Nerd's Eye View blog

Reducing Retirement “Outrage” Risk With Adjustment-Based Planning And Communication

May 19, 2021 07:02 am 3 Comments CATEGORY: Retirement Planning

Financial advisors often seek to help clients understand the range of outcomes they might experience when following a given financial plan, and frequently rely on statistical probability outcomes derived from Monte Carlo simulations to report on what outcomes the future may hold. In turn, some researchers and practitioners have suggested extending the analysis even further, by accounting for related statistics, such as Magnitude of Failure and Expected Failure, to shore up the weaknesses of Probability of Failure and further enrich the breadth of information that prospective retirees have when considering the best plan to pursue. However, a focus on ever-deepening statistics alone ignores other important aspects of how retirees perceive risk.

Peter Sandman, in his book Responding to Community Outrage: Strategies for Effective Risk Communication, suggests an updated definition of risk that includes not just an objective component – “Hazard”, which measures probability and magnitude of failure – but also a subjective component, which Sandman calls “Outrage”. In Sandman’s framework, “outrage” accounts for an individual’s emotional reaction to risk. For instance, if a plan’s Magnitude of Failure is relatively low, we may think that this will calm retirees’ fears; however, including statistics based on failure in client communications may highlight low-probability-but-catastrophic and dreaded plan outcomes that are involuntary and uncontrollable. Rather than calming fears, these factors may instead amplify outrage and, therefore, heighten the perception of risk. And because Sandman finds that outrage can weigh just as much on our evaluation of risk as the hazard itself, advisors who frame their planning process and communication to reduce their clients’ negative “outrage” emotions can potentially help clients better understand what their plan’s outcomes really mean, and make better choices.

In practice, this means moving away from outrage-inducing failure-based statistics and language, and instead counseling towards dynamic adjustments over time (e.g., spending more if they can and less if they must) as circumstances change and the risk landscape evolves. This also allows advisors to reframe retirement risk in more adjustment-based and even-less-outrageous terms that emphasize what is voluntary and controllable, with a process to manage a chronic (not catastrophic) risk, focusing more on questions like: “What would need to happen to trigger an increase or decrease in income?”, “If we find ourselves in such a situation, how large would the increase or decrease be?”, and “What would we expect a household to experience in a good/bad financial environment when following this plan?”

Ultimately, the language we use to describe risky outcomes – and the potential “outrage” it can induce – plays an essential role in the conversation around retirement risk, as much as discussing the hazards (objective risks) of retirement itself. By moving away from the concepts and language of Failure and Success, the financial advisor can lessen the emotional reaction clients may have in response to their financial plan. Similarly, when advisors present adjustments as a natural and necessary part of the plan, clients will be more likely to accept and proactively implement the changes that may be required for a successful plan outcome. By adopting Sandman’s updated definition of risk, and accounting for both objective Hazard and the more subjective Outrage components of risk, advisors may find that clients are not only more open to having conversations about their financial plans but also more willing to listen to their advisors, follow their financial plans, and make changes when action is needed!

#FA Success Ep 229: Navigating The Evolution Of Financial Planning Over 50 Years Of Building, With Alexandra Armstrong

May 18, 2021 07:05 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 229^th episode of the Financial Advisor Success Podcast!

My guest on today’s podcast is Alexandra Armstrong. Alex is the Founder and Chairwoman Emeritus of Armstrong, Fleming, and Moore, a hybrid RIA in Washington, D.C. that she launched in 1983 and ultimately sold to four successors after a career of over 40 years as a financial advisor.

What’s unique about Alex, though, is that she’s one of the true pioneers in the industry, earning her CFP in 1977 as one of the first CFP classes in the country (and the first person in Washington DC to earn the designation), serving for seven years as the first woman chairperson of the International Association for Financial Planning (which would later become the FPA), championing the initial formation of a group of independent broker-dealers that would eventually become the Financial Services Institute, and serving as a chairperson for the Foundation of Financial Planning, a board that she continues to sit on to this day.

