One of the common and ongoing challenges facing CPA practitioners is identifying ways to both grow and diversify sources of revenue. In uncertain times (especially over the past several years), planning for and preparing to overcome this challenge has taken on increased importance for accounting practices across the country. One area where many CPA practitioners can consider offering expanded services is in personal financial planning (PFP).
Although there may be widespread and differing viewpoints on what constitutes PFP, the AICPA created the Personal Financial Planning Section for members in 1986 to serve CPAs who work in a range of financial planning areas, including estate, tax, retirement, risk management, and investment advisory services. The AICPA’s emphasis in this area goes well beyond what is often the traditional perception of PFP as simply selling products and strives to support practitioners in providing comprehensive trusted advice to clients (which in many instances does not involve the sale of financial products).
In preparing annual tax returns for individual clients, the tax practitioner is uniquely positioned to gain insight into a number of areas where value can be added to a client relationship. This column focuses on a single line—Line 15a, “IRA distributions”—from Form 1040, U.S. Individual Income Tax Return, to highlight and provide several real-life examples of the array of PFP possibilities that can develop from the information provided and questions asked during the tax return filing process.
Through the presentation of these cases as well as an introduction to the resources available through the AICPA, the goal of this column is to assist practitioners in thinking about and outlining the first steps to a potentially more diversified financial future and a more holistic approach to serving individual clients. Please note that any regulatory issues to consider in the area of insurance or investment planning are not addressed in this discussion.
The Black Family: Estate Planning
Mr. and Mrs. Black recently retired and have started taking distributions from Mr. Black’s IRA account. In addition to Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reporting the distribution, Mr. Black provides Form 5498, IRA Contribution Information, to the CPA for purposes of completing his 2011 income tax returns. The Form 5498 details the account balance, account holdings, and account beneficiaries.
In analyzing this statement, the CPA notices that only one of the couple’s three children is listed as a contingent beneficiary on the IRA (Mrs. Black is the primary beneficiary). When meeting to review and sign the returns, the CPA asks Mr. Black about the beneficiary designation. Mr. and Mrs. Black say they have not reviewed the beneficiary designations of any accounts since they were opened and also say they recently updated all of their estate planning documents. Based on this discussion, the CPA suggests a project to confirm the beneficiaries on all accounts (i.e., the IRAs and life insurance policies) as well as the titling of assets (i.e., bank accounts and investment accounts) to ensure consistency with the intentions of the revised estate plan.
The Brown Family: Tax Planning
Mr. and Mrs. Brown are both nearing the end of their working careers. Mrs. Brown provides the CPA with a Form 1099-R that details the rollover contribution made from her 401(k) into a new IRA account. The CPA asks Mrs. Brown about the rollover to gain an understanding of the change in circumstances and thoughts for taking any future distributions for estimated tax planning purposes. Mrs. Brown says that she left her employer of 25 years to focus on a longtime dream of running her own business. Mrs. Brown has always made the maximum annual contribution to her retirement plan, and the account had grown into a sizable amount by the time of the rollover.
Mr. Brown has enjoyed a successful career as well, and the couple have always been (and are projected to remain) in the highest income tax bracket. Based on these facts, the CPA suggests running a multiyear tax projection to forecast future income tax expense and to determine if a Roth IRA conversion makes sense in light of the scheduled future tax increases.
The Green Family: Retirement Planning
Mr. and Mrs. Green are a young couple who welcomed the birth of their second child in 2011. Both spouses work, and each has contributed the maximum amount to an IRA account in previous years. As their combined income has just exceeded the allowable maximum for deduction purposes, these contributions have been deemed nondeductible and reported on Form 8606, Nondeductible IRAs, to properly track the tax basis. Before finalizing the income tax return, the CPA asks Mr. and Mrs. Green about IRA contributions made during 2011, because no information was provided.
During this conversation, the Greens discuss their financial uncertainty in terms of how to best save moving forward and their lack of action as a result. Based on this call, the CPA suggests preparing a multiyear financial projection to find the right balance between emergency savings, college funding, and retirement planning, as well as how to best use the couple’s financial resources (including taking advantage of employer-provided retirement benefits).
