Read The Transcript Below:

Steven (00:56):

Hello, everyone, and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and this week I’m really excited. We’re going to go past some of the high-level concepts we talk about and really dive into what does this look like in practice. Because we all know the only thing that counts is the actions that our clients take. So joining me this week is James Comblo, who is going to share the in-depth process he goes through to make sure that his clients are really taking action on tax planning. So James, welcome to the show.

James (01:26):

Yeah, thanks for having me, Steven.

Steven (01:27):

Like we talked about before we hit record, I love having people like you come on and share what happens in the real world. Since I’m on the CPA side of things, I can talk all day about what gets filed in the tax return how we communicate about these things, but it’s a different perspective being on the advisor side and having to go through all of these steps and make sure that the concepts we talk about really become reality. So before we dive into the nitty gritty, talk just a little bit about what your practice looks like, your background, and then let’s launch into how you’re working through this with clients.

James (01:56):

So we’re an independent RIA. We’re approaching at $300 million in assets under management. We’ve got probably another a hundred to hundred 50 million on a broker dealer platform as well. So we’re a hybrid, and we kept that hybrid relationship just so that we can always offer for our clients whatever they need, no matter what type of product or strategy it is. But we’re fully holistic, comprehensive planning focused. So everything we do, there’s the five pillars of holistic wealth management. There’s the financial plan, there’s asset management, insurance protection planning, there’s tax management, there’s estate planning, and how do we meld that all into one comprehensive plan and not something that’s boilerplate that you’re going to get the same advice for every single client, right? No matter what, no matter what you ask us. So we really want to be specific to our clients and what they’re trying to accomplish. And so we’ve developed quite a bit of processes that help us to, and I say this after making the boiler probably comment, but we want to be like McDonald’s where no matter where you go in the world or country, if you ask for a burger, you’re going to get a burger, right?

(02:59):

But we want to be able to customize that burger with the exact ingredients you want for it.

Steven (03:04):

And I love that approach because I’m all about systems and processes. I mean these are technical areas that we’re not dotting i’s and crossing t’s, things get missed and things get lost. And one of the reasons I was excited about this conversation specifically with you, is because I’ll be totally honest, I don’t love the words holistic and comprehensive. Me either. I’m with you. Because they get so overused. And so when you and I first talked, and you led with, well, we do holistic, comprehensive planning, there’s that part of my back of my head. It’s like, yeah, you and everybody else, and now you’re going to tell me that you’re comprehensive tax planning is that we do tax loss harvesting and that drives me nuts. But then as you and I talked more, this goes way beyond the surface level you’re actually getting in and making sure you’re living up to those pillars.

James (03:44):

Yeah, so it’s funny, I read one of your emails actually a couple months back where it said get every single tax return for every single client every single year. It doesn’t matter. And we do that. So we get the tax returns, we analyze them just to see what did it actually look like last year. It gives us a pretty good indication unless something drastic has changed going forward, what this year will look like as well. And then the reason I think we really connected is because we’ve created a seven step process called the tax management journey to walk through the tax analysis in depth with each client every single year as we sit down. And this as well as anybody, the tax planning is not done from January to April. There are steps along the way where you have to make decisions and do things all throughout the year to make sure that what you want the tax return to say in April actually gets done.

Steven (04:37):

Yeah, absolutely. Now James, real quick before we dive into those seven steps, and you might already have been planning to cover this, but you’re absolutely right. I make that statement all the time of get every tax return every single year. And some advisors are like you and say, yep, Steven got it. We got this down. And I get other advisors who say, yeah, but then how do I have the time to spend an hour on every tax return every single year? So since you brought that up, talk to just a little bit about what that looks like as far as a time commitment. Who on your team is helping with that? How do you practically get that done every year?

James (05:08):

Yeah, that’s a great question. So originally, it was just me and now I’ve got four advisors. We’ve got five full-time support staff now. So we’ve got a decent sized team. I do a lot of the tax analysis for my team, but my main assistant, she also does a lot of it and we utilize software. We used to use a software called Tax Clarity. Now we’re using something called Holistic plan. And Holistic plan is great because it can analyze it for you and all you have to do is check and make sure that it actually saw what you fed it, right? There has to be a quality check there, but myself and another member on my team, we both will either look at or input that information to the software, we see what the software tells us, and then if we have to, we dig deeper into specific areas.