In this episode, we talk in-depth about Alex’s journey through the financial services industry at a time when there were even fewer women in the industry than there are today, her appreciation for the fact that she was mentored by two women who were both top producers at their firms in the 1970s (demonstrating that even early on, women could find success in the industry), Alex’s early recognition that providing comprehensive financial planning was a competitive advantage and a way to differentiate herself beyond “just” selling investment products, and the camaraderie that Alex found amongst other early financial planners from around the country who shared a passion for helping people with their entire financial picture in an industry that was still entirely focused on selling limited partnerships and other financial services products.

We also talk about how Alex’s natural ability as a delegator was (as she puts it) the real secret to her success (as it allowed her to spend more of her time on client-facing activities), the importance of involving both spouses of a client couple in the planning process (going so far as to send each spouse a separate copy of the financial plan before the review meeting so they would each have time to think about any questions they might have), and how having the ability to be picky about who Alex chose to work with helped her foster the formation of lifelong client relationships.

And be certain to listen to the end, where Alex shares why she believes a career in financial planning is ideally suited to women (because it allows them to utilize their emotional intelligence, and gives them the opportunity to do work where they can use their intellect, make a real difference in people’s lives, and earn a good living), how Alex struggled emotionally when it was time to transition out of her own career that meant so much to her (and how she’s found purpose and satisfaction serving on various boards, including her ongoing service to the Foundation for Financial Planning), and how Alex found that transitioning to retirement ultimately wasn’t all that disruptive because of the wisdom that her clients shared with her about retirement after starting their own next chapters.

So if you’re interested in learning about Alex’s pioneering career in financial planning, some of the key lessons she’s learned along the way, or how her clients’ experiences entering retirement helped her with her own transition, then we hope you enjoy this episode of the Financial Advisor Success Podcast with Alexandra Armstrong.
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Managing Client Variability As A Pathway To Scalable Efficiency

May 17, 2021 07:04 am 0 Comments CATEGORY: Practice Management

As financial advisory firms grow and accumulate more and more clients over time, the increased client load creates a growing pressure to find ways to be more efficient to scale the business. Yet the challenge is that with an ever-growing client base, where each different client has different needs – and where advisory firms often differentiate themselves by providing individualized and customized services to the differing needs of every client – it becomes increasingly difficult to systematize the business, precisely because the level of variability from one client to the next makes it difficult or impossible to scale efficiently.

Rather than trying to figure out how to gain efficiency when serving an ever-widening range of clientele, though, an alternative approach is to actually try to tackle the issue of “client variability” itself, recognizing that having clients with a wide range of needs is itself a choice of the advisory firm… as is the firm’s decision of whether or how much to accommodate those varying needs (and/or whether or how to charge more for the service of greater individual customization).

In her Harvard research on “Breaking the Trade-Off Between Efficiency and Service”, Dr. Frances Frei highlights two alternative strategies to manage client variability between just “doing more and charging more” or “doing less and charging less”: low-cost accommodation where the firm offers flexibility to clients but ‘only' within a fixed range of choices, and uncompromised reduction where the firm doesn’t make compromises in the services it offers but instead reduces the breadth of who the firm serves in order to have a more focused clientele where their ‘customized’ services can still be delivered as repeatable expertise.

These techniques to manage client variability can then be applied across each of the domains where client variability occurs: manage ‘arrival variability’ (when clients meet) by offering them incentives to meet during quiet times of the year and/or using flowcharts, checklists, or other client educational materials to handle common client questions without a meeting; manage ‘request variability’ by rolling out a portal for clients to access their own reports/requests on demand, or by purchasing more specialized tools and then systematically rolling out analyses or solutions for all clients who might be interested in a similar service; manage ‘effort variability’ by implementing tools like Knudge or and e-signature to make it easier for clients to get through the process, or consider rolling out a service to turn a challenge into an opportunity (e.g., converting the data gathering meeting into a “Get Organized” meeting); and manage ‘subjective preference’ variability by either creating a standardized solution for more common client preferences (e.g., a set of ESG models for SRI-oriented clients), or by systematizing their higher-level service requests (e.g., creating a standard [email protected] that top clients get to have their needs handled quickly by anyone on the team who gets/sees the request first).

