What’s Up Uncle Sam?
In light of it being everyone’s favorite time of year and as a shout out to everyone’s favorite uncle (what’s up Uncle Sam?), I thought we’d holler for the tax dollar today. What I’m talking about is tax deferred savings options available to you. I know lots of people have to shovel up the cash envelopes to good old Uncle Sam around this time of year, so I think it’s a perfect time to talk about different ways you can also benefit from the tax code. So let’s holler for that tax deferred dollar!
Ok so first of all, disclaimers. This is not tax advice, legal advice or investment advice. Please seek the advice of your tax professional, certified public accountant, attorney, legal counsel, professional licensed investment broker, or any other appropriate party for advice and consultation on what to do for your specific situation.
I am not a qualified or licensed professional in this area to give you specific advice. I’m just providing general info as I see it. Please then take this info and consult with the appropriate professional named above for advice on your specific situation. Alright? Now that we got the legal sharks out of the water, let’s proceed.
We Are All Responsible For Freedom To Prevail
Here is the second disclaimer, we are all obligated and responsible to pay into the tax system of this great country of the United States of America. I have no problem with paying my part to make sure we keep this beautiful land beautiful and running. If we are all going to live on this land together and utilize the resources paid out through the tax system, we all need to pay into this system as well.
It’s Not Going To Be Even, But It Is Still Just
Obviously not everyone has the ability to contribute the same into the system. And that’s ok. Some people are going to need more from the system than others at certain times of their lives and that’s ok too. But let’s shift our mentality from pitting the wealthy against the less wealthy. Let’s shift our mentality from dividing those who have more against those who have less.
We are all one nation of people occupying the most amazing country to ever exist in the history of the world. The beacon of light, the stripes and stars baby! We are all truly blessed to be American, to be born or to be otherwise citizens of this country. To be free. We are blessed to live on this awe inspiring land. We are blessed to have our brave and courageous armed forces out there fighting to protect us too, so don’t ever forget that either. Utmost respect for the muscles and brains protecting us day in and day out.
We Are In This Together- United We Stand
Don’t ever forget where all these tax dollars you are paying are going. They are going to support our great nation. They are going to support your hungry and sick neighbors. They are going to support your soldiers in the dark, cold trenches right now. They are going to support your veterans. They are going to support your elderly who have worked their bones to the ground and finally get to rest those bones in retirement.
And don’t hate on the wealthy either. The wealthy pay a huge percentage into the tax system to help make it all happen for this country. The politicians and media like to divide and conquer. But remember we are the United States of America. United we Stand. Divided we fall. That goes for division based on anything.
Let’s start changing our mindset back to peace and unity as Americans and put all the other bs aside. I’ll be the first to say I have love for every American out there regardless of how they vote, regardless of their religious preference, their race, their ethnicity, their gender, their sexuality, their socioeconomic status. I don’t really care. I’ve got love for you. You are my neighbor in freedom.
I’m Not Saying I’m Not Sassy
Don’t get me wrong. I’m still opinionated as all heck, and I can be a little sassy now believe me. People who know me know that (and no, we don’t need any witness to testify to this…just hush your mouths lol). But I’m also totally fine with listening to the other side of the table with an open mind. I sometimes change my own mind and other times agree to disagree. But either way, we should all strive to hold the intention to respect each other’s opinions and beliefs. That is the American way. My hope is that we can get back to that place of respect as a country. It really is.
Ok enough of my soap box.
Now Embrace Your Inner Capitalist
Now let’s talk about ways that you can save some tax dollars. Hey we are still living in a Capitalist nation right? We are rooted in capitalism and opportunity, so embrace your roots and take your opportunities when you got them. It’s all a balancing act. Give and take. Give and take. Yin and yang.
What is Tax Deferment?
So what is tax deferment?
According to the wonderful Wikipedia definition which I thought was a solid explanation:
Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period.
In addition, investinganswers.com had this to say:
In the investment world, “tax deferred” refers to investments on which applicable taxes (typically income taxes and capital gains taxes) are paid at a future date instead of in the period in which they are incurred.
So taxes can sometimes be deferred indefinitely or may be taxed at a different rate in the future, depending on what type of account or tax benefit you are dealing with.
Tax Deferred Contribution Account
Ok so we have different ways you can tax defer. You can tax defer now on your contributions by having an amount come out of your paycheck pre-tax into an investment account. So with these types of accounts, you are basically making the choice to take more money in your pocket now tax deferred with the understanding that down the road you will pay those taxes at whatever tax rate you are subject to at the future time of withdraw.
