Does Your Huge Tax Refund Make You More or Less Financially Savvy Than Those with Smaller Refunds?

Does Your Huge Tax Refund Make You More or Less Financially Savvy Than Those with Smaller Refunds?

Let’s say John and Kevin have basically identical sets of circumstances – same income, number of dependents, deductions, etc. But when they filed their taxes, John received a refund check that was three times larger than Kevin’s. Does that mean Kevin’s tax preparer or the tax software he used (if he self-prepared) is substandard?


Well, since their circumstances are identical, and I’m assuming their tax preparers are smart enough not to engage in any illegal activity, I am left with only one conclusion – John advanced or paid much more money to the IRS than he should have! See, people get excited to receive a big refund, but all that really means is that you've given the IRS an interest-free loan and you're just getting back money that already belongs to you. Think about it – why else would it be called a r-e-f-u-n-d?

In the tax year of 2009, approximately 96.7 million folks received refund checks averaging $2,683. As someone who holds a professional designation in cash/treasury management, all I see here is more than $259 billion in interest-free loans to the IRS, and to that I say, “What a deal!” How I wish I could convince these folks to send me just a third of those amounts, and I’ll pay them back (without any interest) at year’s end. Sound like a bad financial deal to you? Actually it is! But, that’s exactly what you do every time you receive a huge tax refund check. I don’t fault the average taxpayer as much as I do their so-called tax advisors or experts who, quite frankly, should know better and help their clients to do some planning during the year.

It seems to me that countless Americans are under this completely bogus impression that those who receive little or no refunds are not as smart as those who receive fat refunds, or that perhaps they are using the wrong preparers or software. That may be true in some cases, but not many. Some people question their ability to determine their tax situation before they actually file their returns at the end of the year. Anyone who holds this view or even thinks that it remotely makes sense needs some serious financial education. The thing is, savvy financial people plan their taxes at the beginning of the year. Everyone should know that the year is over by the time you file and nothing can happen at that point to reduce your taxes or give you more money back.

Did you know, for instance, that the tax rules and rates for 2011 were published before the end of 2010 - like always? So why would you rather pay several thousands of dollars over and above what is due Uncle Sam, only to get it back (without any interest)? Did you also know that you’ll not be disadvantaged on your taxes in any way, shape, or form by receiving a small or even no refund? What I mean is that you don’t get any special credits or deductions by giving the IRS interest-free money.

It really saddens me to see so many hard-working Americans struggling to get by during the year, and as a result racking up interest and late fees on their debt. They spend all year waiting for their tax refunds to pay those bills, when they could have planned ahead by adjusting their paychecks to increase their take-home pay so as to avoid those fees and interest, and spare themselves the stress associated with dealing with creditors. I am not a tax expert, but what I just pointed out does not rise to the magnitude of brain surgery or rocket science. It’s not too late to start now to plan next year’s refund – but you’ll need the help of a professional with some good old commonsense!
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Start planning next year's taxes today by visiting with an advisor who can offer you practical, common-sense tips and tools. Get a complimentary overview of your finances by calling 301.949.4449 or visiting Laser Finanical Group on the Web today.

How to Be Simultaneously Pessimistic and Optimistic About Your Retirement (Without Being Irresponsible)

How to Be Simultaneously Pessimistic and Optimistic About Your Retirement (Without Being Irresponsible)



Let me first define what I mean by those two terms in the context of a short story:

A major shoe manufacturer sent two of its top marketing executives to a remote part of the world to conduct a feasibility study about expanding into that market. Upon their arrival, the executives discovered – to their amazement – that not a single soul in that part of the world wears shoes. Come time for them to submit their reports to the head office, Executive A wrote, “The situation is completely hopeless – no one wears shoes here!” Executive B’s report, on the other hand, read, “We have an awesome opportunity – there are no shoes here!”

Optimistic people make things happen. Pessimistic people watch as things happen – in extreme cases, they wonder what even happened. The “downside” to being an optimist is that an idea might not work or something could go wrong, which, not coincidentally, tends to be the very viewpoint often advanced by pessimistic folks. The good question here would be: How, then, do you proceed? At our firm and in other places where I interact, I am known to be a decisively fast decision maker. And this is not because I am a pessimist, risk-taker (as some would say), careless, or because I possess any sort of super powers. In fact, I consider myself to be extremely skeptical and risk-averse to the very core!

