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Investing, tax, super, property: Money mistakes 40-somethings make

Investing, tax, super, property: Money mistakes 40-somethings make

Your 40s is an exciting time when it comes to wealth building, as this is the time most people reach the tipping point on their journey to financial independence.

But you have to get it right. If you don’t, you’ll be playing catch-up in future years and likely will need to make sacrifices.

In this piece, I cover the key money areas you should be focused on in your 40s to drive success.

Automate your saving success

Your 40s will be close to your peak earning years, and will likely be your peak borrowing years, so being on top of your savings and cashflow is important.

From a savings perspective, when you’re earning bigger dollars the difference between doing OK and doing great is huge. If you don’t already have a good savings system in place, now is the time to make it happen.

You should be looking to automate your money management, have all your bills and commitments provided for and paid without you having to think about them, and to have your savings building automatically.

Having a good savings system is important so you’re crystal clear on how much money you have available to direct wealth building strategies. Particularly given your 40s are likely to be your peak potential borrowing years, having total clarity on your “free cash” number will give you the confidence to take full advantage of your ability to grow wealth through borrowing.

investment

By the time you get to your 40s, you should already have some good experience with investing and have a foundation of quality investments in place. If not, this should be your first priority.

There are a lot of different opinions (and ways to be right) on the best way to invest, but the statistics show us that passive index funds perform best 95 per cent of the time. My view is that passive investments are an extremely effective way to build wealth while minimizing risk.

If you’re really drawn to interesting investments (read: crypto, start-ups, etc), with higher potential returns and higher risk, it’s important in your 40s you have clear boundaries for how much of your portfolio you want to hold in these sort of riskier investments.

My view is that you probably don’t want to hold more than 10 per cent of your investments in this bucket, and skipping them altogether to focus on the more boring but highly effective investments like index funds will serve you well.

Property

Your 40s are going to be your peak borrowing years, with higher incomes and a long time until retirement age (as defined by the banks and lenders).

Risk management is critical, but in my opinion leverage is a highly effective way to build wealth relatively quickly – and something you should look to go “all in” on in your 40s.

I’m not saying you need to rush out and buy 20 properties, but having a good quality investment property, or properties, behind you in your 40s will do some magic in future years.

It’s important when you’re borrowing at higher levels that your plan around this is rock solid – you don’t want to be caught out by higher interest rates, rental vacancies, or unexpected expenses that can throw a spanner in the works.

If you’re going down this path, take the time to map out your game plan and consider investing in some good quality financial advice so you know all your bases are covered and that you can execute and drive the results you want with confidence.

tax

In your 40s tax planning can mean the difference between success and mediocrity. Your income (and marginal tax rate) will be higher, and you’ll have more investments behind you generating taxable income that needs to be dealt with.

Having a smart tax strategy will pay big dividends.

You’ll want to look at where and how you’re holding your investments, if you’re part of a couple, who should own which investments, how to leverage the concessional tax rates in super, and whether you’ll benefit from using tax structures like trusts and investment companies.

You should also be looking at tax strategies like debt recycling, super contributions, and harnessing the power of franked dividends to cut your tax bill and boost your after-tax investing return.

Every dollar of tax you save is an extra dollar you can direct back to your wealth building, ultimately helping you get ahead faster and easier.

Super

The effort you put into super in your 40s will be a big driver of your success in future years.

With a higher income and (relatively) limited time to retirement, you should be looking to maximize the tax deductible “concessional” contributions to super every year. The current limit for these contributions is $27,500 including money contributed by your employer.

If you haven’t been maximizing your super contributions in previous years, you can also “catch up” on up to five years worth of contributions, generating some serious tax deductions and getting a heap of money into the low tax super environment.

Maximizing your super contributions through your 40s will ensure you go into your 50s with a solid amount of investments behind you that can grow well over the decades to come.

Insurance

In your 40s your income and financial commitments will likely be at their highest levels, and because you still have some time to reach the typical retirement age, it’s likely you’re still heavily reliant on your income to get you to where you want to be .

I get that most people don’t like and often don’t trust insurance, but in my opinion this is something everyone should have until they’ve reached complete financial security.

Income replacement insurance premiums are tax deductible, and having this cover in place will give you peace of mind that the unexpected isn’t going to sabotage your money success.

Be aware that not all insurance is made the same, and cheapest is definitely not best when it comes to protecting your wealth. Insurance is incredibly complicated and can be confusing, so if you’re considering putting insurance cover into place you’ll benefit from getting some good advice.

The wrap

Your financial potential is still yet to be unleashed in your 40s, and the work you put in here will dictate how far you can go in future years. But it won’t just happen on its own – you need to be firmly in the driver’s seat here.

You should go into your 40s with a solid plan, revisit it regularly, and keep your focus as you move forward achieving your money milestones.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth www.pivotwealth.com.au, and Author of the Amazon best-selling book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your

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With 87,000 new agents, here’s who the IRS may target for audits

With 87,000 new agents, here's who the IRS may target for audits

Jeffrey Coolidge | Photodisc | Getty Images

As the Democrats’ spending plan moves closer to a House vote, one of the more controversial provisions — nearly $80 billion in IRS funding, with $45.6 billion for “enforcement” — has raised questions about who the agency may target for audits.

