Cryptocurrency: When FOMO Becomes Uh Oh

Over the past year, I’ve fielded a number of questions about the feasibility of investing in cryptocurrency so I thought I’d give you “Kitty’s Take” on the whole “let’s invest in something that doesn’t really exist” situation.
What is cryptocurrency anyway? Right out of the gate, we need to understand that these are currencies, not investments, and there are a lot of them (more than 50 at last count). There’s Bitcoin (currently trading at ~$49,500 per token), Dogecoin (trading at $0.41), and PancakeSwap (trading at $29.35 per token), just to name a few. For comparison, the $5 bill in my wallet is trading at…wait for it…$5. Let’s put it another way, when you invest in a share of Ford Motor Company, you own a little itty bitty sliver of Ford Motor Company. When you invest in a bond mutual fund, you become a little itty bitty recipient of the dividends of a bunch of bonds. When you buy a token of a cryptocurrency, you’re holding the rights to a little itty bitty share of…of…an electronic promise. 
Cryptocurrencies are usually positioned as an alternative to cash and these tokens can be traded for services and things but only as long as the company selling you those services and things accepts the cryptocurrency as a form of payment. On a positive note, these currencies are run on the blockchain principle, which has some great recordkeeping features meaning no more missing or inaccurate cost basis. Every transaction involving every token is tracked and, in theory, can be pulled out of the ether when you need it (or by someone monitoring your activities but that’s a whole other rabbit hole). On the downside, from a currency standpoint, while the vendor you are negotiating with may take Bitcoin, if you hold PancakeSwap, you have to log on to an exchange, replace your PancakeSwap tokens for Bitcoin tokens, for a fee, then return to the place of purchase and exchange your tokens for whatever it is that you are buying.
So why are these currencies so popular? Mainly it’s the convergence of several different factors, including a whole lot of marketing savvy using social media, layered with a lack of anything resembling regulation, and a year of millions of people looking for anything, literally anything, to distract themselves from the COVID situation. Mostly though, it’s been FOMO—”Fear of Missing Out”. Now, FOMO isn’t anything new. It’s been around for as long as humans have been walking upright. FOMO is that Dutch Duke in 1636 spending his ancestor’s fortune on tulip bulbs because his fellow Dukes were all talking about them (and no, that didn’t go well for anyone involved), and it’s the guy on YouTube telling you he traded enough Bitcoin to buy a house (and because it’s on the internet, it MUST be true…).
Now, I’m sure you are catching the vibe of my thoughts on the viability of buying cryptocurrency so let’s exit my brain and talk about some real-life issues. First off, about 7 million people in the US and over 2 billion people in the world are unbanked—meaning this new currency is completely out of the reach of all of those people. That’s not really going to improve our wealth inequality situation. For those who are banked and are using some form of this currency, apparently, not only can it be harmful to your net worth, using it can be unhealthy for your relationship, too. According to a Bloomberg study, ~60% of people who “invest” in cryptocurrencies say their beliefs or their investments have had a negative impact on their personal relationships. What if you’re banked and single, or not overly worried about your relationships? How about the environment. These cryptocurrencies are complete resource and energy hogs. To keep these currencies humming, there is an increasing number of server farms parked all over the globe and some of these farms have an energy consumption that is on par with the energy used by smaller countries. Even if all of those farms used renewable energy (chuckle, chuckle), all of those servers need rare minerals to build and some put mining for rare minerals in the same category as blood diamonds. Mmmmm…
Bottom line—consider following two simple rules: 1) things that are intangible, lack regulation, and have a lot more in common with gambling over at Turning Stone probably shouldn’t be in your portfolio if you need those dollars to meet your long-term goals and 2) if you don’t understand it and/or if you (or your advisor) can’t explain it to your mother, you probably should be putting your money to better use.

The 4% Rule – Retirement Fact or Fiction?

