However, you can’t use these accounts as complete tax shelters. Indeed, there are limits on how much money you can contribute each year. On top of that, if you contribute to a Roth IRA, your contribution eligibility phases out according to your income. Every year, the IRS reviews economic conditions, and considers inflation, and makes a decision about whether or not to increase the contribution limits. For a couple of years, no changes have been made, but the IRS announced a few changes for 2012.

IRA Limits

The contribution limits for both traditional and Roth IRAs hasn’t changed. For 2012, the annual contribution limit is $5,000, although those 50 and older can contribute $6,000 as a “catch up.”

Your ability to contribute phases out as well, as your income increases. With a traditional IRA your tax deduction begins to phase out with your contributions. Even though you can continue to make contributions, up to the limit, at any income level, you won’t be able to tax the tax deduction. Those who are single begin phasing out their deductions with a modified adjusted gross income (MAGI) of $58,000, and those who are married filing jointly see a phaseout at $92,000.

You can’t get a tax deduction for contributing to a Roth IRA, and the phaseout levels are higher. Phaseouts begin at $110,000 MAGI for singles. At $125,000 a year, you can no longer contribute to a Roth IRA at all. The income limits for those married filing jointly are $173,000 to start, and the phaseout is complete at $183,000.

401(k) Limits

The contribution limits on a 401(k) plan are higher, allowing you to set aside more for your retirement in a year. For 2012, the contribution limit is higher, set to $17,000 for those under the age of 50. Those who are 50 and older can make the same catch-up contribution available in 2011 — an extra $5,500 for the year. Total contributions to a 401(k) — which include employer contributions (usually through a match program) — have been increased to $50,000.

A Roth 401(k) has the same contribution limits as the traditional version. However, there are no income phase outs, as with the Roth IRA. When you contribute to a Roth 401(k), you don’t have to worry about a higher income making you ineligible for the tax free growth that comes with a Roth account.

Health Savings Account Limits

It’s also worth noting that there are new Health Savings Account (HSA) contribution limits for 2012. You can contribute up to $3,050 for individuals, and $6,150 if you have family insurance. If you are over the age of 55, you can add an extra $1,000 as a catch-up. As long as you meet the eligibility requirements for a HSA, you can make your contributions and receive a tax deduction.

For 2012, savers are getting a bit of a break. Tax deductions have increased, and income limits have eased, depending on the accounts you have.

(Photo: urban_data)

IRA, 401(k), HSA Contribution Limits for 2012 from personal finance blog Bargaineering.com.

Just because your company has a 401(k) doesn’t mean that it’s the right choice for you. Before you just blindly participate in your company’s 401(k), make sure that it makes sense. You don’t want to end up with a retirement account that doesn’t help you maximize your money. Here are some indications that your company 401(k) may not be the best choice for you:

• No company match: Many companies will match your contributions to a certain point. However, if your company doesn’t provide a match, it better have some other great features that make up for it.
• High plan fees: Some company 401(k)s feature high plan fees. You might pay high administrative costs, or there might be a buy-in. The funds chosen by some companies might come with high management fees and even sales loads, that eat away at your returns.
• Limited investment choices: In some cases, you might not have many investment choices when it comes to your company 401(k). Without the option to choose something that works for you, you might end up in a plan that doesn’t adequately help you reach your goals. Another problem might be that your plan is too heavily invested in company stock. Do you really want your future to be tied too closely to the fate of your company’s stock?

In some cases, you might be better off opting out of your company’s 401(k) and instead investing on your own. You could open an IRA, and have access to lower cost options — and a variety of investment choices. This is especially true if you don’t have the ability to max out your 401(k). One of the advantages to a 401(k) is that your contribution limits are higher. If you won’t contribute more than the IRA limit, though, that advantage disappears.

Of course, it doesn’t have to be either-or. You can also combine your efforts. If your employer offers a match, but you don’t like your investment options, you can do what is necessary to earn the maximum match, and then open an IRA to handle the rest of your retirement contributions. It’s perfectly alright to spread your contributions around between accounts — especially if your employer’s 401(k) is lacking.

