Taxes

Tax Time

JW SteinertLeave a comment

tax time

It’s that time of year when we begin collecting our W-2’s, 1099’s and other documents to prepare our tax returns.  For some of us, there is a reason to get excited about tax time.  Why?  A tax refund!

A couple of years ago a car salesman told me that the car industry loves tax season.  Why exactly?  Because many people end up using their tax refunds to help with a down payment of a new automobile.

If you get a tax refund, you might view it as a “bonus”.  Unexpected money just fell into our lap.  We get the urge to spend this money on a luxury that we might otherwise have not been able to afford.  It’s YOUR money, do with it as you please, but I will offer some advice on how to spend your tax refund wisely:

Pay down Debt:  Instead of buying a new car with your refund, use it to pay down an existing car loan if you have one.  Make an extra payment or two to a student loan you might have.  Debt is an obligation you will have to pay down eventually, so why not use the extra money to give you an extra step to being debt free.

Go on a Vacation:  Maybe you feel like you have worked hard, and you probably have.  Use the money, or part of the money, to treat yourself to a vacation.  The enjoyment and peace of mind you can get out of an experience far outweighs any “thing” you might want to purchase.  You will have created lasting memories.  Plus, more than likely, you will be more focused upon your return.

Just save it:  Suppose you are 25 years old and receive a tax refund of $1000.  If you used that money to open a Roth IRA or put it in a taxable brokerage account, you will be well on your way to creating future financial freedom for yourself.  Let’s use the following example: You take the $1000 and open a Roth IRA.  If you put in just $100 a month into that Roth IRA, then assuming an 8% return annually, you will have an account balance of well over $300,000 in 40 years.  Granted 40 years is a way off, but that money can help supplement your retirement.  You can also use the refund to build up an emergency fund or to contribute to a taxable brokerage account.

A tax refund is welcomed by everybody who receives one.  You worked hard last year, you paid a little more in taxes then you should have, now it’s the government’s turn to give a little back to you.  Treat yourself to that vacation you’ve been craving, or use it to help put yourself in a better financial situation at the beginning of the year.

Budget Smart, Invest Wise

The Potential Retirement Cap

JW SteinertLeave a comment

retirement cap

In his plan for the 2016 budget, the president and his administration are seeking to disrupt the current retirement process.  A number of retirement topics were mentioned such as Social Security, the elimination of a “back door” Roth, and a cap on the amount eligible in a person’s retirement accounts.

For the subject of this post, I will discuss the president’s plan to limit the amount held in retirement accounts for an individual.  Presently, an individual can have an unlimited amount in retirement accounts.  This includes employer-sponsored 401k’s, traditional IRA’s, and Roth IRA’s.  The only limitations currently imposed on retirement accounts are the amount you can contribute.  This includes$5500 ($6500 for people over 50) for IRA’s and $18,000 ($24,000 for people over 50) for 401k plans.  These limitations are currently set so that individuals don’t stash all of their retirement savings in tax-free or tax-deferred retirement accounts.  The government has to make its money somewhere.

The 2016 budget proposal would now not only put a limit on the number of contributions you can put into a retirement account, but also on the amount held in your various retirement accounts.  The proposed limit: $3,400,000.  For a younger person saving for future retirement, this amount might seem astronomical.  However, I am here to tell you that it is not.  Granted a lot has to happen for this limit to take effect.  It has to be voted on and passed, and then I would assume the government would adjust this number to reflect inflation, roughly 3% a year.  If, and again this is a big if, this law were to be put into place it would impact roughly 10% of 401k plan participants according to Forbes.

Example:

Take the proposed limit on retirement accounts: $3,400,000 and adjust it for inflation of 3%.  In 40 years this inflation adjustment amount would be approximately $11,000,000.

Mike is a 25-year-old with $20,000 in retirement assets.  This includes an employer-sponsored 401k plan along with a Roth IRA.  Mike will contribute $18,000 a year to his 401k and get an employer match of $3,000.  He puts in $21,000 a year into his 401k.  Additionally, he contributes the maximum $5,500 into his Roth IRA every year.  Mike spreads this amount out evenly over the 12-month year.  When Mike turns 50, he contributes the new limit, $24,000 in an employer-sponsored 401k with a $3,000 match and $6500 in a Roth IRA.  Assuming Mike’s portfolio returns 10% a year, Mike will have over $15,000,000 in his retirement accounts, more than what would be allowed.  He would then have to divert some of those funds to a taxable brokerage account or be forced to spend it.

Sure, the example of Mike listed above is an outlier.  Many of us can only dream of having so much set aside for retirement.  The fact is that some people DO!  We can agree this would be a good problem to have, but nonetheless a problem.  Are you aggressive enough with your retirement planning that you have to worry about this law possibly being passed?  I am!  And for that reason, my vote is against it.

Budget Smart, Invest Wise

What to do with Your Tax Refund

JW Steinert3 Comments

Tax Refund

It’s that time of year when we begin collecting our W-2’s, 1099’s and other documents to prepare our tax returns.  For some of us, including myself, we get excited about this tax time of year.  The main reason: a tax refund!

I found out last year through a car salesman that the car industry loves tax season.  The reason why?  Because many people end up using their tax refunds to help with a down payment of a new automobile.  A friend of mine last year used her tax refund to purchase a designer purse.

If you get a tax refund, you might view it as a “bonus”.  Unexpected money just fell into our lap.  We get the urge to spend this money on a luxury that we might otherwise have not been able to afford.  It’s YOUR money, do with it as you please, but I will offer some advice on how to spend your tax refund wisely:

Pay down Debt:  Instead of buying a new car with your refund, use it to pay down an existing car loan if you have one.  Make an extra payment or two to a student loan you might have.  Debt is an obligation you will have to pay down eventually, so why not use the extra money to give you an extra step to being debt free.

Go on a Vacation:  Maybe you feel like you have worked hard, and you probably have.  Use the money, or part of the money, to treat yourself to a vacation.  The enjoyment and peace of mind you can get out of an experience far outweighs any “thing” you might want to purchase.  You will have created lasting memories.  Plus, more than likely, you will be more focused upon your return.

Just save it:  Suppose you are 25 years old and receive a tax refund of $1000.  If you used that money to open a Roth IRA or put it in a taxable brokerage account, you will be well on your way to creating future financial freedom for yourself.  Let’s use the following example: You take the $1000 and open a Roth IRA.  If you put in just $100 a month into that Roth IRA, then assuming an 8% return annually, you will have an account balance of well over $300,000 in 40 years.  Granted 40 years is a way off, but that money can help supplement your retirement.  You can also use the refund to build up an emergency fund or to contribute to a taxable brokerage account.

A tax refund is welcomed by everybody who receives one.  You worked hard last year, you paid a little more in taxes then you should have, now it’s the government’s turn to give a little back to you.  Spending our refund on cars, purses and consumer electronics is what American society has conditioned us to do with extra money.  Don’t fall into the trap of what everyone else does with his or her refund.  Use it to create a better life for yourself, for the present and the future.

Budget Smart, Invest Wise