I Got a Second Opinion Last Week…

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So, I had been talking with one of my mentors a couple of months ago and we got on the subject of taxes… particularly taxes regarding rental property.  If you’re a regular follower of my site, you know that I currently have one rental house and I’m looking for a second so this was an important topic for me.

My friend that I was talking with has five rental houses and is extremely savvy when it comes to the financial details of this arena, so I definitely listened intently.  In short, what I decided after this discussion was that I needed a second opinion on my taxes.

For the past 15 years, I’ve done my taxes through TurboTax.  It started out pretty easy… just answer their questions and make sure your resulting 1040 looks similar to last year’s return.  Not a problem.

But then over the years, things slowly started to change…

• Got married
• Bought a house
• Started to get a bunch of new investment vehicles (401k, Roth, taxable accounts)
• Bought a rental house
• Started a couple small businesses
• Had an awesome daughter
• Etc., etc., etc.

Such is life, but the taxes have been more and more complex to do every year.  Now, I will say that TurboTax (and I’m sure most of the other competitors as well) is excellent at presenting you the information needed and asking the right questions.  However, with each new change, I have nothing to compare against to know if I’ve done it right.

Well, after my conversation with my mentor, I decided to talk to an accountant to have him review my past few returns.  I wanted to make sure I was depreciating the rental house correctly, taking the right deductions, and whatever else he might find.  My friend referred me to his CPA with high regard so I called and setup a visit.

After reviewing the last three years of returns, he gave me the news which was both good and bad.  I have been doing everything correctly on my returns.  That’s a sigh of relief, but also kind of a letdown that I wouldn’t be doing amended returns and getting backs tons of dough.  Bittersweet, but at least it didn’t go the other way and I find out that I owe money to our friendly-neighborhood IRS.

When we wrapped up on the tax return conversation, I then moved onto the next topic on my agenda… early retirement.

When I told him that my plans were to be financially free in no more than ten years by the age of 50, he just looked at me blankly for a few seconds before talking – I guess I’ll have to get used to that.

Then he proceeded to shotgun questions at me such as…

• Are you maxing out your 401(k)?  Yes.
• Have you started a Roth IRA?  Yes – I’m not contributing the max yet, but working on it.
• What are you going to do about Social Security?  You can’t access it until 62, but by then, the age of retirement will probably be raised to 65 or so.  I’m not going to count on social security whole-heartedly.
• How are you going to access your money before the retirement age?  I’m planning to use money from my taxable accounts over the first five years while I set a Roth IRA Conversion Ladder in process.  Also, I am guessing that there will be some side income as I work on some other projects.  Finally, my wife isn’t planning on retiring right away so there will be some other income still coming in for a while.
• Don’t you think you’re going to be bored retiring so early.  No.  Maybe I should be referring to this as “pretiring” since I’m already getting the ball rolling on some things that should bring in at least some income (including this blog).

We then had this conversation…

CPA:  “Well, I definitely applaud you for wanting to retire early, but I’ll be honest – I don’t think you’ll be able to do it by 50.”
Me:  “Really – why not?”
CPA:  “Well, you start to get used to a certain lifestyle and to go backwards from that is extremely tough for a lot of people.”
Me:  “The good news is that I live a pretty modest lifestyle compared to my peers.  In fact, I throw about a third of my income toward my savings, 401(k), Roth (IRA), HSA, and 529.  Then I pay extra on my mortgage to try to eliminate that.  Minus healthcare, we’ve figured out that we can easily live off around $25,000 during retirement without really changing our lifestyle.
CPA:  “Then maybe you do have a good chance of making this work.”

We had a lot more discussion after that revolving around the cost of healthcare and social security and what to expect, but that should give you a good sense of the general back and forth of the conversation.

Now, if you’re thinking that this guy was being a jerk – he wasn’t at all.  In fact, this was exactly what I wanted.  He was the nicest guy, but wasn’t after just being a “Yes” man.  He was pushing me to make sure I didn’t miss anything and that’s what I was after.

In a nutshell, here’s what I gained from my second opinion with the accountant:

• I’m doing things correctly with my taxes (Pfewww!).
• I need to keep pushing everything I can toward tax-advantaged accounts (and my daughter’s 529 College Savings Plan, if we want to help pay for her college down the line).  I actually just upped my Roth and 529 contributions today and I’ll do that again as well as my HSA contributions with the start of the new year.
• I need to dig into and stay on top of healthcare changes.  This will be my biggest expense after I leave my career and although aware of that, I wasn’t expecting the numbers to be as high as he mentioned.  However, as you probably already know, this is going to be one of those things that’s going to keep changing by the time I reach retirement.  I just need to keep up with it and know what to expect as we get closer.

So the second opinion was worth it in my opinion.  The next stop will be to get another opinion – perhaps from a financial adviser/planner.  This is too big of a deal to just roll the dice and think that I have everything covered.  It’s also something I would prefer to know sooner than later if there are changes I need to make in my planning.

How about you?  Have you gotten a second opinion on your plans yet?  Was it with an account, financial adviser, or maybe even just a financially savvy friend?

Thanks for reading!!

— Jim