Ed Slott's Tax Season Game Plan for Advisors

What You Need to Know

If advisors lack in-house tax expertise, they should talk with their clients’ CPA, says Ed Slott.
Hold off on backdoor Roth conversions until the Build Back Better bill passes, or doesn’t.
RMDs might be lower due to new life expectancy tables put out by the IRS.

Tax time has rolled around again, and tax and IRA specialist Ed Slott of Ed Slott & Co. has plenty of advice for advisors. First and foremost, he told ThinkAdvisor in a recent interview, now’s the time for advisors to “communicate to clients that you add value beyond your core capability” by advising them on tax issues.

Advisors, Slott said, “do a pretty good job on investing and rebalancing and all that stuff, that’s kind of baked into the cake.”

However, if they’re “not adding value in the mind of the clients, then [the clients are] going to look at price and everybody else’s price” compared to their advisor’s.

If advisors lack in-house tax expertise, they should “connect with their clients’ CPA,” Slott said, especially if the advisor is “handling what may be your clients’ largest asset, their IRA or 401(k); these accounts are loaded with taxes.”

If advisors “don’t know who [their] client’s accountant is, then that’s a bad sign,” Slott said. It’s “a great thing to connect with the client’s CPA. Clients love that their advisors are strategizing for them … everybody wins.”

As pending tax and retirement legislation looms, Slott explains that advisors need to be more careful than ever in helping clients this tax season. He also provides an overview of tax and retirement planning areas where advisors can add value to their client relationships.

ThinkAdvisor spoke with Slott recently from his office in Rockville Centre, New York. “That’s command central,” Slott quips. “That’s where I do everything; that’s like a studio … as a person who does a lot of presentations, they all went virtual very quickly” during the pandemic. “It’s a mess, but I know where everything is!”

Backdoor Roth IRAs

First, hold off on backdoor Roth IRA conversions, Slott says.

A situation came up recently where a client had started to contribute to their backdoor Roth and Slott advised the client to wait. “There’s a difference of opinion with one of their [the client’s] advisors,” Slott relayed. “He disagreed with me. I said, ‘there is pending legislation to ban backdoor Roths, so I don’t know if I would run to do them so quickly.’ Some people are go-getters and want to get that done early in the year for 2022.”

Slott says to wait on contributing to backdoor Roths “until we know if this Build Back Better [economic bill], or some version of it, will ever pass. If anything passes, that provision I believe will be included because there’s no big opposing constituency for it. There’s nobody picketing at the Capitol: ‘Save the Backdoor Roth!’”

The backdoor Roth is a workaround to the Roth IRA contribution limits: The client first contributes to a nondeductible traditional IRA (where there is no income limit) and then converts those funds to a Roth IRA, Slott explained.

“The existing provision [in the Build Back Better bill] says the ban on the backdoor Roth will be effective as of Jan. 1, 2022. But we’re already past that,” Slott said. “So [the advisor’s] point was: ‘Well, they can’t disallow something retroactively once you already did it.’ But I’m more conservative; why take a chance?”

However, if a client contributes to a backdoor Roth, and has to “undo it,” Slott continued, there’s “a lot of paperwork and reporting, and who needs that? And the more paperwork and changing you do, the more likely mistakes are going to be made.”

Also banned under Build Back Better would be so-called mega backdoor Roths, Slott explained in a recent ThinkAdvisor article, for those in company retirement plans who can contribute after-tax funds to the plan and then convert them essentially tax-free to their Roth IRAs.

“For 2022, that can be for up to $61,000. If you have clients who do these each year, have them hold off in 2022 until we know if they will be allowed,” he said.

1099 Mistakes

Review Form 1099s, Slott warns, as they can be rife with errors.

Form 1099s “are coming out right now for retirement distributions, interest dividends, capital gains; review them, don’t just send them out,” Slott said.

“We’re finding there are lots of mistakes in there — maybe some of these institutions were short-staffed or people were working from home …, he explained. “You type the wrong code into a 1099-R for retirement distributions, it can make the difference as to whether something is taxable or not or subject to a penalty.”

Due to COVID-19 and “more mistakes that we’re seeing” on the 1099s this year, “you can’t rely on the first version of the 1099 that either Schwab, Fidelity, Vanguard or whatever company you’re with because they are constantly issuing corrected 1099-R forms as they find different things — capital gains, a lot of different items,” Slott warns.

Hold off on filing tax returns until at least the end of February, Slott advises. “I found [errors] on my own, with Schwab, I think, I had two or three corrected 1099s for big statements.”

New RMD Tables

Help clients collect all their information for their required minimum distributions, Slott said.

There are new life expectancy tables, “but only for 2022 RMDs,” Slott said. The Internal Revenue Service hasn’t made such a change in 20 years, he said.

“You don’t want a client coming back saying, ‘I took out too much because I used the old table.’”