Many of my retired clients have mentioned that the working part of their lives was much easier than the retirement stage and I’m reminded of a t-shirt my husband would wear that said “Old age ain’t for sissies.” One of the most pressing questions I hear is “how do I determine a comfortable draw from my portfolio that ensures there is money left over when I am unexpectedly drawing breath at age 95?”  Enter a gentleman named William Bengen who postulated, in 1994, that a retiree could draw 4% from their assets, increasing their distributions by inflation each year, after rebalancing their portfolio annually.  Sounds like solid advice…and Swiss Cheese is still a cheese.

Let’s start with what that portfolio looked like back in 1994. Mr. Bengen did his calculations based on a portfolio that contained just two asset classes—intermediate Treasury bonds and large-cap stocks. Intermediate Treasuries were paying an enviable 5.92% in 1994 compared to 1.29% for those same issues right now. In his favour, the inflation rate when he did his research was 2.56%. That’s not terribly far off from our current non-medical inflation rate, although he didn’t account for the increasing amount an older person spends on medical expenses as they age. Another cheesy hole—this is based on a ~25 year draw so you have a choice: don’t retire early or don’t live too long.

All that number-crunching aside, there was a huge flaw in Bill’s strategy—annual rebalancing. While strong statistical data is hard to come by, years ago, the stat often quoted was that less than 15% of people rebalanced their portfolio annually. Anecdotally, I can tell you that the majority of people who swing through my office haven’t rebalanced their portfolio in several years and there’s a good percentage who have rarely, if ever, rebalanced their accounts. Rebalancing annually means every year, not just the years you feel like it and absolutely rebalancing during the years you don’t want to even open the envelope.

My next cheesy hole has less to do with Mr. Bengen’s calculations and more to do with people’s interpretation of his rule of thumb. You’d be surprised how many people layer their own interpretation on this mathematical theory and “feel” that it shouldn’t have to include taxes (boy, are those taxes inconvenient). On a $500,000 post-tax portfolio, 4% is $20,000 (let’s ignore that whole capital gains nonsense). To pull that same $20,000 from your $500,000 pre-tax portfolio, you have to pull at least $24,100, which is now closer to 5% of the portfolio, more than 20% more than the recommended draw. When you are building that retirement cash flow, make sure that you adjust your work based on what you have in your post-tax account and what you have in your pre-tax accounts (and no, we aren’t going to talk about Roths…. it’s been a long week)

I’m not saying that targeting a 4% draw is a bad thing. I love the idea of a structured stream of income since it makes my life a whole lot easier helping people build strong balanced portfolios with that goal in mind. I‘m just saying that what some talking heads call rules, I call guidelines and everyone needs to make sure they take into account as many variables as possible when they come up with the goals we are working towards. If you want to pull more than 4% in the early years of retirement, I hope you have a cash flow put together that has you spending a lot less than 4% in your later years. If you are in a higher tax bracket and all your money is pre-tax, your cash flow should be built on a lot less than 4% after tax.

If you are thinking of leaving a legacy for your kids, if there is an age difference of more than a couple of years between you and your partner, if one of you is the picture of health and one of you isn’t, then I would seriously reconsider becoming too enamoured with the 4% theory. In fact, there are mathematicians who are now saying a more realistic draw is closer to 2.5% (although I think that’s a little on the miserly side myself). As with so much of what we talk about, having a better understanding of what you have, what your resources can, and can’t, do, and setting some realistic (and somewhat flexible) expectations goes a long way towards helping you create a consistent, annual stream of income in retirement.

