What Are the Pros and Cons of Filing an Extension?

As with most things, there are pros and cons to filing an extension on your taxes. Let’s take a look at the pros of getting an extension to file first.


1. You can avoid a late-filing penalty if you file an extension. The late-filing penalty is equal to 5 percent per month on any tax due plus a late-payment penalty of half a percent per month.

Tip: If you are owed a refund and file late, there is no penalty for late filing.

2. You can also avoid the failure-to-file penalty if you file an extension. If you file your return more than 60 days after the due date (or extended due date), the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

3. You are able to file a more accurate–and complete–tax return. Rather than rushing to prepare your return (and possibly making mistakes), you will have an extra 6 months to gather required tax records. This is helpful if you are still waiting for tax documents that haven’t arrived or need more time to organize your tax documents in support of any deductions you might be eligible for.

4. If your tax return is complicated (for example, if you need to re-characterize your Roth IRA conversion or depreciate equipment), then your accountant will have more time available to work on your return.

5. If you are self-employed, you’ll have extra time to fund a retirement plan. Individual 401(k) and SIMPLE plans must have been set up during the tax year for which you are filing, but it’s possible to fund the plan as late as the extended due date for your prior year tax return. SEP IRA plans may be opened and funded for the previous year by the extended tax return due date as long as an extension has been filed.

6. You are still able to receive a tax refund when you file past the extension due date. Filers have three years from the date of the original due date (April 18, 2017) to claim a tax refund. However, if you file an extension you’ll have an additional six months to claim your refund. In other words, the statute of limitations for refunds is also extended.


And now for the cons of filing an extension…

1. If you are expecting a refund, you’ll have to wait longer than you would if you filed on time.

2. Extra time to file is not extra time to pay. If you don’t pay a least 90 percent of the tax due now, you will be liable for late-payment penalties and interest. The failure-to-pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25 percent of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. If you are not able to pay, the IRS has a number of options for payment arrangements. Please call the office for details.

3. When you request an extension, you will need to estimate your tax due for the year based on information available at the time you file the extension. If you disregard this, your extension could be denied, and if you filed the extension at the last minute assuming it would be approved (but wasn’t), you might owe late-filing penalties as well.

4. Dealing with your tax return won’t be any easier 6 months from now. You will still need to gather your receipts, bank records, retirement statements and other tax documents–and file a return.

When Did the Concept of “Retirement” Come to Be?

As you can well imagine, the idea of “retirement” did not exist in Roman times, nor medieval times, and certainly not when Pilgrims discovered America.  What about during the days of Lewis & Clark?  Or when the wild West was being settled?  History teaches us that a Roman peasant had to fight for food every day of their life.  A peasant could not even fathom taking life easy, sitting back to watch the evening news, or going out to eat and taking in a movie. How could an English Lord even conceive of “retiring?” He had to manage a kingdom and train new knights to protect him and his vassal serfs.

Some examples of newly created words, along with the idea of “retirement” in the last 100 years include:

  • Internet
  • World wide web
  • iPhone
  • Light bulb
  • Polyester
  • DVD
  • Contact lens

We have seen so many advances in technology and medical care in the last century that we have a lot more time on our hands than anyone born before the turn of the last century. That extension of life plus all that time we have available has been the reason the idea of retirement even exists.  “Retirement” is a new concept, only around since just before World War II broke out. Up until 1920, most people died before they reached the age of 60, so retirement wasn’t even an option.  When people started to live past age 65, some elderly folks started to save money for when they could no longer work, and thus the concept of retirement was born.

Four problems came along with this new concept. The first problem is outliving your income. Today 92 percent of everyone who is retired is totally dependent upon their Social Security benefit.

A second huge problem is inflation.  Just use your Web browser to see what one gallon of milk cost 20 years ago and you will be shocked.  You will most likely need to double the money you think is needed at retirement, because of inflation.

A third problem is continual taxation.  As you take money from you retirement savings plan to live, this income is taxed and can cause Social Security benefits to be subject to income tax as well.

