February 2002
Free Money
Amy E. Gibb, MBA, CFP
Did you know that the government has a FREE MONEY program? Well, it isn't actually free money, but almost. They let you keep taxes you owe them for a while, say 20, 40 even 50 years, at no charge, and you don't have to pay those taxes until you are ready to spend the money. Sounds like a good deal doesn't it? So how do you sign up?
This FREE MONEY program is called a retirement plan. They have lots of names like, IRA, ROTH, 401(k), 403(b), Money Purchase, SIMPLE IRA, Profit Sharing, SEP, but the idea is still the same. By putting money in a retirement plan, you wait to pay taxes on that money until you take it out. Better yet, you get to earn interest on those tax dollars in the mean time.
Here's how it works…Jane is 30 and has a retirement plan in her business. She puts $200 a month from her paycheck into this plan. She would normally pay $56 in federal tax and $10 in state tax on this money. Because the money is put into a retirement plan, she can wait about 30 years to pay those taxes. Jim is also 30, doesn't have a retirement plan but would like to save money too. So he budgets the same $200 from his paycheck a month. But first he has to give $56 to the IRS for federal tax and $10 to the state. The amount left that goes into his savings is only $134 a month after paying taxes.
Both Jane and Jim invest this amount every month in an investment that pays a 10% annual return. Because her money is in a retirement plan, Jane doesn't have to pay tax on these annual earnings until she takes the money out of the plan. Jim has to pay tax on these earnings every year. Both Jane and Jim save every month for 30 years. After 30 years, after paying all income taxes, Jane has about $300,000 and Jim has about $150,000. How can that happen? Mainly because Jane is earning investment returns on the governments' tax dollars every year while Jim doesn't have that option.
So how do you get to have some of this FREE MONEY? Save money in a retirement plan! If you don't have a plan for your business, start one. If your employer doesn't have a plan, ask them to start one. There are retirement plans that will fit most budgets. Also consider saving in an IRA. If your business has a retirement plan, try to save the maximum allowed, but at least as much as the match that is provided (more Free Money). You should be saving at least 10-15% of your gross income.
Still confused? Call your investment advisor, CPA or other financial advisor for help. There are restrictions and qualifications, so consult your advisors about your situation.
Start saving in your retirement plan today, don't let the FREE MONEY get away!
Amy E. Gibb, MBA, CFP
President
Money $ense
Amy@MoneySenseSolutions.com, www.MoneySenseSolutions.com
303.494.5362
Financial Advising for individuals and business owners
"Money isn’t everything, Managing it is"
Amy E. Gibb, President of Money $ense specializes in helping you keep more of your hard earned money. She may be contacted at 303.494.5362, or for more information go to www.MoneySenseSolutions.com.