Shoring Up That Wobbly Retirement Stool

Whether you are standing on it, sitting on it, or hiding underneath it, a stool is only as stable as the number of legs supporting it and that’s no different than our retirement plan. If you think of your retirement plan as a stool, it needs those sturdy legs. And since it isn’t as much what you save as it is what you keep, the tax treatment of each of those legs is what creates that stool’s strength. No matter what stage of life you are in, these principles really apply to everyone thinking about retirement so here it goes…
Leg #1: The Pre-Tax Leg
This is the leg everyone focuses on and the one that makes our government happy since they now know there will tax revenue for many, many years to come. This is going to include everyone’s 401(k) / 403(b) / 457 / SEP / SIMPLE, and plain ole’ IRA plans. You put the money in now (either from your paycheck, by way of a company contribution, or simply making a personal deposit), take a tax deduction for the year, and let those dollars build and build, tax-deferred, until age 72 when the IRS says “thanks for the memories, where’s our dosh…” 
Leg #2: The Partial Tax Leg
When Social Security was first established, it was tax-free but thanks to President “lower taxes” (but only for some people) Reagan, Social Security is now up to 85% Federal taxable (it’s still tax-free in some states). Here’s a fun challenge—take too much from Leg #1 and you run the risk of making more of Leg #2 taxable, effectively decreasing your available cash…talk about conundrums. Here’s a fun fact—the average person collecting Social Security gets back everything they contributed in less than 10 years. As someone who identifies with the younger generation, I have very mixed feelings about that particular flaw in the formula.
Leg #3: The Post-Tax Leg
Have cash in the bank, in a money market, or under the mattress? That’s a #3 leg. Money in an investment account? Ditto. How do we know the difference between this leg and other legs? If you take money from this leg, the taxes are called “capital gains” whereas the taxes on other legs are called “income taxes.” While both taxes are somewhat manageable, managing “capital gains” taxes is much, much easier than managing “income taxes”
Leg #4: The No-Tax Leg
Wait, What? There’s a leg where I won’t pay any taxes??? Yup, under certain circumstances and like a truffle, not the easiest to find and use. It’s called a Health Savings Account and it allows you to deduct the contributions from your current year taxes, invest those dollars tax-deferred, and take the proceeds out cash free. Of course, in order to use this account, there are challenges worthy of a medieval knight but yes, the prize at the end is not only a slain tax-dragon but a lovely golden goose laying tax-free eggs in retirement.
Leg #5: The Mystery-Tax Leg
While many people consider anything including the words tax, financial, and investing to be a mystery (but not any of you because I know you faithfully absorb these weekly emails), there is one type of retirement vehicle that does have the air of mystery about it and that’s the Roth IRA. Established in 1997 by Senator Roth, the theory goes that you put the money in AFTER paying taxes and let it sit there for a specified period of time, then, when you take it out, the government won’t tax the earnings. Of course, this would mean that the Senators of today could balance more than a Venmo account and a handful of uppers so I’m sure none of you are surprised that there have already been several bills presented to Congress to tax the earnings on these accounts the same way Social Security is taxed. We’ll call this the “balsam-wood leg” and wait & see.
As you look at your retirement (whether you are in the throes of it, can see it floating on the horizon, or it rests somewhere in the hazy future), adding as many legs as possible to your retirement stool puts you in charge of your retirement tax picture, which means you keep more of what you have.

The Economist’s Bogeyman – Inflation

For this week’s Mulling Over Money Matters, I thought we would talk about inflation from an operational perspective. I initially thought this would be a quick one to write but boiling the nuts and bolts of inflation down into bite-size pieces isn’t all that easy. Let’s give it a try…

What is inflation, anyway? From a purely economic standpoint, inflation is a change in price level over a period of time (usually a one-year period). That sounds pretty straightforward..perhaps or perhaps not.  That simple term, “change in price level,” is really a delicate balance (or lack thereof) between the amount of money out and about and the goods and services being traded (using that money). Inflation is really a measurement of the trend in those price levels—moving up or down like a wave rather than specific points in time. 

Who controls the amount of money out and about? That’s the government. Things like stimulus checks and enhanced unemployment benefits introduce cash into the system. On the flip side, to pull cash out of the system, the Fed will buy back various treasuries (bonds) to take them out of circulation. Another, more familiar, way to control the money supply is to alter the interest rates. Increase the interest rate and people/businesses borrow less money, which really means they spend less money. Lower the rates and, as the theory goes, people/businesses will spend more money. Is this an infallible way of controlling money supply? No, but you work with what you’ve got. 

