Tag Archives: 401k

Is Social Security a Ponzi scheme?

Is Rick Perry right or just looking for attention?

Hi Dad,
I’ve seen Rick Perry stating that Social Security is a Ponzi scheme.  I’m hesitant to buy into that view.  Slate Magazine put out an article examining – What would happen if we stopped Social Security right now.  
What do you think of Rick Perry’s statement?  Do you think we should get rid of Social Security?



Cartoon courtesy of: Nate Beeler, The Washington Examiner, Washington, D.C.


Dear Daughter:
This cartoon appeared in the Sunday paper yesterday. It pretty much illustrates the reality of the situation. Perry needed a sound bite and he got it. 

The Truth about Social Security

The truth is more like the statement on the left. The Social Security funding methodology was developed at a time when the workforce was young and growing; where the population at work outnumbered the population in retirement. There would always be enough workers paying in to cover the blueheads drawing out. Now, of course, we have a burgeoning baby-boom generation that will (at the current pace) suck the system dry faster than you kids can replenish it.

The problem with Social Security in 2011

The problem (aside from the upside-down funding) is the expectation that Social Security will provide your average worker with a quit-and-go-fishin’ retirement. It wasn’t intended to do that and it can’t. It’s a safety net; a supplement; that’s all.
Back in the 80s, two things happened that make this all the worse. A change in the Financial Accounting Standards Board (FASB) rules required companies to fully fund their qualified pension plans. That made it a lot more expensive for employers to maintain traditional Defined Benefit plans. DB plans are the ones that provide a worker with a guaranteed annuity at retirement. They also put all the investment risk on the plan sponsor (the employer). Second, a financial advisor looking for an advantage for his client discovered an ignored chunk of the Internal Revenue Code in section 401, subsection (k). It’s a nice little tool that allows an employee to set money aside on a pre-tax basis to save for retirement. Only problem is, it’s too easy to get at your money out before retirement and all the investment risk is on the participant (that’s you) not on the employer. End result – employers are shutting down their pension plans and shifting the responsibility of your retirement back on you.
Oh, your question.

Inflammatory silliness

Yeah, Perry’s Ponzi Scheme comment is just inflammatory silliness. You will get a benefit from Social Security. You will likely have to pay more for it and wait longer for it. You should support federal level politicians who understand finance and who talk about restructuring Social Security funding to a system where YOU get out what YOU put in. There should be a cap on income that is replaced, but no limit on income that is taxed.
And don’t stop contributing to your 401(k).

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Filed under Retirement, Taxes

Filing Your Taxes: The Fun Stuff

Part Three – Other Fun Stuff

Prosecutor : You haven’t been paying your taxes.
Chico : Taxes. I have an uncle who lives in Taxes.
Prosecutor : No, Money. Dollars.
Chico : Dollars, Taxes. That’s where my uncle is a-from.

[The Marx Brothers; Duck Soup]

Estimated Taxes

On the off-chance that you have income from sources other than wages and salary, for which no income taxes are withheld, you might find that the IRS wants some of their potential tax money in advance of April 15. In that case, they will require you to calculate and pay “estimated taxes.” These are quarterly payments that have deadlines of their own. There are a couple of ways to calculate how much you owe. Until you start making money in the stock market or selling collectible ash trays, you probably won’t need to worry about estimated taxes.


Tax refunds are the Siren’s song of the IRS. It feels great to get a nice big fat check from the IRS. It’s Christmas in May. It’s cash found in the pocket of an old coat.  But as good as it feels, it’s a bad thing. The money you get from a refund was yours to begin with. But the IRS took it from you, held onto it and used it for their own purposes, neglected to pay you any interest on this de facto loan, and won’t give it back to you until and unless you demand it by filing your return. The IRS is currently holding onto $1.3 billion in unclaimed tax refunds from 2006 alone. That’s an interest-free loan that the feds use to fund your favorite boondoggle. The interest alone is more than any of us will make in our lifetime. You should be striving to break even – no refund, no tax due.

Refund Loans

There are a few ideas that entrepreneurs have come up with that are tempting at first blush, but are – at least in my opinion – really stupid. Refund loans are high on that list. Here we are talking about tax preparation firms who offer to lend you a portion of your anticipated tax refund. This has a few implications:

  1. You’re going to have to pay them to do your taxes first ($50-$150) – something you could do for free.
  1. You’re not going to get the full value of your refund because they are going to take the interest for the loan out of the refund.

III.                  If your refund is not as big as they said it was going to be, you could end up owing the tax preparer more than the value of the refund.

Last. If you consistently have a refund that is big enough to borrow against, then you should
have your Form W-4 adjusted to have less withheld in the first place (see Refunds above).

Paying Yourself More and the Government Less

You’ve heard it before; I’ll say it here too – to the extent that you can do so (and even if you can’t) you should be contributing to a 401(k) plan. Most employers offer them and when you are 73 (cuz that’s what the Social Security “Normal Retirement Age” will be by the time you get there) you’ll be able to go fishing instead of being a greeter at Wal-Mart.