In some cases, the costs associated with an employer’s plan can be so high that you are better off investing elsewhere, even if you aren’t using a tax-advantaged plan. Run the numbers and consider the costs (including the costs that can arise from having an incompetent plan manager at the helm of your retirement account). It goes against most financial conventional wisdom, but sometimes it actually makes sense to opt out of your company’s 401(k). Just make sure you have an alternative plan for funding your retirement if you decide that opting out is your best choice.

(Photo: mujitra)

When It Makes Sense to Opt Out of Your 401(k) from personal finance blog Bargaineering.com.

As it turns out, it’s similar to another rule I’d read about regarding retirement savings – the 4% rule. The 4% rule says that you should expect to spend 4% of your nest egg each year if you want it to last. Between Social Security and fixed income investments, 4% of your nest egg should last you for your entire retirement under normal circumstances. As is the case with all rules of thumb, your mileage will vary.

The Rule of 33 isn’t much different since it’s a slightly more conservative version of the 4% rule. Having 33 times what you need to spend in your first year means you’re only spending 3% of your nest egg each year. One divided by 33 is about 3%.

Sadly, whether it’s 3% or 4%, all the statistics seem to show that we aren’t saving enough!

Rule of 33 from personal finance blog Bargaineering.com.

Most retirement investment planning, at least when you’re in your early twenties, focuses on two accounts – a 401(k) and an IRA, typically a Roth IRA. The contribution limits are $16,500 for the 401(k) and $4,000 for the IRA, higher if you are permitted a catch-up contribution due to your age. If you were to max out your contribution to both, that’s a hefty $20,500 a year towards your retirement. That’s a lot of money for anyone to be contributing and I’d argue that contributing $20,500 each year until you retire is too much. Unless you make a lot of money, contributing that amount will put a significant strain on your current lifestyle and that’s a tradeoff that you may not want to make.

Here’s how I approach my retirement planning.

Calculating How Much

How much will you need in retirement? Ask ten people and you’ll get ten numbers. They will all be wrong. I do something simple, I calculate how much money I need to live on today and use the 4% rule. The 4% rule is a retirement rule of thumb that says you can only spend 4% of your nest egg each year if you want it to last for the rest of your life. With appreciation and interest, a 4% drawdown is ideal. That means if you want $40,000 a year in income, you’ll need a $1 million in retirement savings. If you want $80,000 a year, that’s $2 million. Calculating how much you need will depend on your lifestyle, so that’s up to you.

From there, you’ll want to set the finish line at 65 (or whenever), and calculate how much you need to save each year in order to reach that number. Then, calculate how much those savings will grow given rates of appreciation (minus inflation). You can use whatever growth rate you feel comfortable with, I personally use 7% (and 3% inflation). That will give you how much you need to save each year.

Front Load Contributions

My strategy has been to front load my contributions. In the first few years I was working, I contributed as much as I possibly could to both my 401(k) and my Roth IRA. With investing, time is your best ally and you’ll want as much money in the pot as early as possible in order to take advantage of time. I maxed out my contribution for two years before tapering back because I wanted to buy a house. By going full throttle on contributions early, I was able to build up a nice nest egg that can grow on its own.

If you use this strategy, rather than equal contributions each year, remember to recalculate your annual savings needs so you don’t overshoot your target. If you need to save $8,000 a year annually and you contribute $20,000 now, your annual savings needs will go down significantly.

Get Free Cash

At a minimum, I will always contribute enough to get any company match on my 401(k). If your employer offers you a match of any kind, take advantage of it. My first employer offered an extra 3% if I contributed 4% (full match on the first 2%, half match on the next 2%) and I always contributed at least the full amount. Who turns down free money?

Taxes

One point I purposely overlooked was taxes. Contributions to your 401(k) are tax deductible but you pay income taxes on the disbursements during retirement. If you need $80,000 a year and it comes entirely from a 401(k), you’ll need to save for more because you’ll be taxed on that income. I conveniently ignored it because it complicates things and I just figured that any Social Security payments would help offset that tax so that the math would come out close enough. I could be wrong but for the sake of simplicity, that’s where we’re going.

So, are you saving too much?

(Photo: italintheheart)

Can You Save Too Much For Retirement? from personal finance blog Bargaineering.com.

