Personal financial planning can take many forms. We often think of financial planning as determining if someone is going to have enough money to retire or reach specific goals. In these instances, there needs to be an understanding of income and expenses. However, this should not distract from uncovering opportunities for clients to generate additional sources of cash flow that sometimes get overlooked. Helping your clients find new money or keep existing money adds additional value to the planning you are already doing.
A typical area where CPAs help find money is determining if the client’s employer matches retirement savings, and suggesting that clients take advantage of the “free money” and the income tax savings on the same. But other areas to investigate that are often overlooked include mortgage insurance, unclaimed property, health savings account deductions, back-door Roth IRAs, discount programs, and early payment discounts.
Mortgage insurance costs that apply to loans from the Federal Housing Administration (FHA), U.S. Department of Agriculture, and Department of Veterans Affairs (VA) typically are not cancellable. Some have loan costs up front, as part of the monthly payment or through up-front funding fees. It is nice to have these options available for a home purchase when a 20 percent down payment is not feasible, but to avoid these noncancellable loan costs, clients may want to wait until the funds are available or refinance through a bank once the property value increases.
For conventional loans or refinanced loans with less than 20 percent equity, private mortgage insurance (PMI) is required to protect the lender in the event the buyer should default on the property. Unlike mortgage insurance on FHA and VA loans, PMI can be cancelled if certain criteria are met (including when equity in the home reaches 20 percent of the value), if requested in writing, and if there is a good payment history. Alerting clients to this cancellation availability can be like finding money for them.
Another way to find money is to search for unclaimed property on state treasury websites. According to the Pennsylvania Treasury (www.patreasury.gov), the department is seeking the owners of more than $3.2 billion in unclaimed property, and it will help you recover the property at no charge. Some search tips include looking for deceased relatives for expected inheritances, checking a maiden name, and reviewing multiple states of residence. Check periodically. Property may be turned over to the state at any time if the custodian was not able to locate the owner. This happens more frequently with retirement accounts or property and U.S. savings bonds left in safe deposit boxes.
More people are using high-deductible health insurance plans, so that opens the door to tax savings using a health savings account. If eligible, a participant may make a pretax deduction for contributions through an employer plan up to IRS limits and reduce some income tax. If the employee and employer fail to fund up to the allowable contribution level through payroll, additional amounts outside of a payroll system may be contributed up until the normal due date of the tax return. These amounts would be deducted on page one of the tax return. It is important to understand the eligibility requirements to take full advantage of this benefit.
Another way to find money is in tax-free growth on Roth IRAs instead of saving money in taxable accounts. Some people do not qualify for Roth IRAs, so making a nondeductible IRA contribution and later converting it to a Roth could be an option as the “basis” would not be taxable on conversion. Prior to the Tax Cuts and Jobs Act of 2017, practitioners may have been more hesitant to recommend this strategy. Now, since it was specifically addressed, the concept bears revisiting. It may make more sense when there are no other IRA monies to muddy the conversion calculation as the IRS views all IRAs as one for basis calculations.
Helping clients find money is important, but it is also important to take advantage of discount programs from retailers or credit card issuers when those services would be used anyway. Counsel clients to use available programs to their advantage while avoiding additional debt or excessive spending. Further, advise clients to avoid paying penalties and interest when they otherwise would not need to do so. For example, penalties and interest for underpayment of taxes, tax return late filing, late payments, unreasonable credit card balances, or deferred student loans are all examples of costs that should be avoided. Advise punctuality or early remittance, especially if paying early provides a benefit.
Once the money is found (or not carelessly spent), clients will have more resources available to reach their goals. Helping clients find money in often overlooked places is not only fun, but valuable.
Laurie A. Siebert, CPA, CFP, is an investment adviser representative of Valley National Advisers Inc., and securities are offered through Valley National Investments Inc., Member FINRA, SIPC. She is a member of the
Pennsylvania CPA Journal Editorial Board, and can be reached at firstname.lastname@example.org.