Common Tax Questions

For most of us, Tax Day has come and gone. What can we do to better prepare ourselves for filing for 2015?

One of the most important things that you can do is to be certain that you and your spouse or domestic partner are maximizing your 401(k), SIMPLE IRAs, IRAs, Roth IRAs, or other retirement accounts.  Each type of retirement plan has different contribution limits, but it is prudent to try to achieve saving to these limits as soon as possible.  One way to achieve this is to raise your contribution percentage to your plan each time you get a raise.  For instance, if you receive a 3% annual increase, increase your retirement savings by 3%.  You will still see your paycheck grow each week or however often you get paid, but you will also see your retirement balances grow.  However, this type of savings usually helps reduce the taxes you have to pay during the year because traditional retirement savings plans allow you on a tax-deferred basis which means your annual income is reduced by the amount you contribute to your plan.  Additional matching funds from your employer  (if available in your plan) can also be a big bonus for you.

The world of investing seems so complicated, where does one even begin?

This is a great question and I find that most often, an employers sponsored plan is the easiest place to start.  These plans allow for easy payroll deductions and many employers also provide matching funds which is essentially “free money”, so long as you are fully vested by your length of service within the company.  Your HR department should have all the information you need to learn more about your plan and there should also be a financial advisor who services your plan and should provide additional guidance based on your individual needs and goals.

I want to retire by the time I am 65 or 70.  What steps do I need to take to insure this happens?

The most important thing that you can do is to begin to save and invest for retirement as early and as often as possible.  It is far less expensive, on a monthly basis, to save for retirement if you start saving in twenties or thirties than it is when you reach your forties.  At the same time, many experts believe that your forties and fifties are your “prime earning” years, so there is a lot of ground that can be caught up if you have paid down your debts and really focus on saving.  

It is also very helpful to work with a financial professional who has competence in developing holistic financial plans.  These types of plans take into consideration, your hopes and dreams, along with the financial realities of what your expenses are likely to be in retirement.  And, while there are many facets of these types of plans that you need to prepare for, retirement savings is THE foundational element – if you fail to save enough for retirement, you are likely going to have to continue to work well into your yearning years.    

I’m trying to balance saving for retirement and funding my children’s education, which one should be my first priority?

This is a really good question.  As a general rule, retirement savings needs to be your first priority.  There are many options available to students today to finance their education if you are unable to do both; however, there are no options, other than you saving for your future, to finance your retirement.  

Also, I believe that our paradigms about what post-secondary education should look like needs to shift in many cases.  20 years ago, a college education set someone apart in the workplace, today, it may or it may not.  I believe that one thing we can all do as parents is to encourage our children to follow educational paths that will lead to real employment, instead of just getting a more general 4 year degree, just for the sake of getting one. As college costs continue to spiral out of control, we need to help our children understand that they need to see a “return on their investment” in their education today more than ever.  And, it is also helpful to consider having your children explore Ivy Tech, Indiana University Southeast, and other local/commuter schools, which offer excellent educational opportunities, that can lead to real jobs at a fraction of the cost of many of their peer institutions.

What’s the best way to teach my child financial responsibility?  I’m new at this and want to set him on the right path so he doesn’t make some of the same mistakes that I did.

Perhaps one of the best pieces of advice that I ever received on this was from Jerry Finn, Executive Director of the Horseshoe Foundation of Floyd County.  He suggests that we teach our children to think about money in terms of 1/3 rds – saving 1/3, spending 1/3 and giving 1/3 to charities or to those in need.   Obviously, the proportions are likely to skew towards saving and spending – and hopefully primarily saving – in reality, but I have found that this concept helps my children keep all three of these issues present in their minds when they earn or are given money as a gift.

Also, I believe it is important to start by teaching children to save money in a savings account with a bank and then, once they accumulate a meaningful sum of money in their savings, they can start to think about putting additional funds into broadly diversified mutual funds.  I am not a big fan of getting kids started by buying them individual stocks with their own money (receiving gifts of stock is great as it is “found money”), because it is important that they get in the habit of building an investment portfolio on a solid, well-diversified, foundation.

Responses were written and provided courtesy of Vaughan Scott, Senior Vice President – Investment Officer with Axiom Financial Strategies Group in New Albany, IN. He can be reached via email at [email protected].

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