Steven (05:52):

I really appreciate you adding in that quality control piece, a huge fan of holistic plan and what Roger and Kevin and the team over there are doing. But they’ll even talk about how it’s a tool and it needs a good operator. So I see again, I see so many advisors who say, oh, it went through software, we’re good to go. And I love that you take that extra step to say yes, but I got to make sure the right thing went in and the right thing came out. So well, I can’t promise I won’t go off any other tangents, but let’s dive into what this seven-step process for you looks like.

James (06:17):

Our entire approach really starts with education. So the first step on what we call our tax management journey is just understanding the order of money. So every single year, every different asset type that you have is taxed differently. So we want to understand how your actual dollars are taxed, and we want to make sure that the client understand how your dollars are taxed and make sure that we are all on the same playing field. This is where we are in today’s tax environment. It was drastically different 15 years ago. It’ll probably be drastically different 15 years from now, but in today’s world, here’s what the order of money looks like. And so…

(06:53):

For us, the best kind of money in that situation would be things like a Roth account monies that you’ve already paid tax on. We’re in control of that tax situation, we’ve already decided it. Then we go to our post-tax accounts because right now assets get favorable tax treatment, right? Anywhere from 0 to 20% including the ancillary things like net investment tax, things like that. But then there’s the pre-tax accounts, which are things like your IRA 401k pension, which is taxed at the full power of the IRS, right? They will tax you at the highest marginal rate possible. And so we just want to understand where you fall on there and is there any wiggle room to make changes or maybe contribute or withdraw from a different place?

Steven (07:33):

And real quick for our listeners, as you listen to James talk about this, there might be part of you that thinks that’s all old information. Of course, I know all of those things and maybe you do what James is focused on here is you led that with this is the education piece for the client. So unless your clients are consistently coming back to you and regularly understanding how these things work, you need to look at your process for educating clients and making sure that you’re providing that foundation for them so that the rest of the tax planning can happen effectively.

James (08:00):

Yeah, I’ll say we have clients, longtime clients where they’ll come back and we’ll just do a quick refresher so that again, they’re on the same page and they understand why we’re making the recommendations that we’re making year in and year out.

Steven (08:14):

Absolutely. Alright, so we start with education, understanding the order of money, I love that phrasing. Then what comes next?

James (08:20):

So then the second step would be just measuring your tax bracket. So we use a measuring cup. Everybody’s pretty familiar with a measuring cup. We want people to understand that while you’re working, you’re in a two-tier tax system. So here’s how income tax rates work and if you make X amount of money, here’s how that works, walking through that process and then the long-term capital gains tax rates and how those work. But then as you know, once you’ve retire, there’s also the third component of social security and all that. So we want to make sure that we’re fully educating and actually measuring the tax bracket every year. So that’s where getting the tax return, analyzing it, seeing where they fall in the tax code actually comes into play on a year to year basis.

Steven (08:59):

I love that point about measuring it every year because again, for advisors who are hesitant to get tax returns from every client every single year, you could even just do that one thing every year of, Hey, we’re going to get your tax return and let you know which bracket you’re in. It’s probably buried somewhere and what their CPA gave them, but their CPA is probably not taking the time to explain that to ’em. So even if you did nothing else other than let them know how their taxes were measuring up, you’ve still provided value. And James, as you know, there’s a whole bunch of other things we can do, but that at least should help get rid of some of the head trash of, well, what if I can’t do anything? There’s one thing everybody can do.

James (09:31):

That also will illuminate all the opportunities within the current tax brackets. Do you want to do absolutely not to get too deep into the weeds, but a bracket bumping strategy, do you maybe want to change where you’re taking income from this year because it’ll actually lower your taxes significantly? What are the opportunities that just measuring the bracket every single year, which again, like you said, is so simple, but it creates those opportunities.

Steven (09:54):

Well, and then one other quick side note on that, and then we’ll go to step three. That’s also something you can train someone on your team to do that does not have to be A CFP or a CPA or a tax expert. It’s great. Show ’em where taxable income is on the tax return and then have the RTS guide, whatever you’re going to use for brackets, but anybody on your team can learn to do that. So let’s keep going. Step three, here we go.

James (10:15):

So number three is just avoiding marginal tax traps. And so we’ve already touched a little bit on social security, but a lot of people, including advisors that I talk to, don’t really understand how social security’s impact from a tax standpoint based on income. So we want to make sure, and this is something I try to educate the vast public on, is just avoiding what we call the social security tax torpedo. And I’m sure that’s another coined term around the industry at this point, but I’ve seen where people are taking it $10,000 out of their IRA to go on this vacation and they’re paying a 40% marginal tax rate because of social security and they didn’t understand the impact it would have. Just taking that one extra distribution.

Steven (10:57):

Love that reminder there of we want to make sure that we understand all those different pieces. And again, on a 30 minute podcast, it can be easy for me at times to get focused on just one topic, and that’s really never my intention because all of these things work in parallel with each other.

James (11:12):

So moving on to number four, just how do we allocate tax sensitive assets? So you may have a boatload of money and after-tax accounts, I just worked with a client where they had a couple million dollars sitting in CDs and they don’t want to expose themselves to ups and downs in the market and all those kinds of things. They wanted the safety of a CD, but they didn’t realize they were literally paying taxes on 150, $200,000 a year in taxes, in income off that interest. And so how do we just reposition it, create some of the same safety, but avoid as much of those taxes as possible where we can then create opportunities to do other things?

Steven (11:51):

That’s such a great one from the advisor’s standpoint because I’m pretty open and transparent about the fact that I’m the tax guy and not the investment guy, and so I’m constantly reinforcing to clients, these are conversations you need to have with your advisor, but most tax professionals are both not doing the investment side and not telling clients they need to go have a conversation about it. But yeah, having a non-growth asset sit inside a tax-free account really is kind of counterproductive in the long run. So that asset location becomes a really critical piece of it.

Commercial (12:19):

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James (12:41):

So the fifth step would be gifting, right? There’s all kinds of ways that we could be creative with our gifting. We can gift to do qualified charitable distributions if you’re charitably inclined. We can do donor-advised funds if you have bigger chunks that you want to do, but maybe not send that gift today. We also do a lot of intrafamily gifting. So if you have an asset, maybe bought Amazon at $5, you were the genius back in 2001 today, that would have a massive tax impact if you sold that position, we could actually gift it to a family member for them to sell it. And so we’ve done this with family where a mother and father are gifting a stock to a daughter who’s paying for a wedding. We’re just getting that money liquid at a much lower tax rate than had the parents done it themselves. We’ve also done gifting to elderly family members that potentially, and this may sound morbid, but maybe they’re going to pass away and we know that their health isn’t doing well, so we’ll gift them shares of stock, which will then be left back to the client after they pass away and we’ll just step up that cost basis and basically cut uncle Sam out of that portion of it.

Steven (13:50):

That’s really interesting. That’s not one I’ve gone down before. The IRS usually catches on to different fun things like this in some kind of timeframe. Are there time limitations? If I know someone’s terminal is going to pass away next week and I gift them all of my stock just to get it back two weeks later, is the IRS already keen to that?

James (14:06):

So you would know better than I would on that front. I think we want to be intelligent, right? Obviously we can’t gift somebody who’s got three days to live stock and ask them to give it back to us. That’s going to be a red flag. But if you’ve got a parent who’s a hundred and again using the Amazon stock, you don’t need that stock for a while, you’re not going to need those assets. You can gift it to a grandparent and have them leave it back to you. And I think that’s all above board.

Steven (14:34):

James. This is why I love having these kinds of conversations. Like I said, I haven’t come across that in practice before, and so I love learning from what other people are doing and I’m absolutely going to go dig into that one. That’s fascinating to me. I definitely get all the pieces of what you’re talking about. So yeah, I’ll have to look into that one and bring it up on a future episode. So thanks for sharing that.

James (14:49):

Please, if there’s anything should know about, let me know.

Steven (14:52):

Absolutely. I love the community learning around this.

James (14:55):

The sixth step would be pay now versus pay later. So we all have to pay taxes. What makes the most sense for you? Do you want to pay them today and never pay them again? Or do we want to defer today’s taxes and hope that we’re in a better situation down the road and we’ve got people on both sides of the lane here? It really is specific to what you are looking to do

Steven (15:14):

That helps illustrate that even though it might’ve sounded like boilerplate language off the top, that you’re through these steps, you’re getting into client specific situations, and it’s not just blanket recommendations. If everyone has to convert everything right now, it’s what does your situation look like?

James (15:28):

No, and we work with a lot of executives where their 401k will allow them to contribute past the deductible portion and then we’ll do the mega backdoor Roth. And we’re actually getting the best of both worlds there, in my opinion, but they’re in an ultra high tax bracket. So no, we don’t want to pay 35, 30 7% taxes, but we know we’re going to pay taxes on the remainder of that money, so let’s figure out a better way to do it.

