“A penny saved is worth two pennies earned . . . after taxes. ”

-Randy Thurman

Another year has passed and it is time to get your paperwork in order so you can file your tax return. It can be an exciting event for those of you who expect to get a refund, or an incredibly stressful one if you are worried about how much you might owe. This year, with the new tax laws in place, a lot of people seem to be feeling more hesitant than anything else, since it can be a bit hard to sort out if the new laws fall in your favor or not.

Talking with your trusted tax consultant will be the best way to sort out those concerns… And, while you are there, make sure that you ask her about the W-4 form you currently have on file with your Human Resources department at work. While many of the new tax laws took effect in the last year (2018), they were not all in full force until now, and some of those changes could have a bigger effect than you might expect. The IRS (anticipating the confusion that these changes would bring) has created an online calculator to help sort out what your new withholding number should be. The webpage where you can find a link to this calculator is . Be sure to read through the page instead of skipping right to the calculator, and then be prepared to set aside about 20-30 minutes for this task.

It seems that, if you do not have dependents, things may not have changed much… but if you do still hear the pitter-patter of little feet running through your home, the new numbers will now look sort of bizarre…. as in, “15 allowances for a single mother of three who files as Head of Household” kind of bizarre….! Because you want to have the right allowance number, having a helping hand from your tax professional will certainly be important. If you think about it, when you send too much money to the IRS every paycheck (by having the wrong number of the allowances selected on that W-4 form you have filed with H/R), you are giving the government an interest-free loan for up to, or more than, an entire year… Just imagine how many people do this year after year, and how many earned American dollars are “loaned” to the government in this way! Would the government be willing to give you a loan with the same 0% interest terms? I doubt it.

It seems irrational, then, to be excited about a large tax return. In some (rare) situations*, it may be beneficial for you to let the government take your money and hold it until you ask for it back in your tax refund. In every other case, it is better to NOT give the government your money…. but instead, to get every penny of your hard-earned cash in your paycheck and, at your own discretion, work it into your budget or save it in a bank account. Most banks have savings accounts specifically for Holiday Funds, Vacation Funds, and the like. Then, you can control when and for what it is used. At the very least, put it into a CD or a Series I Bond (where the government pays you interest to borrow your money from you) for a year instead… Or, an even better idea could be to invest it in a mutual Bond Fund or (if you’re more daring) a Total Stock Market mutual fund and let it grow.

It may be less exciting next tax-season when you only get a small tax return or owe a tiny bit of money at the end of the year, but it is important to get this part right. You are perfectly capable of managing your household, and having access to ALL of your money is paramount when you sort out your budget. It is a good lesson in controlling your own destiny, and it will be empowering to know that you are saving on your own terms, and earning interest, for the rest of your life.

*This rare situation may be that you will use the extra earned money each month to ruin your life…. Perhaps by digging yourself further into debt because of a gambling problem or by using the funds to purchase illegal substances… Ask yourself “If I have some spare money, will it get me into a lot of trouble?” If the answer is YES, then, by all means, let the government keep your money! Really, though, short of these unlikely circumstances (readers of this blog are very dependable people!) there is no reason to let the government hold your money for free!

The IRS notes the following:

IMPORTANT NOTE: This Withholding Calculator works for most taxpayers. People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents or certain other taxes, people with long-term capital gains or qualified dividends, and taxpayers who have taxable social security benefits.  (The calculator won’t determine the taxable portion of your social security benefits, but if you estimate the taxable amount (e.g., using the worksheet in the Form 1040 instructions), you can enter that into the calculator as other nonwage income so that the calculator can take it into account.).

Tax Deferred Accounts 101

“‘In this world nothing can be said to be certain, except death and taxes.”

The Works of Benjamin Franklin, 1817:

It seems like an easy enough task… Put your money into investments and let it grow until you are ready to retire.   So why is there so much confusion?  Well, there are some concepts that must be understood in order to do it properly.  Many people find the whole idea of investing to be “out of their league” and so they never get started.  You will NOT be one of those people, because you are willing to start with the basics and really understand what needs to be done!

