Software program aims to simplify retirement account tax management

Taking the grunt work and the guesswork out of retirement account tax management could be right around the corner, assuming that 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 a key mechanism for pushing the development of the so-called unified managed household, which integrates all a household’s accounts and assets.

Such an account, considered the next stage of evolution beyond the unified managed account, helps a financial 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., and a member of the LifeYield advisory board.

Mr. Reinhart, a managed-accounts industry veteran, 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.

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 that 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. He 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 likely will be lower than the ordinary income tax rate.

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 declined 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 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 hasn’t seen the product.

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, said 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.

A typical household account can be most complex during retirement when there are rules and limits on distributions across multiple taxable and tax-deferred accounts, he said.

In addition to helping advisers manage an extraordinary distribution event, the program is designed for continuing 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].

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