5 retirement planning tips for tax clients
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5 retirement planning tips for tax clients

Jan 04, 2019 · 2 min read · AICPA Insights Blog

Successful retirement planning is all about strategy. Analyzing sources of income, estimating expenses, choosing investments and managing assets are vital to safeguarding long-term financial comfort later in life. However, one aspect of retirement planning is sometimes overlooked — tax planning.

As a CPA, you’re already helping your tax clients with their retirement planning needs, but are you doing enough? Take a moment to review these tax considerations to make sure you’re exploring all the options with your retiring clients.

Looking at tax as part of retirement planning

Tax issues are a big part of nearly every major life moment. Retirement is no different. Perhaps what stands out the most, though, is the number of moving parts that contribute to tax issues at this stage in life. These include:

  • analyzing the best account types to use when saving for retirement

  • determining how much money to save for retirement

  • exploring when to start taking Social Security benefits

  • staying mindful of taxable income

  • reviewing pension plan options

  • considering modified adjusted gross income limits for Medicare purposes

  • managing a second home or rental property

  • picking a time and order in which to draw from retirement accounts

Managing cash flow concerns

Cash flow is a top concern for retirees. Those worried about having sufficient income might choose to place much of their portfolio in higher-yielding bonds and higher-yielding or dividend-paying stock. This increases portfolio risk and reduces tax efficiency.

This increased risked means more of a retiree’s principal may be reduced at a moment when it’s needed most, such as during an emergency. In addition to the risk, a retirement income strategy that depends solely on interest or dividends is less tax efficient compared to a strategy dependent on capital gains.

Knowing your client’s tax situation can lead to stronger planning strategies. Completing a long-term cash flow and tax projection can help identify opportunities for tax maneuvering, and regular monitoring of changes to cash flow can help your retired client stay on track.

Liquidating investment accounts

Liquidating investment accounts can be tricky and requires careful calculations and review. When done correctly, this move can bring a lot of added value to your clients. Like other planning issues, how you proceed will depend on the types of accounts they have, client spending needs and the age of your retiring clients.

A classic approach includes reviewing which after-tax accounts should be liquidated first and then liquidating tax-deferred accounts like IRAs and 401(k) plans. Unfortunately, if a retiree waits to tap into their IRA, they may find themselves in a higher tax bracket when required minimum distributions kick in. This method can also wreak havoc if a retiree needs to access large amounts of money in an emergency.

If your client decides to spend taxable dollars first, consider simultaneously filling lower tax brackets with a Roth IRA conversion. A tax projection will help you identify the opportunities for a Roth IRA conversion and how much makes sense.

Examining taxes associated with investment choices

The tax picture gets more complicated when various investments and types of income come into the mix. Interest, dividends, capital gain distributions and other sources of income all have significant tax considerations.

When choosing mutual funds, most investors don’t think twice about the tax consequences of these moves. Many funds pay out large capital gain distributions. If clients hold these in taxable accounts, the tax bite could be significant. Make sure your clients are placing the funds in the right places.

Tying it all together

Smart tax planning plays a vital role in a retiree’s long-term financial security. And being ready to address this issue and other planning topics with your clients can contribute to your firm’s continuing success.

Expand your knowledge and demonstrate your expertise through the AICPA Retirement Planning Certificate program, a series of courses covering the retirement planning life-cycle. Earning this certificate gets you one step closer to the Personal Financial Specialist (PFS) credential, setting you apart from other CPA and non-CPA planners.

Oscar Vives Ortiz, CPA PFS

Oscar Vives Ortiz, CPA/PFS, is an assistant vice president and wealth strategist providing advice on complex estate and other wealth strategy issues. He shares a high level of technical experience in estate, tax and wealth strategy with his clients.   

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