A fourth gigantic problem is the cost of medical, long-term care and nursing home expenses.  The national average shows costs for a retired couple for medical/nursing care is $250,000 before they die.  This kind of cost is eating up all possible savings most people manage to squirrel away for retirement.  When all resources have been exhausted, the surviving spouse becomes destitute and is classified as being on welfare.

Considering these four problems, now is the time to decide what “retirement” means to you and whether you will be able to make that vision a reality. You have heard about the importance of planning for retirement your entire life, while those who lived before 1920 did not even have an inclination of what that meant. Before it’s too late, define what you want to happen when you reach age 65 because unlike your grandpa and great grandpa you will likely live longer than 60 years, so you will need to be prepared for that long life and how you want to live it.  It’s never too late to get going on this.  Go to moneymastery.com and sign up for the Basic online training package and see for yourself how much money you need to be saving for retirement, or calculate how long your money will last. For more help, contact me directly: peter@moneymastery.com.

What Is a True Financial Coach and How Do They Differ from and Adviser?

Many people confuse financial coaches with a financial adviser. These are two very different animals that need distinguishing.

Financial Coach:  A true financial coach focuses on your knowledge, your habits, and your ability to make wise decisions.  They don’t superimpose their feelings upon you.  A true financial coach knows that each person is unique with different goals, different attitudes about money, different challenges with math, and different strengths/weaknesses.  A true financial coach will know how to strengthen your where you are weak.

Financial Planner or Adviser:  This person is most often selling a product.  A financial adviser wants to profit on the money you have already accumulated.  The problem is that this is not what most people actually need.  Most people need and want to know how to create the money in the first place and then how to manage it wisely, perhaps with the help of a financial adviser, once they acquire it.

Think about how a salesman wishes to make money.  They sign up with an institution and then submit to their training.  What kind of training will that be?  Will it be training on five other competitor products so they can sell for them as well?  Absurd, not ever!  This employer wants to train you on his or her own products.  In the Time and Moneycase of a financial adviser, who are truly not a lot more than sales representative, they are encouraged to acquire knowledge and even
seek degrees like Certified Financial Adviser, to show the public that they are knowledgeable.  All of this effort by the sales representative can be helpful to you with a small part of the puzzle, but they very rarely have all the answers to every part of your financial life.  Have you ever thought about asking a financial adviser about what to do about your overspending? Of course not, they wouldn’t be likely to have much information about how to help you with this, and even if they did, this is not what they’re paid to do. What about how to get out of debt, or to create a passive income from better managing  your own money? They wouldn’t know the first place to start helping you with these important matters.  Where they can sometimes help is in what to do with extra money you have created, but that’s really where their “advising” ends.    

Here is the real difference between a coach and an adviser.  A coach helps you with problems you are having with managing your money and your emotions. People have lots of emotions surrounding money. The products financial advisers sell have very little to do with how to manage emotions and get in control on a grassroots level. They don’t teach you principles of financial management, they only sell tools that can help you once you have money to manage. A coach, on the other hand, offers solutions on how to control spending, get out of all debt, save for retirement, and pay the right amount of taxes. If you don’t have someone who can teach you how to do all of these things (at the same time) then you aren’t getting advice from the right place.

Here is a test question to ask a sales representative to determine if they are an adviser or a coach: “What do you recommend I do?”  Then listen carefully as to how fast they go directly to a product that they think you need.  If they make a specific recommendation they are a financial adviser.  If they say, “Tell me more about what you are trying to accomplish, today and in the near future?”  Then they search out your true feelings and even coach you along these lines before identifying options.  A true coach will strengthen you until you are making good decisions. Once you are making better financial decisions, then you can talk about what to do with your money from there.  

There are huge differences between a coach and an adviser, but it will take some time interviewing and asking questions of these people before you will see  how they approach helping you.  Most likely you will find 1 out of 25 advisers that will serve you like a true coach will.  For true financial coaching without the pushing of products, visit www.moneymastery.com

Your Financial Life is Like a Puzzle… How Well Are You Putting It Together?

