Rockbridge Named #81 on CNBC's Top 100 Fee Only Wealth Mgmt Firms List
Mar 15

Tales from the Tax Prep Front Lines

by Dick Schlote

Tax preparation gives interesting insight about personal financial situations.  Here are some examples.

Last year an elderly lady brought her tax documents to the AARP Volunteer Tax Service for preparation.  Her 1099s, etc. were not well organized, but appeared to be adequate.  She, herself, was a little disorganized, and not entirely comfortable with what she needed.  For example, she didn’t have her prior year return, one item that we specifically request.

One item was a 1099 for an IRA distribution of about $150,000, from which there was federal withholding of 10%, no NY withholding.  I immediately thought that she would be grossly underwithheld unless there were huge deductions or unless some of it had been rolled over to another IRA.  I asked about it and she told me she took it all out and bought gold.  Alarm bells automatically went off in my head.  I asked who her advisor was, or what firm had done this transaction for her:  her response was that she did it herself and bought the gold from the guy on the late-night talk radio program, Coast-to-Coast.  I finished the tax return and explained that she would owe over $20,000 to the IRS and over $6,000 to New York State.

She told me she would sell the gold to get the cash to pay IRS.  When asked how that would work, she told me that she had not yet received the gold, and that she had bought it back in the fall of the previous year.  I fear that she will never see the gold, or proof that she owns it.  With any luck, she has the gold or certificate of ownership, but she did just about everything wrong to get it.  This transaction may work out for her but is full of questions that should have been addressed by an advisor with fiduciary responsibility prior to the initial IRA distribution.

Another return this year points out just how important it is to plan for your retirement.  A few years ago I met with a couple who planned to retire early at age 62.  They had company 401k plans and would begin to collect Social Security at age 62.  Presently they were covered by a subsidized company health plan at a total monthly cost to them of $400.  Fast forward to a return I just did for a single individual age 60 who paid $1,300 monthly for health insurance, and another $2,000 for co-pays and deductibles in 2010.

Imagine the shock for this couple when they factor this kind of expense into their retirement cash flow budget.  Their monthly medical costs will have gone from$400 to $2,800. They would need another $100,000 in assets just to pay for health care costs to get them to age 65, at which time they would be eligible for Medicare coverage at a lower cost (assuming it still exists at today’s premiums and coverages).  They had budgeted and saved for years for this early retirement goal, but the single most critical factor in their decision to retire early is this important, necessary expense.  Of course, they could self-insure and take the risk of not needing health insurance for three years, but I don’t recommend it for anyone with today’s costs of health care.

A realistic plan for retirement is important, as well as a regular periodic review of your financial status once retired.  Lots of things change, some of which we as retirees can’t control.  Your investment advisor can help develop and monitor a retirement plan for you.

You Might Also Like

Other articles filed under Family Finances

Market Commentary – October 2018

October 22, 2018
Stock Markets For the last quarter, stocks are up except for Emerging Markets, which were close to flat. Domestic stocks are seemingly shrugging off the uncertainties of increasing interest rates, trade wars and tariffs. Year to date, an Emerging Market...
Continue Reading

Is Your Cash Earning Interest?

October 16, 2018
Interest rates are rising, and yet you may not be earning much on your cash.  As financial markets finally begin to reflect a recovery from the crisis of 2008-09, the brokerage industry is changing the way they handle customers’ cash,...
Continue Reading

Understanding Bond Returns

October 12, 2018
We had several clients this year reach out to ask how bonds were performing in their portfolios. These are great questions, so we created a few items to address what you see in your statements.  Some people notice they have...
Continue Reading

New Tax Law Makes Bundling Gifts to Donor-Advised Funds Attractive

October 9, 2018
“Give, but give until it hurts.” - Mother Teresa -    I don’t think Mother Teresa paid much attention to the tax code, but her quote is unusually prescient for 2018 taxpayers.  The changes have made it unlikely to get...
Continue Reading

What to Ask Your Financial Advisor

September 20, 2018
How does/and how much does your advisor get paid? Fees matter.  It is important to know how much you are paying and the value you receive for that payment.  If you're paying 1% or more for only investment management with no...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter