The following is a staff writer post from MikeS. He is a married father of 2. So, with the cat, he ranks number 5 in the house. He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.
There have been a couple of instances recently where past actions or decisions have come to back to haunt me financially. One instance is me now having to pay for not taking care of my health in years past. In the other instance, I was not able to take advantage of the best financial option and as such, incurred increased expenses.
I have always enjoyed sweets. For as long as I can remember, I have had an addiction to sugar. Unfortunately, I was not diligent in taking care of my teeth. I brushed, probably not very well, didn’t floss nor did I visit the dentist regularly. As a result, I have had numerous cavities and subsequent fillings. I shudder to think what the lifetime cost has been for me. This came up recently because I had a filling that began to fail. The filling represented such a large percentage of my tooth, that another filling wasn’t possible. So, I need at least a crown and possibly a root canal. What does this mean financially? The cost is probably about $600 after the insurance covers 50%. It is annoying more than anything to me. I have the money to cover the cost from my HSA. The annoying thing to me is I didn’t understand the implications of my actions in the past. Had I simply been on top of my health in years past, I would not have to incur this expense today nor would I have incurred all the other expenses through the years.
Included with my inheritance was an IRA. I did have the option of rolling this IRA into what is known as a stretch IRA. A stretch IRA is one in which I would have been required only to take annual distributions, but the distributions would be based upon my life expectancy. Since I am only 38, the IRS would expect me to live on average another 45 years. So, my RMD (Required Minimum Distribution) would have only been about 2% (1/45) of the account value. Chances are I would have been able to produce investment returns of greater than 2% and grown the account. The RMD would grow every year, but it would be a significant time until the distribution would be a high percentage of the account value. So, one of the costs that I incurred was the opportunity cost of not rolling the IRA into a stretch IRA. Because of past mistakes I made with my finances, I was not in a strong enough position financially to take advantage of this opportunity.
The other costs I incurred with the inheritance were taxes, both federal and state. I had anticipated some of the impact to my federal taxes. I knew the money would be taxable, but the one impact I didn’t anticipate, was the additional income pushed my income up such that I lost one of my deductions which caused my taxable income to be greater than I thought. So, rather than receiving a few hundred dollars back as my refund, I only received $161. The biggest tax impact was to my state income taxes. The increased income due to the IRA caused a significant tax liability. I ended up owing about $1,200 to the state. Just to give you some context, my income for 2012, 2013 and 2014 are all in the same general range give or take a few thousand dollars. In 2012, I received a $237 refund and 2014 I expect to receive a roughly $300 refund. That is a pretty big swing. Thankfully, I had the money in my savings to handle it.
Looking Towards the Future
What both of these situations have shown me is to pay attention. Due to the lack of attention to my health and finances in the past, I caused myself to incur costs in the future. It is reminders like this that keep me dedicated today. To make sure that I keep my financial position as strong as possible, so that I can take advantage of opportunities when they present themselves. To make sure that I pay attention to the little things that could turn into major future expenses. I guess I could say that these lessons have made me smarter and that’s the bright side. I can pass this knowledge, hopefully, onto my children and maybe they won’t repeat the same mistakes. Still doesn’t make me like the incurred costs any more.