Lock in a Fail-Safe Savings Plan
Budgeting and saving are skills many Americans learn late in life, if at all. Only 36 states require high schools to offer personal finance courses. While that’s a marked increase from seven states in 2000, it still leaves many Americans adrift. Many consumers benefit from setting up regular automatic deposits
Automate retirement savings. If possible, put 10%–15% of your paycheck into a retirement account, such as a 401(k), Roth IRA, SEP-IRA, or another investment account. To help you meet this lofty goal, take full advantage of any matching program your employer offers. That’s free money! Open a brokerage account. A regular investment account gives you access to stocks, bonds, and other instruments. Most advisors recommend a low-cost index fund as an initial investment, but if you are uncomfortable with stock market volatility, consider certificates of deposit or bonds. If you hold investments for at least one year, your earnings will be taxed at the long-term capital gains rate — far less than the tax on your ordinary income. Set up a health savings account. Health savings accounts (HSAs) are a powerful way to set aside income tax- free to pay medical bills. They offer a triple tax advantage in that deposits, earnings, and withdrawals are tax-free if you use withdrawals for eligible medical expenses. You can sign up for these plans through an employer or HealthCare.gov by opting for an HSA-eligible health insurance plan. To determine how much to deposit, search online for “HSA Contribution Calculator.” Unlike other tax-sheltered savings vehicles, HSAs do not have a “use-it-or-lose-it” requirement, so you can accumulate funds for the future.
to each of the four key savings and investment accounts, either through paycheck withholding or via their bank. With this system, growing their savings requires no conscious effort.
Start an emergency fund. Deposit 2% of your paycheck into an emergency fund, either a high-yield savings account or a money market fund. These accounts currently yield about 4% annual interest or more, so your money will be working for you. Work toward setting aside enough to cover at least three months’ expenses to avoid using high-interest credit cards. Willie Nelson’s Wild Tax Ride At 91, the great Willie Nelson is one of the world’s most beloved and longest-running entertainers. As his classic 1980 song “On the Road Again” suggests, he’s likely traveling on a bus to his next show as you read this. Although his gifts as a performer are indisputable, his talents in tax preparation are infamous — and almost cost him everything. In 1990, the IRS went after the country superstar, known for his high- spending ways, to collect $32 million in back taxes. Unfortunately, his finances at the time — which, according to his daughter Lana, were less than $50,000 — didn’t allow him to settle the debt. Fearing a prison term, he promptly sought legal assistance. He also shipped his cherished guitar, Trigger, to Hawaii to prevent it from being seized along with his ranch and other possessions. Although Nelson’s lawyers were able to negotiate his debt down to $16 million, the reduction did little to calm the singer’s concerns. In a surprising move, the singer arranged to release an album in 1991, cheekily named “The IRS Tapes: Who’ll Buy My Memories?” to solely use its proceeds to help pay off the high bill. Unfortunately, the album generated only $3.6 million in sales. He continued to do all he could to get money, including appearing in a TV commercial for Taco Bell. In 1993, Nelson struck a deal with the government to finally put the nightmare to rest. In addition to giving the IRS the money raised by Off the Road to Wealth
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the album's sale, he reportedly agreed to pay an additional $2.4 million over three years before adding a final payment of $3 million. Based on these figures, the ordeal ultimately cost him $9 million — nowhere near the original amount owed but still a costly example of gross financial mismanagement. In addition to decades of unforgettable music, Willie Nelson has taught us an invaluable lesson on the importance of working with trusted tax professionals who have our best interests in mind. After all, not everyone can whip up a country album to help save their assets.
2 ∙ www.Roberts.cpa
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