One thing we need to do immediately is change the tax with-holding for both my wife and I. Getting back a tax refund is nice but it would suit us better to have the money in our pockets every paycheck rather than every April or so.
An interesting thing our accountant told us is he would like to see us contribute more to our 401(k) and 403(b) plans. I told him we were planning on putting money in our Roth IRA. He said it would be better to take advantage of the tax savings of the 401 and 403 plans. His rationale is that we are probably in our highest tax rate right now but when we retire we’d be in a lower tax rate. The 401 and 403 plans allow us to contribute $15,500 each in 2008 (not that we could afford to do that). One way to look at the tax break is $100 contributed to my 401(k) would only cost me $80 (assuming a 20% tax rate). For $80 I get $100 invested.
If you remember my Roth IRA goal for 2008, my wife and I were going to contribute $4000 each to our Roth IRA’s for ’08 ( a total of $8000). Well now I’m revising that goal. Since my 401(k) plan at work is pretty diverse I’m going to increase the percentage I contribute rather than put the money in my Roth IRA. Since my wife’s 403(b) isn’t as diverse (it’s something like either real stable or high-risk; about two choices) we’ll continue to invest her share in her Roth IRA. We’re also going to make sure both of our tax with-holdings are adjusted.
What are we doing with our tax return you’re asking? We’re getting some work done on our co-op so the refund will help replenish our savings. (We weren’t counting on our tax return for this expense so the return is a nice bonus). Also, if you’ve been reading Free From Broke you know that our garage was upset with us and jumped out and attacked our car recently. The return will help buffer those expenses too.
Are you getting a tax refund? What will you be doing with it?
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Grumpy Misanthrope says
Heh…I never get a refund. I’m just hoping that my liability will be less than last years.
Congrats on the refund! That is soooo much better than owing!
We are going Saturday to get ours done. I am really hoping we don’t owe. We have had some craziness going on and I am not sure how it will add up!
Part about your tax rate being lower in retirement is a misnomer. In truth, no one knows. If you retired today, your tax rate may be lower, but that may not be the case in 30 years.
Most savy retirement planners (who do it for a living rather than taxes) I’ve read suggest contributing to 401(k) up to the employer match, then fully funding a roth, then maxing out the 401(k).
Just my two cents.
There’s also that business of 10% early withdrawal penalty if you withdraw money from 401K before age 59 1/2 . If you don’t plan on retiring early, then I guess that’s not a big issue.
But if you do you must have enough cash saved up to tide you over until you’re able to tap into your 401k without penalty or have some money in Roth IRA. That’s my take on that.
Free From Broke says
@ Grumpy – Not getting a refund is fine. As long as you don’t owe too much it could be like getting a free loan from the gov’t.
@LJ – Yeah, I’d rather not owe, but if you do you’ve been borrowing money free from the gov’t. The best I think is to break even. We’ll see how close we get next year. Good luck on your taxes!
@ Anon & FrugalChick – I understand where you’re coming from. But there’s also the theory that since social security could disappear then the gov’t will have to do something to make up for that and make it easier for people to use their 401(k) and such. Yes, it’s speculation but a decent theory still. We’re hedging our bet with increasing my 401(k) while increasing our remaining goal in our Roth. Time will tell of course! The main point is to be saving as much and as soon as possible!
And you know what? It’s a little easier to contribute to my 401(k) too so that’s an added incentive/bonus. Yeah, it’s a bit lazy maybe. We’ll have the auto-deposit set up on the Roth’s soon.