With this option, you may be hedging your bets that you can do more with your money now than later. You may have the mindset that you don’t know what will happen in the future, so you’d rather put your money to use now rather than wait for the unknown future. You may also be hopeful that you will be subject to a lower tax bracket by the time you pull the money out; or that you will be willing to take a bigger hit on the money at a future date at a higher tax bracket because you will be more financially well off by then.
Common examples of these types of accounts are the traditional 401K account, traditional Individual Retirement Account (IRA) or other tax deferred annuities available through your licensed professional investment broker who you will consult for advice. There are tons of regulations on investment accounts including possible penalties for early withdraw, so talk to a licensed broker.
The next type of tax deferment I’m going to discuss is when you go ahead and pay the taxes now on the contributions into the investment account with the expectation of tax free distributions down the road. Basically this is the “I’m just going to bite the bullet now mentality”. People who choose this option may decide to just pay up now, so they don’t have to pay up later at an unknown tax rate that could be higher. Remember the tax rate could be lower, the same or higher in the future. It is unknown. Since there are unknown variables with the future tax code, some people are not willing to take the risk of future taxation and prefer to just go with the current tax code and pay up now. Common examples of this type of account are the Roth 401K and the Roth IRA.
You Can Also Diversify
Some people diversify and do both types of accounts, so they may have both a traditional IRA and a Roth 401K for example. Again speak to your licensed investment broker about what is best for you. This is a highly regulated industry with lots of rules on these accounts, so you want to be well informed about the rules of your investments. Remember knowledge is power.
Meet a Broker for A Cup of Coffee
Most investment brokers will meet with you for a free consultation and a friendly cup of coffee. They oftentimes are also partnered with local banks and credit unions, so ask who you already do business with if they have a person. If your financial institution is not partnered with a broker, they will still most likely be able to give you a good reference of someone to contact.
Flexible Spending Accounts
Some other tax benefit accounts to check out and talk to your broker or your employer about are flexible spending accounts. This money can potentially come out of your paycheck tax free and can be used for qualifying medical and daycare expenses on what is typically an annual basis. This is usually a use-it-or-lose-it type account. This means you will want to accurately project your expenses for the year in these qualifying expense categories. If you don’t end up incurring the expenses that you contribute to this type of account, then bye bye money. It’s gone.
Don’t worry. It’s not usually too difficult to project what you are going to pay in a year for qualifying medical or daycare expenses, plus these accounts have an annual cap of what you can contribute. I personally go on the conservative side of a projection when dealing with use-or-lose accounts. AND that is not in any way advice of any kind, just my personal preference. Sharks be gone, ha,ha.
Don’t Forget The Beautiful Children
Ok the last type of account you may want to look into are tax benefit options for education accounts to save for your kids’ college or private education. I know in Missouri, we have the MOST 529 College Savings Plan available. There is also the Coverdell Education Savings Account out there. So check into your options if you expect to have this future need. These accounts can be quite beneficial to those who will need to put their beautiful children through school like me. You should also speak to a broker for which option is best on these.
Right now remember to start getting your tax information ready, so you don’t miss the filing deadline. If you won’t be ready in time, make sure to file an extension if you need one.
Also use this time of year to not only get your taxes in order, but also to plan for your future and start taking advantage of these savings available to you through the tax system. Time goes quick. Don’t put off saving for retirement or saving for your kids’ schooling.
Time is Literally Money
When it comes to investments, time can literally be money if you know anything about compound interest. So make the appointment. Sit down with a trusted professional and start taking care of your future.
If you already have these accounts set up, great job! You are one step ahead in the game. However don’t become complacent. Ask yourself when is the last time you evaluated your contribution amounts or your accounts? Are you on track for your target goals still? Do a review and make sure. You don’t want to get too far down the road and realize you’re not. No one wants that.
Don’t Wait Until It’s Too Late
Use tax time as an annual reminder to make the focused effort to plan for your future or assess your progress, so you don’t regret not doing this when the time inevitably arrives!
“Do not save what is left after spending, but spend what is left after saving.” That is a quote from the brilliant investor Warren Buffet. Let’s heed that advise from the self made billion-(yes with a B)-aire. Ok? Sounds like a plan to me.
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