A prospective client told me he had it all done. He had a will in place, did his own stock picking and his wife did the taxes. What more did he need?
I went through my checklist. He had a lot of cash sitting in the bank and CDs — not ideal for high earners, since the interest is taxable. His will had no family trust, causing potential probate issues, and his adult children had no estate plan either. He was giving cash to charity, another tax faux pas. And on we went.
On the surface, financial planning can seem simple, if you are unaware of the possibilities. That is where a professional can help. And thanks to improvements in technology, today I am more excited about the opportunities to help high-income earners than ever in my 25-plus years in the industry.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
Here are three examples, depending on individual circumstances, where technology may help in financial planning for high earners.
Tax-aware fixed income
High earners were traditionally advised to invest in tax-free municipal bonds in taxable accounts. Municipal bond interest is generally exempt from federal income taxes, and so high-income investors in a high tax bracket can use municipal bonds to avoid having the interest eaten up by taxes.
However, municipal bonds don’t always pay the most interest on an after-tax basis. Some non-municipal bonds, such as corporate bonds and federal agency bonds, can pay more interest even after taxes.
Investment managers today can jump between different types of bonds depending on which yield pays the most after-tax interest for the client. Different bonds move at different speeds or valuations.
Munis might rally and become expensive relative to other bonds, and depending on the client’s tax bracket, the manager might take gains from the munis and reposition into taxable bonds. Of course, you must pay attention to credit risk too, as different bonds have different risks.
The key is: Don’t think municipal bonds always make sense. That might not be the case, and other bonds may offer different after-tax characteristics worth considering.
Robust tax-loss harvesting
If you are staring at a taxable gain on your Schedule D Tax Form, you probably need a more robust tax-loss harvesting strategy. Tax-loss harvesting — selling stock or bond losses to offset gains elsewhere in a portfolio — has been around for a long time.
However, technology has improved trading capabilities immensely. Today, tax-loss harvesting can be implemented more frequently using these tools.
There are other non-traditional tax-loss harvesting strategies appropriate for certain high-net-worth clients that can also be considered. If your tax-loss harvesting is stuck in the old way of doing it once a year around the end of the year, I encourage you to explore the new platforms that are available.
Advanced scenario planning
Moving to a state with a lower income tax? It can seem like a good idea, but it’s best to check with a professional beforehand. Tax software can help show the difference in taxes between the two states, and sometimes the savings is less than expected.
I have client who wanted to see the impact of making additional Roth 401k contributions. The scenario planner showed the tax impact assuming different rates of return and different tax rates in the future. This helped put some context into the client’s decision.
The software most planners use today is highly intelligent. Most of these scenarios can be done rather quickly and can lend confidence to decision-making.
My advice to high-income investors is this: If you haven’t explored wealth management capabilities recently, much has changed in what a planner can do for you. The technology improvements have significantly improved the advice we can provide, and may be worth exploring.