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  • Writer's pictureRob Schmansky

The Importance of Integrating Tax and Investment Advice

As an advisor who works in taxes, it is interesting, and at times infuriating to see the costs some brokers will impose on their client’s portfolios.

The tax piece is important in any investment plan, and unfortunately I see many brokerage created investment plans that appear to be based on what is profitable and convenient, and not what is in a client’s best interest.

The cost to one client in particular I met with were actually staggering given the relatively simple fix that the broker could have employed just by owning the same investments in different accounts. The client was sold over the last year:

  • Non-traded real estate investment trusts held in a taxable account of $45,000

  • An IRA managed portfolio of mutual funds of $250,000

You may be questioning in what ways could a simple portfolio such as this cost the client? Let me count the ways.

One spouse in this relationship is collecting social security disability and a pension while the other makes ~$40,000 per year. They are in the 15% bracket (plus 4.33% state of Michigan), which means they potentially pay 0% on long-term capital gains.

There are several moving pieces here, and the result is the simple positioning of the real estate in the taxable account, rather than in the IRA cost this client an additional $1,275 in federal, state, and increased taxes on their social security income for 2012. For 2013 and future years, the client is on the border of receiving a substantial credit in the state of Michigan that they may lose out on due to the increased income.

Not only that, but the IRA was invested in a third party managed portfolio of stocks and stock mutual funds. The gains in these investments would be taxed at 0%, while the losses would be currently deductible if sold.

My guess is the client would prefer a 0% tax as opposed to nearly 30%.

Another lost opportunity is that this client could have sheltered their entire taxable account over the last four years by putting the maximum amount allowed into a Roth IRA. At this point that means the additional taxes that could have been completely eliminated, not only for the current year, but for the rest of their lives. The client will likely retire before receiving the REIT proceeds, and at that time will not have the earned income to contribute to a Roth.

Setting aside the taxes for a moment, there also seemed to be no acknowledgement that over 80% of the client’s net worth was already held in real estate properties. What rationale there was for more real estate generating ordinary income taxes at 30% is beyond me.

With all of the above errors, why did the broker not simply put the real estate in the IRA, and purchase the stocks in the taxable account? Having been a broker, I can say for sure the answer is it’s either not convenient or not profitable. An annual $6,000 Roth IRA contribution requires paperwork and additional compliance headaches. It’s much easier to sell a $45,000 REIT.

When implementing an investment plan, especially one that uses products that lockup your money for long periods of time like non-traded REITs, see a fee-only advisor who can look at the big picture, rather than just what may be convenient for that particular broker. As you can see, the cost of a good financial planner can pay for itself over years of unnecessary costs and fees less savvy brokers may not be aware they are imposing on you.

The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes.

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