IRS Commissioner Charles Rettig said these resources are “absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” in a recent letter to the Senate.

However, with the investment projected to bring in $203.7 billion in revenue from 2022 to 2031, according to the Congressional Budget Office, opponents say IRS enforcement may affect everyday Americans.

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“Our biggest worry in this is that the burden for these audits will land on Walmart shoppers,” Rep. Kevin Brady, R-Texas, said Tuesday on CNBC’s “Squawk Box.”

Overall, IRS audits plunged by 44% between fiscal years 2015 and 2019, according to a 2021 Treasury Inspector General for Tax Administration report.

While audits dropped by 75% for Americans making $1 million or more, the percentage fell by 33% for low-to-moderate income filers claiming the earned income tax credit, known as EITC, the report found.

Our biggest concern in this is that the burden for these audits will land on Walmart shoppers.

Rep. Kevin Brady, R-Texas

Ken Corbin, chief taxpayer experience officer for the IRS, said returns claiming the EITC have “historically had high rates of improper payments and therefore require greater enforcement,” during a May House Oversight Subcommittee hearing.

Since many lower-income Americans are wage earners, these audits are generally less complex and many may be automated.

How the IRS picks which tax returns to audit

Currently, the IRS uses software to rank each tax return with a numeric score, with higher scores more likely to trigger an audit. The system may flag a return when deductions or credits compared to income fall outside of acceptable ranges.

For example, let’s say you make $150,000 and claim a $50,000 charitable deduction. You’re more likely to get audited because it’s “disproportionate” to what the system expects, explained Lawrence Levy, president and CEO of tax resolution firm Levy and Associates.

Other red flags for an IRS audit may include unreported income, refundable tax credits such as the EITC, home office or auto deductions, and rounded numbers on your return, experts say.

How IRS audits may change with more funding

While the legislation still must be approved by the House and signed into law, it will take time to phase in the funding, hire and train new workers.

The IRS aims to hire roughly 87,000 new agents, according to the Treasury Department.

New auditors may have a six-month training program and receive cases worth a few hundred thousand dollars rather than tens of millions, Levy said.

“You’re not going to give a new General Motors trainee, for example,” he said. “It just isn’t going to happen.”

The chance of an audit may increase for self-employed taxpayers, Levy said, depending on their return. However, the odds may not change for traditional workers with an error-free filing, he said.

“The W-2 employee is much less likely to get audited than a self-employed person by far, in my opinion,” Levy said.

Of course, one of the best way to avoid future headaches is by keeping accurate records with detailed bookkeeping and saving all receipts, he said.

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Categories
US

Reconciliation bill includes nearly $80 billion for IRS funding

Reconciliation bill includes nearly $80 billion for IRS funding

Charles P. Rettig, commissioner of the Internal Revenue Service, testifies during the Senate Finance Committee hearing titled The IRS Fiscal Year 2022 Budget, in Dirksen Senate Office Building in Washington, DC, June 8, 2021.

Tom-Williams | Pool | Reuters

Senate Democrats on Sunday passed their climate, health and tax package, including nearly $80 billion in funding for the IRS.

Part of President Joe Biden’s agenda, the Inflation Reduction Act allocates $79.6 billion to the agency over the next 10 years. More than half of the money is meant for enforcement, with the IRS aiming to collect more from corporate and high-net-worth tax dodgers.

The remainder of the funding is earmarked for operations, taxpayer services, technology, development of a direct free e-file system and more. Collectively, those improvements are projected to bring in $203.7 billion in revenue from 2022 to 2031, according to recent estimates from the Congressional Budget Office.

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IRS audits have plunged over the past decade, with the biggest declines among the wealthy, according to a May 2022 report from the Government Accountability Office.

The audit rate for Americans making $5 million or more dropped to about 2% in 2019, compared to 16% in 2010, the report found. The agency said it is working to improve these numbers.

However, if the Inflation Reduction Act is approved by the House and signed into law, it will take time to phase in the added IRS funding, explained Garrett Watson, a senior policy analyst at the Tax Foundation. The Congressional Budget Office only estimates about $3 billion of the $203.7 billion in revenue for 2023.

“We didn’t get to this state with the agency overnight, and it will take longer than overnight to go in the right direction,” he said.

IRS: We won’t boost ‘audit scrutiny’ on the middle class

While advocates applaud the enhanced IRS budget, opponents argue the beefed-up enforcement may affect more than wealthy Americans, violating Biden’s $400,000 pledge.

“My colleagues claim this massive funding boost will allow the IRS to go after millionaires, billionaires and so-called rich ‘tax cheats,’ but the reality is a significant portion raised from their IRS funding bloat would come from taxpayers with income below $400,000, ” Sen. Mike Crapo, R-Idaho, ranking member of the Senate Finance Committee said in a statement.

IRS Commissioner Charles Rettig said the $80 billion in funding would not increase audits of households making less than $400,000 per year.

“The resources in the reconciliation package will get us back to historical norms in areas of challenge for the agency — large corporate and global high-net-worth taxpayers,” he wrote in a letter to the Senate.

“These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” he added.

More than two-thirds of registered voters support increasing the IRS budget to strengthen tax enforcement on high-income taxpayers, according to a 2021 poll from the University of Maryland.

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