In order to live comfortably in retirement, though, you need to make efforts now. You might already have a retirement account set up, but are you contributing in an effective manner? It is important to consider your retirement account, and make necessary changes. Don’t get complacent about the state of your retirement portfolio; make sure to review your situation regularly.

Should You Increase Your Contributions?

One of the ways that you can streamline your finances and ensure that you are setting aside money is to automate your finances. The downside, though, is that it is easy to “set it and forget it” when it comes to automatic retirement account contributions. You might receive bonuses and raises at work, but not increase your retirement contributions. Perhaps you have paid off some debt, and now have more disposable income. Have your retirement account contributions changed to reflect that?

Take a look at your current contributions. Are you maxing out your contributions? If you aren’t, it might be time to look for ways to contribute more to your retirement account each paycheck. This is especially true if your income has been growing, or if you recently received a bonus. Before spending the increase, consider adding a little more to your IRA or 401k. You will thank yourself later.

Does Your Asset Allocation Still Make Sense?

Another thing to consider as you look at your portfolio is whether or not your asset allocation still makes sense. It’s easy to lose track of what funds you have, and what underlying investments are in those funds. You might also not have rebalanced your portfolio for a long time, and you might have an inappropriate mix of asset classes for your financial and retirement goals.

Pick a regular interval at which to review your investment portfolio. This can be every six months or every year as you approach retirement, or every two to five years if you are younger. Take a look at the mix of investments that you have, and determine whether it still makes sense. Your asset allocation is an important part of your retirement portfolio. Consider shifting your asset allocation as you get closer to retirement, and think about selling funds that create too much duplication in any one asset class. Carefully consider your financial and retirement goals, and make sure that your retirement portfolio accurately reflects what you are trying to do.

Bottom Line

As you get older, and closer to retirement, your financial needs are likely to change. It is important that you realistically consider whether or not your current retirement account contributions, and asset allocation, are doing an adequate job. Take the time to evaluate your position, and then make appropriate changes.

(Photo: RambergMediaImages)

Do You Need to Adjust Your Retirement Account? from personal finance blog Bargaineering.com.

What exactly is this Social Security IRA? It sounds a lot like the privatization of Social Security (which was a red hot political term for many election cycles), by putting it into an IRA and letting the wage earner direct the investments. Their proposal is to make it tax deductible, payroll deducted, and owned by the wage earner (rather than sitting in a “lockbox”). You couldn’t withdraw any funds until retirement (62-65) and 50%+ of the funds would have to be put into “guaranteed interest accounts.”

What’s the downside in all this? As is the case with any investments, people usually don’t make the best decisions since they’ll be governed by their emotions. How would your average wage earner have reacted to the gyrations of the market the last two or three years? We all know that market timing doesn’t work, people were overall terrible at it through this last crisis, so do we really want to offer up that much control over Social Security?

I think people should be able to manage their own money, even if they’re terrible at it. You have to educate people, not shelter them from difficult decisions. I think Social Security is an imperfect system but I also know that giving people that much control, despite my belief that people should have that much control, can be dangerous.

That said, I like that this is being discussed because something has to change about how our entitlement programs operate.

Social Security IRA from personal finance blog Bargaineering.com.

Anyone with earned income can open an Individual Retirement Account (IRA) and start investing. With children, the IRA will be custodial, meaning you are in charge of it until your child reaches the age of majority (check your state law to see when this is). The assets in the brokerage account, though, are your child’s, not yours, so keep this in mind.

What is Earned Income?

In order to open an account in your child’s name so that he or she can contribute, your kid has to have earned income. Here are some examples of what constitutes earned income:

• Money earned from a job: Teens who are able to work a “regular” part-time job can open and contribute to an IRA. Your teen will receive a W-2, which can be used at tax time.
• Money earned from odd jobs: There are kids who earn money by selling lemonade, mowing lawns and babysitting, even though they aren’t old enough to work a regular job. This income can be counted, but good records of the job done, the person who hired the child, the date the work was performed, and the amount collected should be kept.
• Work done for the family or home business: If you have a home business or family business, your child can earn money. However, you will need to make sure that you pay your child properly. Pay with a check from your business account, and issue a W-2. Make sure that the work is age-appropriate and the wage is reasonable. You don’t pay a 9-year-old $500 a week for emptying your home office trash bins and doing a little filing. If you are a sole proprietorship, you don’t have to pay Social Security taxes when you pay your own child under the age of 18. Double check the tax rules on S-Corps and LLCs before you try to avoid payroll tax on what you pay your child.