Your financial life is much like a puzzle, there are pieces that must fit together neatly or there is no picture to see.  But how do you make sense of the puzzle if you don’t even know what it’s supposed to look like, or if you’re not sure what all the pieces are? Over 25 years ago, Alan Williams and I created the following financial assessment to help people ask the questions that help them see where they are financially right now and where they need to go. 

Please take this 12-question assessment available at the link below and see where you rank with your personal finances.   A score of 59, for example is “Fair,” meaning your puzzle is partially put together, but needs improvements for sure.

Money Mastery Financial Assessment

It is wise for you to take this assessment at least once a year.  Compare you score with last year’s and see how much you have progressed.  Then take notes on where to improve and after six months take this assessment again.  Watch yourself grow and develop into a truly principle-centered money manager.

Why is it so hard for anyone of us to check ourselves against a standard of excellence?  It is hard emotionally, plus many of us want what we want and spend anything to get it.  But if you will learn to control your emotional urges, it will make you a fortune.   It isn’t hard to get in control financially — wealth on ANY income is possible for anybody, it just takes being willing to see yourself as you truly are right now so you can make improvements going forward.  For more information on other tools and techniques to get in complete control financially and put your puzzle together so it finally makes sense visit, www.moneymastery.com.

Why 529 Plans Aren’t the Best Way to Save for College Education

Here is an explanation of 529 plans to fund college educations  taken from a well-respected college planning firm.  Review this accurate treatment, then allow me to add my perspective:   

Offered by states and some educational institutions, 529 plans let you save up to $14,000 per year for college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country.
While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences.
In addition, grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.  Keep in mind, 529 plans are counted as available assets on the FAFSA [Free Application for Federal Student Aid] and can affect eligibility for student aid and loans.

Here are my observations about these plans:

Point 1:  The more money you have in a 529 plan, the more it will diminish the chance of receiving any FAFSA funds that may otherwise be available.  This is free money, or “aid” money.  Most likely your student will  not be eligible for student aid if you hvae a 529 savings plan. All 529 plans are required to be disclosed when applying for aid.

Point 2:  Why not use the proposed 529 savings money to purchase a cash-rich-savings life insurance policy on yourself, so that when your child/grandchild decides to go to college they can use the money from there?  There is no tax on this cash value build up, if structured correctly, and it’s not hard to set up. And if you die before the college money is needed, the death benefit will pay into your living trust a multiple of five to 10 times more than any money you could have saved in a 529 Plan.  So you will have the same  cash available plus no taxes due on growth, AND you will have the enhanced death benefit to pay for a lot more than just one college education — think two, three or four educations!  This is a no brainer

Point 3:  If your child/grandchild does not go to college, then if you have set up a cash-rich-savings life insurance policy instead of putting the money into a 529, you still have all the cash to redirect or you can just leave it inside of your living trust so upon your death it can bless other family members as you choose.  This is also a no brainer.

Point 4:  Why not have the options to pay for rent, food, or other necessities for your college student and not be “required” to pay for only tuition, as the 529 forces? There are many expenses outside tuition and books.  And if your student gets a scholarship, then you won’t be able to use the money inside of the 529 plan anyway.  Things change over time, but 529 plans are rigid.

Point 5:  Although the explanation above notes that the 529 plan money can be used at colleges out of the state, most states do not allow the tax deferral you get on the 529 to be transferred, so this induces the student to attend school in their geographic location and may deter them from applying to a college across country. Rules vary, but why place your money into a restricted environment when it isn’t necessary?

Point 6:  And what if your student wants to attend college outside the country? Unfortunately, the 529 plans don’t provide the tax deferral when a child goes out of the country.

Summary:  I hope you can see nothing but limitation using a 529 plan to pay for a college education.  They sound good and upon comparison can look good, but no one knows what will happen in the future so why even risk so much for such a little tax deferral benefit?  This again is a no-brainer.

For more information about how to structure other college saving options, including a cash-rich-savings life insurance policy, contact me: peter@moneymastery.com.

More Ideas on What to Do with “Old” 401(k) Money…

As noted in my last post, “How Old 401(k) Funds Can Get You Out of Debt Quicker,” many people change employment and still have money sitting in an “old” 401(k) they set up with their previous employer.  In my last post, I noted that this money can be used to pay off high-interest-rate debt, such as credit cards.