Ultimately, though, the key point is simply to recognize that the challenge of having an ever-widening range of clients with an ever-widening range of demands – and the challenges of efficiently scaling across such a wide range of needs – is itself a choice that an advisory firm has. Which means it’s not only a matter of either doing-more-and-charging-more or doing-less-and-charging-less, as there’s also an opportunity to either find more scalable low-cost accommodations to make that also enhance efficiency, or to choose a less-variable range of clientele in the first place in order to create room to provide a deeper service for those clients’ unique needs.

Weekend Reading for Financial Planners (May 15-16)

May 14, 2021 02:58 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that the Department of Labor has withdrawn its proposed new Independent Contractor Rule, that would have made it easier for many firms to treat their "gig economy" workers as contractors and not employees (an increasingly controversial issue), but also would have further cemented the treatment of independent advisors as independent contractors with their platforms... leading the Financial Services Institute to join in a lawsuit challenging the withdrawal of the rule as the independent broker-dealer advocacy organization pushes to preserve contractor status for independent advisors.

Also in the industry news this week is an emerging debate between Riskalyze and various "portfolio stress testing" competitors about what is the best way to evaluate a client's risk tolerance and the prospective risk of a proposed portfolio.

From there, we have several interesting articles on retirement:

The Social Security Administration is testing a new, shorter version of the Social Security statement that would more clearly highlight the increase in retirement benefits for each year that they're delayed
How the SECURE Act has impaired the outlook for trusteed IRAs (and where they're still worth considering)
The rise of aging-in-place technologies is increasing how long seniors stay in their homes... which may be quickly leading to an overbuilding glut of senior housing
The rise of automatic enrollment 401(k) plans is leading to a rise in early withdrawals and 401(k) loans (that lapse), raising questions of whether the industry may be pushing too hard to automatically enroll those who really can't afford to save?

We've also included a number of articles on credit cards and cash flow planning:

The pandemic is leading to the largest ever pullback in the use of credit cards and may be spawning a new era of credit responsibility (and a new surge of credit card issuers marketing to get more people to sign up for new cards!)
Considerations when swapping to one of the 'hot' new credit card deals and giving up a long-standing credit card (that may be a foundational pillar in one's credit score)
How keeping significant cash on hand (or in the bank) may be a significant drag on returns but a worthwhile trade-off to sleep well at night?

We wrap up with three final articles, all around the theme of the emerging in-person/virtual hybrid work environment:

How to think about the kinds of tasks that should return to being in person, versus the ones that might be better suited to remain virtual
Tips for recognizing team members in a virtual environment (when you can't just call everyone into the break room or gather around a desk to celebrate a win)
How advisory firms are shifting in their own business approach with clients now that offices are re-opening to in-person meetings, but it turns out not all clients want to return to in-person!

Enjoy the 'light' reading!

Preparing Clients For Action By Confronting Their Fear Of Failure

May 12, 2021 07:06 am 0 Comments CATEGORY: Client Trust & Communication

Change is a constant reality of our lives. In some cases, change beyond our control occurs in the world, and we have little choice but to respond. In other cases, the change is something that we wish to initiate to improve our own situation. Yet, the reality is that, in either case, change is hard. So much so that it is not uncommon for us to fail in our initial efforts to make a change. Unfortunately, though, such experiences with failed attempts at change (or lapses after a change had seemingly taken hold) can result in feelings of dread and frustration when we consider a future change, as we potentially get stuck thinking about past efforts that may have been unsuccessful and lose confidence that we’ll be successful this time. Which raises the question: when change is hard, and failure and relapses are common, what can financial advisors do to help clients overcome fear and reluctance, negative self-talk and doubt, and actually implement the action steps they need to take to achieve their goals?

