5 questions to turn tax prep into wealth management
“Your clients’ tax returns can yield a treasure trove of clues about their possible need for financial services,” noted Chad Smith, a wealth management strategist at HD Vest Financial Services.
Here’s a rundown of five conversation-openers that can lead to your developing a more holistic advisory relationship beyond tax preparation:
1. Why don’t you have any Schedule B income? A lack (or minimal amount) of taxable interest and dividend income can suggest several things. One is that the taxpayer’s entire securities portfolio is held in tax-qualified retirement plans. If that’s the case, this could indicate the client has failed to build up a reserve of funds outside the retirement plan that could be drawn upon in a financial crunch without having to incur a tax penalty by withdrawing funds prematurely from the retirement plan. Or it could mean the taxpayer simply doesn’t know how to invest taxable assets in a way that will generate income. Whatever the explanation, advice on cash management and investment planning is clearly indicated.
2. Do you want to know the easiest way to reduce your Schedule C income? Clients with income from a business probably have opportunities to shelter more of their business income than they realize by setting up a SEP IRA. Maximum deductible SEP contributions can exceed top conventional IRAs by several orders of magnitude (limits vary; the formula is outlined in IRS Publication 560).
3. What is your plan to replace your W-2 income when you retire? While taxpayers (especially younger ones) know they will want to retire some day, they typically don’t connect the dots between the income they report on their tax return, and the amount they’ll need to live on in retirement. A typical response to the question is, “What do you mean?” That opens the door to the crucial topic of retirement income funding.
4. What are you doing to protect your dependents against the loss of your income? Unlike the previous question, this relates to a bread-winner’s premature death, naturally leading to a conversation about life insurance. Many people have some amount of life insurance through their employer, but coverage amounts are typically far from adequate. Plus when people buy life insurance from an agent who does nothing but sell that product, the amount of protection they get, and policy features, often are sub-optimal. With your broader perspective on the client’s financial circumstances, you are in an ideal position to make appropriate recommendations.
5. How much of your required minimum distributions do you need to support your standard of living? This question for taxpayers who have hit the RMD threshold age of 70-1/2 can identify opportunities. Retired clients fortunate enough to have sufficient income from Social Security, pensions, annuities and taxable investment accounts to live on without drawing upon on those mandatory IRA distributions, have some other options. Depending upon the individual’s circumstances (particularly age and health status), long-term care insurance premiums might be a suitable destination for that unneeded IRA income. Of course, not every older client would be insurable at a reasonable price, or at any price. But in many situations, LTC insurance can be an excellent tool to protect their estate from depletion, for the benefit of a surviving spouse, children or other heirs.
“Your clients’ tax returns are a window into their financial lives that can be used to find ways to help them and their families maintain a level of economic security and to achieve their long-term goals,” Smith said.
Published in partnership with HD Vest.
For more information about HD Vest Financial Services and how they can help you transfer a client’s wealth, visit hdvest.com/join or contact a Business Development Consultant at (800) 742-7950.
HD Vest Financial Services® and its affiliates (collectively, “H.D. Vest, Inc.”) do not provide tax or accounting services. You should consult your tax professional regarding the tax implications of any investments.
The views and opinions presented in this article are those of Chad Smith and not of HD Vest Financial Services® or its subsidiaries.
HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name.
Securities offered through HD Vest Investment ServicesSM, Member SIPC, Advisory services offered through HD Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.