The important thing about your contributions to a 401(k) Plan is that they are made with “pre-tax” money. (OK – truth is, you don’t actually make a contribution, your employer does. You sign a contract wherein you agree to take a cut in pay in exchange for the employer’s making a contribution.) Because your take-home pay is less, your taxable income is less and – voila – your taxes are lower. The tax man is like the grim reaper however. You won’t avoid those taxes forever, just until you withdraw money from your 401(k) at retirement. And Dad’s Dad always says, “Never pay taxes today that you can pay tomorrow.”  I won’t get into it here, but you should also look into IRAs and your employer’s Section 125 plan.


The IRS can do a lot of mean things if you don’t play by their rules. One of the things that they like to hold over your head to compel compliance is the dreaded audit – a review of prior filings in search of boo-boos. According to Eileen Bailey, the IRS will audit 1%-2% of all returns. But they are less likely to nab you at random and more likely to revisit you if you have done something that raises a red flag. These include, but aren’t limited to:

  • Inordinate deductions
  • Ongoing business losses
  • Blatantly bad math
  • Input values that don’t jibe with reported values
  • Year-to-year inconsistencies (e.g., each year you report a different number of kids)

When the IRS comes to call, they will likely have a specific issue that they want to follow-up on. If they specify, then that’s what you are responsible to review with them. So keep those receipts and bank statements handy (7 years is the amount of time you want to hold on to your records). Dad’s Dad has, on more than one occasion, proven the IRS wrong in their assertions. He has also come out of an audit with the IRS owing him money. But the IRS will never flag you if the error they found was in their favor. Hmmm. I wonder why that is?


There are few definitive correct answers. Even the Internal Revenue Code is subject to interpretation and judgment. And remember, even if you call the IRS with your question, you can get an incorrect answer. In a 2005 test of the system by the Treasury Inspector General, 35% of answers were incorrect.  And if the IRS gives you a bogus answer, you are still responsible.

So that’s taxes. Aren’t you glad you asked?


Filed under Money, Taxes

Dad says: Do your taxes!

This is the first year I’ll be filing my own taxes.  I’m using the free Turbotax online Federal tax forms.  But that comes without professional advice. so half way through the process, I call my Dad:

Me:  How come there’s a running counter on the top that says how much tax is due? I thought the whole point is to get refunds …

Dad:  The early part of the process records how much you made, so from its perspective you owe taxes. After that, you start to record how much you, a) have already paid in taxes (i.e., withholding) and b) have paid to other things for which you deserve a deduction (e.g., charities). The the amount that you owe exceeds the amount you have already paid or deducted than you will have to pay additional tax. If that which you have already paid exceeds the amount you owe, then you get a refund. You true objective should be to come out exactly even.

If you get a big refund, it’s because you paid the government too much tax during the year (for which they paid you no interest while they held your money). This year, you were a working stiff for the entire year. While your withholdings will likely offset what you owe on your salary, your interest and dividend income is still taxable. You will likely owe taxes.

Me: gah!  Thats not fair. I didn’t do anything to them. They’re the ones that messed up if they didn’t take it out right.
Dad:  Welcome to the working world. You can have your withholding adjusted so that they take more or less.  The IRS never messes up. Only you mess up.  California taxes will be a whole other issue. Turbo Tax is not going to give you that one for free.

Me: boo

Dad: You could fill out the actual forms. That’s free.

Me:  I could do that and probably find free advice online.  So, I’m going to ask a question that I could look up
but I’m lazy.  Are u supposed to have an IRA and a 401k?

Dad: It’s OK to be lazy. It gives me value.

Me:  haha   Write a blog!  Maybe someone will find u and give u a book deal!

Dad:  It would be very good to have a Roth IRA as well as your 401(k).  That’s nice of you to say. But I don’t right that good.

Me: Is a Roth IRA better than a traditional one. I found this website that explains it but i don’t see the difference

Dad: Different rules of eligibility, different contribution limits and different tax consequences. Roth is better because you will never (providing the law doesn’t change) pay tax on the earnings.  Different withdrawal rules too.

Me:  What if I die when I’m 30? who gets it?

Dad:  I do.  Then again, maybe it’s the person you designate as your beneficiary.

Me: I’m watching this Charles Dickens mini series and it’s about a will what wasn’t written correctly and the court case has gone on for generations but eventually all the money was used up in court fees and all the descendants failed at life cause they had been planning on the money.

Dad:  Something about counting chickens and eggs hatching …
Make sure you designate a beneficiary for your 401(k) also, so the the Governator doesn’t take it away.

Ladies and gentlemen, that is the inaugural post / test run for A Dad’s Advice
Thanks for reading!

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Filed under Retirement, Taxes