The CFP® Professional and CPA Relationship with Logan DeGraeve, CFP® and Corey Hulstein, CPA

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The CFP® Professional and CPA Relationship with Logan DeGraeve, CFP® and Corey Hulstein, CPA Show Notes

On Episode 95 of The Guided Retirement Show, Dean Barber and Jason Gordo discussed why it’s critical to work with a team of financial professionals rather than just one financial advisor. They specifically talked about having the “three C’s” working for you—a CFP® Professional, CPA, and CFA. That episode served as a perfect segue for today’s episode, as Logan DeGraeve, CFP® and Corey Hulstein, CPA will describe the working relationship between a CFP® Professional and CPA.

Corey and Logan spend a lot of time working with clients on their individualized tax plans. So, they’re going to share specific tax situations that they’ve helped clients with over the past year.

In this podcast interview, you’ll learn:

The importance of forward-looking tax planning.
How to go about tax bracket management.
Things to consider with charitable giving.
There Are Several Tradeoffs Throughout the Retirement Planning Process

What Is Tax Planning?

Before Logan and Corey share some of the specifics of the CFP® Professional and CPA relationship from their perspectives, they want to make sure that you understand what tax planning is and why it’s important.

“Effective tax planning tries to minimize your taxation over the course of your lifetime. Or if it’s important to the client, over the dollar’s lifetime as it passes to the next generation.” – Corey Hulstein, CPA

Logan and Corey’s CFP® Professional and CPA Relationship

Logan has an idea of how taxes work as a CFP® Professional, but he’ll be quick to tell you that he’s been humbled several times in meetings with Corey when it comes to being knowledgeable about taxes. There are things that Corey thinks about as a CPA that Logan doesn’t as a CFP® Professional because they have different perspectives. Let’s dive into some situations that Logan and Corey have been in while working together with clients to describe the CFP® Professional and CPA relationship.

Tax Bracket Management

The first situation we’re going to discuss has to do with college credits. The client they were working with has some kids that are finishing up college. Logan’s first thought was to speed up income for the client because we have low tax rates today and they hadn’t started Required Minimum Distributions yet. Logan wanted to max out the tax bracket that client was in, but Corey told him to pump the brakes.

With the client’s kids being in college and the ability to manipulate income in retirement, Corey saw an opportunity to attain some college credits. The college credit phase out happens at $160,000-$170,000 of adjusted gross income for married filing jointly. It’s $80,000-$90,000 for single filers. If they were going to max out at the 22% tax bracket for that client, they could go up to around $200,000 to $220,000.

By adding additional income through a Roth conversion, it’s at a 22% effective rate for the marginal rate. The problem was the effective rate was significantly higher. It was about 34% because of the opportunity cost of sacrificing that college credit.

“There were two things that allowed us to help in this client. One was looking at a long-term tax plan and having a financial plan built to look at it. The second thing was making an individualized tax plan for 2023.” – Logan DeGraeve, CFP®

Using the Financial Plan as a Guide

We want to dive deeper into how the client’s financial plan guided Corey and Logan into the decision they made for the client. The first step of building an effective tax plan is understanding where we’re at today relative to where we’re going to be at in the future. To do that for a lot of retirees, it’s building out that financial plan.

“That financial plan shows you all the assets and what spending is going to be over a long duration of time. How do the tax rates fit into that long-term plan?” – Corey Hulstein, CPA

The plan provides the context of how our team makes these decisions. From there, the CPAs need to look at it from a holistic approach. There are so many loopholes in the tax code that you need to be aware. But as a CFP® Professional, Logan has a lot of other things on his plate. He can’t spend a significant amount of time figuring out the loopholes in the tax code.

Why We Have Our Team Approach

Logan’s job is in the financial planning and the investments. Corey’s job is in the taxation piece of it. And those are just two pieces of it. When you bring in various types of insurance and estate planning, you need to be working with insurance and estate planning specialists. There are a lot of changes to keep up with in those sectors as well.