Here are some additional options to think about in terms of how to use this money instead of leaving it behind where is doing very little to benefit you today:

Option 1:  Roll this 401(k) money over into an IRA that you control.  Put it where you might get a good rate of return and have little or no risk.  Make sure you keep control of this account and can take the money out as needed.  Of course there will be a 10 percent penalty to pay if you do withdraw from an IRA before age 59.5, but that does not apply to the 72(t) tax rule. This ruling allows you to retire this plan (meaning you no longer contribute to it and only take the earnings from it over your life expectancy, usually age 84) without incurring a penalty. 

So, for example, if are say age 44 and have $100,000 in an account you retire, you will receive $3,365 per year without any penalty. CAUTION:  Once you select this option, you cannot change it  until age 59.5.  This example is simplified, so check with your tax adviser on how this best fits your circumstances.  There are places to put the $3,365 each year that can make you around 4 percent interest per year. Contact me for more details:  peter@moneymastery.com. So for this example, this means that when you reach age 59.5, all the money you started the account is still there, as you only took the earnings when you took the 72(t) option.

Option 2:  Roll the 401(k) money over into your own IRA that you control, then convert some portion of this amount once a year to a Roth IRA.  After five years, the principal amount you placed into the Roth IRA can be taken out without a penalty.  Check with your tax adviser first before taking this option to make sure you know all the rules associated with it, but in general this is another great way to get money out of an old 401(k) without paying a 10 percent penalty.

Option 3:  Roll the 401(k) money over into your own “self-directed” IRA.  There are extra fees you pay to the trustee of these kind of plans, but they allow you flexibility on where to invest and manage your money.

These ideas are for the purpose of giving your alternatives to leaving your money in an old 401(k) or IRA.  By being creative you can double the amount of money you might otherwise have if you just leave it where it is. For more information on these options feel free to email me: peter@moneymastery.com.

How “Old” 401(k) Funds Can Get You Out of Debt Quicker…

Are you one of those people who has changed employment and still has money sitting in an “old” 401(k)?  I want to give you options to think about in terms of how to use this money rather than just leaving it sitting there doing very little to benefit you. 

Take a look at the following illustration. It shows an employee putting money into a 401(k) “vault” of sorts:

The reason I call the 401(k) a vault is because money in this type of account is sort of locked up. It’s not liquid and can’t be used very easily. Basically you have very little control over this money. As you examine this illustration further, you’ll see that there are cracks in the vault, which represent the expenses of keeping your money in the 401(k) vault.  The vault does not offer protection from losing the money, as it is most likely invested in the market or mutual funds, which have volatility.  And notice when you retire and start drawing down on this 401(k) Uncle Sam is there, positioned to take a share of everything that you’ve put into the fund, plus any amount it has grown.

Now take a look at a couple I’ll call Mark and Joyce and their “Get Out of Debt” report, which is based onPower Down principles of quick debt elimination:

If Mark and Joyce will control spending so as not to keep getting into debt, they can have all debts paid off in less than 10 years.   It demonstrates how Powering Down your debt will get you debt-free in about 9 years, including your mortgage.

Now combine these two concepts of how the 401(k) locks up your money with the Power Down principle of getting out of ALL debt in less than 10 years. If Mark and Joyce were to consider taking all the money in an old 401(k) to pay off debts with higher interest rates, this could jump start their debt elimination considerably. Now of course, if they are younger than age 59.5 then they will have to pay a 10 percent penalty on top of the income tax due, but I don’t think you should be afraid of the 10 percent penalty because it’s less than those  high-interest rate debts you would use the 401(k) money to pay off.

Here’s how it could work:  

  1. Roll your 401(k) money into an IRA, so you have control.  Consider a credit union’s IRA savings account and remember earning interest is not the point. 
  2. Early in the year, like January or February, consider taking out a large chunk (in this example, I’ll use $10,000) and pay off credit card debt.  Taxes and penalty on this collapse of the 401(k) money are not due until April of the NEXT year. 
  3. Using this example, you would pay off $10,000 worth of high-interest debt (I’ll use a 22 percent credit card) and save that 22 percent for one year, which would equal $2,200.

