It is that time of the year when the anticipation of the tax return is on the minds of many people. On the surface, this sounds like a great idea. But the truth is that getting a tax return is a major financial mistake.
“The average family receives a $3116 tax refund in 2014. The IRS expects that to increase in 2015 to $3295”.(1) A tax refund is just an overpayment of your taxes. So in essence, you are loaning that amount to the government for up to 12 months.
Think about it this way. If you bought a coat for $120 and gave the clerk two $100 bills, you would expect $80 in change. How would you feel if the clerk handed you a bag with your coat and said he would send you your $80 by April 15th? If you wouldn’t accept it from a clerk for $80, why would you accept it from the government?
Let’s take a look at what that costs you over time.
If you choose to continue receiving $3116 at 0% interest per year for 20 years it would be $62,320 and in 40 years you would have gotten $124,640 in refunds. In 40 years, regardless of the investment vehicle you chose, it would have been more than a $3 million mistake.
In the example above, the $3116 invested in a Roth IRA at 12% would grow to $260,241in 20 years and $3,127,794 in 40 years. Invest that same amount in a traditional IRA and add the tax savings ($799) to the investment and that money would grow to $325,301 in 20 years and $3,909,742 in 40 years. Can you and your family afford a mistake like that?
To fix this error, one must increase the deductions on their W4 form. Most individuals are under the impression that a deduction is only credited for the number of people in your household. There are many other items that count as a deduction. Some of these include interest on your home and school loans, medical expenses, charitable contributions, some work and educational expenses, and contributions to personal IRA’s just to mention a few.
If America learned and implemented this simple concept, our retirement crisis would be over and our country would be financial well. For more information about this subject or other financial needs, email me at email@example.com or call me at (610)657-1708.
Upcoming Events: College Planning Seminar. The event is scheduled for March 19th and will begin at 6:30pm. The discussion will include the proper way to plan for your children’s education as well as the best practices for qualifying for financial aid. This event is free to the public. Reservations are required as space is limited. For more information, call Diane Heydt @ (610)657-1708.