| You've heard this every spring in the lunch room at | | | | over time and as they got raises they could increase |
| work. Joe bragging about getting a $1400 tax refund. | | | | the amount invested until they reached the allowable |
| Jenny tops him with a $2200 tax refund. Then Jack | | | | yearly maximum. The big benefit would. be after age |
| whose wife had a baby during the year and bought a | | | | 59 ½ they would pay no income tax on any |
| new house tops them all with a $3100 tax refund. | | | | withdrawals from the Roth IRA.. So in the first year, |
| Over in the corner smiling to herself is Joan who had | | | | they had $120 a month automatically deducted from |
| to pay an additional $120 in income tax. With all the | | | | their checking account, with $60 allocated to each |
| others getting big tax refunds what is so special about | | | | Roth IRA. So in one year each Roth IRA was funded |
| Joan's situation? | | | | with $720. An additional benefit of the Roth IRA was |
| And why was Joan smiling? Well because after last | | | | they considered them an emergency fund as there |
| years $2000 tax refund Joan and her husband | | | | was no penalty for withdrawing the funds. |
| decided they didn't want the government holding their | | | | Now you ask where did they get the money to fund |
| money for the better part of a year and they earned | | | | the Roth IRA's and the added contributions to the |
| nothing on the funds. How could they tune-up their | | | | 401k? After some calculations they submitted new |
| investing and saving plans so they did in fact earn | | | | W-4 tax withholding forms. They increased their |
| something on the prospective tax refund? Importantly, | | | | deductions to equal the amount of the anticipated tax |
| they wanted a plan so their earnings would compound | | | | refund. Now their take home pay was increased, but |
| and over time they would have a comfortable nest | | | | with the extra 2% (before tax so the real cost was |
| egg with the annual tax refund. | | | | about 1.70%) for Joan's 401k and with the $120 a |
| Their first step was to review their savings and | | | | month automatically deducted from their checking |
| investing plans. They found that Joan was not | | | | account to fund their Roth IRA's their collective take |
| contributing enough to her 401k to get the maximum | | | | home pay stayed about the same. |
| company match. So she increased her 401k | | | | But look what they accomplished. A 401k with an |
| contribution from 3% to 5%. The gross cost on her | | | | additional $1200 invested and Roth IRA'swith an |
| $40,000 annual salary was $800 but since it reduced | | | | additional $720 each invested for a total of about |
| her taxable income by $800 her net cost was about | | | | $2620. All instead of a tax refund of about $2000. |
| $680. The company matched 50% up to 5% so the | | | | And the investments will continue to grow and |
| company added $400 to her account. Not bad | | | | compound. When asked if she missed the big tax |
| investing $680 and increasing the amount invested by | | | | refund Joan said, "I don't even remember what we did |
| about $1200. | | | | with the tax refund last year. I think we paid some bills |
| Joan's husband was contributing 6% in his company's | | | | and went out to eat a few times and it was gone. I'm |
| 401k plan and was getting the maximum company | | | | real happy with the change." |
| contribution of about .60 cents for every $1.00 | | | | What about you? Which group are you in the lunch |
| invested. | | | | room? It's never too late to take control of your tax |
| They decided to start Roth IRA's with the balance of | | | | refund. Consider turning it into a long term benefit |
| the prospective tax refund. Although there was no | | | | rather than the one time windfall. After all it's your |
| immediate tax benefit, the investments would grow | | | | money and your future. |