I try to be “proactive” with my clients, and I think most reputable accountants and tax preparers do too (despite what “experts” might say).
One of the sticking points I have found, especially when dealing with average folks, is Roth accounts. Here’s an example:
Taxpayer makes enough money to be able to max out their contributions into their employer’s 401(k) plan. The taxpayer usually owes money to the IRS at tax time. They want to know what can be done to eliminate the need to pay in at tax time. After all, “everyone else is getting refunds.”
So I explain the Roth situation. Roth’s are great because the money (including gains) comes out tax-free at retirement. But you don’t get a deduction when you put the money in.
Compare this with traditional 401(k) contributions. Traditional contributions are deductible off the top of your wages. In other words those contributions reduce your W-2 income, i.e. you get a deduction. However, you pay taxes on withdrawals (including paying tax on earnings) when the money is distributed.
In the situation here (which happens often, by the way), the taxpayer could eliminate their current-year tax liability by diverting some of their contributions into the traditional 401(k) side instead of the Roth side.
In the one example I am thinking of in particular, the client would have needed to divert about $8,000 into the traditional side to eliminate their tax liability. So they could still put money into the Roth but use the traditional to reduce current-year tax liability.
The client’s response was “I put all the money in the Roth because I don’t want the government to get their hands on MY MONEY!!!!”
And I get that. The problem, as always with “proactive planning,” is: there is no magic-wand solution.
I have conversations such as this with clients every year, and the message doesn’t sink in: Roth accounts are great, but you don’t get to deduct the money you put in. This might affect the bottom line on your 1040 in the current year. And if you’re an “average” person, there’s not some magic wand sitting out there that I can wave to change that.
This is the tradeoff on Roth accounts: big savings if you can leave the money untouched until retirement, but maybe a problem on your 1040 in the here and now.