One of our favorite plans, applies a special TAX ADVANTAGED investment strategy to the amount of money people receive from tax returns. Tax returns are almost always overlooked as a source for saving but almost never overlooked as a source for spending. We only mention this in light of the many testimonies from those who can’t even remember what they spent it on. Interesting also, is that the money refunded by the IRS is returned with absolutely no interest paid to the taxpayer. While these windfalls, if not spent on binges, could be invested after the return, there still remains a better plan. Claiming extra exemptions at the employer to match the amount received at the end of the year, produces higher paychecks. These funds can be reassigned for investing on a dollar cost average basis and monthly as received in earnings. If done so in a tax qualified plan via the employer’s own 401k or personal IRA, the plan produces more cash for new investing via increased tax returns again.
The illustration below displays a series of calculations applying this principle to the complete funding of an IRA without using all one’s cash from regular earnings.