In order to address the negative self-talk that can preclude clients from taking action on their financial plans, financial advisors can encourage their clients to openly share and discuss their frustrations, feelings about their past efforts at change, and the things that make them nervous about moving forward. While these conversations may be difficult to initiate, worksheet tools adapted from the Transtheoretical Model (TTM) of change can provide advisors and clients with a valuable opportunity to examine specific reasons that create frustration for the client. And by closely examining how the client’s feelings and attitudes around past efforts influence their ability to implement change, advisors can help clients understand how considering unsuccessful past efforts as lessons and planning opportunities (rather than as failures!) can be highly effective in removing negative self-talk roadblocks. By adjusting their perspective around past attempts and the opportunity for planning that they present, clients may also improve their self-image and, ultimately, build financial self-efficacy.

Advisors can also help clients by exploring the emotional significance of their goals to strengthen their commitment to change. Because understanding the emotional reasons behind a goal tends to be a much more powerful motivator than simply relying on willpower and trying to tackle goals that have little (if any) personal significance for clients. Goals that are based on the notion that they simply seem like the sensible or ‘right’ things to pursue will be much harder to commit to, in contrast to those that have personally significant reasons that bring some form of emotional satisfaction. To this end, another worksheet tool adapted from TTM offers advisors a resource to initiate conversations with clients to elucidate why pursuing their goals is personally meaningful to them and the reasons that implementing change to achieve those goals is so important on an emotional level. And this conscious understanding and contemplation of the emotional significance of goals can reveal highly compelling reasons for clients to stick to their commitment to implement change over the long run.

Ultimately, the key point is that by understanding the various roadblocks typically associated with each stage of the change process, such as negative self-talk and dread that arise in the Preparation stage, advisors can engage their clients in specifically structured discussions that help them navigate through change. Helping clients successfully move past the Preparation stage will reward financial advisors with seeing their clients through to the final Action stage, where clients will be fully prepared to finally take action to implement the changes they need to realize their financial goals!

#FA Success Ep 228: Accelerating Growth By Paying To Outsource Lead Generation And Prospect Follow-Up, With Jeremy Keil

May 11, 2021 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 228^th episode of the Financial Advisor Success Podcast!

My guest on today’s podcast is Jeremy Keil. Jeremy is the founder of Keil Financial Partners, a hybrid-RIA located in Milwaukee, Wisconsin that manages $85 million for 170 clients.

What’s unique about Jeremy, though, is that he’s been able to double his firm’s size over the past two years not by prospecting more aggressively but by leveraging two external lead generation services, SmartAsset and Wiseradvisor, and then outsourcing all the follow-up outreach to those leads so he only spends time meeting with qualified prospects who want to meet with him (in addition to focusing the rest of his time on his existing clients and other needs of the business).

In this episode, we talk in-depth about why Jeremy feels that spending as much as 15% of his gross revenue on marketing generates a good ROI as long as he can generate 15% organic growth from that marketing spend, why Jeremy focused on his branding and refining his retirement planning niche to make sure his messaging resonated with his target audience first, and how Jeremy’s been able to compound the benefits of purchasing leads by publishing a wide array of digital marketing content to nurture those leads in his marketing funnel.

We also talk about Jeremy’s passion for helping his clients with their retirement planning, how he differentiates himself from other advisors focused on retirees by using a “decision-based” financial planning approach that prioritizes those factors that his clients can control (or, at least, influence), why Jeremy has chosen to eschew more mainstream financial planning software packages and instead uses a combination of Income Solver and Holistiplan in tandem to map out his clients’ retirement income and tax planning needs, and how Jeremy has been able to increase his firm’s growth trajectory by building on a number of leads he’s received from SmartAsset to develop expertise in the unique planning needs of local employees of Harley-Davidson.