Viola! You have just paid off a high-priced debt AND you are saving a ton of interest you would have had to pay to the credit card company. This suggestion would save you from paying interest of $6,500 on the credit card if you were to pay it off over a 5-year period, or much, much more if you never paid off the card at all!

So if you have an OLD 401(k) consider “using” it.  It does not have to stay in the “vault.” As it sits in the “vault” fees are being assessed, the market can decline, and in the meantime you owe $10,000 with a 22 percent interest expense on credit card debt — you’re basically going around and around in circles instead of getting on the road to total debt elimination.

While this is a great idea, I want to CAUTION you.  If you do not control your spending and therefore cannot save the monthly credit card payment of $275, in this example, you had better not touch the 401(k).  It makes no sense to pay off debt in this way where you will pay a bit of a price to do so if you are just going to get into more debt.  

Contact me with your debt information and I will prepare a Power Down report for you at no cost that will show you when you will be completely out of debt: peter@moneymastery.com.

Tax Preparation Made Easy

Here are 4 easy steps I wanted to share with you for making it easy to have your 2016 taxes prepared:

1. Gather your forms.  Be sure you know where your W-2, 1099, 1098 and other forms are.  It’s also important to understand what forms you will use to prepare your taxes or have others prepare them.  Search www.irs.gov for information on the proper forms to use based on your circumstances. I think it’s important that you are engaged in this process, rather than just handing a shoebox full of receipts and other papers to the tax preparer to sort through. In my experience this professional certainly won’t be happy with you and may even charge you extra. Seriously, organize your information and know for yourself what your income and expenses are so you are educated.  Sandy Botkin, a well known tax attorney and CPA, says, “The seven most expensive words are ‘My tax accountant takes care of my taxes.’”   Stay in control of your own finances, money and taxes.  It could be worth as much as $2,000 each year. 

2. Decide how you should file.  Tax software is available and of course professionals can help. Search online to get help on how to prepare your taxes.  If your taxes are simple and you have no business activities recorded, then it can be inexpensive to hire someone rather than doing it yourself.  I have always prepared my own returns, then I hire a professional to check what I have done. This has been the most cost efficient method for me as it saves on the hourly rate paid a professional to do your taxes. Plus, I have always found that using a professional improves my situation and I make the necessary changes for the following year.

3. Determine when to file.  This year, April 18 is the tax filing deadline.  If you file early, you still have time to pay any balance owed up and until April 18.  Remember that when you extend your tax filing, it doesn’t extend your need to pay.   All money owed needs to be paid by April 18 or you will have to work out a payment plan with the IRS and this will cost you extra money in interest and penalties.  

4. Get organized for next year. Since you just finished preparing your 2016 returns, you learned some things about your organization.  Identify those helpful items for next year and implement them now.  As the years come and go you will get better and better at being organized.  

For more information on how to pay the proper amount of taxes, contact me: peter@moneymastery.com.

What the Future Holds for Tax-deferred Accounts

Don’t you think it is better to have one bird in the hand, than two birds you can see in the bush?  Of course! Then why do so many people defer their taxes by using 401(k) plans, or others like it, when the future and the markets are so uncertain?  We all know the federal government is overspending.  We all know the feds cannot possibly pay out the Social Security and Medicare benefits it has already committed to.  Do you think taxes just might go UP?  Wouldn’t it be better to pay taxes now, and then never again? 

Since the average person reaching age 65 has less than $60,000 of total assets, why would you consider to deferring taxes until the worst possible time in your life, when you can least afford to pay them?

Consider this: When you start drawing money from these tax-deferred plans it can easily force your Social Security benefits to be included for income tax purposes also, meaning you will pay at a higher tax bracket.  So knowing this in advance, it’s time NOW to reconsider how you really want to fund retirement and how you want to pay your taxes. Don’t just go with what everyone else is doing, consider that there might be many other viable options for creating a predictable retirement you cannot outlive than throwing money into a 401(k). Contact me for these ideas:  peter@moneymastery.com.

