To create retirement income that generates the least tax liability, it's just as critical to diversify tax-wise as it is to diversify asset allocation-wise. Indeed, in the final analysis, it is "after-tax growth that funds investors' goals," stresses Lauren Oschman, a partner in Vestia Personal Wealth Advisors, in an interview with ThinkAdvisor.
Meanwhile, as the extended 2020 tax deadline looms, many of the changes in tax provisions that last year's legislation brought will manifest in both 2020 and 2021 returns.
Oschman, whose client niche is female physicians — especially those with a specialty in surgery — is focused on imminent legislation to help fund the American Rescue Plan, which is likely to raise taxes for her high-earning clientele.
In light of similar changes already in effect, the CFP, who manages $100 million in client assets, recommends that advisors consider strategies for reducing tax consequences through tax-loss harvesting (to balance the rebalancing that occurred last March when many investments sold at a loss); more gifting by $1 million-a-year earners; and managing expected higher taxes when selling a business.
Diversifying holdings based on tax liability uses the familiar three-bucket approach, but from a tax perspective: tax-deferred, taxable, and tax-advantaged. That last bucket will be key this year, says Oschman, who recommends Roth IRAs to maximize retirement income.
The 10-year advisor, 32, started out as a hybrid firm FA, then three years ago co-founded Nashville-based Vestia, whose niche is helping physicians manage their finances and offering tax planning as related to their investments.
ThinkAdvisor recently held a phone interview with Oschman, speaking from her Nashville home. The firm's chief marketing officer as well as chief experience officer, she says a three-bucket approach to tax planning "allows you to withdraw the most value based on your tax rate environment when you're retired."
Here are highlights of our interview:
THINKADVISOR: Over the last year, legislation has continually changed — and much of it has impacted taxes. There's the Paycheck Protection Program, new tax guidance in the American Rescue Plan, the stimulus check payments — all happening virtually at once. What are you zeroing in on sharply to help your clients, who are all high net worth?
LAUREN OSCHMAN: Higher earners were largely phased out of the American Rescue Plan. That means I'm focusing on impending legislation that's probably going to increase taxes to raise money to fund that plan. It's wise to pay close attention to development of all these legislative proposals.
How are you keeping on track and on top of all the proposals with specific regard to your clientele?
I have a heat map [graphical matrix] of 65-75 of my clients to see who will be the most heavily impacted by the big changes that could come from this legislation.
What action would you then take?
As we see things [emerge] that are very likely to be part of it, I want to make sure we're moving quickly [to help]. People who make over $1 million a year are going to be impacted a lot more by certain changes than those making $250,000. The heat map lets us know who we need to act most quickly with, depending on what becomes reality [law].
What's one potential change that you consider crucial to address?
You should be reviewing clients' net worth because one of the biggest changes is that the estate and gift tax exclusion could go down significantly. So clients that have higher net worth or that do a lot of annual gifting should consider strategies to use that high exclusion now before anything changes.
What tax could go up markedly?
If you were to sell your business, the amount would be taxed at a rate that could be significantly higher. Therefore, we're going back to [look at] the financial plan for clients who are depending on revenue from the sale of their medical practices to fund a lot of retirement goals. We're having conversations about how this legislation could impact that and change their trajectory or what changes we need to make to keep them on track to course-correct.
How can investors make the most of three types of retirement accounts?