It is important to note that allowance is not considered earned income. Additionally, interest received on savings accounts, and gains from investments in the child’s name, are not considered earned income.

Contributing to a Child’s IRA

Regular contribution limits apply to any IRA opened in your child’s name. Many parents like to go with a Roth, since a child’s income now is not likely to be large enough to result in taxes, so contributing “after tax” dollars is of benefit, since they will grow tax free.

The main limitation on child IRAs is that the child cannot contribute more than he or she made in a year. So, if your child only earns $1,500, that is maximum that can be contributed to the account. If your child earns more than $5,000 (more likely for teens), then it is possible to max out the IRA. You can contribute on your child’s behalf, but the same contribution limits apply: Max IRA contribution or amount your child earns, whichever is lower.

Opening an IRA for your child can be a great way to get the ball rolling, and help him or her get off to the right retirement start.

(Photo: Howard County Library System)

Kids and Money: Early Retirement Savings with an IRA from personal finance blog Bargaineering.com.

However, there is a key difference: You can’t spread out the tax payments associated with your Roth IRA conversion. Before you decide whether a conversion to a Roth IRA is a good idea, consider the tax implications, and how you might be affected by making the move.

Paying Taxes on Your Roth Conversion

One of the things you have have to consider before you decide to go through with a conversion is the tax implication. Contributions to a traditional IRA are general made with pre-tax dollars. This means that you get a tax deduction immediately. The Roth IRA contributions, though, are made with after-tax dollars, and the earnings grow tax-free. That means that when you convert, you will have to pay taxes on the money from the traditional IRA.

In 2010, though, you had the option to spread the tax payments out over two years. If you had made a Roth conversion then, you could have spread the tax liability out, reducing the immediate impact on your pocketbook. In 2011, though, you don’t have that option. Instead, you have to pay the taxes on the conversion amount (which is treated like a withdrawal) immediately — no putting it off.

Before you convert, you need to consider whether or not it makes sense to do so, and whether you can handle the additional hit you will take to your finances by paying for the conversion. However, if you think that taxes will rise in the future, it might be worth it pay some tax now, and not have to pay the higher rate on withdrawals from a traditional IRA during retirement. For some, though, it makes more sense to forgo the conversion, and pay the taxes in smaller increments, later on.

Recharacterization

Some might convert the the traditional IRA to a Roth IRA, and then regret it. If you change your mind, you can decide to recharacterize your conversion, and go back to having a traditional IRA. However, there are limits. You can only recharacterize if you do so by October 15 of the following year. So if you convert in 2011, you can only take it back if you do so by October 15, 2012. Realize, though, that you can’t reconvert back to a Roth IRA in the same tax year as your recharacterization back to a traditional IRA, and you have to wait at least 30 days to switch back to the Roth.

What you decide to do depends on what you think is most likely to help you in the long run. It can help to talk to a financial professional to get the ins and outs of conversion and recharacterization so that you have a better idea of what might work best for you in terms of saving on your tax liability.

2011 Roth IRA Conversion Rules from personal finance blog Bargaineering.com.

IRAs and 401ks have some different advantages and disadvantages, and it is up to you to determine what is most likely to be the best course of action for you. As you try to figure out what to do with your retirement money, here are some things to consider:

The Employer Match

Your employer match is one of the most important considerations when deciding which type of account to fund first. If you have a 401k and an IRA, you might want to consider funding the 401k first if there is an employer match. You don’t have to max out the 401k, but you don’t want to leave money on the table, either. If your employer offers a 50% match up to 5% of your income, you can get a pretty good chunk of free money.

If you make $45,000 a year, 5% of your income is $2,250. If you put that $2,250 in, your employer match will be $1,125. That’s not too shabby, considering it’s free money. That boosts your annual contribution up to $3,375.

