Right now, you can convert a traditional IRA to a Roth IRA as long as your adjusted gross income is under $100,000. The $100,000 limit applies whether you are single or married, tax filing classification wise, which makes it one of the few limits that is the same for both. So if your AGI is under $100,000, then you can convert today and you don’t have to wait for 2010.

Do You Want To Do This?

Before we get into the mechanics and the rules, you have to ask yourself whether you want to do this. The benefit of converting is that your assets can now grow tax free. With a typical Roth IRA, you don’t deduct the contributions from your taxes so you gain no immediate tax benefit. The tax benefit comes on the tail end when distributions from that Roth IRA are tax free. With a traditional IRA, you gain an immediate tax benefit because you can deduct your contributions but distributions are taxed many years later as ordinary income.

We have two major decisions during the conversion process:

1. Tax diversification: Since we won’t know the tax rates, or how tax will be collected (more income taxes? more sales taxes? VAT?), it’s difficult to say which type of account is better. The basic decision is that if you think your tax bracket will be higher when you draw from the account, then you want a Roth IRA. I’m of the belief that you should diversify between tax benefits today and tax benefits tomorrow, so I want to convert a few of my accounts over so I get a more even mix.
2. Paying the tax today: When you convert a Traditional to a Roth, you have to pay taxes on that conversion. I’ll go into greater detail on this but the gist is that you will need to claim the conversion amount as ordinary income and pay taxes on it. There are opportunities to defer on a limited basis but you still have to come up with the funds somehow.

Now that we have a good idea of the big decision points, let’s get into the mechanics.

$100,000 AGI Rule Removed

2010 is such a big deal because the $100,000 AGI rule is lifted, making a conversion possible for many dual-income families. According to the Journal of Financial Planning, it’s believed that more that 13 million people will become eligible for a Roth conversion when the limit is lifted.

Conversion Tax Rules & Implications

When you claim the ordinary income and pay taxes: Normally, when you make a conversion, you must claim the conversion amount as income the following year. If you convert in 2009, it is considered ordinary income for 2010. However, there’s a special rule for conversions made in 2010, you can opt to recognize half the conversion amount as ordinary income in 2011 and the other half in 2012. This special rule is only for conversions in 2010. If you convert in 2011 and beyond, the normal rules apply.

Experts advise that you should only convert if you can pay the taxes with other funds.. You also have the option of paying for the taxes from the account itself but every expert I’ve read recommends against that. If you want your money to grow tax-free, it’s best to maximize how much it can grow. If you’re planning on making a conversion, start saving for the taxes today.

Recognizing the conversion amount as ordinary income can cause problems. This is an issue many people overlook. When you convert, you have to recognize the conversion amount as ordinary income. This can have a significant effect on your finances. You may become ineligible for certain deductions or credits because of their income phase-out requirements so be sure to take this into account.

Non-Deductible Traditional IRA Loophole

One big consequence of lifting the AGI limit is that it creates a loophole for high income earners shut out of the Roth IRA. In general, if your employer offers a 401(k) or other defined contribution plan, you can’t deduct your contributions to a Traditional IRA. If you also earn too much, then you can’t contribute to a Roth IRA – leaving you with one less valuable option: a nondeductible Traditional IRA. It’s less valuable because you don’t get to deduct your contributions and your growth is taxed when you withdraw the funds in retirement. (Thanks Dan!)

In 2010, with the $100,000 AGI limit removed, you will be able to convert a nondeductible Traditional IRA into a Roth IRA without paying a penny. Since you’ve already paid the taxes, you won’t have to pay them again to convert it into a Roth. This loophole lets high earners “contribute” to a Roth IRA.

The one thing you have to look out for, which my accountant warned, was that you need to segregate your nondeductible Traditional IRA from your other IRAs. If you make a nondeductible contribution into a regular Traditional IRA, where you’ve taken deductions, then it muddies the water and causes issues. So if you want to use this tactic, make sure it’s segregated into its own account. It just makes everything easier for you down the road.

How to Convert

While it’s called a conversion, you’re actually rolling it over from a traditional IRA to a Roth IRA. The process will be similar to when you rollover any type of account, such as a 401(k) to a Rollover IRA. Since you would usually roll the assets over without changing brokers, the process may be as simple as filling out a form. Your best option is to contact your broker and find out what you need to do.

I believe I covered all of the rules and tried to give you a little insight into how I’m making the decision. The hardest part about all this is that the future is unclear. If there’s something I’m missing, let me know and I’ll add it to the post.

(Photo: doug88888)

2010 Roth IRA Conversion Rules from personal finance blog Bargaineering.com.

I was in a quandary. At such a small dollar amount, it certainly wasn’t worth the time to roll it over. If it appreciated at an average rate of 7% a year for forty years, it’s would be worth a mere $12.43. That’ll be enough to buy me a pack of bubble gum after taxes in 2049.

