Year-End Strategies For High-Net-Worth Investors – In Any Year

Advisors Should Explore Helping Wealthy Clients With QSBS Capital Gain Exclusions, Mega Backdoor Roth Conversions And Gifting While Assets Are Depreciated

With 2022 winding to a close, it’s important to remember that December is often the best time for financial advisors to review all their client relationships and come up with a list of potential to-do items for each one. And while this year is nearly done, don’t forget that 2023 – and the years that follow – will deliver the same opportunity.  

Considerations should include everything from taking advantage of tax-loss harvesting strategies, to updating estate plans based on life events, to making sure every client is fully funding qualified retirement plans. 

Yet if we’re being honest, these steps should be table stakes. So, to stand out, advisors must go further – especially if they want to build a business around high-net-worth investors. Here are three strategies to consider as the year winds down. 

Market struggles may continue

QSBS Capital Gain Exclusions

This is a little-known quirk in the IRS code meant to drive innovation, with startup founders and early-stage executives able to sell stock that has appreciated by as much as $10 million without having to pay taxes on the gains. The catch is that the client must meet a series of requirements. 

For one, the company must be an active C-corporation non-holding company with no more than $50 million in assets since issuing the stock. It also must operate within a specific sector, with technology and manufacturing being the most common, and founders of tech companies and their early-stage employees typically benefiting the most. 

Retire early, then get back to work

Of course, if the market struggles again in 2023, eligible clients may wonder why they should exercise qualified small business stock (QSBS) capital gain exclusions. It’s a valid question. After all, the tech-heavy NASDAQ has shed more than a quarter of its value this year. What if it fails to rebound? Yet with rates set to rise well into next year, it could be a long time before companies in rate-sensitive segments reach the highs set late last year, if they ever do. 

Mega Backdoor Roth Conversions

When wealthy business owners sell their companies or senior executives retire early from C-suite positions, they may decide to settle into consulting work as a second career. These self-employed clients could pursue “mega backdoor” Roth conversions by transitioning pre-tax dollars from their traditional IRAs while also funding a 401(k) they set up for themselves. 

Those likely to benefit most are those with a traditional IRA containing pre- and after-tax contributions earned after their income exceeds the threshold for deductible contributions.

’Tis the season to gift assets

This is how it works. First, clients should transition the pre-tax dollars from their traditional IRAs into their self-employed 401(k)s. Then they can roll over traditional IRAs containing only after-tax money into Roth IRAs tax-free (provided they don’t roll other pre-tax money into the traditional IRA during the same year they conduct the Roth conversion). Furthermore, clients can defer as much as $61,000 annually, or $67,500 if over 50, into their self-employed 401(k) on a pre-tax basis.

Gifting While Assets Are Depreciated

Gifting assets to a family member is hardly a new idea. But giving now could make sense with all the major indexes having declined – which presents an excellent opportunity for the recipient to use the windfall to buy into the market when valuations are low. For 2022, the annual gifting exclusion limit is $16,000

Meanwhile, clients with estate plans may be able to use gifting to fund trusts for their family members, potentially capturing even more upside by reducing estate taxes in the future. Similarly, clients whose adult children have employment income could use gifting to start Roth IRAs for them, with the lesser of either $6,000 ($7,000 if the recipient is at least 50 years old) or the recipient’s taxable compensation for the year. 

Getting A Head StartSupporting any client is a year-round endeavor, requiring constant care and feeding. That can be doubly true when helping high-net-worth investors – whose needs are ever-changing and frequently more complex than most. That’s why advisors who want to serve this segment successfully need to always look for areas of opportunity when others may see only challenges. Considering one of the above strategies is a way to do that. 

Anne Marie Stonich is Chief Wealth Strategist of Coldstream Wealth Management, an SEC Registered Investment Adviser

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