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5 Reasons Your Financial Advisor Should Help You With Tax Planning  Thumbnail

5 Reasons Your Financial Advisor Should Help You With Tax Planning

Investment Planning Tax Planning

It’s not impossible to build long-term wealth without paying attention to taxes.  But taxes can substantially impact the amount of wealth you build and how quickly you build it.  The amount of wealth that gets filtered away is a direct reflection of how tax-efficient your finances are.  Tax planning can help you become more tax efficient.  If your financial advisor is also acting as your tax planner, then you're in the best possible position to make tax-efficient financial decisions.

Background-Taxes vs. Investments

Small business owners and real estate investors both understand the benefits of tax planning.  The successful ones will hire accountants early on, not just to prepare their tax returns, but to act as their tax planner.  They do this to avoid tax mistakes and to ensure their business decisions are tax-efficient ones.  By having their tax planner involved, successful business owners & investors keep as much money as possible to reinvest in their businesses, which in turn allows them to accumulate wealth.  

However, this also means that a successful small business owner or real estate expert is an expert in their field--that's part of the definition of success.  In fact, many accountants specialize by working primarily with small business owners or real estate investors.  Working with a specialist, a small business owner could expect tax advice specific to their situation based upon the accountant’s experience in working with similar business owners.  

This principle also works for traditional investors…up to a point.   

Certainly, a do-it-yourselfer can hire an accountant to ensure they don’t make tax mistakes.  But unlike a small business owner, the average investor might not consider themselves an expert in how to reinvest the money they save.  So, many people try to hire someone to help them with investments.  The problem is that unless the accountant is actually registered as an investment adviser, they’re generally prohibited from giving investment advice.  In that case, the investor might have an accountant AND an investment adviser, hardly cost-effective. 

What your accountant will do:  Give you tax advice-maybe.  The good ones usually do, but not all of them.  So, you might receive advice from your accountant such as, “You can lower your tax bill by contributing to a traditional IRA this year.”  

What your accountant probably won't do:  Give you investment advice.  If the accountant isn’t registered as an investment adviser, you might not know what type of investments you should make with the money that you just put into your IRA.   

What many financial advisors DON'T do:  Tax planning.  Conversely, you might get advice from your investment advisor such as, “You should invest in XXX mutual fund, because of the following reasons….” But if you ask how much you’d pay in capital gains by selling a certain stock, you might also hear, “I don’t know.  You’d have to talk with your tax preparer or your tax planner about that.” 

How do you address this problem?

There are two ways you can address this: 

  1. You can expect your accountant to be registered as an investment adviser.  There are accountants that are registered as investment advisers.  But most accountants do not manage investments.  And odds are, your accountant is probably one of the latter.  So, you’d either have to change accountants or go for option 2. 

  1. You can expect your financial adviser to help you with tax planning.  And to be honest, there’s no reason your financial advisor shouldn't help you with financial and tax planning.  Even if they aren’t a tax professional, your financial adviser has every opportunity to guide you into financial & investment decisions that can keep your taxes low.  And if they can, the only question left is, “Why don’t they?”  And the only acceptable answer to that question is:  “But, we do.” 

And when it comes to the decision to change your accountant (whom most people trust), versus changing financial advisors (whom most people don’t trust), it might be easier to find a new advisor who does tax planning reasons.   

Not convinced?  Here are 5 reasons why. your financial advisor should help you with your financial AND tax planning needs.

Reason #1:  Your financial advisor probably sees more of your finances than your accountant does. 

This is primarily due to two reasons: 

  1. The buffet effect.  Generally speaking, this has to do with the fact that most financial advisors don’t charge by the hour for advice, while your accountant probably does.  Just like buffet diners usually eat more than they would from an a la carte menu, financial planners who offer ‘all-inclusive’ financial services usually get the questions that an hourly planner (or accountant) would not. 

  1. Accountants are usually the ‘tax’ person.  As a result, they might not get the questions that aren’t obviously tax-related, even if there’s a tax impact.  For example, if your financial advisor gives you Social Security advice, you might not necessarily think taxes, even if there could be tax implications related to that advice. 

  2. tax planner buffetMany people see their financial advisor as the 'buffet' for all things financial-including taxes

Because of these, the financial advisor probably sees much more of the financial picture than the accountant.  As a result, your advisor likely has more impact on how much you’ll pay in taxes than your accountant. 

Reason #2:  Your advisor has more impact on your taxes than your accountant. 

Because your advisor sees more of the financial picture, they have access to more of the ‘levers’ that can have tax implications.   

  • Investments?  Check.  
  • Funding your retirement account?  Check.  
  • Advice on annuities?  Check.  

The list of financial decisions that have tax implications goes on.  And odds are, your advisor is (or should be) in the middle of it. 