Why not just take the $0.83 distribution? I did this last time when I had a little less than $5 because the hassle just wasn’t worth it. They withheld 20%, which was less than a $1, and my accountant, upon seeing this, laughed. Since the tax withheld was less than a dollar, it was rounded into oblivion. 20% was withheld and I never even got credit for it… so I was doubled taxed on the rollover.

Out of principle (and, to be honest, stubbornness), I wasn’t going to let it happen again. The tricky part is that at such a small dollar amount, the cost of a stamp would make it a losing proposition. The solution was to have the 401(k) plan mail the rollover check directly to Vanguard. In the past I’ve always had the check mailed to me and then I mailed it to Vanguard along with instructions of how the funds were to be invested. I was forced to do this because one of my employer’s 401(k) plan refused, as a matter of their protocols, to mail the check directly to another plan. Fortunately, this was a different employer and they were willing to mail it direct.

As with any rollover, find out the information that the receiving institution requires before sending the check. In my case, Vanguard needed the check to be made out to VFTC (Vanguard FTC or Vanguard Fiduciary Trust Corporation), FBO [Account Holder's Name] (this is typically automatically on a rollover check), and a Fund-Account Number pair. Then you mail it to their standard PO Box 1110, Valley Forge PA address.

Should be settled in 7 business days and hopefully this is the last I hear about this account!

Get 401(k) Rollover Checks Mailed Directly to IRA from personal finance blog Bargaineering.com.

This is the biggest distinction between it and the Traditional IRA. On a traditional IRA, your contributions are tax-deductible but your earnings and appreciation are taxed as ordinary income when you start making regular disbursements in retirement.

Other Tax Advantages

• In addition to the hallmark difference, direct contributions to a Roth IRA can be withdrawn tax free anytime you want. Since you’ve already paid taxes on the money, the logic is you should be able to access it if you want. Your earnings can be withdrawn tax and penalty free if you meet certain conditions, such as being over 59.5.
• You can contribute to a Roth IRA regardless of your other retirement options. With a Traditional IRA, your contributions, or their tax treatment, are restricted based on your employer’s retirement options. With the Roth IRA, your employer’s options are irrelevant.
• $10,000 Withdrawal Rules: You can withdraw up to $10,000 of earnings tax-free if it is used to buy your primary residence and you are a first time homebuyer. To be a first time homebuyer you cannot have owned a home in 24 months.
• No required age-based distributions: With other retirement accounts, there are required minimum distributions based on your age. The Roth IRA has no such requirement.
• This Wikipedia article has a good comparison of all retirement accounts, worth looking at if you’re deciding where you want to contribute.

There are several other tax benefits but those are the headline ones.

Roth IRA Contribution Limits

The Roth IRA account is so nice, the government puts a contribution limit on it. There is a standard limit followed by a “catch-up” limit for those aged 50 and over:

Contribution Limits

Starting in 2010, the contribution limit will be adjusted in $500 increments in line with inflation.

In addition to the contribution limit, there is an income eligibility phase-out too. If you are single and have a modified adjusted gross income (MAGI) between $105,000 and $120,000, then your contribution is reduced by how much you earn. If you earn more than $120,000, you cannot contribute to a Roth IRA. FOr married filing jointly, the phaseout runs from $166,000 to $176,000.

The phase-out is reduced by the percentage you exceed the floor of the phase-out. For single filers, if you earn $110,000, then you are $5,000 above the floor and can only contribute 66% of the contribution limit, rounded up to an even $10 increment – $3,300. If that contribution limit is ever below $200 but above $0, then you can contribute $200.

Risks

The Roth IRA account is not without risk. The idea of it sounds perfect, I pay taxes now, I let it grow, and I get all my money back tax free. How more perfect can it be? There are actually one big risk with the Roth IRA: Tax rates could go down. In theory, a Roth IRA and a Traditional IRA perform the same if you assume the same rate of return and the same tax bracket structure when you withdraw the funds in retirement. The risk is that taxes could go down.

Don’t think it could happen? If the United States were to ever go to a consumption tax system, such as the VAT in Europe, then you might see income taxes go down as sales taxes go up. If that were to happen, then your Roth IRA would be taxed twice. Once when you made the contribution and then again when you went to spend the money in retirement. Before you think that will never happen, remember that retirement may be decades away for you… a lot can happen until then.

2010 Roth IRA Conversion Loophole

Right now (2009), you cannot rollover a traditional IRA or rollover IRA into a Roth IRA if your income exceeds $100,000. In 2010, that restriction is lifted (it’s known as the 2010 Roth IRA Conversion Limit Loophole). This allows two things:

• If you’ve wanted to convert a Traditional IRA into a Roth IRA, now is your chance. You simply have to pay taxes on the amount you’re converting from a Traditional to a Roth IRA. It is best to pay the tax with non-retirement funds.
• If you want to contribute to a Roth IRA but can’t because of income restrictions, you can contribute to a non-deductible Traditional IRA and then immediately convert it into a Roth. This is possible because the income limit has been lifted.

