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Four Client Conversation Topics for the Fourth Quarter

Turn your clients’ worries into workable actions.

Your clients are likely interested in talking about three topics right now: politics, the stock market and the coronavirus.

Instead of wasting time discussing subjects over which you have little predictive foresight and even less control, switch the conversations back to the truly most important matter: the clients’ finances and what can be done to improve their situation before the end of the year. These specific steps can provide tangible results and immediate reassurance to your clients, something they will especially appreciate during these volatile and uncertain times.

How are we doing?

After the wild investment swings of 2020, clients will want to know that they are still on track to meet their long-term financial goals. And if they’re not, what can and should be done to correct the deficiencies. The best way to accomplish this is to update their financial plan, which will give you insight to any changes in their lives, lifestyle, and goals, and a peek at investments that aren’t under your management. Once the clients see that your recommendations have allowed their finances to survive the pandemonium of 2020 (so far), they will enjoy a sense of calm not known for months. Their relief might also lead to them requesting a retreat to a more conservative portfolio, at least until the events of the next few weeks and months shake out.

Have you tried to re-fi?

Mortgage interest rates are at all-time lows, and in many locations home valuations are near all-time highs. Your homeowning clients may never be in a better position to borrow (especially if they are retiring soon), and lenders have lowered their standards to a level not seen in the last decade. Therefore, even clients who refinanced their mortgages in recent years may want to take another shot at lowering their interest rate, shrinking their monthly payment, or shortening the current mortgage term (and in many instances, all three). Those who have a larger cash expenditure in mind (such as a big remodeling project) may even want to increase the size of the mortgage to cover the upcoming cost, knowing that they will have up to 30 years to repay it but can always pay it off earlier if they should so desire.

May we cut your taxes now ...

Despite the post-pandemic rise in stock prices, your clients may still have a few positions in nonretirement accounts that show a paper loss. Realizing those losses now will not only help them offset any taxable capital gains received in 2020 but can also reduce taxable income by up to $3,000 per year, until the losses are used up. The sooner you sell the position, the sooner the 30 day “wash sale” window will expire, allowing your clients to repurchase the position if they so wish. Keep in mind that the wash sale rule applies to purchases made from 30 days before the sale of the loser and afterward, so make sure no similar purchases are made within 30 days before or 30 days after the sale.          

Make sure your working clients who are able are maximizing their contributions to their pretax at-work retirement plans, like 401ks and 403bs. The actual maximum amount allowed may depend on the worker’s tenure, or if they are considered “highly-compensated employees.”

But the IRS says that for 2020 the maximum contribution to a 401(k) or 403(b) is the lesser of the employee’s earnings, or $19,500. The limit for those who are 50 and over is the lesser of their annual earnings, or $26,000.

 ... or cut your taxes later?

Whether it’s due to a job loss, furlough, or lack of required minimum distributions for 2020, several of your clients might have less taxable income this year than they will in the future.

Those lower-income lemons can easily be turned to the lemonade of lower taxes down the road.

Start by realizing any long-term capital gains in taxable accounts, to the extent the tax rate on those gains will be 0%. You can punch in some prospective numbers at Smart Asset’s calculator.  

Lower-income working clients with the option may want to use a Roth 401(k) for deposits this year. The same limits apply as the pretax versions, but future gains will be sheltered and distributions in retirement will be tax-free.

Another idea for clients who are currently in a lower tax bracket now rather than they will be in future years is to convert a portion of their IRAs to Roth IRAs. A conversion might be especially interesting to IRA owners who don’t have to take an RMD this year but will likely have to do so next year (and beyond).

A couple notes on converting: First, watch that the converted amounts don’t unintentionally trigger extra, unwanted taxes (such as making clients’ Social Security checks taxable). Second—it’s optimal if the clients can move the entire designated amount from their IRAs to their Roth IRAs, without withholding any income taxes. Preferably any taxes due could (and should) be paid from savings held outside of the IRA. If no taxes are withheld, the conversion could obligate the clients to pay estimated taxes before the April 15 deadline, and if those aren’t paid on time, the client could owe penalties on the unpaid amounts.

Tis the season

Clients who have the means will find no shortage of well-deserving organizations looking for donations. Sure, the clients can just write a check to a charity, but they may be better off donating appreciated stock or mutual funds directly to the organization. This strategy may not only save clients some taxes but also the time it would take to document the cost basis if they were to instead sell the position outright. Better yet, if they have more superfluous assets that they don’t wish to donate right now, move the investments into a donor-advised fund. The clients will get a bigger tax break today but can spread distributions out into the future.

Kevin McKinley is principal/owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of Make Your Kid a Millionaire (Simon & Schuster). 

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