And be certain to listen to the end, where Jeremy shares how his focus on offering more well-targeted services for his particular niche clientele allows him to charge slightly higher-than-industry-average fees, how Jeremy emphasizes the value of financial planning over investment management work by quickly lowering his AUM fee schedule down as account sizes grow, why Jeremy has found that the pandemic has improved the data-gathering phase of the initial client relationship (and why he’ll keep that process fully virtual even after things return to “normal”), and why Jeremy feels that his most valuable client deliverable isn’t a physical plan that they can hold in their hands, but the post-meeting follow-up email that helps them focus on the steps they’ll be taking next.

And so whether you’re interested in how Jeremy leverages lead generation services to create consistent growth, how he utilizes Holistiplan and Income Solver to help his clients plan for their retirement, or how he budgets for his marketing expenses, then we hope you enjoy this episode of the Financial Advisor Success Podcast with Jeremy Keil.

How User Experience (UX) Improved My Advisor Website SEO (And How It Can For You, Too)

May 10, 2021 07:08 am 0 Comments CATEGORY: Marketing

In this modern era, and especially since the pandemic, financial advisors’ websites have become a crucial part of developing new leads. However, while many advisors do not build or join a practice because of their experience in web design (justifiably!), their ignorance can prove dangerous on at least two fronts. First, while a financial advisor’s website design technically tells a prospective client nothing about that advisor’s ability to provide valuable advice, visitors often use their website experience (perhaps subconsciously) to assess a financial advisor’s work quality and professionalism. Second, SEO signals, important criteria for websites to get found in the first place, are increasingly based on quantitative User eXperience (UX) metrics as determined by search engines such as Google. Which means that websites with higher UX standards will fare much better in search engine rankings, making them more visible to prospective clients!

Fortunately, advisors looking to evaluate their site’s UX have several key indicators they can use. Some easy measurables such as dwell time (the amount of time someone spends on a page) and bounce rate (the percentage of people who visit only one page before leaving the site altogether) are just two indicators that can help determine if potential clients are finding value on a landing page. Additionally, many of a website’s key UX metrics can easily be tested through various assessment tools, such as Google Analytics and PageSpeed Insights. For advisors who find their website UX stats raise some alarms, thankfully there are often easy solutions to make correcting adjustments that become obvious once the problem is viewed from the perspective of how the user experience can be faster, easier, more convenient, and more useful.

When a website is translated through the lens of the user, advisors need to make two assumptions: first, that prospective clients are visiting the website with no prior knowledge of the advisor or firm; and second, that they are not here to spend a lot of time to do a deep read (unlike our Nerd’s Eye View blog readers!). In essence, when reviewing their website’s UX metrics, an advisor has to ask themselves, “If someone only took one glance at the first part of my front page, would they understand what I do?” In that first glance, all an advisor has to affirm is relevance and competence.

Once the user is convinced they’re where they belong, a well-structured, user-focused website invites clients to dig deeper into the website, where further UX features affirm trust and competence, and also help improve the visibility of the website in search engine results. For example, a page’s loading speed not only makes a difference to the user, but also to search engines like Google, which use a website’s loading speed as an important SEO ranking criteria. Other features, such as non-intrusive (but still noticeable) pop-ups that come after a client has shown interest in content, can help genuinely interested people find their way onto an advisor’s email list.

Ultimately, the key point is that good UX strategies can create trust, which encourages inquiry and helps to convert visitors into clients. Ironically, a website made for users (rather than for search engines) is often a website that performs well in search engine rankings. And when websites cater to users and showcase what makes an advisor unique, valuable, and engaging, UX can have a tremendous impact on people looking for an advisor – not just by helping them find the right advisor, but also by encouraging long-term engagement with their advisor!

Weekend Reading for Financial Planners (May 8-9)

May 7, 2021 02:57 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with a deep dive into the new "SECURE Act 2.0" legislation that this week passed the House Ways and Means Committee... which means it may still be months until the legislation is ultimately finalized and passed, but provides a good indicator of what's coming next from Congress in the world of retirement planning, from a new increase in the RMD age (from age 72 to age 75 by 2030), expanded catch-up contributions, inflation-indexing the limits on Qualified Charitable Distributions, and even the creation of a new "Office of Retirement Savings Lost and Found" to help workers track down old 401(k) plans.

