The Hot Corner...

January 18, 2010

Minimizing One of Your Greatest Hidden Expenses. . .

With every New Year comes the need to set goals -life goals, financial goals, career goals, etc. If we can envision a desired result for a task, we will build a plan and set a goal! It's human nature!

Since we are financial advisors, our goal is to help you achieve, you guessed it, your financial goal(s). One of our greatest tools in assisting clients plan for their financial future is THE TRUTH! Whether it's uncovering an overlooked fact or completing the required analysis, we often can open eyes by producing the truth.

To that, we turn our attention to a familiar fact to everyone but one that is not fully understood - The benefit of a tax deferred investment account ( THE 401K ). All your neighbors are familiar with the benefits of a 401(k) account, but I would bet the majority of them have not calculated the true impact of this tax saving account.

Let's assume your neighbor earns a $100,000 annual salary and has a marginal tax rate of 33%. Without factoring in any other tax savings, your neighbor will pay $33,000 in income tax. Now, let's assume your neighbor lives next to me and has decided to invest the maximum allowable amount, $16,500, into his 401(k) account. My neighbor will now pay $27,555 in income tax, saving $5,445.

Quite a savings! On top of this, let's assume that savings is the money invested in the 401(k) account. If it stays in that account for 20 years and earns an 8% annual return, that $5,445 turns into $26,826. This is only after one year! Imagine the savings you gain after maximizing your 401(k) contribution for say ten or even twenty years?

When breaking out the household budget this year, don't forget to start at the top and do your best to maximize the tax savings made available to you. I know my neighbor and I will put in the effort to take advantage of Uncle Sam's gift that keeps on giving!