In this video, I’m going to walk you through exactly how we saved a client over seven figures in taxes. This is a real client, real strategy, and a real financial plan that shows what’s possible when you move from generic financial planning to integrated tax focused strategy.
When this specific client came to us, he was in his early 60s. He was a successful consultant. He had done a great job saving, but his financial life was a mess. He had a massive cash drag, no plan for future RMDs, and every single one of his accounts had the same cookie cutter allocation, creating a huge unnecessary tax burden. So today I’m going to pull back the curtain and show you the before and after. I’ll break down the specific strategies we implemented around his retirement plans, his investments, his future inheritance, and how they all work together to completely change his family’s financial future. Let’s get into it.
The first thing we noticed was the client’s entire financial structure was working against him. It was a classic case of having a lot of the right ingredients, but they were all in the wrong place. He had significant 1099 consulting income, but was using the wrong retirement plan. And this severely limited how much he could save on a tax deferred basis. He wasn’t optimizing qualified business income deductions. And this was costing him five figures a year in taxes. And even worse, there was no asset location strategy. Every single account from taxable brokerage to Roth IRA was invested in the exact same allocation. This is one of the most common and costly mistakes we see, and it was creating a massive tax drag on his portfolio every single year.
This is what we saw. Every single account was a carbon copy of all the others. His tax inefficient investments were sitting in his taxable brokerage account generating unnecessary income and capital gains while his tax efficient investments were taking up valuable space in his tax deferred and tax-free accounts. We completely re-engineered the portfolio. This is called tax-aware asset location. We moved the most tax inefficient assets into his tax deferred IRAs and we moved the highest growth assets into his Roth IRAs which are tax-free forever. And we took the tax efficient investments and moved those into his taxable brokerage accounts because those are the least tax efficient types of accounts. These simple changes can dramatically increase performance over time by reducing tax drag.
This might sound like a basic concept, but it’s something the vast majority of advisors miss. They’re so focused on the asset allocation, they completely forget about the tax implications of where those investments are held. If you’re looking at your accounts and you’re seeing them all invested in the exact same allocation, that’s a major red flag that your plan isn’t as tax efficient as it could be. We build every single one of our client’s portfolios and financial plans with tax efficiency at the core. If you want to see what that could look like for you, there’s a link in the description to book a call with our team. We can’t work with everyone, but we’d be happy to take your call.
Alright, let’s get back to it. Once we had the asset location fixed, we could start implementing more aggressive strategies to reduce his lifetime tax bill. This is where we could make the seven figure impact.
First, we replaced his outdated SEP IRA with a solo 401k with a mega backdoor Roth provision. This allowed him to move significant amounts of money from his taxable brokerage account into a tax-free Roth IRA. Then, we layered on several institutional grade strategies that most advisors don’t have access to. We used separately managed accounts or SMAs that implement long-short tax loss harvesting strategies that systematically create losses while tracking the market. We also used specialized tools like trader funds and fixed income ETFs that convert ordinary income into tax deferred capital gains. We also rolled his traditional IRAs into his solo 401k which allowed him to do backdoor Roth IRAs. We also had him start maxing out his health savings account.
An HSA is the only vehicle where you can skip taxes on the way in and not pay taxes on the way out. When you take distributions you have to use the money for healthcare expenses, but this is a really valuable account that a lot of people overlook. This is valuable because one of your biggest expenses in retirement is healthcare expenses. And once again, this is the only account where you can skip taxes altogether.
Another thing we did was integrate his CPA into our planning process because he wasn’t utilizing qualified business income deductions to the full impact. By speaking with his CPA, we were able to implement this strategy to greatly reduce his income tax each year. This allowed him to not just contribute as the employee, but he could also do an employer profit share. Both of these are pre-tax. Then comes the mega backdoor Roth. This allows him to put money into the plan after tax and immediately roll it to his Roth IRA for tax-free growth. It’s a powerful way for high-income self-employed individuals to build tax-free wealth.
This is where it gets really powerful. The long-short strategy is designed to create capital losses. At the same time, we use specific ETFs that instead of paying ordinary income, create long-term capital gains when you sell those ETFs. We can then use the losses from the first strategy to offset the gains from the second strategy. This is so powerful because you want the most tax efficient assets in your non-qualified brokerage account. These assets are usually stocks. But on the other hand, when you’re taking distributions, there’s also a competing force. When you’re taking distributions, you want to empty the non-qualified brokerage account first. And typically, you don’t want to take too much risk with money you’re about to use. Combining these two strategies allows you to be tax efficient and manage risk at the same time. That’s what makes it so powerful.
If you’re going to use money in the next 6 months, year, or 2 years, you typically don’t want that money in equities because of the volatility. By utilizing these two strategies together, you can manage taxes and risk at the same time, which is very unique.
Trader funds are another tool that can generate significant losses. What’s unique about trader funds is they create ordinary income losses. This can offset your ordinary income. And in this scenario, we used this ordinary income loss to offset the taxable income that was created by Roth conversions. This allowed us to convert almost all of his pre-tax IRA to a Roth IRA without paying very much in taxes. The combination of trader funds and Roth conversions is such a powerful tax planning tool that most people are not aware of. The biggest impediment to Roth conversions is people paying the taxes. With a trader fund, you have a vehicle that will offset those taxes. Another important benefit of trader funds is they’re a great diversification tool.
The impact of this strategy went far beyond just his own tax bill. It completely changed the financial future for his children. With his massive pre-tax IRA, his children were facing a huge tax bomb when they inherited his IRA. They would have been forced to empty his IRA over 10 years and pay ordinary income tax on all that money. By converting almost all of his pre-tax IRA to a Roth, we not only made his retirement very tax efficient, we ensured that his children will inherit that wealth completely tax-free as well. We didn’t just save him a ton of money, but we saved his kids a tremendous amount of money as well.
This also brings up an important point about financial conditioning. The rule of thumb is that as you get older, your asset allocation should be more conservative, but sometimes the opposite is true. If you’re not going to spend the money and it’s really for the next generation, you can make a strong case that it should still be invested aggressively for maximum growth. Under the old plan, the kids would have inherited a massive tax bill. They would have been forced to take distributions at their own high tax rate. Now, they inherit a Roth IRA. It’s 100% tax-free. They can let those assets grow for 10 years, then take a distribution in year 10 without paying any taxes. This is true generational wealth transfer.
This is what I mean by financial conditioning. The rule of thumb is as you get older, your portfolio gets less risky. As you reduce risk, your return goes down. But if you have more than enough money and the rest of the money is for charity or for your kids, the new timeline isn’t your lifespan, it’s their lifespan, which is much longer. This means you can make a strong case that the asset allocation should stay aggressive. And over time, this will increase your growth and increase the amount they inherit.
This is what a truly integrated, proactive, and tax focused financial plan looks like. It’s about coordinating every single piece of your financial life, your business, your retirement accounts, your taxes, your estate plan, your investments into a single cohesive strategy. If you have a complex financial situation and you’re wondering what a plan like this could look like for you, click the link in the description to book a discovery call with our team. We can’t work with everyone, but we’d be happy to take your call and get you pointed in the right direction.
