Tax-efficient investing and tax-smart withdrawals are two crucial components of any successful retirement plan. With RightCapital's Tax Strategies module, you can quickly identify which tax strategies will provide the most value for your clients, and clearly demonstrate that value with intuitive, engaging visuals.
This module can be found within the Tax > Tax Strategies tab of each and every client plan.
Key Takeaways
Use the Action Items to model Roth conversions, shift a client's Asset location, and alter their Withdrawal sequence.
Utilize key visuals within the Summary, Calibration, and Comparison tabs to showcase the value of your tailored recommendations.
Reference the Details tab for granular cash flow details such as Roth conversion amounts, medicare premium adjustments, and other tax details.
Visit the Strategies tab to solve for the top five tax strategy combinations with the push of a button.
Import your recommendations into the client's retirement proposal, via the Tax Strategy action item in the Retirement Analysis module.
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If you'd prefer a hands-on, visual overview of the Tax Strategies module, click the link below to watch our dedicated Expenses training video:
The Action Items within the Tax Strategies module are where everything starts. Click the 'Action Items' button at the bottom of the page to open a new drawer, revealing a set of tax strategies that you can model (please note that the Action Items are hidden in the Details tab):
The Action Items are split into two columns- a Proposed strategy on the left, and a Reference strategy on the right. The Proposed strategy is what can be imported into the client's retirement proposal in the Retirement Analysis module. The reference strategy is simply used for comparison within the Tax module.
There are three different tax strategies that you will find here: the Asset Location Strategy, the Withdrawal Strategy, and the Roth Conversion Strategy. See below for an overview of each strategy.
Using the Action Items
When making changes in the Action Items, click Refresh in the lower right to see the impact of your changes. You can also click the Edit button to include or exclude specific tax strategies:
The Asset location strategy grants you control over how a client's equities are allocated between the three tax buckets (taxable, tax-deferred, and tax-free). Put differently, you can choose how the equity portion of the client's overall asset allocation is spread between these tax buckets.
The default asset location strategy in RightCapital is Pro-rata. This option allocates a client's equities evenly across the three tax buckets. This can be best visualized using the Asset Location chart in the Summary tab:
Bank accounts will be included in the Fixed Income portion of the Taxable bucket, lowering the overall equity percentage. They have been excluded from these examples for demonstrative purposes.
Additional strategies include Taxable, tax-free, tax-deferred, and Tax-free, taxable, tax-deferred. These options will reallocate a client's equities to "fill up" each tax bucket in order before "overflowing" into the next. Equities will be reallocated proportional to the current dollar value within each bucket.
For example, let's say a client has a $300,000 portfolio, with $100,000 in each tax bucket. If the portfolio as a whole has a 50/50 split between equity and fixed income, here is how their asset location will look with the default Pro-rata strategy in place:
If we switch our equity allocation to Taxable, Tax-free, Tax-deferred, we will first shift as many equities as possible to the Taxable bucket. In this example, we have $150k in equity to work with, and our taxable bucket is only $100k. Using this strategy, our Taxable bucket will become 100% equity, and our $50k in overflow will be allocated to the Tax-free bucket next. Our new asset location looks like this:
Please note that in some cases, it is possible for the Taxable first strategy and the Tax-free first strategy to be the same. For instance, if we take the exact same example described above, but change our equity / fixed income split to 70/30, the overall amount of equity in the portfolio is $210,000. This is enough to fill both the taxable AND tax-free buckets, meaning both strategies will result in the following asset location:
Annuities, inherited IRAs, and 529s are all excluded from the asset location strategy, although these assets will be factored into the Asset location chart. You will also be unable to propose an asset location strategy when using 'No blending across account types' as your Allocation Method.
When should I use the Asset Location Strategy?
Genreally speaking, clients that currently fall into high marginal tax brackets (and/or clients that expect to be in lower tax brackets in the future) may benefit from an asset location strategy. However, this is highly plan dependant! Use the Tax Strategies module to quickly identify if an asset location strategy is a good fit for each client.
