Raises, Refunds, and Windfalls: How To Make The Most Of Positive Financial Changes

By
Mike Loo, MBA
June 21, 2018
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Regardless of where it comes from, getting an unexpected chunk of change usually makes for a pretty good day, week, or even year. But if you aren’t intentional about what you do with your extra cash, you could follow in the footsteps of many lottery winners who squander their winnings and end up unhappy and broke.1  Even if the gift you receive isn’t a significant amount, you’d be amazed at how some smart planning can make a big difference down the road. Let’s look at some ways you can you use your raise, refund, or windfall to get ahead financially.

  1. Pay Off Debt

Big debt, small debt, it doesn’t matter. Debt is debt. Start with high-interest debt and work your way down. Did you know that the average American household carries over $16,000 in credit card debt and pays an average of $1,292 in interest annually?2  Sure, using your extra influx of money to reduce debt isn’t as fun as going on a trip, but think of the satisfaction you’ll feel when you see your balance decrease, knowing that you are saving yourself thousands of dollars in interest in the long run.

  1. Beefing Up Your Retirement Savings

Even if you diligently contribute to a 401(k) or IRA, chances are you aren’t maxing out those accounts. Let’s say you receive a $3,120 tax refund, the average amount according to the IRS.3  You then deposit that $3,120 in an IRA and see a 7% rate of return annually. In 20 years, you will have earned approximately $8,000 on that investment due to compound interest. Let’s go a bit further. If you invest your tax refund every year for 20 years, your retirement savings could see a boost of almost $150,000! If you’ve received a raise, use some of it to increase your contribution percentage right away. That way, you won’t get used to living with that extra money and it puts you ahead for the future.

  1. Invest In Education

Most of us dream of our kids going to a great school and getting a solid foundation for their future career, but have you considered how much of an investment it will take to get them to that point? The numbers can be daunting. These days, a high school graduate can expect to pay upwards of $200,000 for an undergraduate degree at a top school4 and over $10,000 each year for in-state tuition alone at a public institution.5  The costs will vary depending on room and board and other educational costs, but either way, it’s a lot of money.

One option is to open a 529 account with your tax refund and, once again, let compound interest help you get ahead. Not only will your investment pave the way for your child’s future, but it could also give you a tax break.

  1. Build Your Emergency Fund

An emergency fund provides you with a cushion for those times when life gives you lemons. If you don’t have readily available savings, something as simple as an unexpected car repair or medical bill could derail your finances. Or, if you know you have a large purchase or a life milestone approaching, such as welcoming a baby into your family, having an emergency fund will help you avoid digging into long-term savings or going into debt to cover costs. You can’t put a price on the peace of mind that an emergency fund will give you, so think about investing some of your tax refund to boost your short-term savings.

  1. Be Generous

Giving your tax refund away may not help you get ahead, but it could make a lasting impact on someone else’s life. Find a charity or cause that is close to your heart and pay it forward. Your gift could also help you when the next tax season rolls around. Just make sure to get a receipt for your contribution and itemize your deductions.

Have You Received Some Extra Cash?

It’s okay to treat yourself when you find yourself with excess income, but don’t splurge just because the money is there. Make a list of your financial priorities and then map out how your additional money could give your financial future a boost. If you would like guidance on how to use your raise, refund, or windfall, call my office at (949) 221-8105 x 2128 or email me at michael.loo@lpl.com.

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By
Diane Zing, CSA
June 11, 2018

Paying taxes is inevitable. The key to being as efficient as possible about how much one pays in taxes requires careful consideration of the big picture. And while many people simply want to know if they can have a tax-free retirement, it really starts with being clear about how and when taxes get paid…and to defining what a “tax-free retirement” actually means. For example, if someone is striving to have income during retirement that is tax-free AT THAT TIME, then there are a plethora of investment and insurance products out there that could help defer taxes on earnings, and potentially, have tax-free withdrawal benefits for some types of accounts. But that doesn’t mean retirement is “tax-free”.

