Y’see, I’d like to massage the witholding just so that there’s a refund that comes close to what I have to pay my preparer (not to let them take it off the refund, that costs MORE).
Won’t deny some times I sort of miss those days when I did not need a preparer. But hey, that’s movin’ on up for you…
Some excellent points in there, and I largely agree.
One wonders what causes this disparity. There are some predictable things: if you live in a high-crime area, and expect anything you save to be stolen sooner or later, then you’ll have a high interest in spending your cash immediately. Goods which provide some return now (TVs, phones) etc. are good; consumables that provide all of their value at once (food, services, drugs, etc.) are even better.
Some of this may be as simple as “I grew up in a big family; my siblings would have taken/eaten/etc. my stuff if I had saved it. So I learned to use it or lose it.” And that mindset then continues on into adulthood.
I used to try to owe a little bit, that way I’m holding onto the govt’s money interest free rather than the other way around. Don’t want to go too far, as then you can get penalties, but it’s relatively easy to end up owing just a couple hundred.
Now I make quarterly payments that my CPA calculates for me.
You can end up owing the IRS a surprisingly large amount of money before there’s any penalty or interest. The details get deep quickly, but if you’re not cashflow constrained or have a hard time saving money otherwise there’s no disadvantage to being under-withheld by ~10% of your final tax liability.
This year I missed the target by more than my average and so I owe a bit over 16% of my total tax with my return on 4/18. The penalty comes to a whopping 2% of the shortfall and 0.25% of my total tax. Which is less than the money I made holding onto that shortfall all year. And is certainly just noise around the total tax bill.
If I wanted to expend the effort to “annualize” my income, which is actually “subdivide it into 4 quarters and figure the appropriate withholding on each”, I could probably cut the penalty by 90%, maybe even to zero.
But that’s a lot of monkeywork for rather little benefit. TurboTax can do the forms, but you need to compute a bunch of upstream numbers to enter into TT that it can’t help you with.
I have long felt that the easiest, cheapest, and least politically controversial way to reduce income inequality in America would be to teach basic personal finance in high school. It baffles me that, for the most part, nobody is talking about this.
I agree with your initial premise. When you consider who gains and who loses from widespread financial literacy, it seems pretty obvious to me why nobody (who matters) is talking about this.
Maybe it’s because math rules don’t change but personal financial rules and tax rules vary so much and change all the time that you can’t write a textbook that covers all areas and that will still be relevant next year.
Back in the 1970s the letter pages of computer magazines were full of calls for “portable pensions” which could move with someone who did change jobs frequently, and could be available to consultants who did not qualify for pension plans.
Since 401Ks vest almost immediately, I suspect many people are not familiar with how long it took for a pension to vest. 401Ks have a lot of advantages even when the company stays solvent.
The rules and regulations may get tweaked on a regular basis, but they don’t get completely rewritten from scratch every year. A basic primer on marginal income tax rates, capital gains tax, investing for the long haul, compound interest, and building/protecting your credit history would go a long way toward helping many people achieve a useful level of financial literacy.
Yeah I guess you’re right.
Here we go, someone on this board needs a project get on it. Aimed at teenagers or early twenties people. Could be a great hit. Avoid making it too dense and have lost of diagrams and charts etc.
Well, for two real-life reasons for financial illiteracy that can’t be particularly uncommon at least in type if not degree, there’s my husband and me.
Me: I have dyscalculia. Numbers don’t hold meaning in my brain. I can’t figure out a 15% tip even with a calculator. If I measure a board, I will not be able to remember the width after I measure the length. Nevertheless, I pay all the bills that come in and always have, because example #2, my husband, cannot.
My husband spent his career as a development engineer for a university particle physics lab. At times he literally was a rocket scientist. But money is a matter of extreme avoidance for him. Planning of any kind is. He is planning-phobic to an near-pathological degree, and for him, money is simply a kind of planning.
Our successful solution to these two deficits has been to be scrupulously frugal, take no unavoidable risks whatsoever, and take advantage of whatever structures available that avoid or put off decision-making. So my husband stayed at his lower-paying but secure university job for 40 years instead of venturing out into the volatile tech industry. At his retirement he was fully vested in their excellent pension program-- which had been abandoned for newer hires years before. He took advantage of the 401-K plan as soon as it was available. He didn’t start taking benefits until it was optimal to do so. All of this turned out to be good sense but it was mainly the desire to never think about money or take risks that drove it.
And of course on my end, I was entirely clueless, still am, and I’m just as capable of being financially literate as a cow.
So although we are both of us highly intelligent and highly educated, it’s been more our phobias and disabilities which drove us into making good decisions.
I’ve heard speculation that growing up in an era of high inflation can condition a person to not accumulate savings. If prices are going up fast enough, it makes sense to buy something now.
I don’t do it because I want to, I do it because I have to since I’m self employed.
That’s actually not bad. You understood finance well enough to not make serious mistakes, and ended up being comfortable with the result.
Understood. Been there too.
And will again. 2023 will be roughly 3 quarters of high wage W2 work, then unemployment / retirement with nil income for 4Q23. 2024 and subsequent will be shoveling money from traditional IRA/401K to NQ while I have negligible other taxable income to take advantage of the low marginal rates while I can before starting SS and RMDs a few years later.