“It’s hard to be really good at about 10 things. But you can be really good at two or three things. That’s why we have a team in place.” – Logan DeGraeve, CFP®

As we work through some of these examples to highlight the CFP® Professional and CPA relationship, they want people to understand that tax planning isn’t just for retirees. Oftentimes, when people are working that there isn’t a lot of tax planning that needs to be done and they’re just in a specific tax bracket.

Where Are You Saving to?

In some cases, those people might be right. But it depends on what your goals are and what you’re looking to do. Let’s look at a particular example with a client that Logan and Corey worked with who is in a high tax bracket today and will be in a lower tax bracket in the future.

The focus for this client is going to be on where they’re saving to. Should they save to a traditional 401(k) or Roth 401(k)? What do their non-qualified or brokerage accounts look like? Do they have a way to start accumulating some funds in those accounts to create flexibility when they get to retirement? There are some charitable donations strategies that they can look at as well if they’re charitably inclined.

Charitable Giving Strategies

A lot of people are at the highest phase of earnings that they’ve ever been at when they’re approaching retirement. Those rates are likely going to be higher than those early years of retirement.

Donor Advised Funds

Corey and Logan have looked at certain strategies and said that if they can group several years of donations through a donor advised fund into one year, they can deduct those down at the high tax rates. In future years, they’re not getting deductions for those charitable donations, but they’ve already deducted them at 35%, 37% tax rates. In the following years, they’d be at 12%, 22%.

That’s the great thing about donor advised fund. You can get some of the deductions when you’re in high tax rates. But you can still give from that fund in the lower tax rates.

“You don’t give to charity to save taxes. But our job is to maximize what you are doing there.” – Logan DeGraeve, CFP®

Qualified Charitable Distributions

Qualified Charitable Distributions also come into play here. Through QCDs, you can take funds directly out of the IRA account and give them directly to the charity. Nobody in that transaction pays tax on the funds that went out of the IRA account. QCDs are only available for people who are 70½ or older.

In the fact pattern that we talked about, a QCD could potentially make sense. But it made more sense to go with the donor advised fund. It’s important to understand the annual giving that you’re doing.

“In today’s landscape from a tax perspective, it’s hard to get a lot of value from charitable donations.” – Corey Hulstein, CPA

There are a lot of different moving pieces here. That’s why it’s so critical to understand the CFP® Professional and CPA relationship and work together with them. Have a conversation with them about what’s important to you, how much you’re giving on an annual basis, and how to structure those things.

We don’t want to change your charitable patterns. We just want to maximize something that you’re already doing.

How Mutual Funds Work

Before we started to discuss charitable giving, we briefly touched on asset allocation. Let’s circle back to that for a minute. One of Logan’s favorite cases that he’s worked on involved a client with a lot of money in a brokerage account. That’s a taxable account. The issue with holding mutual funds is something called capital gain distributions.

Let’s describe what a mutual fund is before we go any further with this example. A mutual fund is essentially a collection of stocks. It’s very similar to an exchange traded fund (ETF). The large difference is that there’s an actual fund manager pulling the levers behind the scenes. It’s actively managed. The fund manager moves in and out of certain positions to achieve the goal of whatever that mutual fund is set to do.

Every time we sell a stock position, we’re going to have a capital gain or capital loss inside of a brokerage account. They’re continuously moving in and out of positions at the fund level, but who pays the tax on that transaction? It’s the owner of the mutual fund. To be clear, this is for a taxable brokerage account. You can trade as much as you want in IRAs and Roth IRAs.

Capital Gain Distributions

A capital gain distribution usually happens in December after gains and losses have accumulated throughout the year at the fund level. All the gains and losses are distributed to the owner of the fund.

From a tax perspective in a brokerage account, you get this large capital gain distribution that you weren’t anticipating, and you have no real way to value it throughout the year.

“We get we usually get data on these things around October and November, which creates a small window of opportunity to try to capitalize on these things. But it’s not something we can actively plan around in January.” – Corey Hulstein, CPA

The Three Tax Buckets

In the case of this client that Logan and Corey were working with, there were a couple of issues. One, they were trying to do effective tax planning, but they were kicking off somewhere between $70,000 and $100,000 a year from capital gain distributions. That was too much variability for Corey and Logan to feel comfortable with the tax plan.

