Making money is nice. But the real trick is keeping it. No matter how tight you hold it, it seems that the government takes some, your kids borrow some and the rest goes to fix up the house.
Suppose you do make a bit of money and have it to put aside. What should you do with it? Not many years ago the cautious person would buy government bonds. The slightly less cautious would buy corporate bonds because they paid a bit more interest. But in today's world neither pays enough interest to keep up with inflation, so the purchase of a bond is basically losing some of the money over time.
Of course you can put it in your mattress, but that too doesn't help with the fact that the money becomes less valuable over time, as inflation continues to eat away at it.
There are stocks, of course. Some politicians think people should be allowed to invest their retirement plans themselves into stocks. That would no doubt boost the stock market, but since a small percentage of people are knowledgeable in the market, many would lose a significant portion of their money. And only those with a lot of money could afford a professional advisor.
The goal for most is to put the money into something very secure for their retirement. I read a report recently by Bruce Givner, one of the most knowledgeable tax lawyers in California — or maybe anywhere. Some of what I'm writing about today comes from what I learned from him, and his recent article.
The best of all possible places to put retirement funds would be somewhere that allows a deduction when the funds are invested, allows the returns on the investment to build up tax free, allows you to take out money without paying taxes on it and allows it to pass to your spouse and children tax free. Life being what it is, it is probably too much to expect to find the perfect investment vehicle. But you can come close.
Perhaps most financial advisors would suggest a retirement plan. That has all of the advantages you are looking for except that it is not tax-free when you die. But since most people's estates are below the limit of taxability, it's only the very rich that have to worry about that. So a retirement plan is a really good place to put your money — if you can do it. Not everyone can benefit from a retirement plan because if you are in a company with other employees, the government insists that you share the wealth, and some part of the cash contributions have to be put aside for the other employees.
And then there is still the issue of what to do with the money that goes into the plan. Many advisors now suggest bond funds and mutual funds. But generally it's cheaper to get a good advisor to select specific sector Exchange Traded Funds instead because they have less costs and can be traded into more specific areas.
Givner points out another possibility that most people shun — life insurance. The disadvantage of the various life insurance plans is that you do not get a deduction when you put money into the policy. But the money that is earned is tax free. You can take money out without paying tax on it, and — best of all for rich people — it passes to your spouse and children tax free.
For people that can't economically put money into a pension plan without too much of it going to others, this is a good alternative. Another advantage is that you don't have to worry about the investment side of it, because the insurance company takes all the investment risk and gives you a fixed return, typically quite a bit more than is available in a government bond.
Paying Uncle Sam
We are closer to the end of the year than you might realize. So pretty soon it's time to think about year-end tax planning. What I've written so far is part of what you should be thinking about. But there are a lot of other things to think about.
It's a good time to talk to your accountant now about those little things that help with taxes. I can tell you from experience that it certainly is a good idea to keep a really careful record of all business expenses. When you use a credit card, write right on the receipt the names of the people you were with and the business topic that was discussed. File these receipts carefully in a way that allows you to find them by category — dinners, travel, gifts, etc. There are a few computer-scanning programs that you can buy that allow you to scan your receipts and electronically file them by both name and category.
While many accountants and financial advisors do not voluntarily disclose it, there are also a number of other personal strategies you can employ to reduce taxes, if you know about them and ask your accountant about them.
For example, if you work at home you can take a number of tax deductions as a result, usually based on the relationship of the square footage you use for business and the amount used for your personal use. The same is true for telephone and car expenses.
And if your spouse works at home, perhaps helping you with paperwork from the office, you can set up a separate company for him or her, and pay for his or her services. In some cases such a company can provide medical coverage for the family and allow a much greater deduction for these expenses than you can get as an individual. Sometimes this also creates a higher Social Security benefit for the spouse, and a number of other deductions. And the payments are tax deductible at your highest tax rate, while the company might be in a lower tax bracket.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.