On the other hand, if your accountant is only involved when you drop off a shoebox of receipts and your W-2 forms, then it doesn’t matter.  Any advice they might give is already useless, since they can’t go back to change anything.  All they can do is caution you to avoid mistakes and invite you in for tax planning later in the year, when they don’t have 100 tax returns to file before the deadline.   

Your advisor already sees more of the financial picture.  And your advisor already is better positioned to help you make financial decisions as they come up.  If that’s the case, they’re in a better position to see the tax impacts of financial decisions, even if the accountant has more tax knowledge.  And IF your financial advisor is able to help with tax planning, then they SHOULD be doing so.  Unfortunately, they might end up doing the opposite. 

Reason #3:  single tax mistake can wipe out years of investment returns.  

Many financial advisors pride themselves on superior investment performance.  While they cannot legally guarantee results, many advisors will boast about how they’ve outperformed the stock market (with the mandatory disclaimer that past performance is no indication of future results).   

But let’s imagine that your investment advisor does outperform the stock market by 1% per year.  Let’s further imagine that you’ve got $1 million invested with your advisor.  That means that on average, your advisor’s investments might earn you $10,000 per year MORE than a comparable advisor.  In the investment world, these additional earnings are known as ‘alpha.’ 

But what if they make a mistake that costs you $50,000 in extra taxes? You just lost 5 years of the ‘alpha.’  And guess what—a $50,000 tax bill hurts a lot more than earning 1% less per year than the next guy.  Why?  Because it’s tangible.  It’s cold hard cash that comes from your pocket, into Uncle Sam’s. 

And your advisor should be looking for ways to keep money IN your pocket, and to keep Uncle Same’s hand out of it.  This is one of the most overlooked ways to build wealth. 

Reason #4:  NOT being tax-efficient impedes your ability to accumulate wealth. 

It’s a simple fact—the more money you have to invest, the more money you will earn.  And when it comes to taxes, it’s a zero-sum game.  Every dollar you keep is a dollar Uncle Sam does not—and vice versa.   

People who are tax savvy and can keep their tax bill low are the ones with more money to either invest or spend on other priorities.  People who are not tax-focused are the ones with less money to invest, which means that it’s harder to accumulate the same amount of wealth. 

It’s also important to know that it’s not just about tax planning in the here and now.  It’s about taxes over the long run. 

Reason #5:  Like financial planning, the best tax planning is done over the long run. 

Everyone knows about Roth conversions, right?  You take money from your traditional IRA, ‘convert’ it to a Roth IRA, and pay taxes on the amount that you converted that year.  Then, for the rest of your life, the money that’s in your Roth IRA can grow tax-free.  And any money you take out after age 59 ½ is tax-free as well.  A Roth conversion strategy is basically founded upon being able to convert as much into your Roth IRA in your low-tax bracket years, before you reach age 72 (when you’re no longer able to do Roth conversions).  Sounds simple, right?   

It depends on how much time, and how much money you have.  If you have $1 million in an IRA, you might be able to convert everything AND keep in a low tax bracket.  If you have 20 years.  If you’re 69 and trying to convert everything in one year, you could do so, but it probably wouldn’t make much sense. 

But to properly implement a Roth conversion strategy, you’ve got to have your eye on the ball for years.  That means each year,

  • Running a tax projection
  • Figuring out (and deciding) how much to convert each year
  • Updating account balances to account for investment changes
  • Accounting for unexpected events along the way.   

This illustration shows such a Roth conversion strategy.

a tax planner helps financial and adviserThis sample Roth conversion timeline shows the tax benefits of long-term tax planning.  Who’s more likely to be in a position to help you look 20 years down the road—the accountant to whom you dropped off your annual box of receipts, or the financial advisor who just showed you a retirement projection of what your finances might look like 20 years down the road? 

It’s only fair that if your adviser prides himself on giving you a retirement projection, they should demonstrate that their long-term view also includes a tax strategy that supports it.   


When you work with an advisor who incorporates tax planning into the long view, amazing things can happen.  You can actually convert $1 million from an IRA into a Roth account, given enough time.  You can actually be a millionaire and still remain in the 12% tax bracket.  And you can do all of this with the help of a financial advisor who takes a little time each year to help you understand: 

  • Your current tax picture 

  • How to lower your tax bill 

  • What strategies might be available to keep your taxes low over the long term 

  • What changes in the tax law might impact your situation 

And if you don’t currently receive that from your advisor, ask for it.   If your advisor tells you they don’t offer that service, then find someone who does.  You (and your money) are too important for someone who doesn’t have the time (or more likely, the expertise) to help you ensure that you don’t pay more in taxes than you have to. 

And if you’re ready to take the next step and work with another financial planner, you can learn more about how we work with clients right here.

 The foregoing content reflects the opinions of Lawrence Financial Planning, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.  Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.   Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will recover or react as they have in the past.

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