Your Money Matters More

The final installment (Taxes)

The final installment in this series on cash flow relates to making your tax rate work for you.There is no legal way around paying taxes.  However, you are not required to pay more than your share and there are ways to use the tax code to reduce that share.  As always, the goal is to maximize your cash flow with as little effort as possible.

The first line of defense is to using an employer sponsored retir  ement plan such as a 401k or 403b if available to you.  We all want to retire someday, so it is never too early to begin saving towards that goal. These contributions are tax deferred until retirement when you would optimally be in a lower tax bracket.  Once again, make sure that your contribution is equal to that which your employer matches. 

If you don’t have access to one speak with your Certified Financial Planner for the most appropriate IRA for your needs.  She can compare Roth versus traditional IRA to find the best alternative for your tax bracket.  Don’t make the financial mistake of assuming you don’t have enough money to save some money.  Over time that savings compounds and your tax rate will be less when you do retire and use the money.

Don’t treat your taxes like a saving account.  Your refund is not a windfall.  The government has been using your money for twelve months.  Over this year, you could have been using your money to your advantage.  Look at your budget, determine which of your expenditures tax impacted, for instance are, if you have a large amount of prescription cost and your company provides a 125 Plan or a Health Savings Account allocate money to these plans. They are pre-tax and as long as you expense the money for medical cost they are never taxed. However, the difference between the two is that 125 plans are use it or lose it, so be aware of what you have to spend and what qualifies as a medical expense. An advantage to the HSA is that it behaves much like an IRA in that if it is not used, it rolls over and is tax deferred.

A tax savings idea for those with a family is a college saving in a 529 plan.  These allow you to make a contribution after-tax which grows tax free as long as it is spent for education. All fifty states offer these plans, but you need to speak with your CFP because some States offer additional benefits in state taxes for these plans.

Taxes provide services beyond what fire trucks and police cars.  Knowing the tax code and using a CFP to help you maximize the benefits within can help you today as you plan for the future. 

Prospero Financial Planning can help visit our website at www.ProsperoFP.com

Children are Expensive

 Children are expensive. That is a given: but the cost of higher education is growing at an unprecedented rate. A 529 Plan, a type of college savings fund, is a tax free way to accumulate money for college expenses. After the birth of a child, begin to put money away for college. The owner of the account can contribute for a named beneficiary. If for some reason the beneficiary chooses not to use it the owner can transfer it later to a different student. 

There are a wide selection of plans available. Each State has its own plan with some offering more than one, and an investor can choose from any of these. Each state provides its own residents additional incentives, but these tax incentives should be subordinate to the underlying returns of the investments of the plan. Always seek the advice of a Certified Financial Planner (CFP) when selecting a plan. 

Recent graduates have left college with a crushing debt load. An alternative to this is paying out of pocket. Making wise investments early allows compounding of returns to work for you. This is just one of the tools that your CFP has in their arsenal.