The Withdrawal strategyallows you to fully control which tax buckets are pulled from first to fund a client's negative net flows. This strategy ties in closely with the Withdrawal Sequence setting in RightCapital and serves the same function.
The default withdrawal sequence in RightCapital is Taxable, tax-deferred, tax-free. When funding cash flow needs, RightCapital will default to taking money from taxable accounts first, then tax-deferred accounts, and lastly tax-free accounts. The Withdrawal strategy dropdown menu allows you to propose changes to this distribution sequence:
Please note: If you choose the 'Tax-deferred, taxable, tax-free' sequence while a client is under 59.5 years old, RightCapital will pull from the taxable bucket before the tax-deferred in the cash flow projections for the proposed plan.
Changes in withdrawal sequence can be best visualized using the various charts in the Summary and Comparison tabs. By making all other variables the same, you can directly compare two different withdrawal sequences between the Proposed and Reference strategies. You can also mix and match different withdrawal sequences with other tax strategies:
The Roth conversion strategy lets you choose a conversion target, and then ‘fill up’ specific tax bracket thresholds with Roth conversions. This can be a quick and efficient way to identify if Roth conversions are a good fit for a client. When modeling Roth conversions, we recommend using the visuals within the Calibration tab:
The 'Conversion target' determines which tax brackets will targeted for your proposed conversions. Choose between ordinary income tax brackets, and capital gains tax brackets, or convert as much as possible without triggering income-based (‘IRMAA’) adjustments to Medicare premiums.
After selecting a conversion target, use the 'Fill up the tax bracket' slider to choose a specific bracket threshold. RightCapital will then convert as much as possible without exceeding the specified bracket. Please note that these are the upper thresholds of each bracket (hence no 37% bracket for ordinary income, or 20% for capital gains):
With 'Ordinary income tax bracket' selected, you will see two percentages listed for several brackets if you are using the default Tax Law (TCJA with a 2025 sunset). This reflects the bracket thresholds for TCJA / post-TCJA.
When choosing a bracket threshold, conversions will only be generated in years where the household's adjusted taxable income is less than the specified bracket. For example, if you select the 10% ordinary income bracket for a client that never drops below the 12%/15% bracket, no conversions will occur. Conversions will also stop automatically once there are no tax-deferred assets left to convert.
By default, conversions will occur throughout the duration of the client plan ('Already Started' through 'End of Both Plans'). To dial in a more specific time frame, click the Edit button in the lower right of the Action Items, and check the boxes for 'Conversions start' and/or 'Conversions end':
Some advisors will start conversions right after clients stop working, and end them right before RMDs begin within the projections. This is a popular strategy that works well for many clients!
After fine-tuning your Roth conversion strategy in the Calibration tab, the Comparison tab is a great place to showcase the value of your conversion strategy in terms of overall invested assets, total taxes paid, and tax-adjusted ending wealth. The exact conversion amounts for each year can be found within the Details tab:
Several charts in the Tax Strategies module display "tax-adjusted ending assets". These values are tax-adjusted in that we apply an assumed tax rate to any tax-deferred assets, representing the taxes that would still be due on those assets at death. In other words, it is the estimated rate heirs would be subject to upon distribution of assets. You can adjust that assumed tax rate using the Estimated terminal tax rate slider in the Action Items:
Please note that the estimated terminal tax rate will only impact the values displayed within the Tax Strategies tab. This slider will not have an impact on other areas of the software, including the Retirement Analysis when importing a tax strategy proposal (put differently, the Retirement Analysis reflects a 0% terminal tax rate).
The Summary tab of the Tax Strategies module serves as your home base, highlighting the most important differences between your proposed and reference strategies.
