The Art and Science of Tax Planning for Retirement

Minimizing taxes on clients’ investments is far from a cut-and-dried matter.

Decisions around Roth IRA contributions and conversions, for example, come with a number of factors for advisors and clients to consider.

There’s both “an art and a science to tax strategies,” Roger Young, thought leadership director at T. Rowe Price Associates, maintains in an interview with ThinkAdvisor.

“A lot of advisors try to stay away from tax-inefficient categories in a taxable account, and that’s appropriate,” he argues. “But there’s also some art … in thinking about the client’s specific needs.”

The art part applies, for example, as to which accounts will hold various assets and the sequence of withdrawal during retirement, says Young, a certified fnancial planner and former Wells Fargo advisor, who provides T. Rowe Price financial advisors with planning insights based on his research.

Clients should be prepared with a tax strategy that works “reasonably well” with the policies of whoever wins the presidential election this year, according to Young, who notes, “That requires some judgment on the part of advisors.”

Here are highlights of our conversation:

THINKADVSIOR: Are financial advisors now becoming more involved in tax planning strategies?

ROGER YOUNG: Taxes permeate a lot of financial decision-making. So more and more advisors are finding that that needs to be part of their financial planning practice.

Advisors can help clients think about taxes and not cross over into giving tax advice. 

How would a client’s tax strategies differ in another Biden presidency vs. another Trump presidency?

You need to have a strategy that works reasonably well in either case. That requires some judgment on the part of advisors.

There’s an art and a science to tax strategies.

We can run numbers assuming that income tax rates [for individuals] change back to what they were before the 2017 tax reform law was passed, as they’re scheduled to in 2026. We also run them with a different assumption of what the tax regime will look like.

What needs to be considered more than an investment’s tax efficiency?

The tax part is important, but other things are more important for success, including saving at a high rate, tax flexibility over the course of the accumulation years and then, in the decumulation years, asset allocation and asset location. 

At what point should an advisor bring up tax planning?

It depends on the type of practice and the life stage of the client. If they’re relatively young, you can influence their decisions early on and help get them off to a good start.

It’s helpful to know the client’s full family picture because that can affect what they should do in terms of Roth IRA conversions, how to set up beneficiary designations and other things that might affect the next generation.

What should advisors know about Roth IRA contributions they might not be aware of?

It’s important to think about a Roth vs. a traditional IRA a bit more deeply.  

A key factor is what the client’s marginal tax rate looks like today compared to an effective rate in the future. 

When you make that Roth decision today, it largely affects the marginal taxes you pay at the highest tax bracket. 

But when you take the money out in the future, it might be a blend across multiple tax brackets. Probably a large chunk of your income will come from retirement assets.

So making that comparison is important. For a young person in a relatively low tax bracket who expects to be earning a lot more later, a Roth contribution makes a lot of sense.

For other clients, you might not want to be that aggressive in doing Roth conversions today under the assumption that rates are going up.

What else should financial advisors know about Roth contributions?