All of which makes for a very lumpy quarterly distribution of income. And hence the need to do Form 2210 “annnualization”. And 1040-ES estimated payments. Oh bother.
Exactly. Good on ya both there @Ulfreida. A person has got to know their limitations and work with them, not ignore them. You’ve kicked it out of the park. Lots of other folks blunder ahead obliviously and crash.
Which is why I pay my CPA big bucks to tell me what checks to write and when. (It’s actually very convenient, they send me all the coupons with addressed (not stamped, I have to add those) envelopes. All I have to do is write a check out for the amount on the coupon and mail it.) (When I get my taxes back, I just write out all the checks for the year, put the date for them to be mailed where the stamp goes, and put them in the front of my filing cabinet. Then all I have to do is put a stamp on and mail it at the appropriate time.)
As I was going to say, but now you’ve implied in your edit, sometimes financial literacy means knowing your limitations.
You’re teaching basics to high school students. They don’t need to know everything about accounting and taxation which is complicated. But they should understand the time-value of money, how to fill out basic returns, which things provide poor value, budgeting and basic sociolegal things.
I don’t know if it was inflation, or what, but it is easy to internalize certain beliefs that are, long-term, counter-productive. It was that way with me.
Growing up, and even into my early adulthood, I pretty much took it for granted that I was never going to have much money. My parents were both teachers, and pretty frugal. While we were comfortable–we had a nice house, two cars, never went hungry, and were even able to take a little vacation every summer–it was never more than that. Our vacations were always road trips, to places that were fairly close by. We had neighbors that would fly to Florida, or Hawaii, or Colorado, every year. We never did anything like that. Likewise, some of our neighbors got a new car every couple of years. My parents drove the same cars until they wouldn’t run anymore, then bought inexpensive replacements.
At some point I internalized the notion that we were not the sort of people who were able to afford a lot of luxuries. Other people could do that, but we couldn’t. We were always going to have enough money to get by, but not enough to splurge on really expensive things. At some point, that translated in my mind into not wanting to do things like invest, or think about retirement accounts, or things like that. There was no point. I was never going to have a lot of money, so why bother trying?
I am fortunate that, when I was about 30, I got a job in the public sector. That came with a pension*, which I was enrolled in automatically without my even quite realizing it. By the time I left that job, I had figured out enough about retirement planning to start opening IRAs and investment accounts, and to contribute to the 403(b) at my new job. So I do have a fairly secure retirement waiting for me. But I still wish that I hadn’t wasted the opportunity to invest while I was in my twenties.
So yeah, make contributing to the 401(k) the default. That would help a lot of people in spite of themselves.
Agreed. I’d take out as many loans as I could at just about any interest rate if I was absolutely convinced that prices would go up by 10x next year. And spend any cash on goods the very instant it fell into my hand.
It’s going to be hard to reason someone out of this position, since if it happened once, it might happen again…
Government policy and extensive social safety nets also lead to reckless financial behaviour. Take student loans. If Biden’s forgiveness goes through, the message to everyone is going to be, load up with as much student debt as you can, and don’t pay it back. If there’s even a 10% chance of forgiveness in the future, that’s a huge win.
Easy bankruptcy discharge can also be played for value, or at least lower the disincentive to borrow over your head. I know people who have said, “hey, if I can’t pay all my debt I’ll just declare bankruptcy. Sure, it wrecks your credit for 7 years, but my credit is already bad. And besides, I could use the discioline of not being able to borrow.”
Likewise, zero-down mortgages or 3.5%-down mortgages encourages peoole to buy more house than they can afford, because if the market turns down significantly they’ll just walk away from the house.
In Canada, we have a two-tiered retirement system. Everyone over 65 gets Canada Pension, which is around $1,300/mo if you contributed most of your working life. But beyond that, You also get Old Age Security, another $700, and if you have no other income a guaranteed income supplement of another $1032.
But here’s the kicker: The GIS only applies if your retirement income is under $20,952. And the OAS is taxable income. The way it works out is that if you have your own retirement savings in an RRSP, when you take it out at retirement it is counted as income, and your government benefits get clawed back 1:1 pretty much. Sime financial advisors here say that it’s a waste of money to save less than $100,000 in an RRSP because all you are doing is lowering your government benefits.
These all fall under the category of ‘moral hazard’, where honest attempts to make life better for those in dire financial straits makes it likelier that people will make less effort to manage their risk or save for their own retirement.
It makes it worse when government leaders tell people to buy, buy, buy for economic stimulus. Here’s a program where you can buy a home with almost no income. Do it! It’s good for the economy. Here’s a program to encourage you to dump your old car and buy a new one. Student loans should be forgiven. Anyone who takes a big enough risk will be bailed out. Don’t worry about it - the government has your back. Here’s a program for you to borrow lots of money for solar panels or weatherstripping. Hey, we held interest rates to zero, so everyone run out and borrow free money!
And of course, government sets the worst example by borrowing/printing money they don’t have and spending it foolishly.
could it also be that more employees are not thinking long term employment with THIS company, so they won’t receive benefit?