Who controls the goods and services being traded? That’s all of us and all of the businesses producing all of the things and services we each feel is important to us. And it’s not just the stuff we buy, it’s also all the transportation that is involved in getting that stuff to us. We all know that our food travels about 1,500 miles before we purchase it, throw it in our cars, and drive another few miles. Less obvious is the fact that things less perishable can travel thousands of additional miles and every one of those truck-to-container-to-train and/or ship-to-container-to truck transfers adds to the cost of that item. The recent Suez Canal debacle and the 300+ container ships full of goodies for us to buy is a perfect example. If Huggies diapers contain nearly a dozen different components, there’s a pretty good chance at least a few of those components travel a serious distance before reaching the factory and if that cost goes up so does the cost of those Huggies.

So if those are the mechanics, what’s a real-life example? Let’s start with a simple one: if people buy more potatoes than bananas, then the price of bananas goes down (there is an excess supply of bananas) and the price of potatoes goes up (there is a shortage of potatoes). In its basic form, that’s inflation.

OK, how about something a little more complicated: I need a new sump pump. When I go to buy the same model I purchased three years ago, the price has doubled. Part of this increase is a result of the transportation costs increasing for the parts that come from way far away (transportation cost), part of the increase is a result of more people building houses in wet areas and needing a pump in their basement (lack of supply), and part of the increase is an increase in the actual cost to make the various parts and assemble the pump (production cost).

And there you have it. Whether our inflation is low (as it currently is here in the States) or soaring (see various African countries as examples), it isn’t just one reason or one government policy that causes the inflation. It’s a bunch of different things working together (or against each other) that results in what we pay for the things we buy. That also means that there is no one solution to keeping inflation low—something to remember when one of the talking heads on what we humorously call “news” spouts off about this or that governmental policy.

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Fun with Numbers

Even though the IRS moved the tax deadline to next month, I’m calling it for the home team and shutting down that part of my brain. I’m absolutely convinced that extensions were established to allow people in the financial services industry a little breather. I thought we’d do a little fun with numbers today since we haven’t done that in a while.

Let’s kick things off with some fun Federal tax numbers:

• For the year 2021, individuals are expected to contribute $1.932 trillion tax dollars to the US Treasury versus $284 trillion from corporations.

• For perspective, roughly 10% of people ages 25 to 55 don’t pay income taxes while more than 80% of those age 75 or older don’t need to pay taxes (which is completely different than filing their taxes, which they probably should to ensure they are eligible for various program benefits…). 

• The personal Federal median tax rate is about 14 1/2 % (give or take and based on 2017 numbers). The median corporate rate for the companies in the S&P 500 (on roughly $874 billion dollars of annual revenue) is less than 18% (down from 23% and this includes state taxes – the pure Fed number wasn’t available). What would you do with an extra $43.7 billion?

How about some cost of living fun facts:

• $24/hour: The minimum wage if we matched the economy’s productivity growth, as it did until 1968. We’ve already talked about the fact that Geneva’s minimum wage exceeds $19/hour.

• $3 billion: The amount of Paycheck Protection Program dollars received by 200 Catholic dioceses and related institutions. Not for nothing but an organization that owns perhaps as much as $837 million dollars of US property and pays no real estate tax (or other tax for that matter) probably shouldn’t be cashing a PPP check.

• $8/mos: Totally unrelated but piqued my interest—Scotland is the only country in the world that provides school-age and low-income women free period products. The estimated cost is $8/mos which equals about one hour of take-home pay at minimum wage. 

On to life in general numbers:

• It’s safer to deliver a child in Sudan than it is in parts of the US from a maternal mortality perspective. They barely have roads in Sudan but they can keep their moms alive….I guess I’d have to say this is one area I’d prefer to Make America Great, Again (because I know how to use punctuation…).

• There have been 141 mass shootings and 1,991 gun-related deaths reported to the Gun Violence Archive so far in 2021. Since the annual number of firearms manufactured in the US is 9,052,600, I’m actually surprised that number isn’t higher—still appalled though.

