Many people seek professional help to prepare for retirement. You might consult a financial planner to help with saving and investing or an accountant who can assist with tax planning. Here’s a look at how a certified financial planner and a certified public account might fit into your retirement plans.
[See: How to Pay Less Tax on Retirement Account Withdrawals.]
What Is a CFP?
A CFP is a certified financial planner. This is one of several types of financial advisor designations, but the CFP must pass an exam, have several years of experience, meet continuing education requirements and is held to ethical and professional standards. CFPs are also fiduciaries, which means they are required to work in the best interest of their clients. CFPs often focus on helping clients to achieve their longer-term financial goals. Certified financial planners are officially recognized by the Certified Financial Planner Board of Standards.
What Is a CPA?
A CPA is a certified public accountant. CPAs must complete education and experience requirements, pass an exam and agree to maintain professional and ethical standards. There are also CPA licensure requirements that vary by state. CPAs can provide help with taxes and both short-term and long-term tax planning.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
CFP vs. CPA: Is One Better for Retirement Planning?
The best financial professional for your situation depends on your goals, where you are in your life, the legacy you want to leave your family and many other factors. CPAs often help with minimizing your tax burden and can be especially helpful if you have a complex tax situation or run your own business. CFPs are typically focused on helping you to build wealth for the future and achieve your financial goals.
Both financial professionals act in the best interests of clients, but sometimes there can be differing opinions on the best course of action. For example, advice about a Roth conversion might differ depending on whether you are focused on short-term or long-term goals. Traditional IRA or 401(k) deposits are tax deferred, which means there is a tax benefit when you make contributions, but the taxes are due when you make withdrawals. Meanwhile, contributions to a Roth IRA or Roth 401(k) are not tax deferred, but withdrawals can be tax-free, and your funds grow in the account tax-free.
A financial professional focused on the long term might encourage you to convert from a traditional IRA to a Roth because they are looking many years into the future and they would rather that clients not have a big tax bill in retirement. A Roth account allows you to have a tax-free source of retirement income. A professional who is focused on reducing this year’s expenses may not want you to convert right now because a Roth conversion increases your current tax bill and could even push you into a higher tax bracket. It’s important to work with a financial professional to calculate which scenario will benefit you most.
“(Accountants) are forecasting where we think you will be and maybe the CFP is forecasting where you want to be,” says Leah Abrams, a certified public accountant and CEO of L. Abrams and Company in Baltimore. “That’s the reason you need the team. That’s where the CFP and the CPA should be meeting in the middle to figure out how to get from where you think you will be to where you want to be.”
Beau Henderson, founder of RichLife Advisors in Gainesville, Georgia, says there are two types of tax planning: “There’s tactical, which is what is going to get the lowest tax return. What are all the things we can do this year to have as little taxes as possible?” But tax advice can also be more strategic. “That’s what we’re doing with things like Roth conversions where we’re thinking about the moves you can do over the next 20 years, and sometimes they’re not the same thing.”
Some individuals are focused on short-term savings, while others prioritize long-term goals. “Some years it might be that we need to offset more income this year with more 401(k) pre-tax investments,” Henderson says. “And there’s other years, which last year is a good example, where the markets were down and maybe there’s a loss of an income. That gives us more room to do the long-term planning.”
Henderson advises clients to weigh the long-term strategy versus this year’s tax return. “If we do a big Roth conversion, we’re going to pay tax to do that,” Henderson says. “But if in 20 years I’ve got my $500,000 turned into $2 million and it’s 100% tax free, then that was a good move.”
[See: 10 Tax Breaks for People Over 50.]
Do You Need Both a CFP and a CPA?
It can be helpful to work with both a CFP and a CPA. They might have different objectives, and they provide different financial services. You can sometimes get both services from one agency’s team. Also, you might find some financial professionals with both designations.
“We’re both discussing life progression, whether it’s wealth generation, whether it’s regarding your children’s education, whether it’s regarding retirement,” Abrams says. “A portion of those things are all synonymous with both of what we’re doing.”
But when you have both advisors, they must operate as a team. “If not an in-person meeting, there definitely needs to be open communication,” says Michael Becker, a certified financial planner and associate wealth advisor with Hightower Wealth Advisors in St. Louis. “Both sides need to be kept in the loop if strategies need to change. There definitely needs to be an open line of communication at all times between your planner and your accountant.”
It takes a coordinated effort to build a financial plan. “With the coordination of the two of us working together as part of your team, we can give you what I would call integrated or consistent advice,” Henderson says. “So, you’re not being told one thing by one person and something else by somebody else on your team.”
If various financial professionals provide you with contradictory advice, it’s important to get everyone on the same page. “If it’s not matching then one of the two needs to be changed or somebody needs to research on their side to make sure that they’re speaking the same language,” Abrams says. “Because really we’re both there to support you in your future aspirations.”
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Should You Consult a CFP or CPA to Plan for Retirement? originally appeared on usnews.com