The 'Summary of tax strategy' chart simply and clearly displays the value of your proposal in terms of tax adjusted ending assets, federal taxes paid, and tax-deferred withdrawals. Hover your mouse over the chart to see specific dollar values for each strategy:
A secondary 'Asset location' chart can also be leveraged by clicking the downward-facing arrow to the right of the chart name. This chart correlates with the Asset location strategy, displaying how a client's equities are allocated between the three tax buckets. When viewing either chart, you can use the dropdown menu in the upper right to toggle between your current and proposed plans from the Retirement Analysis module:
The Calibration screen provides insight into where clients fall in relation to various tax bracket thresholds. Federal income tax brackets, capital gains brackets, and IRMAA brackets for Medicare premium adjustments can all be viewed via the dropdown menu above the graph. You will also find the key tax components that make up the client's taxable income during each year of the financial plan:
We recommend using the Calibration tab when dialing in a Roth conversion strategy. Choose the chart that corresponds with your conversion target to clearly see conversions occurring up to your specified bracket threshold.
Ordinary income tax bracket
The initial chart illustrates the client's adjusted taxable income in relation to ordinary income tax brackets. If you are modeling a Roth conversion strategy, you will see the adjusted taxable income with conversions in green, and without conversions in blue. Hover your mouse over the chart to view specific dollar values:
What is "adjusted" taxable income?
Adjusted taxable income is the portion of a client's taxable income that is subject to ordinary income tax. It excludes qualified dividends and long-term capital gains.
Tax bracket thresholds may shift depending on the Tax Law that you've selected, and will increase each year based on your Tax Inflation rate. You can use the legend beneath the chart to highlight, add, or remove items for visual clarity.
Key tax components
The Key tax components chart will separate out several of the key elements that make up a client's overall taxable income over the course of their projections. This includes Salary and other income, investment income (interest and dividends), taxable social security, taxable pensions and annuities, and tax-deferred withdrawals. Please note that this chart will factor in any changes you've made within the Action Items for one or more tax strategies:
Capital gains tax bracket
The Capital gains tax bracket graph shows the household’s total taxable income in relation to the capital gains bracket thresholds (0% and 15%). Capital gains income above the 15% bracket will be taxed at 20%.
Medicare premium tax bracket
The Medicare premium tax bracket graph shows the household’s Modified Adjusted Gross Income (MAGI) in relation to the IRMAA thresholds that trigger higher Medicare premiums. The lines on the graph denote the monthly increase in the premium amount based on each MAGI threshold:
The Comparison tab is the best place to directly compare your proposed and reference tax strategies. There are six charts available here, comparing and contrasting various elements of each strategy to help clients better understand the value of your recommendations.
Invested assets
The Invested assets chart is borrowed from the Retirement Analysis module, comparing the value of invested assets over time (excluding real estate and other assets). To the right of the chart you will find two key metrics highlighting the difference between your proposed strategy and reference strategy. The "tax-adjusted" figure will factor in your estimated terminal tax rate, whereas the "ending assets" value will not. If your estimated terminal tax rate is set to 0%, these values will be the same:
Federal tax paid
The Federal tax paid chart compares the client's estimated tax burden throughout the projections. Hover your mouse over the chart to track annual federal tax payments each year. The key metric to the right of the chart will display the client's tax savings as a result of your proposed tax strategy:
Required minimum distributions
The Required minimum distributions chart highlights the difference in RMDs between your proposed and reference strategies. Hover your mouse over the chart to track annual RMDs for each strategy. The key metric to the right of the chart will display the cumulative difference between the proposed and reference strategies:
Tax adjusted ending wealth
The Tax-adjusted ending wealth screen provides two pie charts, detailing the end-of-plan investment portfolios for the proposed and reference strategies respectively. Here you will find a breakdown of each strategy in terms of overall ending portfolio value, in addition to how that portfolio is divided between the three tax buckets.
Withdrawal
The Withdrawal screen compares taxable, tax-deferred, and tax-free withdrawals between your proposed and reference strategies. Hover your mouse over each chart to track specific dollar values for each year:
Account Balance
The Account balance screen compares taxable, tax-deferred, and tax-free account balances between your proposed and reference strategies. Hover your mouse over each chart to track specific dollar values for each year:
The Details tab is where you can find a number of cash flow tables, breaking things down into specific dollar values that can tracked throughout the future projections. Here you can see the impact of different tax strategies on account balances and withdrawals, tax brackets and federal tax payments, and Medicare premiums. Use the dropdown menu in the upper right corner to switch between the four options:
Please note that the Details tab will reflect whichever plan is currently selected within the other Tax Strategy tabs. You can toggle between current, proposed, and additional plans using the dropdown in the upper right of the other four tabs.
