Tuesday, February 18, 2014

Don't Touch that 401K or IRA!!

Okay, now that I've got your attention, you can touch it, just talk to your tax guy or gal first.

Really.

Your financial advisor is not a tax guy.  Your banker is not a tax guy.  Your insurance guy is not a tax guy.  Talk to a tax guy or gal first!  There are a LOT of rules about taking money out of tax advantaged accounts.  These accounts include SEP's, SIMPLE's, IRA's 401K's TSP's, 457's, 403b's and more.  There are some exceptions that get you out of taxes and penalties, but they are complicated.

I'm not even going to go into them in this post.  Talk to your tax guy!

I will say that the withholding is not, "paying the taxes already."  The withholding is rarely enough.  Meeting an exception to the penalty does not prevent taxation, just the penalty.  Some exceptions only count for IRA's, but not 401K's.  Some count for 401K's, but not IRA's.  Only your tax dude can give you the right advice.

Two examples of bad advice:

1.  A client recently took $10,000 out of his 401K to purchase a home.  His banker told him that was an exception to taxes.  WRONG!  It's an exception to penalties, not taxes, and, oops, that exception only applies to IRA's, not 401K's.  Unhappy client!

2.  Another client, age 59, left her job.  She was going to use her 401K to buy a house.  A big house.  Her financial advisor told her to roll it over to an IRA to avoid taxes while looking for a house.  She knew she would pay taxes, but thought she could avoid the penalty.  Her financial advisor told her she could.  WRONG!  Having it in an IRA when buying the house avoids the penalty on the FIRST $10000.  The other part of nearly $200,000 was fully penalized at 10%.  To add insult to injury, because she was older than 55, she could have taken it out of the 401K without penalty, for ANY reason.  Once it hit the IRA, she had to wait until 59 and a half, or meet an exception.  That's right, even with the bad rollover, 6 months would have saved her THOUSANDS!  Unhappy client!

Talk to the tax experts, not the banking/insurance/financial experts.  I won't give you investment advice, don't take tax advice from the wrong guy.

If you like the blog, buy my book: Everyday Taxes only $5.99 for Kindle!

Relax.  It will be okay.

Thursday, February 13, 2014

What do you do with that Big Tax Refund?

If you like the blog, buy my book: Everyday Taxes only $5.99 for Kindle! 

About 200 tax returns into the tax season and I have seen a lot of big tax refunds.  If you read my last post, you know that I'm not opposed to a big tax refund, but, what's the best thing to do with the money?  The answer is, it depends...

1.  If you're behind on any bills, please, for the love of God, catch them up and keep the bill collectors at bay.  After that...

2.  If something important, like your car or your HVAC system is broke, get it fixed, and fixed good.  After that...

3.  If you don't have $1000 dollars saved for an emergency, open a savings account and put $1000 dollars in it, and please, for the love of God, Don't Touch It, unless you have an emergency.  After that...

4.  Spend some of it, no more than 20%, on you or your family for something that makes you, and them, happy.  You should enjoy the fact that you've accomplished steps 1 through 3.  That's more than many families will accomplish in their lives.  A $1000 emergency fund is a BIG DEAL, and you should be proud of it.  After that...

5.  Pay off credit card debt.  All of it, and shred those credit cards, and get a debit card only.  After that...

6.  Pay off student loan or car debt.  After that...

7.  Put away 3 to 6 months of expenses in that savings account we talked about in Step 3.  Leave It Alone!  It's for emergencies.  After that...

8.  Feel free to spend the rest on something you want, or a vacation you desire.  If you've accomplished Steps 1 through 7, you probably have a good budget, and a good plan for your future.  Everything that follows is optional, and you can do any of the steps in any order.  If you want...

9.  Fully fund that Roth IRA for the year.  You have until April 15th.  Or...

10.  Sock some money away for the kid's college fund.  Maybe an Education Savings Account or a 529 plan.  Or...

11.  Put a big chunk towards the house.  Big payments now increase the power of the normal payments you make.  Don't listen to the morons who say you should always have a mortgage.  They don't know what the hell they're talking about.  The Super Tax Genius rules say NEVER do anything just for the tax benefit, and owing money to the bank qualifies as one of the dumber things you can do.  Or...

12.  Upgrade the house.  Maybe new counters, new bathroom.  Whatever.  You've demonstrated that you're smart enough to spend your money the way you want.  I would probably jump on Step 11, but if you've got 1 through 7 done, you don't need me to nag you.

If some of these ideas seem familiar, that's because many of them were inspired by listening to Dave Ramsey.  I don't think his advice is absolutely necessary for everyone, but if you've tried to get your financial life in order and failed, you should follow his plan, TO THE LETTER.  If you're out of debt and your retirement plan is on track, you probably don't need all of his advice, though we can always learn something.  Check out the link by clicking his name.  He's helped a lot of people.

Here's a link to his book:
Dave Ramsey's Complete Guide to Money: The Handbook of Financial Peace University

Friday, February 7, 2014

It's Okay to Get a Big Refund - Really...

If you like the blog, buy my book: Everyday Taxes

I know what everyone says, "A refund means you made an interest free loan to the government!"  And they're right, but really, have you seen interest rates lately?

I'm not here to argue that their opinion or facts are completely wrong, to be honest, they're pretty much spot on.  But that doesn't mean it's the whole story.  I'm here to reassure you that you shouldn't feel guilty about the big refund, and I'll tell you why.  First, however, let me tell you when a big refund really would be bad:

If you're really struggling to make your monthly bills, barely getting by paycheck to paycheck, but get a big refund, you really should adjust your withholding to cut down the struggles.  Beside that, here are a few reasons it's okay:

1.  Interest rates suck.  If saving the money for a big purchase is your plan, you really aren't losing much letting the government keep it and getting it on your refund.  If you're saving for long term things like retirement, then you should get it in your paycheck rather than the refund, but if it's short term goals, there's not much of a difference.  Combined with a few more of the following reasons, you can make a compelling case for a big refund.

2.  Most American's (myself included) suck at saving.  We tell ourselves that we'll save the money, and maybe we even set up an account to do it, but it's there.  Mocking us.  Tempting us.  So we spend it!  Or even more likely, we never get around to setting that account up, or we end up "needing" it for "just this one time", and next thing you know, we've saved butkis!

3.  Getting a big refund is a good way of ensuring you can catch up if you have a bad year with bills.  You get a little behind because, as most American's, we're not really great at budgeting.  The credit cards build up a little more than we wanted, and maybe even get a little hard to pay, then BAM!  It's refund time and we can do a reset.  Now I'm not recommending this as a planning method, but, I see a lot of reality in the tax office, and this is a big helper for a lot of people.

4.  It's really difficult getting a small refund without ending up going too far.  I can say with absolute certainty that virtually every person I do taxes for would consider a $500 balance due as nearly end of the world bad.  It SUCKS owing the government money.  Even the ones who want to get a small refund would rather get too big a refund than owe one thin dime!  Trying too hard for a small refund risks the evil balance due.

So relax.  Tell the naysayers to mind their own business.  If you want a big refund, that's fine with me.