Once you’ve got your employer match covered, you can decide whether it’s worth it to put unmatched money in your company’s 401k. If your plan has high fees, or if your plan has options you aren’t happy with, you can put the some of the money in an IRA that you create yourself, using low-cost investments that you like. After you max the IRA out, if you have some money left over for retirement investing, you can reconsider whether you want the unmatched funds in your company’s 401k.

Flexibility

Often, you have more flexibility with investment options when you use an IRA. With a 401k, you are limited to what the employer offers, although you can always ask to have certain investments added to the plan. And, because you can open an IRA for a non-working spouse, it’s possible to double what you save as a couple for a year, since you can max out your IRA and your spouse’s IRA. However, even doubling up, you won’t be able to contribute as much to your IRAs as you could to one 401k each year.

You should also consider the flexibility of withdrawal options. With a 401k, you can borrow against your account, but if you don’t repay the loan, things can get really pricey really fast. Additionally, you have to pay tax penalties. With a Roth IRA, you can withdraw your contributions (but not the earnings) when you want. A traditional IRA also has some flexibility when you withdraw for some expenses. The 401k, on the other hand, has an interesting option that allows you to withdraw money if you retire after 55 — no penalty (but the money is still taxable).

Tax Situation

Naturally, you will need to consider the tax situation. In the past, if you wanted to withdraw money tax free in retirement, you concentrated mostly on the Roth IRA, paying taxes on your income now. However, if your employer offers the relatively new Roth 401k, you may not have to make that choice.

If you would rather have the tax benefits now, in the form of a deduction, you can contribute more to a traditional IRA or a traditional 401k.

Ideally, you would be able to max out a 401k and an IRA in a year. However, most of us won’t be maxing out all of our retirement accounts; we have to choose between them. With a little thought and planning, you can divide up your retirement contributions in the way that will benefit you the most.

401k or IRA: Which Should You Fund First? from personal finance blog Bargaineering.com.

If you want to retire “on time,” you will need to make plans now to prepare. Put together a financial plan that takes into account your goals for retirement, and work toward making those goals a reality. As you prepare for a successful retirement in the future, here are some things to keep in mind:

Consistency is Key

One of the most important things you can do as you prepare your finances for a brighter future is consistency. You need to be consistent in your savings plan, setting aside money each month. There are a number of retirement calculators out there that can help you figure out how much money you need to put into your retirement account each month if you want to reach your goal. You also need to be consistent about your spending, budgeting and other aspects of your financial life.

Debt is Bad

Nothing drains your retirement income potential like debt. All that money you are paying in interest to someone else is doing nothing to benefit you. It just leaks out of your budget and into someone else’s pocket. One of your goals, before you hit retirement, is to reduce your obligations as much as you can. Many people include their mortgage debt in this. You will feel more secure about your retirement, and have more money at your disposal, if you can pay down your debt — especially costly consumer debt — as quickly as possibly.

Fees are Bad, Too

It’s not just the interest you pay on debt that can reduce your real returns and slow your efforts to achieve your retirement goals; fees are a drain on your retirement as well. If you pay high fees on the funds in your retirement account over the course of 20 or 30 years, you will miss out on a substantial amount that could have been funding your retirement. If you want to maximize your retirement, you should look for low fee investments. Additionally, minimize transaction fees by avoiding constant trading. You should re-allocate your assets on occasion, but you don’t need to be constantly trading. That’s a good way to reduce your real returns.

Max Out Your Tax-Advantaged Accounts

If most of your investing is done for retirement purposes, it is a good idea to max out your tax-advantaged retirement accounts before you open other investment accounts. Make sure you are taking advantage of IRAs and 401Ks (you can have both kinds of accounts) before you use investment accounts that do not have the same advantages. And remember that your spouse’s contributions to accounts in his or her name are considered separate. So if you both have IRAs, you can contribute up to $5,000 to each IRA, for a total of $10,000. And while you’re at it, don’t leave free money on the table. If it’s an option, max out matching contributions from your employer.

So… will you be ready?

(Photo: erbutcher)

Will You Really Be Ready for Retirement? from personal finance blog Bargaineering.com.

As I read the Q&A, I thought I’d write down some good takeaways as well as clarifications on what I found suspicious. In summary, I felt like there were some good lessons to learn from someone who earned a significantly above average income that anyone could use.