• Americans spent $99 billion on their pets in 2020 with an average of $1,063 spent on non-food items. This one made me laugh out loud. I tell my cats I love them every morning when I leave but there is no way I am spending that much on treats and toys—they can have the cardboard toilet paper roll and be happy about it. 

In closing, for those who don’t think numbers are fun:

• The volume of a cylinder is PI times the radius squared times the height, which means the formula for a pizza reads: PI*z*z*a 

We’ll tackle something more serious next week but now you all have a little tidbit to throw out there during your first post-vaccine cocktail party.

Baby Talk

Spring is in the air and it leads me to think of lambs. Yes, I have a thing for sheep…don’t know why but they just make me smile…and lambs lead me to think of babies which, apparently, is a pretty common thought as I’ve been having the baby conversation with several couples lately. For this week’s topic, I thought we’d take a little journey through the finances of having little ones.
Let’s start with the proverbial “twinkle in the eye” period of time. Long before there is a bun in the oven, you and your partner should have some serious conversations about the actual costs of getting pregnant.  While some women “fall” pregnant quite easily (“to fall pregnant”—a curious phrase with biblical origins intended to free men from responsibility—take from that what you will), an increasing number may need some assistance. Making sure both of you (or you and your financial advisor if you are single) are on the same page about how many rounds of help you are going to pay for is imperative. The average cost of one round of IVF is ~$12k and the average is three tries before success. Adoption isn’t cheap either (although my personal opinion is that it should be subsidized since that would be way cheaper than accommodating kids without parents through to adulthood – oooh, I’ll get some letters on that one…) and you’ll want to have upwards of $35k in the bank if this is the route you decide to take.
Next up, the prenatal and birthing process. While many health insurance policies will cover a good chunk of the prenatal care under their “wellness” strategy, some require a co-pay for each visit and those visits are pretty frequent in the last stretch leading up to the actual birth. If you need some additional testing— that’s not “wellness” anymore so cha-ching. Giving birth, on the other hand, is often considered “surgery” which can (and often does) result in healthcare bills running at least $2,500 for an uncomplicated birth.  Complications can increase that bill exponentially since you’ll be footing 20% of the costs under some policies. For comparison sake, the cost to have a kid in England: ~$60. The average cost to give birth in the US: more than $5,000.
You’ve brought your little bundle of joy home so, hopefully, you’ve had the child care conversation. The days of this being a gender thing are long gone—this is a fiscal issue at its core. Is one of you is going to stay home and, if so, for how long? Can the two of you alter your work schedules so that one of you is home and available throughout the week? Will you be pulling in relatives to cover some of the time?  Childcare is going to run you about $225/week (more for an infant, less for an older child). Step back and compare your take-home pay with child care costs and you can start to see why some choose to leave the workforce for at least a portion of their children’s early years. And speaking of child care, if you aren’t married, make sure you have put the paperwork in place to ensure that you are both legally listed as your child’s parent otherwise grabbing little Susie from child care unexpectedly can become quite a challenge.
And for all of you who are way past the actual pregnancy zone, grandbabies are the budget buster of all time. I strongly suggest that you have a line item in your cash flow that is specifically dedicated to how much you are going to spend on your grandchildren each year. Let’s put this another way—say you had two children and each of them now has two children. That’s four grandkids you’ll want to shower with all sorts of things. Now, let’s say those four grandkids are spaced over a decade because one of your kids got married early and popped out a couple of honeymoon babies and your other child waited to get married then waited to have their kids. You can start to see how easily this can throw off the budget of the grandparent generation. Having some definition on what you can afford to spend in total can help avoid the spending creep as one grandchild becomes three grandkids which then turns into five.
In closing, here’s an interesting fact—New Zealand recently became the first country in the world to provide bereavement time off for a miscarriage. Given the fact that nearly 20% of pregnancies end in a miscarriage and that the further along a woman is when she loses the pregnancy the more likely a couple is to divorce, a couple of days off seems like a decent gesture. Of course, that’s what it looks like to be governed by a woman.