First, we must specify that there are places where you put money (Accounts) and then there are WAYS that that money is considered for taxes by the government (Tax Status). The tax status of the money you save is important (to you and to the government!)

You can, for example, choose to put money into a brokerage account that allows you to invest in the stock market.  When that money grows with the market, the newly “earned” money is called GAINS, and those gains can be taxed as income if you take them out of the account, unless they are in an account that is set up to be DEFERRED from paying taxes because you plan to use it at retirement age.

That isn’t too confusing! Honestly, they probably make it confusing so people are afraid to use tax sheltered accounts… But you know they are worth it, and you are ready!Great! OK, just one more little thing to add… There are two types of Tax Deferment….

Pre-Tax – Pre-tax means that you do not pay taxes on the money NOW, but you pay them when you withdraw amounts in retirement, you will pay taxes THEN.

Post-Tax – Post-tax means that you pay taxes on the money you invest NOW, but you will not pay taxes when you withdraw amounts in retirement, even on the amounts that it grows in interest/earnings until then.

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A little bit of math done at this time will probably have you asking more questions, so let’s see what we find out… Let’s say you pay the government 15% in taxes on your income. If you earn, $7,000 at work, the government will take $1,050 of that money, leaving you with $5,950 to do with what you will. You can choose to invest that $5,950 and you will earn money from those investments.  When older-you takes out those investments and uses the money you earned, you will have to pay your tax rate at that time(maybe 15% or maybe more, depending on your income level) of what you earn to the government.  That is an example of a Taxable Account.

OR… You can use a tax-deferred account.  *

If you use a Post-Tax deferred account, you will invest your$5,950 and you want to invest it and you will earn money from those investments.  When you take out those investments and use the money you earned, you will NOT HAVE TO PAY any taxes on those gains.

If you use a Pre-Tax deferred account, you will invest your whole $7,000 (the government doesn’t take any yet) and you will earn money from those investments.  When you take out any of the funds, whether they were part of the initial investment or part of the gains, you will pay taxes on the money at your current income tax rate (maybe15% or maybe more).

So, the two tax deferred options are significantly better than the first option where you pay more taxes! Your tax rate will determine how much you are taxed when you take the funds out in retirement, and that is sort of a guessing game, but you know how much you are taxed right now, so you can run some numbers and judge what is better for you. BOTH OPTIONS ARE USEFUL! Depending on your situation, one may be better than the other, but you should do you best to take advantage of both as much as you can! Grow your nest egg as much as you can, and Old You will thank you later!

Photo by Soner Eker on Unsplash

If you work, your company may offer a company sponsored 401k,SIMPLE IRA, or some type of similar plan, which is a Pre-Tax option.  Try to contribute as much as you can to that!  Many companies also offer a“company match” earning you free money just for saving for your own future.There are different maximum amounts for the different types of accounts, and each year the amount may increase, depending on the government’s calculations.

Some other tax deferred accounts are Traditional IRA and ROTH IRA accounts.

                Traditional is Pre-Tax while the ROTH is Post-Tax. 

You can contribute as follows:

                $6,000 per year in 2019, plus

                $1,000 per year in 2019 if you are over 50.

NOTE: You can only contribute to EITHER a Roth or a Traditional, or a combination of both, up to the $6,000limit (or $7000 if over 50)… so, for example, you can put in $3,000 to a Traditional and $3,000 to a Roth…  but you cannot put in $6,000 to a Roth and $6,000 to a traditional in the same year.

IF you take advantage of all of these maximum limits in all of these accounts, you could have a tax “shelter” of over $19,000-$32,000per year!!  And any dollar saved from taxes is truly a dollar earned!

OH! And just one more thing…. There is also a MAX limit to contribute to an HSA (Health Savings Account) that may be available to you, depending on your health insurance setup.  If you do have an HSA available to you, that can even be BETTER than the other tax deferred accounts, since you NEVER pay taxes on the money you used out of an HSA to pay your medical costs!

*Keep in mind, some people will not qualify for tax deferred accounts because of their income levels and other factors, so you should ask a tax advisor if you think you might be one of those people.