It’s no secret that it is critical to consider the tax implications when it comes to creating a thorough retirement strategy, however many financial advisors won’t address the topic out of fear of violating federal regulations or industry standards that limit who can provide “tax advice.” Those who refuse to address taxes in retirement entirely are doing a huge disservice to their clients.

It’s important to remember that just because a conversation is tax-related doesn’t necessary mean you are offering tax advice. Advisors can and should give retirement advice that is tax-sensitive without crossing the line into tax advice.

In the current market environment, two very specific tax-related considerations should be front and center; harvesting capital losses and Roth conversions. Understanding the line between tax advice and tax-sensitive financial planning will be more important now than ever.

What Is Tax Advice?

Only someone who is qualified to practice in front of the IRS can deliver tax advice; this includes attorneys, certified public accountants, enrolled agents and a few others. If a consumer follows incorrect tax advice in good faith, they are able to waive penalties they may incur as a result of the advice given. However, if the consumer thinks you’re giving them tax advice, and you’re not licensed to practice in front of the IRS, those penalties will not be waived. Advisors need to protect clients by making sure they don’t cross the line.

What Is the Line?

Financial advisors should be building tax-efficient retirement income plans. Evaluating whether to withdraw from an IRA or a nonqualified account or which position to sell in order to have the least tax impact are all important factors for the advisor to consider because they’re relevant to cash flow. However, if you are telling a client which number belongs in a specific box on their 1040, you’ve gone too far and crossed the line into tax advice.

That is why I’m not fond of financial planning software that completes a hypothetical 1040 for each year. There are simply too many assumptions to accurately complete the 1040, and displaying the projected information in that format may lead consumers to believe it could or should be used in the tax prep process. Alternatively, the same information can be displayed in a format that could be matched up to appropriate 1040 lines, so that a tax professional is able to understand the planning effort while avoiding the misperception of tax advice.

It’s best for advisors to avoid the specifics of the 1040 altogether and instead focus on the entire tax landscape throughout retirement. The role of the advisor is to define the universe of possibilities that are available, consider the tax implications, and choose the one or two possibilities that are the best fit for the client’s situation. There are a variety of tools available that are focused on the overall retirement landscape.

One of the central challenges in financial planning is appropriately balancing today with tomorrow. From a tax perspective, this often means leveling out effective tax rates over the lifetime of the portfolio. The lifetime of the portfolio may span longer than the client’s life or even the initial beneficiary’s life. Often the accountant’s focus is on reducing taxes in the current year. Financial advisors are uniquely able to find situations where paying more tax earlier or maybe even more taxes in total are actually more beneficial to the client.

What the client ultimately cares about is whether or not they will have enough money to enjoy the retirement lifestyle they’ve desired and leave a larger legacy to the people and causes they care about. It’s the outcome that matters the most.

— Related on ThinkAdvisor:


Joe Elsasser, CFP, Covisum

Joe Elsasser developed his Social Security Timing software in 2010 because, as a practicing financial advisor, he couldn’t find a Social Security tool that would help his clients make the best decision about when to elect their benefits. Joe later founded Covisum, a financial tech company focused on creating a shared vision throughout the financial planning process.

In 2016, Covisum introduced Tax Clarity, which helps financial advisors show their clients the hidden effective marginal income tax rates that can significantly affect cash flow in retirement. In early 2017, Covisum acquired SmartRisk, software that allows advisors to model “what-if” scenarios with account positions and align a client’s risk tolerance with their portfolio risk. In January 2019, Covisum launched Income InSight, an income planning tool.

Covisum powers some of the nation’s largest financial planning institutions and serves more than 20,000 financial advisors.