Most people go solo at the beginning of their financial journey. When your income is straightforward and investments are minimal, it’s easier to file taxes on your own or draw up a basic financial plan based on independent research. But as your income and investments grow, many people choose to work with tax and financial advisors.
While it’s a wise decision to get professional assistance with taxes and finances, too many people choose one or the other. Others may have both a financial advisor and tax consultant, but not have them in direct communication with each other — which could be a missed opportunity.
Financial decisions often have tax implications, and tax strategies often affect financial planning, making close collaboration between the two essential. Below, we’ll go over three specific examples of why that’s so important.
Financial Advisors and Tax Consultants: What’s the difference?
Before we get into the weeds, let’s clarify what tax and financial advisors do and how they differ.
Financial advisors help individuals identify and develop a strategy to reach their personal financial goals. These strategies cover areas such as budgeting, investing, retirement planning, estate planning, and tax management. On the other hand, tax consultants (also called tax advisors) focus specifically on taxes.
Financial advisors are knowledgeable about taxes. They help you understand the tax implications of certain investments and implement investment strategies to reduce your tax burden. On the other hand, tax consultants are dedicated to taxes. They help you to file your tax returns and stay up-to-date on the latest tax changes, and they can recommend new strategies. For example, a financial advisor may recommend increasing your retirement contributions to lower your taxable income. A tax consultant could then run the numbers, confirm whether it’s the right move from a tax perspective, and offer additional or alternative strategies. Tax consultants may also directly file your taxes on your behalf.
Pro tip: If you’re searching for financial and tax advisors, certified professionals are your best bet. When researching financial advisors, look for someone with a CERTIFIED FINANCIAL PLANNER® (CFP) designation. When searching for tax consultants, look for a Certified Public Accountant (CPA) designation.
Three Benefits of Having Tax and Financial Advisors Closely Collaborate
1. Get Things Done Right the First Time
When your financial advisor and tax consultant work closely together, you increase the odds that your comprehensive financial strategy will work for you right from the get-go. It’s best for them to be in direct communication with one another without relying on the client as an intermediary. The more people you have passing along information, the more likely it is that something will get lost in translation — just think of the childhood game of broken telephone.
Moreover, having your tax consultant and financial advisor engaged in ongoing communication allows each of them to stay on top of any changes or updates that could have important tax and financial implications.
Take, for example, the case of a client who switched financial advisors midyear, from Fidelity to Schwab. Their tax consultant wasn’t kept in the loop, and the client only shared 1099s from Fidelity — so their taxes were filed with missing documents. They ended up having to file an amended return with their Schwab 1099s after receiving a surprise tax bill.
Maintaining contact between tax and financial advisors also ensures that they stay on top of significant changes in income, whether that’s due to a change in employment, Social Security payments, investments, etc. Having an accurate idea of income is essential when it comes to activities such as paying estimated taxes and choosing the level of tax management for your portfolio — otherwise, you run into risks such as paying more taxes than necessary.
Read More: 5 Essential Elements of Tax Planning with a Financial Advisor
2. Identify and Capitalize On Financial Planning Opportunities
Close collaboration between your financial advisor and tax consultant is also a great way to ensure that you capitalize on any new potential financial planning opportunities that could present themselves as your finances evolve.
This might include deciding which retirement plans — such as traditional or Roth 401(k)s, traditional or Roth IRAs, or deferred compensation plans — are best for you. In the right circumstances, for example, a Roth IRA conversion could help you save on taxes during retirement and efficiently distribute assets to your heirs.
However, deciding on this isn’t as simple as calculating whether your tax rate will be higher once you retire. Roth conversions can affect multiple areas of your finances, including Medicare premiums. As such, your tax and financial advisors should work together to evaluate and decide on strategies like this.
Another important area for them to collaborate on is compensation planning. If you receive incentive stock options as part of your compensation, you’ll need to decide when to exercise them and then, whether to hold or sell the resulting stock. It’s not as simple as selling once the stock price reaches a certain number — especially if the alternative minimum tax (AMT) is involved.
While your financial advisor can make recommendations, having your tax consultant gut-check the tax implications could help you make the most of your equity.
3. Maximize Tax Efficiency
As a general rule, the higher your tax bracket and the more complex your financial holdings, the more important it becomes for you to work with both a financial advisor and tax consultant. Working together, tax and financial advisors can create and implement strategies that help you meet your financial goals while minimizing your tax liability.
There’s a wide variety of tactics that may help you do this, including:
- Investing in tax-managed mutual funds/ETFs
- Employing tax-loss harvesting
- Investing in municipal bonds vs. traditional corporate bonds and U.S. Treasuries
- Taking advantage of a backdoor Roth IRA
The right option for you will depend on several factors. Financial advisors can take the lead on assessing how much and which parts of your portfolio need to be managed to account for taxes. Tax consultants’ specialized accounting backgrounds, including knowledge of the latest tax legislation, allow them to recommend or confirm potential strategies to mitigate tax burden.
This can be especially helpful during year-end planning. It may be better, for example, for a couple with a new baby to wait until the next tax year to sell a vacation home if one of them plans on taking unpaid parental leave. For others, increasing charitable contributions before the end of the tax year could lower their taxable income enough to move them to a lower tax bracket.
Pro tip: If you’ve reached the age of required minimum distributions, you can choose to make charitable contributions via QCDs1 instead of receiving the payments to lower your taxable income while potentially avoiding a higher tax bracket.
Tax and Financial Advisors: a Winning Combo
If you’re a high-net-worth individual, odds are that your tax and financial needs are complex. Rather than following your gut on financial decisions and using tax software, you could benefit from having both tax and financial advisors. And when the two of them closely collaborate, they can apply each of their unique skill sets to add even greater value than they could individually.
The end result is a personal financial strategy that’s more comprehensive and ultimately, stronger — allowing you to rest easy, having the confidence that you’re set up for success.
If you’re looking for help with your finances, don’t hesitate to reach out to Team Hewins. Our team of experienced CERTIFIED FINANCIAL PLANNER® professionals can work with you and your tax consultant to create a roadmap to financial well-being. Get started with your free consultation.
1. “What Is a Qualified Charitable Distribution?” Fidelity Charitable, www.fidelitycharitable.org/guidance/philanthropy/qualified-charitable-distribution.html#:~:text=An%20individual%20donor%20can%20contribute,all%20IRAs%20in%20a%20year.
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