Financial Planning: Taxes Should Come First

Josh Strange is the Founder and President of Good Life Financial Advisors of NOVA.

Let’s assume you’re in the market for a financial advisor.

Before now, you’ve been making a six-figure salary for years, but your needs have been pretty basic. So, you’ve opted for the do-it-yourself route, leaning on a self-directed investment platform while doing all the right things, including sticking to a budget, contributing the max to your 401(k) plan and maintaining an emergency fund.

All that simplicity is about to change: You’re getting married soon, and down the line, you’d like to have children. It’s time to get serious about your financial situation and set some concrete goals for yourself.

What You Need Today From A Financial Advisor

As you begin to interview advisors, you’ll likely hear all sorts of things from them about how they are different and what they can do for you that no one else can.

Maybe they’ll point out that they are a fiduciary, obligated to put your interests ahead of their own. That’s a good start, but that alone isn’t enough to work with someone.

Perhaps they’ll tout their clean compliance record. While that’s always nice to hear, why would you work with anyone whose record isn’t?

Another common claim: “I treat clients like family.” Everyone says this. Whether that actually happens is another matter.

Or some could brag about their unique trading system, which provides them with a leg up in picking the best stocks. Run for the hills if anyone says this to you. There’s a reason that most investment managers rarely outperform common indexes such as the S&P 500.

Then, some will get serious, saying they focus on financial planning. Now we’re finally getting somewhere.

Everyone needs a comprehensive plan, including help with cash flow and investment management, as well as estate, tax and retirement planning. It doesn’t matter whether you have a net worth of $10 or $100 million.

And while all these various components are critical to the pursuit of your financial goals, tax planning is increasingly becoming the most important. That’s because tax rates in the near future (possibly as soon as the end of 2025) are likely to increase significantly—and then potentially stay elevated for some time.

A Debtor Nation

The reason the tax code is bound to get reworked is simple: The nation’s finances are on shaky ground, and based on projections, the situation is likely to get worse.

From its inception, the U.S. government has always been in debt. For instance, the country owed over $75 million to creditors after the Revolutionary War. Then, during other inflection points, such as the Civil War and World War II, liabilities ballooned once again.

In the past, though, anytime the national balance sheet suffered, policymakers usually brought it back to health. That’s not what has happened more recently.

In 1990, the national debt was roughly $3.2 trillion—an unthinkable number. But it’s nothing when you consider today it’s about $34 trillion and rising. And from what I’ve seen, there’s nothing to suggest that the situation will improve going forward thanks to various factors, including rising healthcare spending, unsustainable entitlement programs and interest payments.

So, it’s not so much a question of if higher tax bills are coming; it’s a question of when. It could happen as soon as the end of 2025, when the Tax Cuts and Jobs Act is set to expire. At that point—if nothing changes between now and then—individual rates will revert to previous levels, resulting in Americans getting higher tax bills.

Tax-Focused Planning

This means strategies such as Roth conversions or Roth options (which offer tax-free growth and withdrawals in retirement) within your 401(k) may take on added meaning over the next few years. Effectively managing required minimum distributions to ensure they don’t cause you to enter a higher bracket may be equally important.

Even pursuing outside-the-box strategies such as not maxing out your 401(k) and putting the extra money into a taxable account will be worth considering since your obligation today could be lower than it is in the future.

Good financial advisors can help you think through all of these choices. Proper tax planning can mean a difference of hundreds of thousands of dollars in your retirement years. And the sooner you start to incorporate tax advice into your planning, the bigger the impact can be.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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