HAPPY SUMMER EVERYONE!
I spend most of winter complaining about the cold and snow, so to say I am excited about summer would be an understatement. Unfortunately, now you get to listen to my complaints about the humidity! Oh, the joys of the northeast!
We are excited to get Emmy to the beach a few times this year. Her first beach experience last year went well, so we’re hoping for the same this time around.
Feet in the sand, wind in your hair, the smell of the salt water. Ah, I can feel it already. Every kid loves the beach, right?
Apparently not. My mother said I would hysterically cry for the first few years of my life when put onto sand. Yeah, I was a real treat.
Moving on.
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Max it out?
You’ve all heard me (with your eyes) talk about how important it is to save not only for your immediate goals, but also for retirement. Yes, I know its 20-30 years away, but due to compound interest, starting early pays dividends down the road.
A common question I get from a lot of my older millennial clients is whether or not they should max out their 401k plan at their employer. If they have an accountant they most likely are getting this advice so it must be a good idea. Well, yes and no.
The Tax Man
The tax man (your accountant) is always looking out for your best interests, but they are very focused on saving you on your tax bill and not so much on your financial goals.
How can we get our client to pay less taxes this year? By declaring less taxable income. Therefore, a very common suggestion will be to increase your contributions to your 401k plan or Traditional IRA. This will bring down your taxable income for the year and as a result the amount of taxes you owe will be lessened.
Very High-Level Example: $150,000 gross income with a $12,400 single standard deduction.
- With $5,000 contributed to 401k plan your total Federal income tax will be approximately $25,903.50.
- With $10,000 contributed to 401k plan your total Federal income tax will be approximately $24,703.50.
- By contributing $5,000 more to your 401k plan you saved $1,200 on Federal income taxes.
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Immediate vs Future
As shown above, contributing more towards your 401k plan you will reduce your tax bill for the current year. Sounds great, what’s the prob, Bob? Well, the problem is that you cannot touch the money you contributed (without penalty) until you are 59.5 years old. The IRS does give a few exceptions to this penalty, but for the most part that money is tied up until retirement.
My point is that you need to decide what your financial goals are over the next few years. If buying a house, starting a family, buying a car, going on vacation, etc., are some of your more immediate goals then you need to make sure you have the money to fund them. Unless your income is substantial, maxing out your 401k (up to $19,500 in 2020) might be too much while also accomplishing some of these other more short-term needs.
Understanding your cash flow and goals are very important when making financial decisions. Spend some time on these two critical financial planning principles and you’ll always make the best decision for your family.
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Feel free to ask a question, I’d be more than happy to help!
Robert.A.Gariano@ceterafs.com
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Fun Fact: Radio City Music Hall was opened in 1932 and remains the largest indoor theatre in the world seeing over 300 million visitors.