One Piece of Advice for New and Old Investors Alike

JohnChisum

Each year around tax time I mention this tidbit to others who are investing. Are you getting a large refund from Uncle Sam this year? If so, why?

I hear stories every year of people and families getting large refunds after they do their income taxes. I say why give your money to the government so they can hold it for a year and then give it back to you? Adjust your W2 so that you break even or come close. Then, by investing that same amount back into your retirement or personal investments, you will be miles ahead. People tend to spend their "windfall" each year.

It might take a few tries to get to that magic number. I took multiple W2 forms and over a time frame of several pay periods I was able to do it. One year I got a $5.00 refund. ( rounded off). Even if you have to pay a small amount, it is still worth it. As an example, if you get a $2000 refund this year and get paid every two weeks, divide 2000 by 26 (# of pay periods in a year) and you come up with almost $77 a paycheck. That comes to just over $166 a month. Over the years that extra amount will grow immensely.

I hope this helps someone on this board to increase their investing power money wise.

John

bee

My investment challenged friends call this tax refund their force savings account. I reply,
"O.K., but please don't blow it the moment you get your paws on it."

Of course they do...and for that moment they seem happy.

JohnChisum

Reply to @bee: Samsung and Sony sales surge during tax time as the big flat screen televisions flow out of the showrooms.

hank

I enjoy writing the IRS a small check each year. It's important however to consult your tax advisor to be sure the amount owed is small enough to avoid fines or other penalties. But, when possible, it's better to have your $$ invested as opposed to sitting in state or federal coffers waiting to be refunded.

As bee says, the "investment challenged" may intentionally over-pay, opting for their big refund. Provided they intend to invest the proceeds or pay down debt, it's probably a useful planning tool for some.

Michigan residents. ... If considering taking distributions from "pensions" (including both Traditional and Roth IRAs), you may want to obtain and complete Michigan MI W-4P to make sure the amounts withheld by your custodian are appropriate for your tax situation. Depends on individual situation, but worth taking a look at and perhaps talking to your custodian and/or tax advisor to avoid unwanted surprises at time of distribution.

Ted

Reply to @JohnChisum: There are Pros & Cons regarding the issue.
Regards,
Ted
https://www.mint.com/blog/saving/the-pros-and-cons-of-using-your-tax-refund-as-a-forced-savings-plan-0413/

JohnChisum

One of the better books on frugality and investing was written by James Stowers.
http://www.amazon.com/Yes-You-Achieve-Financial-Independence/dp/0836280784

Mr. Stowers was a founder of American Century, previously Twentieth Century. A real class act amongst the investment community. He is still active in cancer research as some of the profits from American Century fund a research center in Kansas City.

Here is a chance for those who are interested to use the Amazon link from this page to get this book.

Old_Joe

Reply to @JohnChisum: Yes, we've used Twentieth Century/American Century for a very long time, and with complete satisfaction.

Glad that you survived all of the excitement over there!

OJ

Ted

Reply to @JohnChisum: Do you mean the one and only James Stowers who resisted to the bitter end, law suit, to allow investors out of American Century Gift Trust.
Regards,
Ted
http://www.marketwatch.com/story/giftrust-teaches-a-painful-lesson/print?guid=7F8B71AB-E5FE-4F13-8CCE-6D38FCF748BC

JohnChisum

Reply to @Ted: I am not totally sure, but was that his kid? I never participated in that fund until after it changed over to All Cap Growth. That was a unique fund and something I was never interested in. Those who did invest in it had to read the prospectus.

AndyJ

That's been the M.O. at this house since ~ 1980. Here's the IRS rule on underpayment (when a penalty may kick in):

"Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller."

Other than the linked summary page, Pub 505 is the place to go for the details.

Gary

James Stowers bio

http://en.wikipedia.org/wiki/James_E._Stowers

Also proposed a tax for KC to be used for medical research, I think this past spring.