Your Tax Refund - Evidence of a Terrible Financial Decision

Here we are, with just a few weeks left until one of our nation’s most reviled, I mean revered, dates on the calendar. April 15. Tax Day. That day when you are reminded just when you think no one in your family cares about you, your dear old Uncle Sam is always interested in what you’re up to.

It’s also around this time that I hear from clients, listeners to my radio show, and just about anyone that pays taxes how happy they are to be getting a gigantic refund from the government. I can’t do anything but hang my head and think, “Where have I gone wrong?!”

You see friends, your refund does not represent some financial boon. It is not found money. It is money you have already earned, and it represents an interest free loan to the United States government. It also represents money that you could have invested or used for some other purpose.

I recently gave a presentation at a local company for an event celebrating National Women’s History Month. After the presentation, one attendee asked this question:

“My husband and I have more money withheld from my paycheck because we like to use it as a sort of savings account. We know we’ll get that money back in April to use for major purchases. Do you think that’s a good idea?”

Tax deferral is one of the greatest weapons we have in our financial arsenal, and guess who gave it to us? The government! I spend my every waking moment helping clients avoid, or at least delay, paying taxes. It’s not that I’m un-American or don’t want to pay my fair share. I just don’t want to pay any more than is necessary any sooner than is necessary. My advice to the sweet lady that asked the tax question was this – lower your tax withholding and invest the difference in your company’s 401(k) plan. The 401(K) offers tax deferral, and combined with compound interest over time can be quite powerful. I gave her an example of $1,000 from her paycheck.

  Bank                    401(k)

Earn                    1,000                   1,000
Taxes (28%)         -280                          0   
Save                       720                   1,000
Interest (6%)          43                         60
Taxes (28%)           -12                           0
Total Saved           751                   1,060

If you are paid $1,000, and have taxes withheld, you sacrifice $249. Over 30 years invested at 6% interest, that $249 would have been worth $19,685. Still feel like giving it away for free to the government? Conversely, if you invest the full $1,000 each year in the 401(k), in 30 years at 6% interest, your account total would be $79,058. 

 

Another added benefit of tax deferral to a retirement account is that if you make pre-tax contributions, you will lower your taxable income, which means your overall tax bill will be lower. That’s two tax benefits for the price of one! Tax deferred growth of your investment and immediate reduction of your tax bill. 

 

There’s probably not a lot you can do to reduce your tax bill for 2014 at this point. You do have until April 15 to contribute to your Traditional IRA or a Health Savings Account, which will give you deductions. But from here on out, I want you to learn this rule – large tax refunds represent a bad financial decision. Plan now to keep more money in your pocket and out of Uncle Sam’s.

 

Live Fabulously - Diva

When Is Zero a Great Investment Return? You Might Just Be Suprised!

I remember the date as if it were yesterday.

September 29, 2008. The Dow Jones index fell 777 points, the most in any single day in its history. It was the official beginning of what would become known as the Crash of 2008, and investors everywhere saw portfolios that took years to build blow away in the wind in a matter of weeks.

Less than 18 months earlier, the Dow Jones index had reached its highest level up to that point, 14,164. The economy was flying high and we felt great about the future.  “Let the Good Times Roll!”… but, do good times last forever? The worst recession in a generation set in for two years, but it seemed like a lifetime.

When I think back on that time, I recall two things:

·       Those that lost most of their retirement nest eggs failed to protect them.

·       I didn’t lose one client because mine were well diversified and included protection as well as growth in their portfolios.
 

When I ask potential clients “When is zero a great investment return?” it usually takes them a few seconds to think, but they eventually come up with the right answer – when it’s better than a negative return. Now how is this possible? Don’t all investments come with some risk of loss? All investments in the market do. But there is an option that protects your money from the market, can grow your money at a modest rate, earns no less than 0%, and never declines. This seemingly magic option is not magic at all. It’s called a fixed index annuity, and if protecting at least some portion of your money is something you care about, then it’s an option you should consider.

A fixed index annuity is not an investment in the market. It is an insurance vehicle whose performance is tied to, but not directly invested in, the performance of a market index like the S&P 500. You deposit a sum of money into an account for a certain period of time for an agreed upon rate of interest, and your money is guaranteed never to decrease. Annual interest on a fixed index annuity is tax deferred. Most fixed index annuities will earn you between 3% and 6%, depending on where you live and the type you choose, but can never earn less than 0%. You can add money to some indexed annuities depending on which you choose, so be sure to ask.  Some are Single Premium and will not allow additional deposits. When the term of years is up, you can pull out the money in a lump sum, convert it to a stream of lifetime payments, leave it to grow, or move it to a newer annuity that better suits the current environment and your life. Since you can name direct beneficiaries, an annuity is removed from your probate estate in the event of your death. But the most important thing to remember is this – no matter what happens, this money will always be there for you.

I want you to do a little exercise. Take a look at all your assets – cash, investments, real estate (other than the house you live in), and any other liquid assets you own. Now, of that money, how much would you absolutely, positively not want to lose if you knew the market would crash tomorrow? That is the amount of money I would advise you to protect with a fixed index annuity.

I am an economic realist. I know the market will eventually come down, and if you believe the predictions for this year, we are in a for a major market correction. If you saw a train coming a mile away, it could reverse, stop or keep going. Regardless, would you stay on the tracks or get off just to be safe? The market may go up, it may go down. But the only way to keep some of your money safe is to get it off the tracks.

Live Fabulously - Diva