Many financial advisors are successfully putting a new twist on the traditional asset allocation review. With Baby Boomer clients heading toward retirement and the prospect of higher tax rates imminent, it is increasingly important that clients’ assets are diversified from a tax perspective, in addition to the traditional asset allocation perspective. For many clients, the bulk of their investable assets are held in traditional retirement accounts and therefore are subject to ordinary income tax rates when withdrawn. Greater tax diversification can lead to more flexibility on where to draw income from based on personal tax circumstances.
Schedule specific meetings with clients to assess their tax diversification so they can better manage their tax bill in retirement. As part of the review, segment all of their assets within three buckets: taxable, tax–deferred, and tax–free. For clients who lack tax–free assets, discuss the benefits of specific product solutions, such as municipal bonds and Roth IRA conversions. For clients, taking steps to help them be more tax-efficient in the future is a tremendous value. And for financial advisors, conducting this exercise can help you identify investments not currently under your management for potential account consolidation and can help you grow your business.
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