Ryan Eisenman, the CEO of the digital admin software company Arch, discusses how family offices can best leverage technology for tax filing and investment benefits.
Family offices try to be at the forefront of smart investment decisions. How do you think they can have a more complete view of their portfolio?
It’s wild that a significant percentage of family offices and other sophisticated investors don’t know key information on their portfolios. This can include the value of their investments; how their investments are performing; and their total unfunded commitments across private equity, which amount to future payment liabilities. With the sheer volume of private investments that we’re seeing from our hundreds of family office clients, it’s becoming increasingly important to have a smart workflow solution that offers unique insights into individual investments and portfolios.
How can family offices minimize pain points in their tax reporting?
Don't delay the process of getting tax-ready. The collection of K-1s and other documentation is an extremely time-consuming process. There is also the potential for the documents you receive to be inaccurate or instances where you were not the intended recipient. It's important to have structure to tackle this burdensome administrative responsibility.
Get to know the nuances of the hurdles that come along with private markets investing. For example, funds of funds historically provide their tax documents later than other vehicles. This is because they are unable to prepare a final K-1 until they receive all underlying K-1s of their investments. Once you have a stronger understanding of the different pieces of the puzzle, like K-1 arrival dates, you can ensure you don’t run into any unforeseen challenges.
What are the common mistakes you’re seeing families make when it comes to taxation?
It's critical to understand the complete picture of your private markets investments. Most investors do not have an accurate view of the after-tax return for their investments, let alone the actual return for their investments.
There are various opportunities for families to minimize their tax burden based on the investments they're allocated to. For example, within real estate investments, there is the option to report depreciation of assets for possible tax deductions. Additionally, if an actively traded hedge fund reported losses, those may also be disclosed for potential tax benefits. Overall, it's important to have a tax expert on your side that understands these complexities and who can ensure they are addressed appropriately.
What do you see as some of the most difficult challenges family offices face today?
There’s more optionality, information and complexity than ever before. Markets move quickly, and the types of investments available to family offices are also evolving quickly. It’s easy to get bogged down in a deluge of paperwork and logistics.
What does the future hold for private markets investing, in your opinion?
We’ll continue to see the proliferation of alternative investments, where private market investments will increase as a percentage of an individual or family’s overall asset allocation, to where they may make up the majority of a portfolio for many investors.
Top tax strategies to benefit retirement planning
By JOHN MAJORS
Wealth planning can be fluid and complex, and retirement savings programs can provide advantages at different points in a taxpayer’s life. However, as the truism goes, “Nothing can be said to be certain, except death and taxes.” Before a taxpayer passes away, that person should explore strategies that could lower payment obligations while simultaneously saving for retirement.
While obvious strategies are, well, obvious — pay yourself first by participating in a qualified retirement plan and max out contributions, especially if there is an employer match — there are intricate programs and approaches that can mitigate tax exposure within retirement plans and wealth management accounts.
These three strategies take significant planning and exacting execution to ensure that taxpayers can take full advantage of their benefits.
The HSA triple play
Health savings accounts (HSAs), the companion savings plan for high-deductible health plans, pack a triple-tax benefit not seen in any other savings program. First, there is the upfront deduction, as contributions reduce taxable income. (Be mindful of limits based on marital status and age.)
Second, the earnings on HSA funds grow tax-deferred. Additionally, HSA funds can be invested, making them more dynamic than a traditional savings account, though not everyone takes advantage of this opportunity. The Employee Benefit Research Institute reported that only 12% of HSA funds were invested in 2021.
Finally, withdrawals are tax-free if they are used for qualified medical expenses. Also, at a certain age, based on several factors, the funds can be withdrawn for nonmedical expenses without penalty.
The added benefit of an HSA is that contributions can accumulate, and there is no annual “use it or lose it” component like financial savings accounts (FSAs) and other medical expense savings accounts.
529 plans
College is expensive and tuition climbs every year. The cost of in-state tuition and fees at public national universities has increased by about 56%, when adjusted for inflation, in the past 20 years, according to U.S. News & World Report. Congress created 529 plans decades ago to help save for the cost of higher education. However, the program has benefits beyond financing tuition.
Contributions to a 529 plan grow tax-free, and withdrawals for qualified educational expenses are not taxed. In addition, any remaining unused funds can be transferred to another qualified family beneficiary — including siblings, grandchildren or parents — without tax consequences.
There’s also an investment benefit to a 529 plan. As of this year, unused funds can be rolled over into a Roth IRA for the current beneficiary without penalty or additional taxes. There are limits and other restrictions, so check with an adviser on the rules.
The back door and the mega-back door
Most financial advisers are aware of back-door Roth IRA contributions, which allow individuals to participate in a Roth IRA even if they exceed the allowable income limit. Roth IRA contributions are currently limited to $7,000 per individual ($8,000 for those over 50). The funds grow tax-free, and withdrawals in retirement are not taxed.
So what makes the so-called mega-back-door Roth such a big deal? The high elective deferral limit is currently $69,000 (or $76,500 for those 50 and older), allowing some retirement plan participants to defer significant after-tax dollars to a traditional retirement plan and then convert those contributions to a Roth.
It’s an investment strategy that advisers working with high-income-earning clients, especially those older than 50, may find a valuable option in providing additional tax savings for those who qualify.
While the current tax season has ended, it’s never too late to implement one of the above strategies to help clients pursue a tax-efficient method of saving for retirement. It is always good to revisit potential strategies in case a client’s income or situation has changed.