There are a number of professional service providers that help clients manage assets and remain in compliance with applicable tax or investment regulations. Both wealth managers and tax specialists, such as CPAs, help people potentially preserve and grow their wealth through a variety of strategies and techniques.
However, CPAs and wealth managers have different backgrounds, areas of expertise, service models, and relationships with their clients. Thus, coordination between tax advisers/CPAs and wealth managers is a critical component of an effective and comprehensive financial strategy.
Do Tax Planning and Wealth Management Services Overlap?
Many CPAs do not offer wealth management services for a few different reasons. For example, the business models for these two different types of service providers tend to be starkly different. These differences can affect when and how often each provider works with their clients.
Wealth managers need to be available and attentive throughout the year as financial goals, personal situations, and/or investment priorities change. In contrast, tax advisers do not always have this luxury. For instance, during the tax season of 2020 (Feb-April 15th), capital markets were incredibly volatile. Tax advisers who also wore wealth management hats likely had to make difficult choices about how to spend their valuable time.
While CPAs may often share recommendations with their clients for saving money, recommendations don’t always translate into action. This can be due to a variety of factors, such as inertia or a lack of understanding on how to take next steps and complete important tasks. Wealth managers can offer tremendous help with bridging this gap.
How Wealth Management Advisors and Tax Advisors Can Partner on Client Objectives
Good communication between CPAs and wealth managers can help guide client tax and wealth management advice and recommendations; below are nine areas wealth managers can help clients potentially optimize tax and wealth management strategies.
- Coordinating the timing of capital gains (and losses). This includes both selling investments with unrealized loss to help off a capital gains tax from the sale of another investment (a process called “tax loss harvesting”) .
- Setting up retirement plans for small business owners. Several different types of retirement plan solutions out there for small business owners to put into place. Examples of options include IRA-based plans (e.g. SEP of SIMPLE IRA), Defined Contribution Plans (e.g. profit sharing, 401(k)s, 403(b) Plans), and Defined Benefits Plans (e.g. pensions). Thoughtful plan selection and design can meaningfully impact how much a business owner can contribute to their retirement savings a participant in the plan as well as confer real-time tax savings and benefits, at both the personal and business level. Some wealth managers can also be the investment advisor for qualified retirement accounts, helping with plan design, participant education and support, and selecting fund line-ups for participants to choose from.
- Encouraging enrollment in and contributions to employer-sponsored retirement accounts, when available. This can include options like a Simple IRA, a 401(k) plan, or a 403(b). Some clients may also have qualified retirement plans through past employers that they may consider rolling over into current plans or new plan, depending on age and objectives.
- Setting up Health Savings Accounts. Health Savings Accounts (HSAs) can be a remarkably efficient way to grow an alternate investment account (pre-tax), save for qualified healthcare expenses, and lower overall taxable income.
- Setting up and managing Trust Accounts. Individuals can set up an account that is managed by a trustee for a designated 3rd party. Often used as part of a strategy to minimize estate taxes, trusts are an essential component of an effective estate plan.
- Utilizing investment strategies that minimize the tax burden through several methods. Wealth managers can help clients with selecting securities with an eye toward optimization for tax efficiency (e.g. mutual funds vs. ETFs), picking the right type of account (i.e., tax deferred vs. taxable), and determining the most suitable approach for either total return or income investing based on client needs, goals, time horizon, and risk tolerance.
- Setting up Donor Advised Funds. Many people want contributions to charitable causes to be part of their financial management plan or estate. Donor Advised Funds let individuals make tax-free deductions that will grow over time but can only be used for the predetermined charitable causes or sources.
- Setting up and managing 529 education accounts. Saving for future educational opportunities is a key priority for most families that have the means to do so. 529 plans offer a tax-advantaged way to set aside money for educational expenses or, in some cases, pre-pay for tuition on behalf of a beneficiary.
- Managing retirement withdrawal strategies. When individuals are ready to begin using their retirement funds, the timing and method of using investment income is critical for avoiding undue tax penalties or burdens.
While each of these areas is meaningful, these are only some of the ways in which wealth managers can add value. There are a lot of levers to pull and not every lever should be pulled each year. In fact, some of these opportunities are very meaningful to some families and completely irrelevant to others.
Sapling Wealth Management partners with a variety of vendors to help individual clients with their financial and investment priorities or assist small businesses with retirement plan selection and management. Contact us for a meaningful discussion about how to ensure you receive the advice, strategy, and active financial management needed to help you reach your goals.