We Do More Than Just File Your Tax Returns and Manage Your Investments
By Matt Ward, CFP®, CRPC®
Many people think they only need to worry about taxes once a year, but that’s like driving a car looking only into the rearview mirror. How could one possibly navigate their financial future by only looking at their finances from a past perspective?
Your Finances Don’t Exist in a Bubble
Every decision you make and every milestone you reach directly impacts your financial situation. Think about this example:
Your employer offers you a 401(K), you have the decision to contribute for a match up to 6%. You decide not to. 10 years goes by. There are 3 downfalls here. First, you missed out on tax savings. You paid more to Uncle Sam than necessary. Contributions to your 401(K) are typically tax-deductible. Second, your employer was willing to give you a 6% raise (“free money” albeit it’s a match for your retirement in the future), and you missed out on that. Third, the money in a 401(K) grows at around 6-8% per year. Therefore, between lost tax savings, lost “free” money match from your employer, and missed investment growth, you have missed a significant amount of opportunity.
There are multiple pieces that affect one another, such as income tax planning, cash flow, risk management, investment planning, estate planning, retirement strategies, and more. The two most common professionals you should consider integrating are your financial advisor and your CPA.
CPAs and Financial Advisors Have Different Perspectives
There is, surprisingly, a lot more overlap between taxes and the other aspects of a financial plan than most people realize. This is exactly why a CPA and CFP® professional working together is beneficial. Before looking at the benefits of a CPA/CFP® professional working together, it may be helpful to clarify the difference between a CPA and a financial advisor or planner.
- A certified public accountant (CPA) views your financial plan from a tax perspective. Their goal is to make sure you’re following the tax law and not doing anything to get yourself into trouble with the IRS. They’re looking at things like whether you exceeded your annual retirement contributions, or if you paid enough self-employment tax.
- A financial advisor with a CFP® (certified financial planner™) certification views your taxes as one part of a comprehensive financial plan. Their goal is to make sure all of the individual parts, such as taxes, investments, retirement goals, and risk/estate management, all work together to support and advance your long-term goals and objectives. They ask questions like: Are you making the most of your investment opportunities? Could you be contributing more to retirement? Is there a more effective savings vehicle available to you?
When a CPA and a financial advisor look at the same thing, they view it from two different, but enhanced, perspectives. When these separate views are combined, you get a more complete picture of the client’s financial life situation. This means the two working together provide a better overall view of the client’s financial plan.
For small businesses, it’s the best of both worlds. A CPA and CFP® professional working together is the dream team. For instance, a CPA might look at a business’s books to reconcile past transactions and review for compliance reporting on forms 1099 or W-2, whereas a CFP® professional might look at those same set of books with an eye for opportunity to decrease taxes, for example using bonus depreciation or opening a Solo 401K. They both could work together in designing a plan that is optimal to reduce tax, increase returns on capital, and increase the client’s overall financial net worth.
For retirees, a CPA and CFP® professional working together is exactly what they need. A CFP® offers a personalized, professional, forward-planning relationship. When a client and advisor meet, they review things like goals, retirement, tax and financial planning, investments, and insurance and estate plans. A CFP® professional who works closely with a CPA provides many advantages for a client, such as sheer strength in numbers, differing perspectives of the same situation, enhanced planning around tax savings, improved investment analysis, and more.
So, what are the benefits of a CPA/CFP® professional working together? What insights can a financial advisor provide that are enhanced working with a CPA?
Here are a few examples of how a financial advisor and CPA working together may be able to reduce your tax burden:
- Roth conversions. If you have a significant amount of money in a traditional 401(k) or IRA, it may be wise to convert some funds to a Roth IRA in a year in which you are in a lower tax bracket. This is because Roth accounts are post-tax and withdrawals are tax-free. Converting funds from a traditional account to a Roth account can save you big in taxes over the very long run, but this strategy requires an understanding of your time horizon and full financial situation in order to be properly implemented.
- Gifting opportunities. For those who are charitably inclined, being strategic about your gifting can save you a lot in taxes. For example, if you are over 701/2 years old, you may be missing tax savings with what’s called, Qualified Charitable Distributions (or QCDs). Your CPA can manage the tax implications of a gift that’s already been given, but the benefit of working with a CFP® professional, in addition to a CPA, is that they are actively looking for gifting strategies that can work as part of your overall financial plan.
Tax harvesting. There is an upside to having an investment loss. If you sell it, and buy something substantially different, you can offset the loss against investment gains and taxable income as a way to minimize your annual tax liability while still keeping your money invested and working for you. This is another tool that may be overlooked by a CPA, since their main goal is to report once sales have been made, rather than plan for sales. A CFP professional will add value here, looking for opportunities such as this, as their focus is on the overall forward-looking financial plan. While these examples show what a financial advisor can do in a perfect world, their ability to strategize and make effective recommendations is only as strong as the information they are provided. The reverse is also true. You can’t expect your CPA to find all applicable tax deductions and credits if you only give them half the picture. Communication between financial professionals should be a two-way street so that your financial goals can be handled in a comprehensive and cohesive manner.
Get the Best of Both Worlds
With expert knowledge as a CPA firm, and years of experience as a financial planner, we ensure your financial plan is fully integrated, maximizing your ability to achieve your financial goals and reduce your tax liability. If your CPA and financial advisor aren’t talking, schedule a complimentary introductory consultation by calling us at 817-238-6300, emailing Matt.Ward@NewCenturyInvestments.com, or scheduling an appointment online.
Matt Ward is a financial advisor and the president of New Century Investments, an independent investment advisory firm serving business owners, pre-retirees, and retirees in the Dallas-Fort Worth area and beyond. Matt is passionate about integrating investing, planning, and tax management into a holistic approach. Matt’s breadth of knowledge and experience in both taxes and investment management sets him apart, giving him the ability to design, advise on, and manage business strategies, tax efficiency, and retirement planning. He is known for his care and attention to detail and works hard to develop personal relationships with each of his clients so they can benefit from his customized service and guidance. He loves walking with his clients through their financial journey, supporting them and celebrating with them as they reach their goals.
Matt graduated from Texas Tech University with a bachelor’s degree and is a Certified Financial Planner™ and Chartered Retirement Planning Counselor℠ professional. He’s currently working toward receiving his CPA certification so he can provide a higher level of service to his clients. When he’s not working, you can find Matt hiking, playing the guitar, and spending time with his family. To learn more about Matt, connect with him today!