement-account tax management while trying to help his mother-in-law re-balance her accounts and take some distributions.
"I didn't think it was complicated until I started to do it myself," he said. "It's difficult and most advisers doing it don't know if they're doing it right."
SEVERAL PROGRAMS
Although there are a number of overlay programs that help advisers manage tax efficiency during the accumulation phase, the distribution end has been left mostly to the application of traditional models by individual advisers.
The problem with this method is it can be time-consuming and complicated.
"It's a combination of art and science, but the more you know about your client's situation, the easier it is to figure out the best way to do it," said Kenneth Robinson, owner of Practical Financial Planning in Cleveland.
"The knee-jerk reaction of automatically taking money out of a retirement account that's subject to the required minimum distribution is not always the answer," added Mr. Robinson, who advises clients on a retainer and flat-fee basis.
For example, in a year in which a client has a lot of taxable income and needs a one-time, emergency distribution, it might be better to withdraw money from a taxable account, since the capital-gains tax rate will likely be lower than the ordinary income-tax rate.
"There's no one right answer, and you may have to look at more than one year if next year's income is expected to be higher than this year's," said Mr. Robinson.
According to SunTrust, which plans to make the LifeYield program available to its 600 brokerage representatives and wealth managers, the software can generate a 30% increase in a client's income over a 25-year retirement period.
SunTrust representatives refused to provide details on the company's financial commitment to LifeYield. However, the product is being designed for application by any adviser or advisory firm.
There are no details available on what the licensing cost might be.
The best way for an adviser to determine whether the new software does what it claims to do is to go through a withdrawal simulation manually and then check it against LifeYield's result, said Bruce Moulton, a principal with Moulton Strategic Partners Inc., a Flower Mound, Texas-based technology advisory firm for financial advisers. "You'd have to see a measurable return in terms of tax savings or time savings to determine whether the software makes sense," said Mr. Moulton, who has not seen the new product. "All things being equal, though, if the adviser were comfortable with the results and the process took 15 minutes rather than 15 hours, than that would be a pretty good result."
SunTrust is already using tax-optimization overlay technology for its $18 billion UMA business, but the LifeYield product is seen as the next step toward "decumulation" and a move into the UMH business, according to Ken Yarbrough, SunTrust's senior vice president of retirement strategies.
"We're already a big player in the UMA space, so the next logical step is UMH," he said. "LifeYield gives us a leading-edge product for tax management in the retirement and pre-retirement base, and nobody has cracked that code yet."
CRACKING THE CODE?
The code might be cracked by LifeYield chief executive Mark Hoffman, chief investment officer Paul Samuelson and president Mark Benedek.
This is the same trio that founded Upstream Technologies LLC, a Boston-based portfolio-management-overlay technology firm that was acquired by Norcross, Ga.-based CheckFree Corp. in June 2007. CheckFree is now part of Fiserv Inc. of Brookfield, Wis.
"These are the same guys who started Upstream to develop tax optimization on the accumulation side, and this LifeYield technology is the same kind of thinking for the decumulation side," said Jack Sharry, LifeYield's chief marketing officer.
As he explained it, a typical household account can be most complex during the retirement years when there are rules and limits on distributions across multiple taxable and tax-deferred accounts.
In addition to helping advisers manage an extraordinary distribution event, the program is also designed for ongoing tax optimization on regular account distributions as well as overall allocation across multiple accounts within a single household.
E-mail Jeff Benjamin at [email protected].
