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Financial Planning > Tax Planning

April 15A Day of Rejoicing?

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Yes, Say Advisors, Who Cite A Spike In Business

By Warren S. Hersch

Tax return filers who were eligible for refunds werent the only ones rejoicing on April 15. Advisors also benefited from a spike in business, because of clients heightened focus on tax-advantaged investment vehicles, as well as the more favorable tax treatment of those products in 2003 returns.

The combined effect led clients to pump big bucks into new and existing individual retirement accounts and cash out on long-term investments that benefit from reduced capital gains tax rates, say advisors. Many clients also invested in new health savings accounts, which replaced medical savings accounts in December of 2003.

“HSAs got a lot of attention this tax season because they expand on and make permanent the older medical savings accounts,” says Paul League, a principal with League Financial Services, Beverly Hills, Calif. “Health care expenses are fully deductible under HSAs. And the plans are open to everyone. I think youll see more advisors getting behind them.”

Congress enacted the HSA as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The law aims to help individuals not yet eligible for Medicare save money to meet medical and retirement expenses on a tax-free basis.

The HSA improves on its MSA precursor by enabling account holders to secure services from any doctor of their choosing. HSA premiums paid to the plans catastrophic health insurance component are also 100% tax-deductible (as are personal contributions to the savings account). That compares with 65% and 75%, respectively, for individuals and families under MSAs.

Not all advisors, however, are convinced that HSAs will prove attractive to a broad base of clients in all parts of the country.

“The cost savings involved in the higher deductibles are not creating enough incentives for HSAs in the tri-state [New York/New Jersey /Connecticut] area,” says Anthony Domino, president of Associated Benefit Consultants, White Plains, NY. “Although a great concept, they havent demonstrated the savings we anticipated.”

Advisors witnessed increased interest in another savings vehicle: individual retirement accounts. Because contributions are tax-deductible, many IRA holders sought to fully fund their accounts by the April 15 deadline, thereby reducing their 2003 taxable income.

“Our clients are funding their retirement plans not solely because it makes sense to invest but also because there are tax benefits for doing so,” says Domino. “We typically see a spike in IRA contributions this time of year.”

Adds Brian Cohen, president of Los Angeles, Calif.-based Farmers Financial Solutions: “From a sales perspective, the wonderful thing about April 15 is that it offers reps an opportunity to remind people who dont have an automatic deposit program to max out on their allowed contribution. We also use this time to urge prospects without an IRA to open an account.”

More than 60% of Farmers 7,000 registered agents sent materials to clients prior to April 15 to pitch the benefits of IRAs. Result: Upwards of 30% of Farmers prospects opened IRAs, a 10% to 15% gain over last year, according to Cohen.

The rise may also be due to a rebounding stock market, Cohen notes. “Faith in long-term investing is back.”

The more bullish investor outlook had a similarly salutary effect on producers efforts to market after-tax investment vehicles, like variable annuities. Adding to the products attraction were the reduced capital gains tax rates that went into force in May of 2003.

Tax rates on “net capital gains” from the sale of equities–the amount by which net long-term capital gains for the year exceed net short-term capital losses–were reduced from 20% and 10% to 15% and 5%, respectively (the applicable rate depending on whether the individuals regular tax rate was above or below 25%).

“We saw an increase in leveraging of long-term capital gains rates this year,” says Joseph St. Pedro of St. Pedro & Associates Financial Services, Royersford, Pa. “That has contributed to bigger refunds than in years past. More money flowing back into the economy will impact [funds available for investment in] variable products, especially if the market goes up.”

John Wood, an agent for Northwestern Mutual Life Insurance Co., Milwaukee, agrees, adding that clients are using the capital gains to diversify their portfolios and “do more long-term planning.”

Domino observes, however, that April 15 can be a “double-edged sword.” Though more inclined to do financial planning around tax time, many clients who owe the government dont have the discretionary income to invest.

The investment and savings activity post-April 15, though down from the frenzied peak in the weeks leading up to tax day, should remain high until the summer, advisors say. One reason: Clients who receive extensions for filing federal tax returns can apply IRA contributions to the 2003 taxable year until the date of the deferred deadline.

Producers are also tapping into clients heightened focus on finances at tax time to cross-sell other vehicles. Among these are 529 plans, which let individuals fund college education accounts on a tax-deferred basis.

“After April 15, we immediately direct reps into marketing 529 accounts to keep the momentum we established around IRAs,” says Cohen. “Were playing up 5/29 [2004] as 529 day.”

We typically see a spike in IRA contributions this time of year.

Anthony Domino, president of Associated Benefit Consultants, White Plains, NY.

Reproduced from National Underwriter Edition, April 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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