This couple has been a client for about four years now and Logan and Corey know that long-term tax rates are a problem for them. However, they’ve done such a wonderful job saving to different buckets. They have a lot in the taxable, tax-deferred and tax-free buckets.

Logan and Corey were initially going to do large Roth conversions for this client. But then something happened. The client needed to find health insurance. They weren’t 65 yet, so they weren’t eligible for Medicare yet. Corey and Logan knew it would be impossible to get any level of decent premiums if the client still had these capital gain distributions. That would toss them over the income thresholds.

Corey and Logan made it clear to them that there was going to be a year or two of pain. They paid a lot of money in taxes. Part of what Logan and Corey did for them was trade a mutual fund for an exchange traded fund because the timing of it was good.

Retirement Considerations When Retiring Before 65

The point here is that income really matters if you’re retiring before 65 and looking for health insurance. There’s a big stigma around not being able to retire before 65 which we like to disprove. You can retire before 65, but there’s a lot of planning that needs to be done beforehand. It’s critical to have a comprehensive financial plan that gives you the clarity and confidence that you’re able to do so. Having a relationship with a CFP® Professional and CPA that work together can be a huge help as well.

With Affordable Care Act insurance, AKA Obamacare, your health insurance premiums are dictated by your level of income. What shows up on your tax return as income?

“In this client’s situation with their high level of brokerage funds, we can access those funds at a low tax ramification. We can meet all their daily living expenses at essentially no taxation.” – Corey Hulstein, CPA

For this client, the variability of the income from the capital gain distributions was going to be $70,000 to $100,000 a year and they had no control. Not only are they paying tax on those funds, but they’re also driving up the cost of their health insurance.

For anyone thinking about retiring before 65, this is a complicated area of tax law. And it’s something that’s going to be moving over the next few years. It’s important to know that there are options out there. If you don’t have a lot of flexibility in your accounts, how can you create that flexibility to retire at 62, 63 before you retire?

Financial Planning in Your 30s and 40s

To put yourself in a position to successfully retire before 65, you need to be think about how you’re saving in your 30s and 40s. That’s crucial in creating that flexibility.

“We meet people where they’re at. If we can get a year or two of planning done beforehand, there’s a possibility we can still make that happen for a particular client.” – Corey Hulstein, CPA

Another client that Corey and Logan worked with didn’t have any flexibility in their account. Essentially, all the funds were saved to IRA accounts. That meant that every time they took a distribution to meet their daily needs, they had to pay tax. That’s income that’s going to drive up the cost of health insurance.

Roth Conversions Before Retirement

The tradeoff for that client was doing Roth conversions while they’re still working. That’s not normally a strategy that we’re looking to pursue, but it creates a lot of cash that you can live on. You have access to those funds to live on in those ACA years, keeping the cost of health insurance significantly lower.

It’s important to understand that this is too complicated to do on your own. This is where you need the relationship with a CPA and CFP® Professional that work together.

“Oftentimes what’s best for you from a health insurance or tax perspective or where you’re going to draw money from, one of those things may not be the best. But how do you compromise that plan to work together?” – Logan DeGraeve, CFP®

Again, don’t just decide that you’re going to work until 65 because your friend said that health care premiums were $2,000 a month for their family. That could be the case. And we’ve seen that. But the reality is there are some ways around that.

A Nightmare Scenario

The other thing we want to talk about with capital gains distributions is that a lot of people lost 20%, 30% in these equity type funds last year. Some people lost more if they were tech heavy. What if you had to pay tax on $70,000 to $100,000 of capital gains as well? How does that make sense?

It makes sense because it all depends on what happened at the fund level. If the fund manager got out of certain positions before the market went down and reallocated, you probably still lost money based on just the movement of positions. But what that did was incur the capital gains.