Let’s clarify what a few of the most common types of taxes are:

Income Tax – taxation on earned income can occur on many levels; local, state and federal. The amount a person would have to pay varies greatly on their situation. And, there are various types of tax credits that could affect the amount of taxes that would be paid on income. Any earned income that is deferred into a qualified retirement account generally means that taxes on that income won’t get paid at the time it is earned, but when that income is taken at a later date, during retirement, taxes are paid at that time. The idea that paying taxes on income later, when one might be in a lower income tax bracket, might prove more beneficial. But a) there is no guarantee what the tax rates will be in the future, and b) there may be several other factors with a person’s overall taxation that could affect what is perceived as a benefit. A tax professional is the best person to help folks evaluate what kinds of strategies are best for their overall situation. At the end of the day, SOME form of income tax will be paid, either when it is received upon earning, or when it is withdrawn from a qualified plan “down the road” in retirement.

What can be done to possibly reduce these taxes? Speak to a tax professional about what tax credits might apply, and also review with them if itemized deductions can play a role in reducing taxation.

Sales Tax – taxation occurs on state levels for various goods and services that get purchased. The percentage of taxation is usually based on the price of said goods and/or services. But that percentage charged can vary greatly from state to state, or even within different municipalities. There are a few states that don’t have any sales tax on most goods and services.

Excise Tax – taxation that is applied to specific types of goods; gas, cigarettes, beer, liquor, etc. These are typically nicknamed as “sin products”. Taxes received for these particular products are generally used to help raise money for bringing awareness to the potential dangers of these products.

What can be done to manage sales and excise tax? Not much. These types of taxes are very hard to “manage”. Changes in lifestyle; consumption of goods that fall within this category, will obviously affect the amount of sales taxes paid.

Property Tax – taxation that is applied to property owned. Taxes received tend to go towards local municipality needs. The amount of property taxes charged is usually based on a percentage of the value of the property.

What can be done to manage or alleviate property tax? Renting instead of owning might prove beneficial with alleviating property tax. However, there may be tax benefits also lost by being a renter instead of an owner. Again, a tax professional is best for helping to calculate what the tax benefits are for both scenarios.

It might not be possible to have a completely tax-free retirement, but by working with a financial professional and a tax professional, the ability to strategize investments and manage how taxation occurs could prove very beneficial. It’s not just about saving and investing…it’s about being as savvy as possible with the decisions along the way.

By
David McDonough
February 22, 2021

Preparation for retirement is extremely important, and it extends well beyond finances. In addition to knowing how you’re going to fund it, you also need to know what your time will look like when you say you’re done with being a wage earner. With this new lifestyle, you not only need to determine how to fill up the hours in the day, but you also need to determine what your new purpose is. This can be a pretty significant task, which becomes even more complicated when you add another person to the equation. That’s why you need to work on your retirement compatibility with your partner way before you stop working.

Retirement Compatibility is a tricky thing. Statistics show that half of the couples disagree on their retirement age —and a third don’t see eye-to-eye about their expected lifestyle in retirement[i]. This is troubling as there are a lot of logistics you need to determine in this new chapter of your life. Will you be retiring at the same time? Typically, only 1 in 10 couples retire together[ii]. If you and your partner are planning on retiring at different times, you may want to look into how this change affects your health insurance. You may also want to consider re-establishing household roles. Equally important, you will need to find common ground on your retirement budget as it will require commitment from both parties.

Oftentimes, the difficulties in transitioning from a wage-earner to a retiree can go beyond the logistics. Some experience a period of depression as they look for a new purpose in life. As tempting as it may be, that new purpose shouldn’t be your partner. If you don’t plan correctly, you will suffer from what I call too much togetherness. This can be a very real strain on relationships. Instead, look at your life as being divided into “You Time, Me Time, and We Time.” To aid in this transition, you may want to try winding down your career gradually in order to practice retirement. This can prove to be a benefit to both yourself as you experiment with this new stage in your life and your employer as you stay on to train and mentor your replacement.

Start working on your retirement compatibility with your partner with regular financial date nights. Start discussing how you envision that new chapter in your life. What type of lifestyle do you want to live? Will there be a lot of dinners out with friends or home-cooked meals watching your favorite television show? Will you be traveling or developing a new passion? Will you work part-time or volunteer? Communication is key. Share your plans with your partner so that the two of you stay on the same page and prevent incorrect assumptions from being made.

Retirement, a lifestyle of six Saturdays and one Sunday, can be either a wonderful time or a stressful transition, depending on your planning. Make sure you and your partner’s planning extends beyond finances to ensure a smooth and joyous new chapter in your lives.

[i] https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/couples-retirement-fact-sheet.pdf

[ii] https://assets.aarp.org/rgcenter/general/retired_spouses.pdf

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.

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