Taxes, Retirement and Your Investment Strategies

In response to the economic hardship caused by COVID-19, the federal government extended this year’s tax-filing deadline from April 15 to July 15. The state of Connecticut also extended the deadline to match the new date.

While this obviously gave Americans more time to file and pay any amount owed to Uncle Sam, this extension of the tax-filing deadline offers a number of other financial benefits – if you use it to your advantage. There are many long-term and short-term investment strategies that can help you maximize your return.

Avoiding the Costs of Late Filing

Right off the bat, you had more time on the clock to file your taxes, which reduced your risk of missing the deadline. The late filing penalty is 5 percent of the additional taxes owed for every month your return is late, with a maximum of 25 percent.

If you file more than 60 days after the due date, the minimum penalty is the smaller of $135, or 100 percent of your unpaid tax.

Remember, it’s not just about how much you make; it’s what you keep. At Heritage Capital, we conduct periodic tax reviews to look for opportunities to save our clients money and keep more of what they earn. Taxes are an important, yet often overlooked aspect of financial planning. (Read our recent blog post for other common financial planning mistakes.)

Capitalize on Your Return, if You Receive One

The benefits of filing your taxes accurately and on-time may go beyond penalties and avoiding the dreaded correspondence from the IRS. For some, this can mean more time to get taxes done and actually receive a refund. According to the IRS, 73 percent of filers received a refund last year, which amounts to about 96 million people.

Considering the job losses and damage to household income caused by COVID-19, the $2,900 received in the average tax return can offer a small financial boost. These additional funds can be used to cover essential expenses, pay down bad debt or even for saving and investing.

Essential Purchases

Many Americans panicked during the early days of the pandemic, creating a shortage of family essentials, like diapers, water and even toilet paper. After obtaining a refund, consider using this slice of added income to cover crucial expenses or replenish savings if your employment situation has become uncertain. Good preparation can eliminate future financial problems before they happen.

Pay Down Debt

Household debt hit a new high in 2020, reaching $14 trillion. Although making the minimum payment keeps your accounts current, this strategy prolongs the final payoff by many years and can make a full payoff impossible. Use any opportunity you can to reduce your outstanding debt balances, especially bad debt with high interest rates.

Add to Your Investments

Your portfolio grows in two basic ways: Deposits and returns. While investing properly or acting prudently with your savings does provide financial benefits, it’s better if both strategies are combined.

Adding new money to your portfolio gives you the chance to maximize your investment gains even further, by putting more money to work for you. Think about your short-term investment strategies as well as your long-term goals.


Heritage Capital has been helping families with their financial planning needs for more than 30 years. Contact us to see how we can help you too.


Strategize Your Retirement Contributions

In many ways, the added tax deadline served a “mini-extension.” This time buffer enabled many people to peer into their financial records and see their potential taxable income. Once you know this approximate number, speak with a financial advisor about ways to use your retirement accounts effectively to lower your income tax burden, while contributing to your retirement accounts.

The new tax filing deadline also offered more time to effectively use your retirement accounts. If you don’t have an individual, non-employer sponsored plan, consider establishing one on your own. There can be significant tax benefits.

Of course, putting money in a pre-tax retirement account, like a Traditional IRA, can help lower your annual tax bill. For every dollar that you deposit into these accounts, you can potentially reduce your taxable income by the same amount.

Individuals under the age of 50 can deposit $6,000 per tax year, and those over the age of 50 can deposit $7,000 by way of the catch-up provision. If these contributions can move you into a lower tax bracket, or otherwise offer tax savings, they should be strongly considered.

Small business owners can benefit from pre-tax retirement accounts as well. If you are an independent contractor, or you own a business with less than 100 employees, you can make the same deductions to your income, with significantly higher amounts contributed.

For example, owners of Simplified Employee Pension (SEP) IRAs can contribute up to $57,000 per year, or 25 percent of their total compensation, whichever is lower. In addition, another $6,500 may be contributed if you are over the age of 50. This significantly higher limit can be a huge tax benefit for you this year, as well as a great opportunity to invest in a tax-deferred portfolio going forward.

Retirement accounts with after-tax advantages can also be used to your benefit. Since Roth IRAs aren’t tax deductible, they typically don’t offer any tax savings for the current year. But Roth IRAs can be great for investment gains that are tax-deferred in the long run. A common problem is the Roth IRA’s income limits. But, there’s a workaround – Roth conversions.

Roth Conversions

Once your income level breaks and goes beyond $196,000, your Roth contributions become limited, if not completely disallowed. Consequently, many high-earners cannot harness the long-term benefits of Roth accounts.

To get around this policy, many individuals move money from their Traditional IRA directly into their Roth IRA and pay the taxes now (to avoid them during retirement). This is called a Roth conversion.

By completing this simple transaction, your funds can switch from pre-tax to after-tax status. If you are comfortable with potentially paying taxes now in exchange for not paying them when you make retirement withdrawals (once you’re over the age of 59-½), a Roth conversion can be a significant long-term financial boost.

While the new tax date has come and gone, speak with your financial advisor about using your retirement accounts strategically.

Use Your Time Wisely

Time is always an important variable as it relates to money. From investing to saving, time can mean the difference between a gain and a loss. The same applies to your taxes. If filed effectively, you can positively impact your financial picture by using both long-term and short-term investment strategies at your disposal. The key is knowing about them and how you benefit.

If you’re currently looking for a financial advisor to help you with your long-term and short-term investment strategies, or you’re ready for a second opinion, contact us. There’s no obligation from an initial conversation.


Paul Schatz, President, Heritage Capital