People often make the mistake of confusing “failure to act” with being skeptical. I strongly beg to differ, and here’s why: Have you noticed that any successful person you can find (and it does not matter which field they are in) happens to be a decisively fast decision maker? Which, by the way, makes them optimists. You’ll also notice that ALWAYS, 100 percent of the time, before they make decisions, they ask a ton of questions – which makes them pessimists. That’s pretty interesting, isn’t it? They are simultaneously both optimistic and pessimistic.

Do this: Choose three successful people and observe how they make decisions; the similarities might amaze you. One way to do this would be to watch a movie about a couple of great leaders. You will not find one who does not display pessimism by asking multiple questions, but who then puts on the optimistic hat right away by adeptly making a quick decision. So now my secret is out! Or is it?

What Has This Got to Do With Your Retirement Money?

Everyone wants to be successful in retirement. The first step in doing so is getting your questions answered by the right sources – who offer you factual, sensible, and realistic answers. Next, act and act fast, because time is not just money, but everything! I hope you are not taking this to mean that you should be careless or irresponsible, because that’s not what I’m saying. However, inaction is equally bad, if not worse. So go ahead and go for it! Be pessimistic all you want initially, but then turn around and become the optimist by making a smart, quick decision!
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For your complimentary consultation with a financial professional who will answer your pessimistic questions so that you can turn around and make a decisively fast and secure optimistic decision, contact Laser Financial group at 301.949.4449 or visit our Web site today.

The Unintended Tax Trap for Those Who Escape the “RMD” Rule by Working Beyond Age 70

The Unintended Tax Trap for Those Who Escape the “RMD” Rule by Working Beyond Age 70

Today’s column is not about the “RMD” penalty, per se – but, rather, the unintended danger that completely catches off guard those who temporarily qualify for its primary exemption by continuing to work beyond age 70.

The IRS imposes a rather steep 50 percent excise tax (in addition to the normal income tax) on every dollar below the amount you are required to withdraw from your tax-qualified retirement plan at age 70½ and beyond – affectionately known as the “Required Minimum Distribution” (RMD). However, the IRS does not expect you to withdraw anything (therefore enabling you to avoid the 50 percent hit) if you keep working. Great, right? Yeah, right!



Here’s the thing: Table III (Uniform Lifetime), which is used in determining the RMD, does not change for those who keep working. As you’ve probably figured out by now, the whole purpose of this rule is to ensure that you withdraw those funds so that Uncle Sam can get his due share. As a result, the older you get, the larger the amount you must withdraw. For instance, the RMD for a 75-year-old is 20 percent greater than it is for a 70-year-old. Pretty interesting, isn’t it?

By way of example, let’s say you are 70 years old with $300,000 in your 401(k) or other tax-qualified plan, and you decide to work for another 5 years solely because you absolutely love your job! Just so you know, I’m not wishing to limit your retirement funds to $300,000 – it’s just a quick example, remember? Ordinarily, at age 70½, you would have to withdraw at least $10,949 from that $300,000, but since you are still working that requirement does not apply. Instead, your money will keep growing (let’s assume at an 8 percent rate). All things being equal, if you don’t add any more money to that $300,000 pot, it would grow to $440,798 by the time you reach 75 and finally retire. Table III (Uniform Lifetime), which, by the way, is the exact same table that determined the $10,949 withdrawal at age 70½, now requires you to withdraw at least $19,249 at age 75, whether you need it or not!

I hope you are not thinking this is the trap I’m referring to, because it’s not even close.

You see, according to our tax laws, all of the $19,249 that you must now withdraw is called “portfolio income.” And the rather unpleasant thing about portfolio income is that 100 percent of it is factored into an equation known as your “provisional income.” This equation, in turn, determines the extent to which the checks that you’ll be receiving from Social Security will be taxed. So do I even need to point out that the greater your RMD, the more taxes you’ll end up paying? It will probably be unintentional, but you’ll definitely notice it when you file your taxes every year.

