Tag Archives: taxes

3 Things Young Adults can do to Prepare for Their Future

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As millions of young adults enter the workforce, finish education, and begin a life of financial responsibility, there are many of us who have a lot of uncertainty for the future.

The following are three key things to anticipate for the future:

An Older, More Diverse Population

Let’s face it, as time progresses there will be more and more old folks in the economy. This isn’t necessarily a bad thing (after all, someday we’ll be those old folks), but this is just one more thing to anticipate in the future.

In addition, there will likely be more ethnical and gender diversity. More and more women will enter the workforce, as the population of African Americans, Hispanics and Asians increases in the U.S..

These are all positive changes. Not only will we be experiencing more diversity of creed, religion, nationality and ethnicity, but we will also be seeing more and more women in the workforce. This is all at a time when we are living longer and longer.

More Technology and Automation

Unless, in the unfortunate event the world enters WWIII, we will likely see continued progression of technology both in terms of software, like AI and automation and in terms of machines and physical advancement.

Key areas to keep and eye on are in the medical field, biotech, vehicle automation and AI. These massive changes will likely lead to an ever-evolving need for labor. Automation will likely destroy certain jobs forever, while technology will create new demand and new industries.

Potentially Higher Taxes

At this moment taxes are historically low. After the tax cut of 2018 there are many economists and financial advisors anticipating higher taxes in the future to cover our increasing deficit. While there is no crystal ball that can see the future, we do know that it’s unlikely for rates to stay this low forever.

That said, it would be prudent to plan for this by utilizing tax-advantaged accounts like Roth IRA’s and Roth 401K’s.

Conclusion:

Preparing for the future doesn’t have to involve knowing all the details. While you don’t have to know everything, you should prepare for what’s likely to happen.

The advice contained in this blog is meant to be taken at the reader’s discernment. Talk to your financial planner to see how the advice may or may not apply to you. Ultimately you are fully responsible for your finances so make sure you have someone who is willing to walk with you on your journey.

Why Sometimes More Taxes are Good for You

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How can more taxes be a good thing? Well taxes are something you pay either out of your earnings/income or your spending/consumption or when you die. So if we just look at the first type, income taxes, we can see that the amount of income tax you pay is largely determined by how much income you make.

I’m guessing you’d like to make more income this year. Specifically either residual income or capital gains income. So paying more income taxes can actually be a good thing; it means you have made more income.

Before you assume that paying more taxes is universally good I want admit that more taxes isn’t always better. For example if you pay sales tax on the purchase of a new car, that’s not necessarily good. Or if you forget to deduct retirement contributions form your income, that’s not necessarily good.

To be clear, income taxes should be reduced as much as legally possible. However overall, an increase in taxes probably means you’re making more money.

In conclusion, avoiding income tax at all costs may actually be a bad thing because it’s keeping you from earning more money. Go earn more money and eventually you may find that you kind of like the implications of paying more taxes.

The Most Advantaged Retirement Account

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When it comes to picking a place to keep your retirement savings, there are two basic types of accounts to be aware of. The first is what is called a taxable account. This simply means the growth is taxed like most other investments. The second type of account is what is called tax-advantaged. In other words, this account has tax advantages like either  tax free or tax deferred growth.

In the category of tax advantaged accounts, there are a few popular names. Names like 401K and IRA are often used. When setting up a retirement account you can either set one up through your employer, or independently through a broker.

The types of accounts usually provided through an employer are 401K’s and 403B’s. Essentially these accounts are the same, but talk to your tax advisor about the differences and what applies to your specific situation.

If you decide to take the route of setting up a retirement account on your own, you can set up what’s called an IRA  (individual retirement account). IRA rules, for this current year, allow you to put up to $5500 of income away, tax deferred. In other words, you can avoid paying taxes on $5500 of income this year.

So the major employer-sponsored plans are 401K’s and 403B’s. The major independently funded retirement accounts are IRA’s. Within these options there is what’s know as a Roth. Whether it is a Roth 401K or a Roth IRA, the Roth has a few characteristics:

  1. Instead of deferring taxes upfront (and deducting the contribution from your taxable income) you pay taxes from the start.
  2. Instead of paying taxes on the growth, you avoid paying taxes in the future if it is taken out after 59.5.

In other words, Roth accounts are different in the fact that you pay taxes up front, but avoid paying it in the future if all the requirements are met. In recent years, the Roth has become more popular for these reasons.

Generally speaking, the Roth is better than the conventional account because of the power of “tax free” withdraws”. There are a few other types of accounts, but for most people, some form of IRA or 401K is the best option. I hope this helps on your retirement journey, whether you’re starting out, or in the midst of major changes.