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November 16, 2022 at 02:47 PM
What You Need to Know
- Rocky markets hurt nearly and newly retired investors, but they also deliver key tax planning opportunities.
- Tax issue awareness can help financial advisors differentiate themselves while also improving client outcomes.
- While potentially a powerful wealth building technique, tax-loss harvesting is not a silver bullet and must be deployed strategically.
Few investors will need to be reminded of how difficult of a year 2022 has been, both for bond and stock portfolios.
As noted by Joe Elsasser, founder and president of the financial technology company Covisum, those investors who are newly or nearly retired are feeling particularly concerned. All are seeing their well-laid portfolio plans put to the test, and many are finding that they have not adequately prepared for the dangers presented by sequence of returns risk.
Fortunately, the picture is not all doom and gloom for retirement-focused savers, Elsasser says. The current market environment, while painful from an investment perspective, has also raised a number of key tax challenges and considerations for clients.
With a little tax ingenuity, Elsasser says, clients can find a silver lining in 2022’s market woes. At the very least, they can use this year to get a handle on their present and future tax situation.
Collected below are a number of timely tax insights that Elsasser outlined during a recent webinar hosted by Covisum. During the presentation, Elsasser encouraged his fellow advisory industry professionals to take a more proactive approach to integrating tax considerations into the investment management and financial planning process. Doing so will help advisors differentiate themselves while also improving client outcomes.
1. Track and Manage Concentrated Low-Basis Positions
In Elsasser’s experience, it is not uncommon for a new or potential client to come to a meeting and explain that they own, as an example, a sizable portfolio comprised exclusively of Microsoft or Berkshire Hathaway stock they bought decades ago and have never touched.
This is what is referred to as a “concentrated low-basis position,” Elsasser says. On the one hand, it is a good problem to have because of the substantial unrealized wealth contained in the portfolio. On the other hand, so much concertation itself represents a significant risk that the advisor and client should discuss and resolve.
The exact approach to unwinding such a position will depend on the client’s unique facts and circumstances — and likely on the input of a certified public accountant. Federal long-term capital gains taxes of up to 20% can apply to sales of these securities, and there is also a 3.8% net investment income tax and state income taxes to consider.
According to Elsasser, when market prices are meaningfully depressed, as they are in late 2022, this can present an attractive opportunity to realize some of the concentrated low-basis position gains as part of an overall portfolio tax-loss harvesting strategy.
2. Revisit Asset Location Decisions
Elsasser says another common issue he sees with new clients is a lack of an asset location strategy.
“You would be surprised how many investors out there, even those with substantial wealth, have very poor or literally no asset location awareness or strategy,” Elsasser says. “Often you will see a married couple come in with a very complex and inefficient situation.”