Steven (15:51):

Yeah, absolutely. Okay, and then let’s get to step seven. What are we wrapping up with?

James (15:55):

Yeah, so step seven is really just managing it. Your dynamic bracket day in and day out every year, decade over decade to make sure that you are avoiding all of these little pitfalls that you can come across all along the way. And I always say this is another boilerplate thing, but taxes are not just what’s on your tax return. So you have to strategically do things throughout the year to make sure, hey, we’re getting full advantage of this.

Steven (16:20):

Yeah, I love that. And it’s one of the beauties of being involved in taxes in your client’s life is that this changes every single year, whether that’s because their situation changes, Congress changes the rules, we have a presidential election, not that feels relevant right now, whatever it might be. So James, lemme just run back through this really quick. So the seven steps you have, understanding the order of money or doing tax education, measuring tax brackets, avoiding marginal tax traps, allocating tax sensitive assets, gifting timing, pay now versus pay later, and then managing that dynamic situation over time. Is that good recap there?

James (16:54):

And obviously, this is a 30-minute podcast, so that’s a high-level overview, but we’ve got processes to really dig deep into each one of those steps and really checklists and everything to make sure that we’re not missing something as we go.

Steven (17:08):

Yeah, I love that. And we have a few more minutes here, so I am going to ask just a couple of those. Let’s get into the nitty gritty. Anybody watches Nacho Libre? That’s the voice going through my head. So when you talk about these seven steps, is this all in one client meeting? This is over the first year you work with them, this is a particular time of year. You’re focused on these. How do these logistically unfold?

James (17:26):

Yeah, so great question upfront. When we first start a relationship with a client, it’s typically depending on how complicated it’s, we try to keep it three meetings, but I’ve had new clients that are 7, 8, 9 meetings because there are so much of this that we have to dig into, figure out, Hey, you’ve missed all of these opportunities. Here’s all these things that we should be doing, and that could be overwhelming for people. So you want to go step by step, but then typically if your situation is complicated enough, I have a client I spoke to yesterday, I speak to ’em every month because we’re constantly just making little tiny tweaks. I’ve got some clients that I speak to once a year because I have to track them down and get them on the phone and they don’t want to get on the phone. They’re like, Hey, I pay you to do that. That’s what you guys are going to do. But everywhere in between. So upfront, it’s usually we go through this whole process, which includes all the other parts of the holistic, all these other pillars. Yeah. However, when we’re actually meeting with clients, there’s usually strategic plan throughout the year. We’re going to do all the tax prep stuff first quarter, then we start looking at other stuff as we go throughout the year.

Steven (18:32):

Yeah, that’s helpful insight. I appreciate you sharing that because again, talking about this in a condensed format, it can feel like, oh, well I’ll knock that out in 30 minutes in the new client meeting. It’s like, no, no, no. This stuff, we try to make this easier to get done, but there’s still work that goes into this. There’s still this intentionality and this proactive approach that needs to happen if we want it to happen effectively.

James (18:51):

And there’s things that you can’t do until the end of the year. Right. I think you mentioned tax loss harvesting. We don’t know what that actually looks like, right? Usually until some time has gone by. So there are things that have to wait, things that should be done early and kind of everything in between.

Steven (19:06):

James, how has this process evolved over time? What was different five years ago that you’ve learned from either just because you’ve learned more or through painful experience?

James (19:14):

I don’t know that it’s different. The first version of this was written out on a napkin by my friend Dave Allison. He was in at an airport bar. Actually, we still have the picture of it. That’s amazing. So we’re part of a mastermind. There’s 10 of us from around the country. We’re always trying to dig deeper and basically challenge each other to come up with more. Now, generally it falls under these seven umbrellas. Anything we need to do inside of the tax world is usually under one of these umbrellas. But how do we get more deeper into the process, more details out of the clients? How do we make sure that we’re executing the right way? And there have been some challenging things where I got cut once with a client because I didn’t have all the information from them when I thought I did. There was something outside of their control that happened. It was a family trust and they ended up getting hit pretty good and you can’t recharacterize anymore. So that was an issue. So we just kind of flesh that out, added to the process and make sure it doesn’t happen again.