In addition, there are several additional industry "news" articles, including:

A New York Appeals court strikes down the state's Best Interest standard for annuity agents
Ric Edelman's RIA Digital Assets Council launches a new 13-hour online course in cryptocurrency and blockchain

From there, we have several interesting articles on retirement:

The IRS acknowledges it made a recent 'error' in Publication 590 and that the new 10-year rule for inherited retirement accounts will not require annual distributions in each year (just a liquidation by the end of the 10th year after death)
How options-based strategies may become the next big thing in retirement income strategies, and why Registered Index-Linked Annuities (RILAs) may be especially well-positioned to provide a cost-effective solution
How the pandemic is spawning a new wave of early retirees with a "life-is-short" mindset who want to retire and enjoy more of their lives while they can

We've also included a number of practice management articles on the theme of growing and scaling an advisory business:

A new white paper from Bob Veres and Matthew Jackson explores how the advisory firm of the future is not just incrementally better than the current offering but an entirely different solution
How hiring a CEO to professionally manage an advisory firm can be the key to growing to the next level
A look at publicly traded RIAs and investment management firms shows that despite "robo" fears, multiples for advisory businesses continue to expand in the current environment

We wrap up with three final articles, all around the theme of the future post-pandemic workplace:

How Google was once known for creating campuses that did everything they could to keep employees there, but is now rebuilding for a future where employees are in the office less and less
The way workplace "perks" are changing where the new key is "flexibility" for workers
How suburban retail space may become the new big office space as demand for traditional centralized office space continues to wane

Enjoy the 'light' reading!

Kitces & Carl Ep 59: The Time-Finding Trap – How Do You Find The Time To Get More Time Efficient?

May 6, 2021 07:05 am 3 Comments CATEGORY: Kitces & Carl Podcast

Over the past several years, the ever-expanding technological landscape has given financial advisors a plethora of tools that they can use to expand their reach, market their services, communicate with and serve their clients, and manage and grow their businesses. Yet, those same technological tools that have been so useful for advisors (i.e., email, social media, team communication platforms, CRMs, etc.) can also serve as irresistible distractions that can fill an advisors’ days with low-impact tasks as they react to an endless stream of notifications and, in the process, end out sacrificing their ability to do the things that can move their practices forward and allow them to do their best work for their clients. Which raises the question: how can financial advisors create the space in their schedules for high-impact work and actually leverage technology to do so (instead of sacrificing real productivity for ‘unnecessary’ responsiveness)?

In our 59th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss a key framework that advisors can use to prioritize their tasks, actionable strategies to create an environment that’s conducive to spending sufficient time on those things that are the most important, and how to manage their own natural tendencies to get distracted by life’s constant stream of interruptions.

The best place to start is by using the task prioritization framework introduced by Steven Covey over 30 years ago, which uses a container to represent the unalterable amount of time that we all have in any given day or week. The container, as the analogy goes, can be filled with rocks (the big, important stuff that moves us forward), pebbles (which are the things that have to get done but don’t necessarily move the proverbial needle), and sand (which is just the constant stream of communication and distraction). And the challenge that every advisor faces is that, if they don’t actually prioritize their rocks, then the sand and pebbles will naturally fill up all the available space in their container (which is why it’s easy to feel as if there’s never enough time to tackle the big rocks).

From there, the best way for advisors to make time for their rocks is to put it on their calendar… not mentally earmark a slot at some point during the week to get around to the rock, but literally book the time on the calendar, just like it was a meeting with a big client that can’t get moved or interrupted. Because when something inevitably comes up, advisors can (without missing a beat) respond that the time slot is already booked on their calendar. And, in order to create an environment conducive to the sort of deep concentration that working on rocks requires, advisors can turn off all incoming email and text notifications and set messaging apps on Do Not Disturb.

