I’ve been a CERTIFIED FINANCIAL PLANNER™ professional and a CPA for almost 20 years now. Preparing tax returns as a CPA/financial planner gives me great insight on how people manage their money.
Following are ten big financial mistakes I see every year from clients who are not fully utilizing the services of an accountant or financial planner:
- Not contributing to your company’s retirement plan. I see this one in about half of my clients. This is a no-brainer. You’re not only saving for the future, but you’re currently reducing your federal and state tax burden. Often the company will match a portion of your contributions. You’ll be turning away free money by not contributing at least as much as your company will match.
- Not contributing to a 529 college savings plan. College costs are skyrocketing. The easiest way to save for future college expenses is to invest in a 529 plan. All of the growth is tax free when used for college expenses and some state plans will allow a deduction for your contributions. What if the beneficiary doesn’t go to college? It can be used for another family member of the beneficiary.
- Not utilizing pretax company benefits such as child care. If your company offers pre-tax child care benefits, use them! Even though you can get a child care credit on your tax return, it is limited. You can often save much more by using this benefit, especially if you’re in a higher tax bracket.
- Taking Social Security too early. Just because you can start receiving Social Security payments at age 62 doesn’t mean you should. By waiting until full retirement age (now 66 for those born between 1943 and 1954; 67 for those born in 1960 or later), you’ll get an additional 24%. That’s a 6% annual return on your investment! Advances in health care are allowing people to live much longer. Unless you’re in ill health or absolutely need the money to live on, wait until age 66 or even longer.
- Not understanding mortgage closing costs. I see a lot of ‘Final Settlement Statements’ from banks and mortgage companies. I’m confident that many of my clients could have saved many thousands of dollars by shopping and comparing “Good Faith Estimates” from several mortgage companies.
- Using your Roth IRA as a savings account. Yes, you can take your investment back out of your Roth IRA account tax free, and you can even take the growth of the investment tax free after 5 years and after you’ve reached age 59-1/2. But you invested in the Roth to build tax-free savings for the future, so leave it alone. If it has lost money, change the investment; don’t give up on the many benefits of owning a Roth IRA.
- Order of distributions/withdrawals in retirement. Ok, the future is here. Now it’s time to start withdrawing the savings from your IRAs and Social Security. Which accounts do you draw from first? I see many clients doing it wrong by withdrawing their Roth IRAs first. In general, you should withdraw your non-IRA accounts first, except for what you need for emergencies. The taxes will be lower and your IRAs will continue to grow tax free. Your Roth IRA should generally be withdrawn last since it will grow tax free and is not subject to Required Minimum Distributions (RMD).
- Not talking to your accountant or financial advisor before you make important financial decisions. I see a dozen cases every year where my clients sold a piece of investment property but didn’t ask me about it first. Often a little planning could have saved thousands of dollars in taxes. The same goes for distribution of estates and trusts, and general estate planning for wealthier clients.
- Not investing excess cash in the market. I have clients who have been holding their investments in cash since the 2008 market crash. The S&P 500 has grown 275% since then. It’s smart to invest if you are properly diversified and use the right low-risk investments. Except for what you need for emergency savings, invest the rest. If you’re not sure how to invest, use a professional.
- Gifting assets to your children when you get old. Normally when a person dies, their taxable assets such as stock or real estate, receive a step-up in basis, so the recipient of those assets can sell the property without paying income taxes. But, if the property is gifted, the basis retains the basis of the giftor, which may be very low. It can be a huge mistake to put your children on the title of your home, or gift anything taxable worth more than $14,000. Not only will you have to fill out a gift tax return, but the recipient will lose the benefit of the step-up in basis. Always consult with your financial planner, attorney or CPA before you gift or transfer any asset worth more than $14,000.
This article was originally published on NerdWallet’s Advisor Voices.