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What are these percentages I pay with advisory firms and/or financial planners?

As we go through life, it’s okay to take a step back and question the world around us…especially when it comes to our financial wellbeing. That’s why we are launching our series, “Asking Better Questions.” This month’s featured question: “What are these percentages I pay with advisory firms and/or financial planners?”

It’s a great question! Moreover, if you take this question a step further, “Why do I pay percentages with my advisory firm or financial planner.”

Name anything else in life that you pay for using a percentage. When you buy your home, you know what you paid for it and you know what the payment will be. With your investments, however, the percentage you pay is often based on the assets that are being managed, which means that amount changes from quarter to quarter and year to year. Does your house payment do that? What about your car payment?

Talk to your advisor and put some dollars and cents to that percentage fee. Only then can you understand what you are paying for and make an assessment of the value you are receiving.

Steady, Reliable Income… Maybe, Maybe Not

With so many job changes lately (real or being planned for), the topic of pensions has come up recently so for this post we’re going to look at those old-fashioned income streams from several angles.
Before you move on to the next thing, thinking “I don’t have a pension, why should I care,” let me say two things that should catch your attention: Taxes and Social Security. Whether you realize it or not, everyone not only has a pension, which we call Social Security, but also pays a pretty penny to support other people’s more traditional pensions.

By one three-year-old estimate, New York State pensions cost state taxpayers more than $7 billion dollars per year, a rate that will increase exponentially as a huge number of workers reach their magic number (as early as age 55). For an illustrative example, consider the 55-year-old who retired downstate recently and will now receive a pension of more than $450,000 every year (we know this because it is part of a lawsuit). Assuming a 30-year retirement, that one pension will cost you and me more than $13 million dollars including inflation. And we’re one of the healthier states when it comes to pension funding. Pity poor Kentucky and not just for the fact that their pension support is less than 60% of what it needs to be— perhaps good ‘ole Mitch can filibuster for some additional funds. 
Now, maybe you will be entitled to a pension and you are wondering what to do, either now or in the future. Right off the bat, we need to break things down between a government-funded pension and a private pension. A government-funded pension (teachers, firefighters, government workers) has some security in that the benefits are backed by the taxing ability of the state or federal government, and since these sources don’t (usually) allow a lump-sum distribution, the decisions focus more on meeting the magic number, deciding what exit date makes sense with your overall retirement planning, and how to take the pension (with or without a survivor benefit, with or without a pop-up benefit, and what percentage of benefit to lock in—all irrevocable decisions so not something to take lightly). Quite a number of these pensions are built on union contracts so there is also some security in that—impenetrable, absolutely not—but those contracts certainly make changing the benefits in the future more complicated.
Private pensions, on the other hand, are more difficult to evaluate. How strong is the company supporting the pension? Even deeper, how strong is the industry that the company swims in? If you are leaving a position in your 50s, will that company be around 35 years from now when you are still kicking back on the porch watching for the deposit to hit your account? For perspective, have a little chat with a Kodaker sometime about broken promises. Put another way, in the event of a merger, if the company you worked for is the dominant player, your pension is probably safe. Whereas if your company is the little fish, that pension could be altered/bought out/eliminated. Put all that aside, what’s another big difference? With a private pension, you can take a lump-sum distribution and roll it into an IRA which adds another decision layer—can you look in the mirror and honestly say that you’ll be diligent enough to make those dollars last for your lifetime and, if necessary, your spouse’s?
What if you’re not sure if you have a pension from some old job you had eons ago. That’s not so far-fetched an idea when you consider that as many as 30% of all pension accounts are lost, particularly in this age of mobility and more frequent job changes. Take a walk down memory lane and write down every job you’ve ever had then evaluate whether or not there might have been a pension available. Eliminate the jobs where you didn’t stay at least five years or were with smaller companies. If that leaves you with even one or two possible options, consider taking a moment to send them a letter to inquire about your options (if you are going to email something, snail mail as well). If that company isn’t around any longer, you could also contact the Labor Department and/or Pension Benefit Guaranty Corp which both provide free help to people searching for missing benefits.
As you think about your future, make sure you understand what you are owed, what options you have for the dollars, and how comfortable you are with your level of risk depending on your choice.