Steven (20:18):

Yeah, appreciate you sharing that. I feel like the advisors I have the most respect for are describing situations similar to yours in a couple of ways that they’re learning from other advisors, whether that’s through a formal mastermind or going to conferences or friends they have, but they’re always learning from other people and they’re always willing to improve. Totally. Get the overall umbrella hasn’t changed in years. That makes sense. I mean, the general concepts around tax planning are still there, but I love to hear that you’re refining the process that you take those moments of, wait, that didn’t go quite the way we wanted it to. How do we change it the next time? Again, I know advisors have been doing this 20 plus years and they’re still constantly making improvements. Thankfully, the improvements get kind of smaller and more incremental, but you’ve got to have that commitment to learning and growing. If you want to keep delivering value to your clients.

James (21:03):

I don’t know how you could go through life without trying to learn and get better, not only from your own mistakes, but from other people’s mistakes. And so tax planning, as you know, is a super complicated thing. It’s not intuitive, it’s not simple. And so a lot of advisors that I come across, they’re just a little worried about diving into the deep end. How do I actually start doing this for those people? I say, reach out to me, somebody like you. We’re more than happy to help. I’ll introduce you to my team, my bigger mastermind that I’m a part of where we’re all trying to figure this out together and make sure we’re just doing the best for the clients. It’s a more of a eat an elephant, one bite at a time situation. First thing, like your email said, Hey, get the tax return. Just get the tax return and learn how to read it, and then you can do the next thing.

Steven (21:49):

Yeah, the eating an elephant’s a great analogy for that. You’ve got to start somewhere, and I’m a huge advocate for starting with the tax return because again, even if your starting point is simply here’s what your marginal tax bracket is, you’re delivering value and you can build from there. I really appreciate the offer there for people to reach out to you. If you’re listening and love what you’re hearing from James, please take him seriously on that. There’s so much you can learn from other people. I mean, that’s why we created the RTS Premiere membership was to get people access to resources, to ask questions. That’s why we do the summit every year because there’s just so much that we all can learn from each other.

James (22:22):

And my opinion is we all stand on the shoulders of those that came before us. And so I was given this great opportunity, and I would like to also pass that to the next generation or the next advisor who just wants to do good work for people.

Steven (22:35):

When I was younger, and not that I think I’m particularly old, but when I was younger, I definitely had this delusion that all of my success in life was just based on my hard work. I think hard work is super important. I haven’t completely let go of that idea. As I’ve gotten a little bit wiser, I’ve realized that there are huge elements of both luck and the people I’m surrounded by. We probably can’t choose our luck. We can get into some philosophical debates about creating luck, but we absolutely can choose who we spend the most time around. And if we’re spending time around people who are also committed to leveling up and learning and sharing really openly, we’re going to go a lot further.

James (23:08):

No question. That’s why I love what you guys are doing, and I’m willing to help any way I can.

Steven (23:14):

Well, James, I certainly appreciate that. James, any other things that come to mind about your journey on tax planning or what you’re doing with clients? Any last bits of wisdom to share?

James (23:20):

No. What I’ll say is your clients are looking for it. So if you’re not doing it, if you’re saying, Hey, just throw everything in a retirement account and don’t worry about it, you’ve got a problem and they’re probably not getting the best advice. So start learning, start applying, and we’ll all be better for it.

Steven (23:34):

Yep. I hear more and more directly from consumers through the content I put out that they’re looking for advisor, and most of the time they don’t even reach out to me and say, Hey, can you do my tax return? They reach out and say, how do I get connected with one of these? You’re always talking about who thinks about the tax side of it. And to your point, for advisors who aren’t currently doing this, it really is only a matter of time until your clients demand this or they get it from somewhere else.

James (23:56):

I was just going to say, I’ve definitely gained at least 50 million in new assets solely through tax planning. All the investment advice could be the same, right? We all have kind of the same tools and all of that, but the tax planning is something that’s a huge void in people’s lives, and I think you got to do it.

Steven (24:14):

Absolutely. So James, for people who would like to learn more specifically about what you’re doing or ask you questions, what’s the best way for them to get connected with you?

James (24:21):

Yeah, I think LinkedIn is a great way. Get connected with me. Or you could always just email me the letter J, then my last name, C-O-M-B-L-O, at fsc wealth advisors.com. Go to our website, book a call, 20 minute call. I’ll talk to any advisor that wants help. And that’s probably three best ways.

Steven (24:38):

That’s awesome.

(24:38):

Really appreciate that offer. Again, please take James seriously on that. James, thanks so much for being here. Really appreciate your time and insight and for everyone listening. Until next time, good luck out there. And remember to tip your server, not the IRS.