Diversify Your Investments

Lacey was heavily invested in tech stocks, like Cisco (CSCO), when the bubble burst and that hurt big time. A look at Cisco’s historical stock prices is still probably a scary sight for him, since Cisco nearly touched $80 at its peak and is still just a fraction of that, but it should be a lesson for everyone else. You don’t want a seemingly rare “black swan” catastrophic event to wipe you out and diversifying is akin to buying insurance.

Front Loading Retirement

Lacey front loaded his retirement savings because he wanted to retire while he could still enjoy it. I personally front loaded my retirement because I knew my expenses were lowest when I was young and because I had time on my side. This, coupled with frugality, means that you can super-charge your retirement contributions early so that they can grow as you age.

He had to work as a resident physician at $26,000 a year for four years before he could open a practice, where he started earning $220,000. It’s a lot like a college graduate getting their first job. You go from work study programs where you earn $15 an hour to an office job where you earn twice that. While it’s not multiplying your salary by 10, it’s the same idea. By being frugal and front loading your savings, you reduce your effective income to something only slightly higher than your former standard of living.

Pay Yourself Later

The quote of the story: “If you pay yourself first and then try to save, your standard of living will always adjust up to what you’re making, and you’re not going to have money left to put in savings.” Like a gas that expands to fill its container, your spending will almost always expand to meet your salary. Think of the friend who buys a new car after a promotion or raise because he or she can afford a larger monthly payment, that’s how your standard of living expands. There’s nothing necessarily wrong with that unless your goal is to retire early.

On Saving $240,000 in One Year

This answer perplexed me a little bit because I can’t figure out how he was able to save that sum of money into a retirement account until I started reading about defined benefit pension plans. Apparently, the employer’s contribution limit is near $200,000 and there are no contribution limits. Since he was self-employed, he was able to put such a large sum away into this pension account for himself.

It’s easy to dismiss a story like this, since they are talking to a radiologist, but there are still some good lessons you can take away. What did you take away from this Q&A?

Lessons from a Retirement Millionaire from personal finance blog Bargaineering.com.

There were no changes to the contribution limits and some phaseouts saw their ranges increase slightly.

Traditional & Roth IRA

The contribution limits did not change for 2011 as compared to 2010. The limit if you are under 50 years of age is $5,000 or your taxable income, whichever is smaller. If you are over 50 years old, then you can contribute $6,000 or your taxable income, whichever is smaller. The extra $1,000 is known as a “catch up” amount.

The phaseouts for the Roth IRA have increased slightly. For married filing jointly, the phaseout starts at $169,000 and ends at $179,000. For married filing separately, if you’ve lived with your spouse at any time during the year, the range is still $0 and $10,000. For single filers, head of household, or other married filing separately, the range starts at $107,000 and ends at $122,000. As always, you can use this calculator to figure out your contribution limits.

401(k), 403(b)

The limits have not changed from 2010. Your contribution is limited to $16,500 if you are under 50 years of age and limited to $22,000 if you are over 50 years old.

Saver’s Credit

Finally, the saver’s credit saw its AGI limit increased to $56,500 for married filing jointly, to $42,375 for head of household, to $28,250 for married filing separately and single filers.

2011 Retirement 401K, IRA, Roth IRA Contribution Limits from personal finance blog Bargaineering.com.

This post will discuss the idea of whether you should convert your IRA to a Roth IRA this year, in 2010, or if you should wait until next year.

Splitting the Tax Bill

If you convert in 2010, you have the option to pay all the tax at once on your 2010 return or you can split it in half to be paid on your 2011 and 2012 returns. The tricky part of this decision is that while we know what the tax brackets are for 2010, we aren’t entirely sure what they’ll be in 2011 and 2012. All the proposals on the table don’t really make it easier for us to guess, though if you earn under $250,000 a year you will probably see your taxes remain the same (all the proposals seem to favor that, unless they can’t reach an agreement… then everyone’s bill goes up).

So while the tax rates in 2011 and 2012 aren’t set in stone, the idea that you can put off taxes until then is probably appealing. The risk is that you will have to come up with the money to pay for the conversion in 2011 and 2012, which can be a good or a bad thing. You don’t want to be sideswiped with a huge tax bill in two years.