“The Man” Giveth and “The Man” Taketh Away

Many of you will be receiving your Economic Impact Payment from the American Rescue Plan Act of 2021. My first thought was “I wonder if they have a staff whose sole purpose is to come up with these names… sort of like the team of writers who write for the late night shows?” My second, more pertinent, thought was “I wonder what people did with their checks last year?“

I listen to a bazillion webinars over the course of a year and I remember one economic talking head who put up a chart that showed how healthy the economy was since the majority of people who received checks put it into savings and would, therefore, be spending those dollars shortly (which I thought curious at the time since savings is savings not spending but I was group muted so I kept that to myself). The reality is that more than half of the people who received payments last year used them to pay off debt and 15% spent them. The last time I checked 51% + 15% represents a majority so, apparently, I need to find a new talking head who can actually do math.

Digging a little deeper, the number one debt that was cleared with those checks was cellphone bills, followed by utilities and cable TV, which is an interesting commentary on our priorities here in the First World. Spending was on apparel (something I can totally concur with, having worn basically the same wardrobe for over a year now—I’m an in-store shopper who never really adapted to buying clothes online, which I’m sure surprises none of you) then video games and sporting goods, with Walmart, Costco, and Target reaping the rewards. While we’ve put some people back to work, we still have a real unemployment rate of 6.2%—relatively unchanged from January but down significantly from last year’s high of 14.2%—and that’s a lot of people wondering how to keep a roof over their heads and food on the table (and apparently, how to make sure they can watch The Bachelor). So, how will you spend your check?

This week also brought a gift of another colour with the IRS pushing the tax filing deadline out again this year to May 17th. Not as far out as last year but a little extra time if someone wants it. Ironically, this is a whole lot less about the IRS being concerned for all of the taxpayers out there and a whole lot more about them being totally behind the ball handling of last year’s tax returns and struggling to incorporate some of the retroactive changes included in the American Rescue Plan Act of 2021 (which means the Senate has a staff of joke writers but apparently no phone to tell the head of the IRS about what they’re about to do…). 

To put some of this in context, even now, the IRS has a backlog of approximately two million pieces, roughly one-half of which are unopened hard copy returns. While that is down from five million in January, which was down from 11 million in March 2020, they are still receiving between 300,000 to 500,000 new pieces every week. That backlog isn’t going away anytime soon now that we are well into filing season.  This only confirms my number one rule of thumb with the IRS: Their bark is worse than their bite and their first letter is simply a first date, not the wedding.

Regardless of when you file your return, this is always a good time to evaluate how we handle our tax payments. If you owed taxes, the first thing to do confirm you didn’t pay a penalty for underpayment. Paying a tax bill when you file is a personal choice; paying a penalty for underpayment is just silliness. 

Not a fan of writing a check? Now’s the time to look at your withholdings and adjust them so you don’t have to write a check next year. On the flip side, there’s nothing wrong with receiving a refund as long as there is a strategy behind it. The old school of thought was to avoid a big refund since you were letting the government “use” your money which is, well, old school. Unless you are banking somewhere offshore with your cousin in a cartel, you aren’t getting much in your savings account and neither is the government.

Think of your taxes as a cash flow item—if you have trouble saving for the long-term, over-withhold and use your refund to save into your retirement account for next year. You can have your refund direct deposited into a variety of different types of accounts, including IRAs. I’ve had people over-withhold for vacations, upcoming tuition bills, and new furnaces.

Like everything else we talk about in my weekly blogs, the IRS is just another tool in our tool belt—a well-funded tool not deserving of their perceived tough-guy reputation but rather a tool we can use to our benefit.

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