If you told clients you have a master plan to help them keep a whole lot more of their hard-earned money by paying a whole lot less in taxes, how would they respond? What if you told them they have a 3-year window to make it happen? According to CPA and IRA expert Ed Slott, this is a conversation advisors really need to be having with their clients today, because the historically low tax rates in effect now are poised to change drastically after 2025.

Clients greatly underestimate how much money is theirs and what the IRS gets

As Slott explained during a recent episode of The Breakthrough Advisor Podcast, the clients who really need to take action now are the ones sitting on large taxable IRAs and 401ks. Those accounts are loaded with taxes yet to be paid. Unfortunately, many clients are under the delusion that all—well, at least the vast majority of—the money in their accounts is theirs to keep. 

“They think it’s their money but you only get to keep what you have after taxes. I’m worried about future higher taxes, leaving people with less of their money. And the Secure Act and now Secure Act 2.0 made that even more of a reality by killing the Stretch IRA, mainly on the beneficiary side. But beneficiaries are your future clients, and with Secure 2.0, they’ve downgraded IRAs as a wealth transfer or estate planning vehicle, so you need alternatives,” Slott says. 

Why the current tax environment and inflation matter (BIG time) 

We all know inflation is bad, because everything costs more, right? But according to Slott, when it comes to taxes—and to quote Tony the Tiger—inflation is GRRRREAT! Why?

“Tax brackets expand when there’s inflation. We just had the greatest expansion because of the inflation factors, where cost of living indexes went up so much. From 2022 to 2023, it expanded (the brackets, not the rates). The tax rates are the same but more income can be pushed through at these low brackets. For example, in the 24% bracket for a married couple filing joint, you can push up to $364,000 of income at that low rate. We’ve never seen anything like this before, so this is a great opportunity to get rid of some of that future taxable IRA and 401k income,” explained Slott.

That’s right, thanks to crazy-high inflation we saw a big expansion of tax brackets in 2023. While we don’t know what inflation will look like in 2024, inflation, as it always is, will be a factor. Consequently, Slott expects tax brackets to expand at least a little more next year and then again in 2025. 

Why do clients with big taxable IRAs and 401ks need a three-year plan? 

According to Slott, “After 2025, the tax rates are supposed to go back to those higher rates. Will it happen? Well, it’s supposed to happen. We know what the rates and these brackets will be for at least three years. So, why do I say there’s a three-year plan? Well, I’m worried—and you should be—for clients. And the clients you should be talking to are the clients—probably your best clients—the ones with the largest IRAs and 401ks, because it’s more likely to affect more of those balances.”

Taxes are on sale, and clients with big taxable accounts need to BUY NOW

Do you know someone whose eyes light up when they see a SALE sign in the window of their favorite store or get an email boasting drastic discounts? Well as exciting as those sales are for some folks, the difference between traditional retail sales and tax sales, is you really don’t have to buy what’s on sale in a store or ecommerce site. When it comes to taxes, you really, really should.

“With taxes, if you can get it on sale, get it. Now, the foundational principle of all good tax planning is to always pay taxes when the rates are the lowest. Remember the taxes on these heavy accounts, the IRAs and 401ks, are going to increase. I believe at some point they have to be paid.

“It’s not if, but when and if you can get those funds out on sale. If you can, you’ll be doing your client a big service. Yes, they may have to pay some tax upfront, but if they can get the funds out at low rates, they will almost always end up with more tax-free funds later on, IF they move those funds to tax-free vehicles like Roth IRAs and especially life insurance,” explained Slott.

The impact on beneficiaries could have a huge impact on your business

Remember Slott’s comment above about beneficiaries becoming your future clients? If you’re in the business of being a successful advisor for years to come, it’s essential to think ahead. By helping existing clients take advantage of the current tax environment today, you may be able to help their beneficiaries (your future clients) reap more financial benefits later.

As Slott explained, “For those clients with the big taxable IRAs and 401ks, it’s likely more of those balances won’t be spent by the clients and will be transferred upon death to their beneficiaries. And they’ll have a short 10-year window to push all that income out. 

“Not only that, these beneficiaries—I’m not talking about kids, most of them might be in their fifties or sixties— might be in their own highest earnings years. These beneficiaries are your future clients. This is the succession plan for your business, and you should be connecting with these people and let them know about the benefits you can provide with alternative solutions.” 

Slott believes one of the best alternatives for beneficiaries is to inherit tax-free life insurance, as well as Roth IRAs. Even though there’s a cost upfront with tax-free vehicles, which gives many clients pause, it’s important for clients to switch from a short-term strategy and start thinking long-term. 

You as the advisor can provide value by helping them understand the potential benefits of buying taxes on sale now and how alternative solutions may deliver a bigger pay-off over the long-term. InsurMark even offers a tool to help advisors streamline tax planning for their clients—a revolutionary tax planning app our advisors are using to model Ed Slott’s insights.

How does our tax planning app work? The advisor scans a PDF of the client’s tax return, the app analyzes the return, and then it produces a branded report with observations and suggestions the client can share with their CPA. Contact an InsurMark ADC for more information.

Want to hear more from industry thought leaders like Ed Slott?

Then you’ll want to check out The Breakthrough Advisor Podcast here. InsurMark is proud to bring you powerful insight from the best in the industry, so check back often!

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DISCLOSURE: THIS CONTENT IS PROVIDED FOR INFORMATION ONLY AND SHOULD NOT BE CONSTRUED AS TAX ADVICE. FOR PROFESSIONAL USE ONLY. NOT TO BE USED FOR CONSUMER SOLICITATION PURPOSES.

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