How You Define Retirement May Mean You Will Actually be Able to Retire…

Most people have a specific amount of money they dream of having at retirement.  I hear $1 million all the time — that this would be enough by most people’s standards.  I also hear that winning the lottery would do it, although this seldom happens.   Sometimes I hear people plan on inheriting a large sum of money.  But none of these ideas are very realistic in terms of what retirement is really all about.

So what does it mean to retire, especially to you? Does it mean you stop working at the set age of 65? Does it mean sitting back with $1 million, or does it mean getting old and falling apart?

Let me offer you my definition of retirement: 

“To have enough passive income that when I wake up in the morning, I can elect to work or not.” 

This definition has some real meat you can sink your teeth into and some attractiveness to it because it is not a monetary figure or a specific age. Let’s face it, some people will not be able to quit working at 65, and some people will not accumulate $1 million, but that doesn’t mean they can’t have a good retirement.  Some people want to work until the day they die, if they’re able, and that’s not necessarily because they have to. Some people want to quit work altogether and travel the world. And some want to retire somewhere in between these two.  What I try to help my clients see is that setting up methods of creating income out of existing money and resources that they cannot outlive and does not require their active work to generate is what they really ought to be concentrating on, not trying to save a certain figure by a certain age.

What passive income means is different for every person.  What amount of passive income would you like so that you could decide to work or not? Not everyone needs a million dollars to feel like they can retire.

To think of being prepared for retirement as only saving a set amount of money, such as $1 million can be very depressing, especially when it’s pretty hard, almost impossible to save that million. It’s much easier to learn how to generate passive income that does not count on your activity for its creation.

Here’s an example of creating a retirement using passive income:  One of my clients used active income that he generated during his working years to buy a simple do-it-yourself car wash, you know the kind where you drive your car into the bay, put quarters in, and spray down your car with a hose and soap. Taking the profits from that first car wash, he then went on to purchase two more. These car wash locations provide an average of over $12,000 monthly passive income for him, and that’s after what he spends to maintain them. He doesn’t work at any of these car wash locations, he isn’t washing any of the cars himself, but he’s making money off them. Of course, the amount of money he makes varies at different times of the year, and he has taxes to pay and bookkeeping and other maintenance costs to pay but he recently told me that if sold the three locations, he would have about $400,000 in cash. He would have to pay taxes on this amount, but it would provide him a serious chunk of change he could then also live on, if he no longer wished to continue maintaining the three sites.

Trying to come up with $1 million by a set age is pretty hard, whereas creating $12,000 a month from a business activity that basically runs itself is a lot easier. After all, $12,000 a month is $144,000 a year.  If you divide $1,000,000 into $144,000 earnings you’ll find you would be making a 14.4 percent rate of return on your money.  So wouldn’t you conclude that investing in three car washes with a total value of   $400,000 would be easier than trying and save $1,000,000 from your day-to day-work?

Now’s the time to think about defining retirement for yourself. It isn’t about a set amount of money, or a specific age. It’s about determining how you can create enough passive income so you will have the freedom to do the things you want to do once your active working years are over. Perhaps you do want to continue working as you get older. Perhaps you want to travel, or spend more time with your kids and grandkids. Perhaps you want to do philanthropic work, or finish your college education. Maybe you want to write the next great American novel, or try to get a book of poetry published. Perhaps you want to sit and do nothing all day. Having the freedom to choose what  your path will be in retirement has nothing to do with set figures and ages. It has everything to do with how well you can set up a predictable income that you cannot outlive.  Defining retirement for yourself now, when you can explore more options than just working like a dog and trying to squirrel away money might mean the difference between working until death, or free time and fun times.  There are so many options for creating passive income that I would love to share with you. Contact me today: peter@moneymastery.com.

Whatever retirement might mean to you, see it clearly, define it in writing and refer to it often so you can track precisely when you will have enough passive income to quit active day-to-day work.  Share with me your successes and I will publish on our Website.