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Making The Most Of Tax Season

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Tax time may generate high anxiety for millions of Americans rushing to get their returns filed on time. But for advisors, the season is an opportune time to help boomer clients kick-start–or kick into high gear–their retirement plans. They also see the weeks preceding April 15 as a great time to connect with prospects.

“Tax season is definitely the right time to talk to boomers about retirement planning opportunities,” says William Supper, director of financial planning at Massey, Quick & Co., Morristown, N.J. “They’re more tuned in to their financial situation now than at any other time of the year.”

Advisors interviewed by National Underwriter say they are using the weeks leading up to the April 15 deadline for filing federal and state income tax returns to remind clients to maximize 2006 contributions to their 401(k)s, IRAs and Roth IRAs. Boomers who are eligible to receive an income tax refund this year should consider redirecting the money to these plans, sources add.

A February 2006 survey from Principal Financial Group, Des Moines, Iowa, reveals that more American workers this year than during prior years are planning to do just that. Of the 1,374 individuals polled for Principal’s Financial Well-Being Index, 84% of respondents said they expect to receive a federal or state income tax refund. Of those who do, 38% plan to save and invest the refund, up from the 31% in 2003, the last year in which the survey was conducted.

“It’s encouraging to see that folks are more likely to invest their [income tax] refunds this year,” says Tim Knott, vice president of group underwriting at Principal Financial. “Workers are increasingly concerned about their financial future.”

Boomers who are 50 years or older stand to gain most from revised retirement plan contribution limits. For 2006, they’re allowed up to $5,000 in catch-up contributions to their employer-sponsored 401(k) plans, up from $4,000 in 2005. Maximum 401(k) contribution limits for all employees also have risen this year to $15,000 from $14,000 in 2005. IRA limits, too, have increased to $5,000 for boomers 50 and older in 2006, from $4,500 last year.

A new retirement savings vehicle that came into force Jan. 1, the Roth 401(k), mirrors the contribution limits permitted under 401(k) plans ($15,000, plus $5,000 in catch-up contributions for employees age 50 or over). But unlike Roth IRAs, eligibility is not restricted by income threshold. And, as with the 401(k), employer-matching contributions are pretax.

“The plan is very good for [affluent clients] who want to stretch out their IRAs, as you can force more money into a qualified plan,” says Steve Kaye, a financial planner and president of American Economic Planning Group, Watchung, N.J. “It’s definitely good for people who think they’ll retire in a higher tax bracket.”

Advisors note, however, that the Roth 401(k) has not yet gained traction in the marketplace. One reason is that plan administrators still are working to integrate the Roth 401(k) into their retirement plan portfolios. Kaye says employers likely won’t adopt the plans in large numbers before January 2007.

Where to place retirement savings could be a secondary consideration for many boomers who expect to owe tax this year. Supper says capital gains tax resulting from the sale of real estate properties that appreciated significantly in value have “shocked” clients, especially those in the New York City metro area. He cites one couple that got hit with approximately $500,000 in capital gains tax connected with a home that rose to $5 million from a purchase price of $2.5 million.

Joseph Halpin, a financial planner and president of J.P. Halpin & Co., West Chester, Pa., observes that boomer clients this tax season are chiefly concerned with the alternative minimum tax. Many believe, erroneously, that the AMT is an additional tax that establishes a ceiling on tax obligations. In fact, says Halpin, the AMT sets a floor; those subject to the AMT do not pay regular federal income tax.

Whatever the governing tax, advisors say that a key focus of financial planning is to help boomer clients break even on their returns, realizing neither a tax refund nor a tax obligation. Refunds, especially, are to be avoided because clients enjoy no interest on tax withholdings.

“We systematically analyze on an annual basis what the client’s needs and opportunities are,” says Ricky Grunden, a financial planner and president of Grunden Financial Advisory, Denton, Texas. “Our software accounts for every penny the client delegates to us. I know what the client’s situation is even before the CPA knows.”

Grunden leverages that advance knowledge during tax season to enhance his relationship with partnering accountants. In 2005, his firm created a CPA tax assistant, which contains financial data about the client’s investments: realized gains and losses, dividends, fees paid, rates of return and so on.

Grunden sends these kits to the client’s CPA to allow “another set of professional eyes” to review–and offer kudos for–his firm’s portfolio management. Often, he says, accountants who receive the kit make complimentary remarks on Grunden’s work when meeting with clients.

Halpin generates good will with clients by actually completing or reviewing their income tax returns. Though a loss leader for his practice, the tax service frequently generates referrals to prospects, especially from clients whose tax obligations Halpin reduced or eliminated.

“One accounting firm that had been doing a client’s tax return for several years indicated that she had to pay a certain county tax. When I reviewed the return, I checked with the county in question and confirmed my belief that the tax–more than $1,000–didn’t apply. She was so happy. Now, she wants me to do her financial planning.”


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