How a Tax Planning Financial Advisor Can Help You Plan Ahead
A financial decision made in March can affect the tax return you file the following year. Selling appreciated investments, taking money from a retirement account, exercising stock options, or making a large charitable gift can all change the tax picture.
This is where a tax planning financial advisor can play a useful role. Tax considerations can be incorporated into financial decisions as they arise throughout the year, instead of being addressed only when it is time to prepare a return.
What Does Tax Planning Look Like in Financial Planning?
Tax planning can involve reviewing how income, investments, retirement accounts, and significant financial events may interact with federal and state taxes.
Depending on your circumstances, an advisor may help you evaluate:
Capital gains associated with investment decisions
Retirement account contributions and distributions
Roth conversion opportunities
Required Minimum Distributions
Charitable giving strategies
Tax considerations related to different account types
Timing of certain financial transactions
Planning considerations surrounding a business sale or liquidity event
VestGen Wealth Partners incorporates tax considerations into financial planning alongside areas such as investments, retirement, estate planning, and cash flow. This allows related decisions to be evaluated within the same planning process.
Why Can Timing Matter for Tax Planning?
The timing of a financial transaction can affect the year in which income or gains are recognized.
Consider an investor who wants to sell appreciated stock. Before completing the transaction, it may be useful to review the unrealized gain, other taxable income expected for the year, and whether additional investment transactions are anticipated.
Retirement can create another set of timing decisions. Withdrawals from tax-deferred retirement accounts generally create taxable income, while qualified Roth distributions receive different tax treatment. Roth conversions can also affect taxable income in the year of conversion.
A tax planning financial advisor can help identify these considerations before a decision is made, while a qualified tax professional can address specific tax advice based on the individual's circumstances.
Where Do Your Financial Advisor and CPA Connect?
Financial advisors and tax professionals have different responsibilities, but their work can intersect.
An advisor may be involved in investment decisions, retirement income planning, charitable strategies, or cash flow. A CPA or other qualified tax professional can prepare tax returns, interpret tax rules, and provide specific tax advice.
When appropriate, firms like VestGen Wealth Partners can coordinate with a client's other professional advisors. That coordination can be particularly relevant when a financial decision affects investments, income, taxes, and estate considerations at the same time.
Financial Events That May Call for a Tax Review
Tax planning may deserve additional attention when you are:
Preparing for retirement
Receiving a significant bonus
Exercising stock options
Selling appreciated investments
Selling a business
Making a substantial charitable gift
Beginning Required Minimum Distributions
Experiencing a significant change in income
Each event can introduce different questions, which is why the appropriate planning strategy depends on the individual's financial and tax circumstances.
Questions Worth Asking an Advisor
If tax planning is important to you, ask how often tax considerations are reviewed and how they are incorporated into investment and retirement decisions. You can also ask how the advisor works with CPAs and what information is typically shared among your professional team.
Understanding those responsibilities can make it easier to know who should be involved before a significant financial transaction.
Conclusion
Taxes touch many areas of financial life, from investing and retirement distributions to charitable giving and business transitions. Reviewing potential tax implications as decisions arise can provide useful information for the planning process.
A tax planning financial advisor can help identify where those considerations intersect with your broader financial plan. VestGen Wealth Partners is one example of a firm that incorporates tax planning considerations alongside other areas of financial planning and can coordinate with a client's other professional advisors when appropriate.
Frequently Asked Questions
What does a tax planning financial advisor do?
A tax planning financial advisor considers how financial decisions may interact with taxes and incorporates those considerations into areas such as investment, retirement, and cash flow planning.
Is a tax planning financial advisor the same as a CPA?
No. Their roles and qualifications differ. A financial advisor may incorporate tax considerations into financial planning, while a CPA or other qualified tax professional can provide specific tax advice and tax preparation services.
When should I discuss tax planning with my financial advisor?
Tax considerations may be worth discussing throughout the year, particularly before significant investment transactions, retirement distributions, charitable gifts, business transactions, or major changes in income.