“It’s a nightmare scenario for a fund manager and a taxpayer, but we see it all the time.” – Corey Hulstein, CPA

Building Generational Wealth with the Help of a CPA and CFP® Professional

Let’s shift gears to another situation that Corey and Logan were in recently involving legacy. It’s another area where it’s critical to have a relationship with a CPA and CFP® Professional as well as an estate planning specialist.

A lot of people want to leave their money to their loved ones and have a goal of being as tax efficient as possible. But sometimes there’s a tradeoff between being as tax efficient as possible and exercising control to your loved ones.

A Series of Tradeoffs with Estate Planning

Maybe someone doesn’t want their IRAs to go outright to their beneficiaries where they can access the money Day 1 and it needs to all come out in 10 years. They might be worried about lifelong income for these beneficiaries.

“The issue with this is when you name a trust as the beneficiary of an IRA, it must come out over a five-year period instead of 10 years. And it only takes around $15,000 to get to that highest tax bracket.” – Logan DeGraeve, CFP®

Like any area of life, taxes are a series of tradeoffs. When we look at estate planning and how we structure the control element versus the tax element, there’s going to be a tradeoff with these two components.

How Much Do You “Trust” Your Heirs?

When the trust inherits an IRA account, that means the IRA funds are going to go to the trust level. Inherently, what the trust is trying to do in this situation is to control how much income the beneficiaries could receive on any given year. The client that Corey and Logan were working with didn’t want their heirs to just stop working and live off their funds.

When an individual receives a beneficiary IRA, there are no restrictions. They own those funds at that point. Is it in their best interest to distribute it on Day 1? Probably not. But they have complete control to do so, whereas the trust component allows the decedent to essentially control how the funds go out to the beneficiary.

In this example, let’s say there’s $1 million of IRA funds left. Again, instead of a 10-year rule, there’s a five-year window now to distribute the funds to the trust. This stuff gets complicated, but at the heart of it now, instead of a $100,000 distribution every year to the beneficiary level, there’s a $200,000 distribution to the trust level.

You Can’t Have Your Cake and Eat It Too

The trust rates get high quickly. The top tax rate bracket is around $15,000 of income. Anything over that is taxed at 37%.

“With trust taxation, you can pay the tax at the trust level or send the beneficiaries the cash and pay the tax at the individual level. If you have restrictions on how much the beneficiaries can receive, the trust must retain the income and pay at those top tax rates.” – Corey Hulstein, CPA

In this situation, there’s nothing wrong if you want to exercise control. The tradeoff with that is they’re probably not as tax efficient as they could be.

“I enjoyed this meeting because it was a you-can’t-have-your-cake-and-eat-it-too type of thing. But if control is the most important thing to you, no problem. That’s great. But let’s look at maybe changing the tax plan that we would have moving forward.” – Logan DeGraeve, CFP®

Understanding IRMAA

What Logan was getting at was considering larger Roth conversions. Pay some tax now at 10%, 12%, 22% versus the paying at the trust level in the future. You’re probably not going to get all the IRA money over, but you’ll make a good dent. That changes the conversation from wanting to stay in the first IRMAA bracket to the second or third IRMAA bracket.

Effectively, these rates aren’t nearly as high as what they could be if you stay at the trust level.

Before we go too much further, let’s make sure we explain what IRMAA is. IRMAA stands for Income-Related Monthly Adjustment Amount. It’s a surcharge for Medicare Parts B and D. If your income crosses over certain thresholds, the first one being right around $200,000 of income, they’re going to charge you more for the exact same coverage of Medicare as everybody else. Corey refers to it as a shadow tax because it’s not something you feel on your tax return.

“IRMAA is something we must plan around. We’re managing tax rates, but we’re also managing those Medicare premiums.” – Corey Hulstein, CPA

It’s incredibly important that our clients are communicating with us what their desire is. Corey and Logan were recently working with a client couple where they were looking at going to the first level of IRMAA. Logan and Corey didn’t want them to pay more in Medicare premiums because they didn’t see the need for it.