After making rocks a priority and eliminating distractions comes the hardest part, which is maintaining focus to actually do the work (and avoid the temptation of taking a quick look for any messages that may have come in). Maintaining focus, just like any other worthwhile endeavor, requires practice, but one effective strategy to get started is by setting milestones, and when a milestone is reached, the advisor can take a break and do something pleasurable (like going for a walk or getting an afternoon coffee).

Ultimately, the key point is that advisors who want more time to tackle the important things that will push themselves, their clients, and their businesses forward can start by actually booking time on their calendar to force time to be made. And if that causes issues because other urgent tasks aren’t happening, then the next logical step is to find someone to help handle them. Because, at the end of the day, there will always be more things to do than anyone has time for, and advisors who don’t actively take control of their calendar will always find themselves reacting to the sand and never have enough room for rocks. Or, put another way, no one has a magic machine that allows them to do more than anyone else. Rather, the real secret of time management isn’t about being more efficient; it’s about making the things that matter most (but aren’t necessarily the most urgent) the real priority.

Reconstructing Lost IRA Basis To Help Avoid Double Taxation

May 5, 2021 07:02 am 10 Comments CATEGORY: Retirement Planning

From time to time, individuals (typically high-income) can make after-tax contributions to traditional retirement accounts that are usually designated for pre-tax funds. No deduction is received for these contributions because the contributions have already been taxed and should not be taxed again. To avoid such double taxation, however, the after-tax contributions must be recorded properly, and those records must be adequately maintained. This is particularly important when after-tax amounts end up in Traditional IRAs.

After-tax contributions can make their way into Traditional IRAs via two separate routes, either via direct contributions of after-tax amounts or through rollovers of after-tax dollars previously held in an employer-sponsored retirement plan. Critically, while many taxpayers think that their IRA custodian is keeping track of the after-tax amounts they have in their Traditional IRA, it is, in fact, the taxpayer who is responsible for doing so. Specifically, taxpayers are required to file Form 8606, Nondeductible IRAs, to keep track of such amounts. Sometimes, for numerous reasons, taxpayers may fail to file Form 8606, which can result in basis being ‘lost’. Yet filing Form 8606 does not always capture IRA basis, as it is only required either when after-tax amounts go into the Traditional IRA (via a nondeductible contribution or a rollover of after-tax funds from employer-sponsored retirement plans) or when after-tax money is distributed from a Traditional IRA (including a Roth conversion).

Accordingly, there can be gaps between these actions with long periods of time during which Form 8606 is not required to be filed. In the interim, various events, such as changing CPAs or the death of the client, can lead to a previously filed Form 8606 being ‘forgotten’, resulting in a similar outcome to having never filed the form in the first place! One way to dramatically reduce the likelihood of properly reported basis being forgotten is by filing Form 8606 every year regardless of whether it is required. This way, a taxpayer can be sure that their cumulative IRA basis will always be available on their most recent income tax return.

In the event Form 8606 was not properly filed to begin with, basis can be reconstructed from scratch. To reconstruct nondeductible Traditional IRA contributions, taxpayers can find old Traditional IRA account statements showing contributions, past years’ Form 5498 (Individual Retirement Arrangement Contribution Information), or Form 1099-R (Quantifying And Proving Prior Years’ Nondeductible IRA Contributions) that report such amounts. Alternatively, they can also request a Wage and Income Transcript from the IRS. All of these could be used to prove that a contribution to a Traditional IRA was made. And if a contribution to a Traditional IRA was made with no deduction taken, which can be verified with copies of the relevant tax returns or by requesting Return Transcripts to the extent that such returns were otherwise unavailable, the amount is a verified nondeductible contribution!

Ultimately, the key point is that taxpayers may still be able to deduct tax-free distributions, even if they have ‘lost track’ of the basis in their Traditional IRA accounts. By turning to a multitude of resources to help identify the nature of their retirement account contributions and rollovers, financial advisors can help prevent the double taxation of after-tax contributions made to clients’ retirement accounts!