Getting high-net-worth clients out of taxable accounts
For high-net-worth clients, a major challenge to asset growth is Uncle Sam.
The IRS reportedly collected more than $18 billion in estate taxes from 5,200 estates in 2016, according to a study from SmartAsset.
And, depending on the state of residence, the richest clients could be paying more than 35% in taxes, including at the federal and state level.
“It’s always psychological,” says Michael Landsberg, a CFP and partner at Landsberg Bennett Private Wealth Management in Punta Gorda, Florida. “Some people are just not into giving any more money to the government.”
For those clients, advisors should look to Roth individual retirement accounts, Landsberg says.
Roth IRAs are the most effective place to leave money for the next generation, and clients can convert a substantial amount of their own retirement nest eggs into a such accounts for that exact purpose. When clients die, the money gets bequeathed to their spouse or children practically tax-free.
“A lot of my HNW clients are paying upwards of 36%, and with any state taxes on top of that, they end up paying a boatload on traditional accounts,” Landsberg says. “The Roth IRA is the perfect place to store money for the long term.”
Then, there is the backdoor Roth conversion, according to Financial Planning contributor Kimberly Foss, a CFP who is the founder and president of Empyrion Wealth Management in Roseville, California.
Higher-income taxpayers change a traditional IRA to a Roth IRA a short time later, meaning that clients can make tax-advantaged withdrawals from their accounts into retirement. On the other hand, if clients leave money in traditional IRAs, that will be treated as ordinary income.
“With an IRA, the government is going to get paid,” Landsberg says.
“It’s a great tool to accumulate wealth, but it’s not great to die with,” he says. “They’re going to get their money.”
For business owners, the Roth IRA has a hidden advantage as well, Landsberg says.
If a child is also employed by the business, the owner can also contribute to a child’s retirement account, he says.
Client contributions into Roth IRAs are capped at $5,500 per year, Landsberg says.
Young children can benefit from learning about the markets at an early age as well, he says.
“You can go through what the stock market is doing and educate them about money, and at some point, let them pick certain companies that they like,” Landsberg says, who employs his children at his firm.
It is also a helpful educational tool for self-employed clients with their own practices, such as doctors and lawyers, he says.
“It’s a great way for my clients to get some money into an account for their kids or grandchildren that can grow tax-free into retirement,” Landsberg says. “Most people don’t like paying taxes.”
This story is part of a 30-30 series on tax-advantaged investing.