But when the client said their IRAs were going to a trust account, the date of death is obviously unknown. So, Corey and Logan told them that they needed to start hedging against that 37%, 39.6% tax rate.

The 0% Capital Gains Rate and Net Unrealized Appreciation

The last things that Corey and Logan want to discuss regarding the CPA and CFP® Professional relationship is the 0% capital gains rate and Net Unrealized Appreciation (NUA). You’ll see that this goes back to being about a series of tradeoffs.

ESOP Plans

We’ll start by explaining NUA. If you’re working for a public employer and they offer an employee stock option purchase plan (ESOP), it allows you to take money pre-tax and contribute to the stock of the company. That money has grown over time. Oftentimes, the employer will offer a discount on the purchase price. If you work for an employer for 20, 30 years, that stock probably increased significantly.

What we see a lot with ESOP plans is that people have a very low basis in the stock. No tax has been paid on those funds. There are two options here.

“When you retire, you can roll those funds over to an IRA account or make an NUA election. With the NUA election, you roll the funds to a brokerage account instead of an IRA account.” – Corey Hulstein, CPA

But why would we do that? Because we know that every dollar we take out of an IRA account is going to be taxed at your ordinary income rates. But with a brokerage account, you’re subject to the capital gains tax rates, which are 0%, 15%, or 20%. Here’s where the tradeoff comes to play. A, what’s the basis relative to the fair market value? And B, do you have an over-concentrated stock position that’s now running your portfolio?

“For example, I don’t know if Target offers this program, but we saw what happened to Target a few months back where stock plummets. Do we want to be subject to that risk in an overly-concentrated stock position?” – Corey Hulstein, CPA

Tax Planning Isn’t Just for the Rich

When you’re looking at NUA, those are the factors that you need to think about. And remember, you can’t necessarily sell all your stock on Day 1 if it’s in a brokerage account. You would then trigger all those capital gains on the year of sale. In the IRA account, you won’t have any problem reallocating that position because there are no capital gains in the IRA.

If you’re thinking from what we’ve discussed that tax planning is just for the ultrawealthy, think again. Tax planning is critical. We’re all taxpaying Americans, so tax planning is always going to be a big piece of what we do.

“Taxes and health care are the two biggest wealth-eroding factors in retirement. Can we eliminate taxes? Likely not. But it’s important to pay as little amount of taxes over the course of your lifetime regardless of what the actual dollars and cents are.” – Corey Hulstein, CPA

Experience What It’s Work with a CFP® Professional and CPA Together

The big takeaway here from today is that if you’ve done a good job of saving for retirement, you should expect your CFP® Professional and CPA to work side by side. That relationship between a CFP® Professional and CPA is critical with creating a forward-looking tax plan.

“Tax planning isn’t just for the people that have $10 million, $15 million, $20 million. It’s just as important for someone that has $1 million. Maybe even more important.” Logan DeGraeve, CFP®

We can sit down with you and go through your situation. Don’t think you have to work until 65 because of Medicare and those type of things. If you have any questions about our retirement planning process and/or how our CFP® Professionals and CPAs work together, let us know. We can discuss all that with you during a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals. See our schedule below to schedule an in-person, virtual, or phone meeting.

See Our Schedule

We look forward to discussing our team approach to financial planning with you and building a plan for you that takes you to and through retirement. We hope that Corey and Logan’s respective insights as a CPA and CFP® Professional has helped you to understand some critical components of comprehensive financial planning.

Watch Guide | CFP® Professional and CPA Relationship

00:00 – Introduction
01:24 – What Is Tax Planning?
02:09 – Client Case: College Tax Credits
03:37 – Building the Financial Plan First
05:37 – Client Case: High Tax Rate Today, Lower Rate in the Future
08:19 – Client Case: Asset Location
11:44 – Why Income Matters to the Pre 65 Retiree
16:03 – Client Case: Tax-Efficiency and Beneficiaries
20:27 – Let’s Cover IRMAA
22:02 – 0% Capital Gains and NUA
25:00 – Tax Planning is for Everyone

Resources Mentioned in This Article

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC, does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.