Useful tax planning tool: I discovered this Kiplinger Roth IRA conversion tax calculator that takes into account the various tax proposals.

Income Shaping

Now that you have the option of choosing, you might discover that 2010 is a good year to do the conversion because of your income. When you convert, you have to realize the conversion amount as income. This has the effect of pushing you up into higher tax brackets which can affect the rate of the tax as well as what other tax deductions and credits you may be eligible for. Many deductions and credits are phased out and eliminated at higher incomes, so this is something you want to consider.

If you have a large IRA to convert, you may want to take the hit all at once and eliminate a credit or deduction for just 2010, instead of eliminated it for 2011 and 2012.

Those are just two reasons why you might want to convert your IRA to a Roth IRA in 2010 and whether you should split the income into 2011 and 2012 or realize in 2010. If you elect to convert in 2011, you won’t have the option to split the bill.

(Photo: jkonig)

Why You Should Convert IRAs in 2010 from personal finance blog Bargaineering.com.

When you make contributions to an employer 401(k), you get an immediate tax deduction if it’s withdrawn from your paycheck. We’ll look at more examples below but if you contribute $100 a pay period and are in the 28% tax bracket, only $72 is deducted from your paycheck (you contribute $100 but get the deduction, so you pay $28 less in taxes). If your company offers a 401(k) and a company match, saving for retirement is even cheaper.

Actual Cost of Saving

Let’s take a look at some example scenarios to see how little it actually costs you to save towards retirement. Our first example is John and he works for a company that offers a 401(k) but no match. He’s in our standard 28% tax bracket and he’s considering contributing the maximum of $15,500 (401k contribution limits). If he’s being paid twice a week, that’s $15,500 spread out across 26 pay periods, or $596.15 each pay period. That comes out to be $465 after taxes – that’s a little too much every two weeks for John.

Instead, he considers saving $10,000 – which works out to be $300 a pay period. More reasonable but still pushing it. If he contributes $5,000 a year, it’s only $150 every two pay periods and that’s something he thinks he can manage. $75 a week towards retirement seems more than reasonable.

What if John gets a contribution match? Many companies offer something like 3% company match on contributions, which pulls your cost down a little more. It’s not accurate to put the 3% back in as a way to reduce your out of pocket costs for saving since it’s deposited into your account, not into your pocket. It’s just a little sweetener you can appreciate when you start making withdrawals in retirement.

So, if you aren’t saving for retirement because you think you can’t afford it, do the math to know for sure.

Saving for Retirement Is Cheap! from personal finance blog Bargaineering.com.

Before you decide where to put your money, you really need to decide what you want to invest in. If you want to invest it in mutual funds, you’ll be best served going with the company that runs the funds you like. The two big names in the mutual fund space are Fidelity and Vanguard. If you really like their funds, I recommend you open a mutual fund account directly with them because you will be able to buy and sell shares for free.

If individual stocks are more your thing, then you’ll want to pick a broker that offers services you like at a cost that’s affordable. Discount brokers are all the rage these days, with sub-$5 stock commissions and all the research you could ever want. My personal opinion is that as long as you can satisfy the minimum balance requirements and the fees aren’t expensive, the broker is less important. I personally like TradeKing because their customer service has been rated one of the best and I’ve never had issues with it myself (I use their online chat feature all the time). They aren’t necessarily the cheapest anymore, there are a few even cheaper, but there’s a bit of an inertia effect there (I have my stocks there and I don’t trade much, so I don’t want to go through the process of moving them).

Best Roth IRA Broker Fee Comparison

* Zecco offers 10 free stock trades a month when you maintain a $25,000 balance or execute at least 25 trades a month, otherwise it’s $4.50 a trade.

Vanguard Brokerage Account

Vanguard is a special case because they have two types of accounts. They have a fund account where you can only buy and sell Vanguard funds, those fees are listed in the above table. They also have a brokerage account where you can buy stocks, bonds, ETFs, etc. The fees for both are different. Here is the full fee schedule for the brokerage account. I’m not really sure why they segregate it in this way, it’s annoying, but they like to keep the two worlds apart.

If you have a Roth IRA, where do you keep it and why?

What is the Best Roth IRA Broker? from personal finance blog Bargaineering.com.