From the Archives of TGIF 2 Minutes… read on for 2021 updates.Originally sent, April 2019.
Cash flow. Wouldn’t you like to have more of it around tax time? Well then, it may be time to delay or reconsider that new cell phone purchase.
Recently [in 2019] this “sticker shock” issue came to the forefront when I forked over $1,100 for my new Samsung Galaxy Note cell phone. OK, you may say, “Why didn’t you go with the zero-interest payment plan?” or, “Where have you been, Kerrie?” To which I would respond,
Believe it or not, lots of people do not know how much they get paid. That is, in terms of total compensation. Of course, there are that handful of people who know exactly what they make – and most people know precisely their “net pay” that gets deposited into their bank account periodically. But in my years of discussing total compensation with my clients (who typically make a fair amount of money) a great deal of the time they do not know accurately enough how much they made in a given year.
January is an ideal time to take a closer look at a print-out of last year’s year-end pay stub to learn valuable details and information. Why is this important?
The real title of this edition is: The 401k Trap – Have a 401k Strategy.
It has become clear that there is more to saving in a 401k than…simply saving in a 401k. Last year, amidst no travel and not being able to see clients and friends face-to-face, two colleagues and I took 5 months to write an actionable guide to the critical need – due to potentially higher taxes in the future – for a strategy around 401k saving TODAY. For Everyone. The name of the paper is: The 401k Trap.
For those who are just getting started saving in a company 401k or 403b, the strategies we suggest could make a huge difference in 10 years and beyond; for those who have been saving in a 401k for 15-20 years or more, a strategy may be even more urgent.
The key reason is taxes. It is true that no one knows for sure where tax rates will be in 5-10-20 years from today. But with history as a guide and the fact that tax rates on the federal level are near all-time lows, the conclusion can be drawn that tax rates will only be higher in the intermediate- and long-term future. This state of affairs will punish those who have done the hard work of saving large balances in pre-tax 401k and IRA accounts.
Talking taxes on a Friday is a lot easier than talking taxes on a Monday! Believe it or not, at this time of year it is smart to be talking taxes no matter what. Preparation and planning are the name of the game.*
The issue of higher FUTURE taxes is critical to clients of all income levels – especially those in higher tax brackets – and all ages. You will hear me repeatedly hammering home this “tax trap” issue – with the research and collaboration from my sources to back it up.
Here is some “good” news when it comes to taxes and tax strategies: the Roth IRA, Roth IRA conversion and Roth 401k are alive and well for now. The “good” part is that for nearly ALL reading this, you ARE eligible for both the Roth IRA conversion and the Roth 401k (if your company offers a Roth 401k) even if you are in the higher/highest income brackets or own a business! And these strategies can be employed NOW for 2020 and 2021.
“Elephant in the room,” “ticking time bomb”…whatever you wish to call it, there is an issue currently present but not talked about nearly enough. The issue hits a nerve with nearly everyone – investor/saver or not. The issue is taxes – more specifically future taxes on retirement savings. Unfortunately, the issue has become so politicized that its true impact has almost been forgotten.
Back in 2016, I discussed part of this topic in TGIF 2 Minutes. (Click Death & Taxes to read.) At that time, the focus was soaring healthcare costs.
From the TGIF 2 Minutes Archives earlier this year PRE-coronavirus…
Earlier this year in February things were GOOD! The economy was cranking, unemployment was low, wages were up, and it was a somewhat perfect time of the year to set goals. Think: it was pre-tax filing time and after the holidays.
Fast forward to today… the world has changed. Our savings have been tapped in the pandemic — and new savings and other goals need to be reset! While the kids may now be going back to school (followed by maybe not??) using this precious time to set just a handful of goals can pay off toward achieving those goals.
A quick note regarding taxes and upcoming tax payment deadlines. These details could come under the category of “Captain Obvious” but are worth mentioning all the same.
The April 15th filing deadline for 2019 taxes was extended to July 15th. There have been rumors of the deadline being extended even further to September or October. This looks ABSOLUTELY NOT to be the case.* The 2019 Tax Filing deadline remains July 15th . See here: IRS.GOV
Now that the calendar has turned from April to May there will be in effect a “Tax Time Groundhog Day” on July 15th, which is the new 2019 Federal (and most States*) filing deadline for 2019 taxes.
A number of people reading this note may already have signed and filed their 2019 tax returns^ in order to turn the page and move on to 2020 spending, budgeting and saving. However, if you are in the camp that is stretching out your 2019 filing until the July 15th date, then consider a few last-minute items:
As the year turned from 2019 to 2020, there stealthily rolled in several of the most sweeping reforms to retirement and tax legislation in a decade or so (outside of the 2017 Tax Cuts and Jobs Act, or TCJA). The recent changes apply to IRA, 401k and other retirement savings accounts. If any of these apply to you then please read on:
Turning 70½ this or next year
Own a business with or proposing a 401k plan
Working for a small company and do not have access to a 401k plan
Need an early distribution for reasons of qualified birth or adoption