The Silver Family: Risk Management
Mr. and Mrs. Silver are in the middle of their working careers. Mrs. Silver recently returned to the workforce after spending a number of years at home raising the family’s three children. In the process of preparing the 2011 tax return, Mrs. Silver provides the CPA with a Form 1099-R for an inherited IRA for the first time.
For purposes of determining when the required distributions must begin and if there is any basis associated with the asset, the CPA asks Mrs. Silver about the account. Mrs. Silver says the IRA is from her mother who died in 2011. During the discussion, Mrs. Silver also mentions the past few years were difficult on her mother financially after the death of her father. While she was happy to stay home with the children, she feels behind in the family savings, and this played a large part in her returning to work. Based on this conversation, the CPA suggests reviewing the family’s life insurance coverage to ensure adequate protection in the near term, while Mr. and Mrs. Silver work to catch up on their savings.
The White Family: Investment Planning
Dr. and Mrs. White both work, and their youngest child just finished college. The couple have worked hard over the years and have accumulated a large amount of savings in both their retirement and personal accounts. In discussions with their CPA, they mentioned looking forward to retiring in the next five or so years and spending more time traveling—something they have not been able to do because of family and professional responsibilities.
While they have not started taking distributions from their IRA accounts, Dr. and Mrs. White have been diligent in providing the CPA with Form 5498 each year along with the year-end account statements for the IRAs. In reviewing this data, the CPA notices that the IRA account holds a high percentage of low-dividend-paying stocks and tax-managed funds that may be more suited for a taxable investment account. As a result of this observation, the CPA suggests a review of the overall asset allocation to determine the proper division between taxable and tax-deferred accounts along with an analysis of the income that can be generated as the couple enter retirement.
Overall Thoughts on Case Studies
In reading through these fact patterns, the interconnectedness of these planning areas comes into clearer focus. As one area is reviewed, there is a strong likelihood of questions arising in another area. A logical pattern of analysis emerges. One could see the Black family next benefiting from an insurance portfolio review to evaluate the existing policies that have not been analyzed since inception. The Silver family could benefit from a retirement projection to create a budget and savings plan.
To many tax practitioners, these examples may reflect services they already provide that they have never thought of as financial planning. For these professionals, the AICPA’s PFP Section offers resources to expand their practice in this area and help them deliver the financial planning services that ensure all of their clients’ needs are met, including tax, estate, retirement, investments, and insurance. This expansion of service offerings can open up new revenue streams and bring CPA financial planners fulfillment as they work to help their clients realize financial goals.
More information about the AICPA PFP Section is available at aicpa.org/PFP . Further resources, such as recorded seminars taught by experienced CPA financial planners that can help a practitioner transition from tax preparer to financial planner; checklists for analyzing tax returns for financial planning opportunities and assessing clients’ financial lives; links to tools, guides, and online resources covering regulatory and technology issues; proven pricing models; implementation guidance; and more are available at aicpa.org/PFP/Pathway. CPAs interested in demonstrating their knowledge and expertise in PFP can apply for the Personal Financial Specialist (PFS) credential at aicpa.org/PFS.
These examples have been shared to highlight a few of the potential PFP services that can originate from a critical review of Form 1040, Line 15a. There is no promise that asking these questions will lead to the type of answers outlined in the case studies, and there is also no guarantee that the client will accept any of the CPA’s suggestions.
If these conversations do develop into additional projects, the CPA can lead the planning process and bring in other professionals if and when needed (e.g., an estate planning attorney, life insurance expert, and investment adviser). If nothing materializes from these discussions, a client will almost always appreciate the level of attention and thoughtfulness that will ideally improve the practitioner’s overall relationships and lead to additional work in the future.
Theodore J. Sarenski is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. David Hoff is a tax director with Moriarty & Primack PC in Boston. For more information about this column, contact Mr. Hoff at email@example.com.