We are very focused on taxes. Tax planning is a huge part of our business, and we are so good at it. We are always looking at people’s tax situation, figuring out ways we can reduce income tax liability now and long term into the future. We’ve made a big headway in our community with that and with our centers of influence and strategic alliances. And believe it or not, we even have other tax firms that are not within our direct community that let us work with their clients for financial planning, even though we actually have a tax practice where we do over 2,000 income tax returns.

I want to talk to you about how important it is to get the education. I’m going to share with you a tool here in a moment that you can use to simplify tax planning. When we are thinking about taxes, there are really three ways that you can leverage your tax planning knowledge once you have gotten it. For the U.S. advisors, there is Ed Slott’s Elite IRA Advisor Group. I learned so much from that group, foundationally. I can’t say enough about that group, which is a big part of foundational tax knowledge that relates to financial planning.

But you can build it. It’s one of the things we did. We built a tax practice from the ground up to over 2,000 tax returns. We built critical mass with a ton of people who were doing transactional work with us, income tax preparation, and we were then able to explain how tax planning and financial planning were the gaps that they didn’t have, and we parlayed them into financial services clients.

But you don’t just have to build it. If that’s overwhelming or that’s not something you want to do — there’s definitely a process for that — then you can buy it. You can purchase a tax practice and just start plugging in and marketing to those tax clients and meeting people through tax season that could be good financial planning clients. Or, as I mentioned before, you could borrow it. Now, we’ve done all three. We have a documented process for all three. Build it, buy it, borrow it. At the end of the day, if you get that fantastic tax-planning knowledge, leverage it. Get in front of tax-preparation clients. Get in front of them, and start talking about the tax-planning concepts. It parlays into them becoming financial services clients. Trust me; it works.

Now let’s talk about taxation of money. To keep it really high level and simple, there is good, better and best money. All money’s good money, but the good money is pretax money. Pretax money is money that you’ve never paid income tax on because you socked it away before you actually received it. All countries have similar types of programs. But it’s also the money that gets taxed, typically, at the highest rates. Ordinary income in the U.S. is anywhere from 0 to 37 percent. But up to 37 percent, it’s still good money. We want to take advantage of matching and 401(k)s, etc.

But then there is better money. Better money is post-tax money. Why is it better money? Because you have bought the government out of that money. After we take advantage of matching, we want to buy the government out. We get stepped-up cost basis or more preferential tax treatment on long-term capital gains, for example, 0 to 20 percent. Better money is post-tax money.

Then best money is tax-favored or tax-free money. We want to utilize these vehicles that we can get money in to get 0 percent tax in most situations if you follow the rules and play the cards right. How do we explain to the client the three different types of money? We utilize the tax-efficient funnels. We utilize these funnels to explain how we funnel the money through a pretax or a post-tax or tax advantage. Mainly, what we are focused on is trying to get money through the pretax. Because, ultimately, with the pretax, you get the tax deduction upfront, but it’s taxable when it comes out. With tax advantaged, you may not get the tax deduction upfront in most accounts, other than HSA in the U.S., but you are going to get tax-free income on the tax advantage when it comes out. That’s the key there.

We utilize these funnels to simplify how we explain this to a client. What we want to do is just give them a baseline understanding and show them how it’s so important, based on the current administration and current tax levels, to be put in their current situation. How much money they are making, how much money they are going to make in retirement, what their pension or income is going to look like — is a big part of that going to be social security? This is tax planning. We call it “tax modeling.” We start modeling out their tax situation now in this current or next year and then fast-forward it out into retirement. We can start modeling and making better decisions on whether we should be putting money into pretax, depending on the year, or into after-tax, tax-advantage, tax-free accounts.

It’s going to depend again on the current administration and also their current situation. But from year to year, we might change that. We might this year put more money here, or the next year put more money over here, explaining that to the client. The funnels fill the buckets to make sure we pay the least amount of taxes now and into the future.

Jason L. Smith, BPC, CEP, a 16-year MDRT member with 15 Top of the Table honors, is a nationally acclaimed speaker, financial planner, bestselling author, coach and entrepreneur. He is CEO and founder of C2P Enterprises, as well as his own holistically run financial services practice, The JL Smith Group. He regularly trains advisors through live events, webinars, podcasts, coaching calls and study groups, and has been recognized as one of Investment News’ 40 under 40.