Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” can be found on Amazon.

It's the start of the fourth quarter, and there's no better time than now to check in with your clients and work with them to ensure there are no mistakes in their documentation come tax time. Bryce Sanders offers his tips to make your busy season smoother and add value to your client relationships.

Acting, not reacting, is sensible advice. Clients often deliver their tax documentation early in the New Year, expecting you to get it organized and minimize their taxes. If you uncover client mistakes or omissions, it’s often too late to take remedial action. Getting in front of the problem at the start of the fourth quarter shows clients you are thinking ahead and putting their interests first. You are adding value to the relationship.

Salary + Bonus:  But This Time It’s Different

Who: You have a client in a corporate middle or senior management position. They are paid two ways: an annual salary and a bonus. The latter is often paid as a combination of cash and securities, the latter as shares or stock options. These shares and options are often restricted, meaning they can’t be turned into cash immediately.

Client behavior: For years, your client has gone into debt to finance their lifestyle. This often involves running up credit card debt and borrowing on their home equity line of credit (HELOC). All this debt gets retired when their bonus hits their account.

Problem: Suppose in this extraordinary year, either very low or no cash bonuses are paid? Your client isn’t directly in sales where the bonus is commission income. Their bonus is paid based on the success of the company and their department. A company shedding employees would have a difficult time justifying cash bonuses. They might pay still pay bonuses, but mostly in restricted stock and options. Here’s the bottom line: They are still getting a bonus, but no cash they can spend immediately.

Solution: Address this problem now. Clients have three months to moderate their spending (December is big) and direct any extra cash savings from foregone vacations and less dining out towards retiring credit card debt. Remaining debt would be on their HELOC, and interest rates are at historic lows.

The RMD That Wasn’t Required in 2020

Who: Your client is over 70½, the threshold when they are required to take distributions from their retirement accounts. Your client is still working or has income from other sources. This money is not required to fund their lifestyle.

Client Behavior: Because the penalty for non-compliance is severe, your client has their financial institution automatically distribute the required amount every January. This was done in early 2020.

Problem: The RMD is taxable as income. This increases their tax bill. It could put them into a higher marginal tax bracket and/or impact the taxability of their Social Security payments. Your client would prefer leaving the money in their tax-deferred account.

Solution: In 2020, they can have it their way. The stimulus package earlier this year allowed clients to defer taking RMDs during 2020. They also have the ability to return the RMD they took earlier in the year to the account from which it came. You can let them know and help them get this done before the end of the year.

Ordinary Income Clients and Retirement Plan Contributions

Who: Your client is a registered nurse who is paid on an hourly basis. Another client is a teacher or municipal worker receiving a salary as their sole workplace-based compensation. There are no bonuses involved.

Client Behavior: You trained your client well.  They have good habits and contribute to their workplace 401(k). They are current with their IRA contributions. They follow your advice. They have chosen to invest these funds in the stock market, through mutual funds and ETFs available from the account custodian.

Problem: Your client is concerned about job security and the health of the economy post-pandemic. They want the extra immediate income they can generate by stopping their 401(k) workplace contributions. They want to skip their annual IRA contribution, too. They rationalize the stock market has done well earlier in the year. They think they are ahead of where they need to be based on the retirement projections you have provided.

Solution: You need to persuade your client they should continue making retirement plan contributions, even if the future is uncertain. This is logical for seven reasons:

  1. Retirement plan contributions reduce your taxable income.
  2. They won’t get dollar for dollar in hand because those 401(k) contributions are made from pre-tax income.
  3. By stopping your contributions, you are forgoing the matching money your employer is contributing to your plan.
  4. The more money you contribute and the longer it’s invested, the closer you’ll get to your retirement goal so you don’t need to work.
  5. Any gains you realize from shrewd investing are taxable in the current tax year, while money in your tax-deferred account is taxable when it’s withdrawn.
  6. Retirement plans often have borrowing features in case of emergency.
  7. They have developed good savings discipline. It should continue.

In each case you have anticipated a problem. You have acted in the client’s best interest. Once again, you have demonstrated your value.

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