The good news is that this situation is completely preventable, or can be reduced considerably! However, that doesn’t happen for most folks because their financial advisors simply focus on “building” them a nest egg, without any consideration whatsoever for exactly how that pot of money will turn into “income” or be “transferred” to heirs later on. If, on the other hand, income and transferability received equal attention, the tax implications would get serious consideration, wouldn’t they? I cannot even begin to tell you how many people come to see us with this particular issue. And the interesting thing is, most of them didn’t even work past age 70.

In all the years I have been consulting with people from across this nation, the one thing I have never come across is anyone (not even one) whose intention was to enrich the IRS instead of themselves and their family. To that end, may I suggest that you ask all the hard questions today regarding exactly how you’ll generate income or transfer those funds to your heirs and make sure you receive straightforward, factual, and sensible answers, because it’s not pretty to fall into a tax trap. One thing you can be sure of is that sooner or later, the rubber will have to meet the road – will your plan stand the test of time?
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Contact Laser Financial Group today to schedule your complimentary consultation if you’d like some information about where you stand when it comes to the payout of income and/or transferring funds to your heirs. Reach us online or call us at 301.949.4449.

Is Portfolio “Recovery” a Joke That Presumes You Are an Idiot?

Is Portfolio “Recovery” a Joke That Presumes You Are an Idiot?

“Sure, the stock market might dip and your nest egg might take a hit, but you’ll eventually recover from those losses.” Right? Wrong and wrong again!

While you may often hear news reports or even some financial advisors put it that way, it is totally inaccurate. No variable investment portfolio works that way – NONE!

Terry J. has agreed to let me use his situation to explain this. Thanks, Terry. We met in the waiting room of my dentist’s office, where we started talking – which is odd for me because, being a typical guy, I usually keep to myself in such environments. In our initial conversation, Terry mentioned that he was nervous about his nest egg, although his financial advisor tells him he shouldn’t be because, after all, guess what? His account has fully “recovered” from the 29 percent hit (or approximately $70,000) it took during the 2008 stock market crash.

I recently heard a saying to the effect that “knowing what’s false is the first step to knowing what’s true.” I in no way mean to imply or infer that Terry’s advisor is a liar. However, his thought process is a complete misrepresentation on two counts.

First of all, the gains of 18 percent and 10.6 percent that Terry’s account made in 2009 and 2010, respectively, are simply not “recoveries.” The fact is, only two possibilities exist when it comes to how variable investment portfolios work, and “recover” is not one of them. They either “gain” or “lose,” period! What’s more, once you lose, you can never (as in, it is 100 percent impossible) gain back what you’ve lost. Ever! Once that money is gone, it’s gone. Terry’s two consecutive years of gains are just that – gains. That is why no investor has ever received his or her investment statement and seen the word “gain” replaced with “recovery.” You are smart, so you understand that such wordplay could create an illusion and prevent further probing. In my humble opinion, this is all a way to calm frayed nerves.

Secondly, Terry added $7,200 in new contributions in 2009, and subsequently gained 18 percent ($1,296) to grow to $8,496. Then in 2010 he added another $7,200 for a new total of $15,696, which gained 10.6 percent ($1,664) for a total of $17,360.

Now here’s the thing. You wouldn’t consider Terry’s $14,400 in additional, totally new contributions which have grown to $17,360 to be a “recovery” of any portion of the $70,000 hit his portfolio took in 2008, would you? Would you then appreciate your financial advisor, a magazine columnist, or anyone else essentially insulting your intelligence with this bogus “recovery” story? That wouldn’t really be much different from 2-year-old Abraham, who was trying to hide from me the other day by covering his face with his palm, would it?

If Terry had utilized an investment strategy with a 2.25 percent floor and a maximum cap of 13.5 percent, under the exact same circumstances, his nest egg would have grown to approximately $333,124, as opposed to “recovering” back to $240,623. That’s a difference of $92,501! Can you imagine how Terry felt after learning the straightforward, indisputable facts and discovering how to get rid of the nervousness surrounding his nest egg? Just so you don’t wonder, this entire process didn’t happen in a single day – that would have been one heck of a long dental appointment!
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So, what about you? Do you have any concerns about your nest egg? Are you receiving the absolutely best and most candid information in relation to those concerns? Has the “recovery” illusion come up in your discussions? If you’d like a conversation about some no-nonsense, proven techniques that will work for you without any illusions, call us today at 301.949.4449 or visit us on the Web.