Withdrawal and conversion
The Withdrawal and conversion table illustrates precise Roth conversion amounts each year, as well as other taxable, tax-deferred, and tax-free account data. Conversion amounts are calculated based on your Roth conversion strategy, and can be tracked in the 'Conversion Amount' column to the far left. The remaining columns will track withdrawals and ending account balances for each tax bucket throughout the plan:
Tax details
The Tax details table highlights crucial tax information, including adjusted taxable income, federal taxes paid, and the maximum ordinary income and capital gains tax brackets for each year:
Medicare premiums
The Medicare premiums table tracks year-to-year MAGI values, IRMAA adjustment thresholds, and medicare premiums paid for each client. Please note that the 'Medicare Premium Threshold' is the lowest IRMAA bracket (indicating the point at which Medicare premiums will be increased).
Medicare premiums will only populate here if you have chosen to use the ‘Detailed estimate’ option within the Retirement Health Costs goal card. This will automatically calculate Medicare Part B & D premiums based on AGI:
Asset location summary
The Asset location summary table tracks changes in a client's asset location each year. The column on the left displays the percentage of equity within the overall portfolio, and each subsequent column tracks equities within the three tax buckets. The 'Start' year will correspond with the Asset location chart in the Summary tab, factoring in the Asset location strategy that you've selected in the Action Items:
Please note that this table views the plan as a wholeas we project the client's investment portfolio out into the future. In addition to RMDs and other withdrawals, your chosen Allocation Method and Cash Management Method settings will also impact how the equity allocation changes over time.
Click into the underlined column headers to see which accounts are excluded from the asset location strategy:
It can sometimes be difficult to know where to begin when implementing tax strategies, especially for prospects and newer clients. In these instances, the Strategies tab can be leveraged to automatically calculate the top five tax strategy combinations to help maximize a client's ending portfolio value:
Click the 'Solve for Top Strategies' button in the middle of the page to begin a comprehensive calculation, mixing and matching all possible tax strategy options to produce the five results with the highest tax adjusted ending wealth. After a few moments, these options will populate within a color-coded table on your screen, highlighting the ending asset values and corresponding selections for each tax strategy:
Plans with Single, Head of Household, or Married Filing Jointly selected at the tax filing status will calculate the top 5 strategies in 10-20 seconds! Please be aware that Married Separately and Non-Married Filing Single may take a minute or longer due to the increase in variables and tax strategy combinations.
After the calculation has been run, the top five strategies will be saved in this area. If you make updates to the data entry within the plan, the calculation will need to be re-run to account for your changes. A new message will appear asking you to recalculate the results:
The 'Solve for Top Strategies' calculation will consider the start and end dates you've selected for Roth conversions, as well as your chosen estimated terminal tax rate. Making changes to either of these parameters in the Action Items will necessitate a recalculation.
In situations where you may want to isolate only one or two tax strategies, rather than all three, you can click the Edit button in the lower right of the Action Items and fine-tune your strategy selection. Any items that are unchecked will be removed from the Action Items, and will be excluded from the Top Strategies calculation.
For example, maybe you want to run a dedicated Roth conversion analysis, without considering asset location or withdrawal sequence:
After dialing in your tax strategies within the Tax module, you can then choose to instantly reflect these strategies within any retirement proposal. To apply a tax strategy proposal, visit the Retirement Analysis module and access the action items at the bottom of the screen. On the right side of the action items, isolate the 'Tax Strategy' dropdown, and choose the 'Tax Proposal' option. Once you click Refresh in the lower right, details from the Tax Strategies module will flow into the Proposed plan:
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