What’s the best retirement plan for me?

At this time of year, a lot of people hear the same question from their tax professionals: Would you rather pay extra tax or make a pre-tax contribution to a work-based retirement account? Hmm, give the money to Uncle Sam or keep it for yourself…easy choice! Most of the time, you’ll choose to boost your retirement contribution for the tax year in question.

It’s a simple matter for employees to prevent this issue from arising the next year. Just increase your withholding rate and you’ll be in good shape. Workers that make estimated quarterly tax payments can achieve the same effect by increasing the amount of each payment.

For business owners, however, the question can be more complicated. In fact, everything about taxes and retirement planning is more complicated for business owners, including the decision to go with a particular type of retirement plan.

I apply a methodology-based approach to figure out which retirement plan is best for each client. Like adjusting withholding and estimated tax payments, it’s fairly straight-forward for employees. Which plan (401(k), 403(b), 401(a), traditional IRA, Roth IRA, SIMPLE IRA, etc.) will yield the maximum value within the framework of the client’s tax picture, earnings, and family situation?

With clients who own businesses, the methodology gets trickier. These clients have to factor in far more moving parts and data points than do employees to determine the best retirement plan. The owner’s W-2 income, total income (meaning W-2 + K-1), and employee census data (date of birth, compensation for each employee, tenure with the client’s company, etc.) are just a few of the data points that impact the costs and benefits of each retirement option.

This very common situation is one of the many places where collaboration is key in the financial planning and tax advisory space. Without an integrated approach to these two inter-related elements of their clients’ financial lives, even the most diligent and committed professionals can do their clients a disservice.

For example, suppose an advisor has a goal of reducing a business owner’s income tax burden as much as possible for 2018. In that situation, I might analyze the relative benefits of a SEP IRA versus a Solo 401(k) versus a SIMPLE IRA. The maximum contribution to a SEP IRA is 25% of W-2 income.

Unbeknownst to me, the CPA might not want to take a lot of W-2 income in 2018 but instead take more of the year’s earnings as K-1 income so as to maximize the new 20-percent Section 199A QBI deduction. This could potentially restrict the amount that could go into the SEP vs. a Solo 401(k). Without a collaborative approach to the client’s finances, how would I as the advisor know that this was the CPA’s strategy?

The revised tax code — and especially the Section 199A QBI deduction — makes it more imperative than ever for tax professionals to perform multiple testing scenarios before advising clients. More W-2 or more K-1? The answer depends on a number of variables.

Likewise, it is more important than ever that tax professionals and financial planners work together to make optimal decisions that help clients achieve overall goals. Does the client even need a much larger retirement account? With the changes to the tax code, the client’s future income and the tax implications of that income could look significantly different than they did last year. Issues like this require a coordinated approach to financial and tax planning in order to reap the most value from the choices that are made.

The bottom line is that collaboration between your financial and tax advisors is key to making sound financial decisions. Don’t let either of them work in a bubble.

Meredith Moore is a 20-year veteran of the financial advisory industry who specializes in bringing a customized approach to support the highly personal dynamics that govern her clients’ relationship with money and success. She is the recipient of numerous industry awards and a noted speaker and writer focusing on the intersection of power, money, and gender within relationships. Ms. Moore can be reached at www.artisanfsonline.com. Learn how to take control of your financial life and discover what makes women’s financial planning needs such a unique challenge with our free, white paper: https://www.artisanfsonline.com/.19.htm

Meredith C. Moore, Registered Representative, offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, A Licensed Insurance Agency. 1125 Cambridge Square, Suite C, Alpharetta, GA 30009 (770) 587–0281. Financial Adviser offering investment advisory services through Eagle Strategies LLC, A Registered Investment Adviser. NYLIFE Securities LLC and Eagle Strategies LLC are New York Life Companies. Artisan Financial Strategies is not owned or operated by NYLIFE Securities LLC or its affiliates. Neither Artisan Financial Strategies LLC, nor its advisors provide tax, legal or accounting advice.