Small-Business Clients Will See Biggest Tax Impact on Retirement Plans

During a highly detailed webcast session hosted by Kravitz Inc., now an Ascensus company, the firm’s president, Dan Kravitz, discussed the potentially significant impact the Tax Cuts and Jobs Act may have on financial advisers and employer-sponsored retirement plans.

Like other experts to address the topic, Kravitz stressed that financial advisers cannot act in the capacity of a certified public accountant (CPA) or any other “tax adviser” who could legally represent a client in front of the Internal Revenue Service (IRS). While clients will undoubtedly come to their financial advisers looking for tax advice during 2018, this is simply not territory in which brokers or registered investment advisers can offer specific advice or recommendations.

Given this, it would naturally make sense for advisers to work to create new partnerships this year with service providers who can offer up real tax advice. As Kravitz noted, clients can be surprisingly appreciative as a result of successful referrals, leading to increased loyalty and a greater depth to the advisory relationship.  

Kravitz also stressed that IRS guidance is still needed to address many unanswered questions left open by the plain text of the Tax Cuts and Jobs Act as passed by Congress and signed by President Trump—so once that guidance comes out, what has been broadly discussed so far could change.

While they cannot advise on the issue directly, Kravitz still urged advisers to familiarize themselves with the changes that have been made to the treatment of pass-through entities, highlighting that most small business owners organize their companies as a pass-through entity. Plan advisers will have an important role to play as business owners come to terms with how they will structure their various sources of income in 2018, and how these income sources may interact with both qualified and non-qualified retirement plans.

“Many but not all of these owners can now deduct up to 20% of qualified business income,” Kravitz noted. “There are many limitations and phase-outs that have to be considered, but pass-through entities are taxed at the individual level, as we know, so it is important to understand the new individual rates, because it will all directly impact plan design decision that do fall within our purview.”