Retirement Planning Using a Client's Tax Return

By Nevius, Alistair M. | Journal of Accountancy, May 2009 | Go to article overview

Retirement Planning Using a Client's Tax Return


Nevius, Alistair M., Journal of Accountancy


Many CPAs never follow up with clients after tax season, but CPAs can provide valuable assistance by taking some time after busy season to use the tax return as a guide to helping clients prepare for retirement. A tax return is an excellent starting point for the personal financial planning process. While clients might feel threatened if asked to complete a lengthy financial planning questionnaire, starting with an already prepared document is less daunting for the client and provides a natural transition into financial planning. Consider the following points in reviewing Form 1040 for retirement planning.

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WAGES AND SALARIES (LINE 7)

Are clients funding any employer-sponsored 401(k) or other qualified retirement plans? This consideration is especially important when the employer matches employee contributions. (In what other way can a client obtain an immediate return on an investment?) With the current economic slowdown, many employers are cutting back on matching contributions. Nonetheless, it is still advisable for clients to contribute to their plans.

For clients with retirement plans, review their portfolios' diversity. Is it time to change investments? How has the economic crisis changed older clients' plans for retirement? Do clients have adequate disability insurance to protect against loss of earning power?

DIVIDENDS AND INTEREST (LINES 8a, 8b, 9a AND 9b)

Ask clients if they are satisfied with the returns on their portfolios. Discuss the portfolios' diversification. Evaluate the taxability of the portfolios--is more tax-exempt income an appropriate objective? For older clients, is it appropriate to add guaranteed investments such as annuities?

IRA AND PENSION DISTRIBUTIONS (LINES 15, 16)

Ask why the client is taking distributions. Many clients do so to satisfy short-term cash needs. Remind the client of the 10% penalty on early withdrawals. Can a short-term line of credit or loan be obtained instead? For normal distributions, discuss the amount. …

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