Many taxpayers use the withholding/estimated tax method to fund their emergency fund. Each payday these individuals pay the IRS much more than they need to. These overpayments could amount to thousands of dollars each year.

The overpayments are returned to the taxpayer as a tax refund. A tax refund represents an interest-free loan the taxpayer makes to the IRS. The taxpayer is not entitled to interest from the IRS.

Tip: Let’s assume you want to save $5,000 per year:

Step 1. Use the withholding/estimated tax system to pay the required amount of tax. Have your professional tax preparer assist you in determining the amount to be withheld.

Step 2. Open up a savings account with the Municipal Credit Union (MCU) and authorize the City to deduct $208.33 from your paycheck. The law requires the MCU to pay you interest. Do this for five years and you will see how the miracle of compound interest works.

Many Roth deferred comp savers are not taking full advantage of the “in-plan” Roth conversion opportunity. While these people are contributing their deferred comp deductions to their Roth deferred comp account they are under the mistaken belief that they must be retired before they can convert deferred-comp pre-tax dollars to deferred-comp after-tax Roth dollars.

That being said, the “in-plan” Roth conversion process may take place while you are still working—you need not be retired. Bill is age 40 and has accumulated $100,000 in his pre-tax deferred-comp account. In addition to directing all on-going contributions to his Roth deferred-comp account, he wants to convert the $100,000 of pre-tax dollars to his Roth deferred comp account.

This can be accomplished in a lump sum or in smaller amounts over multiple years. The converted amount is an irrevocable taxable event in the year of the conversion. I urge you to consult with a knowledgeable adviser prior to making your decision. As always, I offer my assistance.


Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at rollover@optonline.net.


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