Helping Your Clients Prepare for Retirement

Man and woman in their seventies standing together and smiling

Preparing for retirement is daunting, and your clients likely see you as an expert on all things financial – so don’t be surprised if they ask for your advice. While tax preparers aren’t automatically experts in retirement planning, your tax knowledge means you can help prepare them for tax changes during retirement. 

How do taxes change in retirement?

No matter what types of retirement accounts your clients have, they’re tax situation is sure to change once they officially begin drawing from their retirement accounts. To help them know what to expect, you should be familiar with how the most common sources of retirement income are taxed.

Traditional 401(k)s and IRAs

Distributions from both 401ks and IRAs are subject to regular income tax since the contributions were made with pre-tax income. 

Roth 401(k)s IRAs

Distributions from Roth 401(k)s and IRAs usually aren’t taxed at all since your clients already paid taxes on the contributions. Your clients just need to be over 59.5 years to avoid early withdrawal penalties. (However, if their employers made any contributions on their behalf, distributions from these contributions will be subject to income tax.)

Social Security 

Social Security benefits are taxed according to your clients’ total income. To find out how much they’ll be taxed on their income, they should add their yearly Social Security benefit amount to their other sources of income, including pensions, wages, interest, dividends, and capital gains. 

For those filing single, HOH, or qualifying widow/widower, income between $25,000 and $34,000 means that 50% of their benefits are considered taxable, and income above $34,000 means 85% of their benefits are taxable.

Couples who are married filing jointly should add half of both of their Social Security benefits as well as their other sources of income. If their yearly income is $32,000 – $44,000, half of their benefits are considered taxable income. If they make above $44,000, 85% of their benefits are taxable.

And if your clients balk at those numbers, be sure to remind them that this doesn’t mean they are being taxed at a rate of 50% or 85%. Instead, only 50% or 85% of their benefits will be taxed at the appropriate rate for their tax bracket. 

If they’re still unsure, this questionnaire from the IRS can help them understand how they’ll be taxed:  Are My Social Security or Railroad Retirement Tier I Benefits Taxable?

Pension Plans

Like traditional IRAs and 401ks, the distributions from most pension plans are considered taxable income since the contributions were not taxed. Some states exclude pensions from state income tax, so be sure to look into the rules in your own state. 

If my clients sell a business, how will it be taxed?

If you serve small businesses as well as individuals, your clients’ retirement questions might center around the sale of their business.

Typically, any profit from the sale will be treated and taxed as capital gains. If they’ve held the business for less than a year, the profit will be taxed at the income tax rate for their tax bracket. In the more likely scenario that they’ve owned the business longer than a year, the profits will be taxed at the long-term capital gains tax rate of 0%, 15%, or 20% depending on their income.

Of course, selling a business is complicated, and the exact details of their tax situation will depend on how the business was sold. A few methods for making the sale include collection pricing, seller financing, cash pricing, stock sales, and asset sales. As their tax preparer, you’ll be better able to help them plan for taxes after they’ve decided how to sell their business. 

If they need help setting up the sale and maximizing profit, consider referring them to a professional exit planner who specializes in all aspects of selling a business – not just the tax side.

Basic tips for clients thinking about retirement

Whether they’re months or decades from retirement, some clients are bound to seek your advice on getting prepared. Since you already know their retirement contributions, you have direct insight into their financial and retirement situation. While you may not want to take on a true financial planner role, you can always offer these basic tips:

Start early 

Notice that your younger clients haven’t begun retirement contributions? Let them know about the benefits of compound interest over time and encourage them to start as soon as possible. 

Consider paying off debts first

As beneficial as it is to start saving early, it might make more sense for your clients to pay off high-interest debts first. The earned interest from their retirement savings could be far less than the money they’d save by paying off debt early.

Contribute 10-15% or more

Most experts agree that contributing 10-15% of your monthly income is a great place to start if you hope to maintain your current lifestyle in retirement. However, clients who are older and haven’t contributed enough may need to play catch up and contribute more to meet their retirement goals. In this case, they may need to see a financial planner for more targeted advice.

Match employer contributions

Even if contributing 10% is out of reach right now, encourage your clients to at least contribute the amount their employer is willing to match. They’re missing out on free money if they don’t!

Learn the most common types of retirement accounts

Encourage your clients to stick to low-risk investments for retirement like 401ks and IRAs. Mutual funds can be another great addition to a savings portfolio since they are diversified and therefore less risky than investing in a single stock.

If your clients are after more specific investment advice, you may want to refer them to a certified financial planner (CFP) who can help them set up accounts and savings goals. (The CFP is  likely to repay the referral when their clients need tax help!) Some tax preparers even add financial planning to their services to diversify their income and make money year round. 

This article was last updated on 05/04/2022.