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  • Writer's pictureW. Scott Hurt, CFP®, CPA

4 Reasons Your Financial Advisor Should Do Tax Planning

Updated: Nov 4, 2023

4 reasons your financial advisor should do tax planning

Tax planning can transform your finances.

Think about it—taxes follow you wherever you go. You can find them while browsing in the grocery store, buried in your portfolio, coming out of your paycheck, or even just living in your house. Taxes impact nearly every aspect of your life and being conscious of that presence in your financial plan can save you thousands of dollars each year.

A strong tax planning strategy can save you money on retirement withdrawals, keep your investments efficient, help you give more to charity, maximize your estate, and put more money in your pocket.

Our team at Covenant Wealth is passionate about the role tax planning plays in our client’s financial and personal lives. Today, we are going to dive into the top four reasons we believe that financial advisors should do tax planning.

#1: Your advisor has a comprehensive view and access to your financial life

Most people think about taxes as both beginning and ending on April 15, but that is far from the full story. Preparing your taxes is different than planning for your taxes.

Think about it like this: tax preparation is like the final exam and tax planning is all the studying and work you do to ready yourself for the test. One month of studying likely won’t yield the same results as 11 months of studying. The more time you dedicate to a subject, the more intentional and prepared you will be.

Tax preparation gathers all your information and creates an accurate return for any given tax year. While a vital part of your financial life, it isn’t the same as cultivating intentional tax strategies and implementing them throughout the year to proactively lower your tax bill. Tax planning allows us to plan and execute crucial efficiency strategies on your tax return both now and in the future.

Through tax planning, we can guide clients to make smart choices that have long-term financial impacts both on the current and future tax returns, like devising a tax-efficient withdrawal strategy for retirees. This strategy takes your cash flow, income channels, lifestyle needs, and more into consideration and helps you draw money from the right accounts at the right time to minimize your tax liability.

#2: It can drastically improve your investment strategy

Tax planning can radically enhance your investment approach, making your investments work for you in tax-conscious ways. Below are a few examples:

  • Tax-loss harvesting

  • Asset location

  • Tax-efficient withdrawal strategies

Let’s take a look at how these elements can influence an investment plan.

Tax-loss harvesting allows you to realize a loss while keeping your portfolio fully invested. Recognizing a loss is good for tax purposes because it can offset any capital gains in the same tax year or up to $3,000 in other income. This strategy also creates an opportunity to rebalance a portfolio back to your target allocation while still minimizing taxes.

Asset location is all about making investment portfolios tax-efficient. It’s the process of determining the tax-efficiency of each security (stocks, bonds, ETFs, etc.) and which account (brokerage account, Roth IRA, Traditional IRA, 401(k)) would be best to hold each investment. Certain investments work better in a tax-advantaged retirement account, whereas others function better in a brokerage account. This strategy is about minimizing potential taxable income generated by the investments in a given year.

Retirement income planning is a crucial component of your overall strategy, and determining the right withdrawal strategy for you is a significant part of that conversation. In the accumulation phase, our team works to balance your investments in different tax buckets, such as tax-free Roth IRA, tax-deferred Traditional IRA or 401(k), and taxable brokerage accounts to enhance diversification in retirement.

Once you hit the distribution phase in retirement, we strategically manage your taxable income so as not to push you into a higher tax bracket while still maintaining flexibility for the future.

Say, for example, you have a sizable amount in your traditional IRA. You might not want to delay your distributions until 72 because it would result in annual required minimum distributions (RMDs) that significantly outweigh your income need and force excess taxable income. This strategy is all about tax maintenance and ensuring your money works as efficiently as possible in your golden years.

#3: Proactive tax planning saves you money

There are several ways that tax planning can save you money. By taking advantage of available opportunities, you won’t be surprised by your tax return each April. Here are a few ways that our team at Covenant Wealth Advisors implements tax planning into our client’s financial plans:

  • Invest in low-cost and tax-efficient index funds that garner minimal capital gains and promote a long-term holding strategy. Also, monitor capital gains recognized throughout the year and take advantage of tax-loss harvesting.

  • Maintain appropriate tax credits like the Affordable Care Act, health insurance premiums, and ensure that a client’s modified adjusted gross income remains below the required thresholds for these.

  • Blend charitable giving goals and tax-efficient donation strategies. This could be with a donor-advised fund (DAF), which enables you to remove highly appreciated assets from your portfolio without paying capital gains and potentially deducting the contribution. Another strategy is a qualified charitable distribution (QCD), which allows donations directly from a Traditional IRA to a qualified charity. Many people use QCDs as a way to lower their taxable income by donating all or a portion of their RMD. There are several considerations with QCDs like you must be 70 ½ and you can only do this transaction from a Traditional IRA (including SEP & SIMPLE IRAs), not a 401(k) or 403(b). It is also best suited for taxpayers who are no longer itemizing to gain the biggest tax benefit.

  • Run projections to ensure sufficient tax withholdings and estimated payments to avoid being caught off guard with an extra tax bill in April.

  • Take advantage of years with low taxable income to initiate Roth conversions. This increases the bounty of the tax-free bucket, which is incredibly helpful in retirement. For example, the CARES Act suspended RMDs for 2020, which presented an opportunity for those who didn’t need the income from their Traditional IRA to instead convert to a Roth IRA.

  • Maximize after-tax funding strategies like backdoor Roth IRA and even after-tax contributions to 401(k) should your plan permit. This again helps to build up the tax-free bucket, especially if your income is over the threshold to contribute directly to a Roth IRA.

#4: Tax planning boosts wealth accumulation

The more money you save in taxes, the more you can reinvest in yourself and your future goals. How can you do this? Here are a few suggestions.

  • Prioritize funding Roth accounts early in your career when your taxable income is lower.

  • Convert Traditional IRA dollars to Roth dollars in low taxable income years. You will need to pay taxes on the conversion, but it will likely be at a lower rate.

  • Avoid unnecessary capital gains. An example in your investment plan would be to steer clear of actively managed mutual funds in a taxable brokerage account. Why? The high turnover causes undue capital gain distributions, therefore increasing your tax liability.

  • Make the most of QCDs for charitable giving purposes.

As you can see, tax planning is a complex and comprehensive process. Your specific strategy should be unique to you and your plan. Everyone has different financial needs and visions for the future, and we seek to help you maximize your financial plan to set yourself up for success both now and in the future.

How can you be sure our team can help you achieve your financial goals? All of our advisors hold the CFP designation and one member also has a CPA license. These accreditations combined with years of experience and passion put us in a unique position to help clients set up their taxes in efficient ways. We also invest heavily in technology, which enables us to effectively deliver on all the strategies we discussed today.

Ready for more tax advice? Check out our free resource which details everything you need to know about your taxes in 2020.

Is it time for you to revamp your tax planning strategy? Set up an appointment with our team today. We can’t wait to help keep your money working for you.



Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.

The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

Registration of an investment advisor does not imply a certain level of skill or training.


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