Reader Julio reminds us, in the comments, that the taxes you have to pay on the rollover amount can be spread out across two years so you don’t have to pay the entire bill at once. For more details, contact a tax professional because they would know the exact procedure for taking advantage of the loophole.

Where to open an account?

The answer is anywhere. If you want to invest in mutual funds, I recommend going directly to the mutual fund company. If you like Fidelity funds, go with an account at Fidelity. If you like Vanguard funds, go with an account there.

If you want to buy stocks, my recommendation is that you go with a discount broker. You want to spend as little as possible on trades and keep the funds in your retirement account so they can continue to grow.

Finally, with the current income restrictions, there might come a day when you can’t contribute to a Roth IRA account (this happens for a lot of people when two young professionals get married). When that day comes, you might regret not taking advantage of it for all those years.

Roth IRA Account Explained from personal finance blog Bargaineering.com.

So where do we find the average retirement savings by age? We are forced to rely on the internet. Unfortunately, with the recent stock market crash, writing about nest eggs and average retirement savings hasn’t been very popular. To get data, we turn to the Employee Benefit Research Institute’s latest report on Individual Account Retirement Plans (August 2009).

The EBRI’s report has a ton of detailed information on almost everything you might want to know about retirement savings and participation, from defined contribution plans to IRAs. For the purposes of our comparisons, I’ll just look at the age breakdown (2007 figures adjusted to 2009):

• < 35: $6,306
• 35 – 44: $22,460
• 45 – 54: $43,797
• 55 – 64: $69,127
• 65 – 75: $56,212
• 75+: (sample size insufficient)

Some words of warning after you read this:

• Remember that this data is just data, you can’t draw any conclusions of what’s right or wrong from the statistics alone.
• If you’re “below average,” you shouldn’t feel bad about it. Age is not a good indicator of where you are in your life. Some people get a later start and others have a more inflated lifestyle, how much you’ve saved by when should only give you a bar to reach.
• If you’re “above average,” you shouldn’t rest on your laurels and think you’re doing great. Much like the words I wrote for those who are below, being above doesn’t mean you’ll have enough for retirement. You have a few years until retirement, a lot can happen then, so keep at it.
• Average doesn’t mean someone in their 20s that has more than $6,306 is set in retirement (or that someone with less is screwed). It’s estimated that you should spend about 4% of your nest egg each year. At 4%, your nest egg should last long enough. How does that 4% figure translate to your estimated yearly expenses? Divide how much you think you’ll spend by 0.04 and you have your target (based on that rule of thumb) – $50,000 a year requires a nest egg of $1.25M.

Much like average net worth, it’s useful to know where you stand but don’t put too much stock in it.

How do you stack up?

Average Retirement Savings by Age from personal finance blog Bargaineering.com.

So, if you are faced with such a decision, I think it's important that we review how you can cash out an IRA and avoid the 10% penalty. It will not be possible for you to avoid paying taxes on the withdrawal, since you never paid taxes when you contributed, but we can at least try to avoid the ugliness of the 10% penalty.

Qualified Educational Expenses

As long as you pay for “qualified educational expenses” for you, your spouse, your children, or your grandchildren, it’s safe. It needs to be a qualified institution, which means the IRS has to approve, and it can be public or private, as long as it’s accredited. Qualified educational expenses include tuition, fees, bucks, supplies, and anything else that falls under the category of requirement equipment. If you’re enrolled at least half-time, room and board count too.

First Time Home

You can use up to $10,000 of your IRA towards the purchase of your first home. If you are married and you are both first time homebuyers, you can withdraw $10,000 each for a total of $20,000. The slick thing about first time homebuyers is that the IRS considers you a first time homebuyer if you haven’t owned a home in the previous two years, which is probably a lot looser than you thought. Also, you can withdraw the funds to help your children, grandchildren, or parents in addition to yourself (and spouse).

Hardship Withdrawals

The first two rules probably don’t fall into the category of “you have no choice.” But the “hardship widthdrawal” rules do and fortunately for you, the rules are more lax when it comes to an IRA. With a 401(k), hardship rules are a little stricter because you’re still dealing with an employer. With an IRA, the government is still getting their tax revenue so it’s a little less stringent.

So what counts as a hardship? Here are some common ones:

• If you use the funds to pay for un-reimbursed medical expenses that are greater than 7.5% of your AGI,
• If you become disabled before 59.5,
• If you agree to take equal distributions from your IRA over your life expectancy, according to the official IRS calculation method.

So, if you are going to cash out an IRA, try to make sure it’s for one of the three categorical reasons I listed above or the IRS is going to take yet another bite. If you’re withdrawing it because of hardship, don’t let the IRS make it even harder!

(Photo: stebulus)

Unlock Your IRA: How to Cash Out an IRA Without Penalty from personal finance blog Bargaineering.com.

With the stock market swinging so wildly these days, it’s risky to rollover a 401(k) because you might miss a big jump in the transition time. Since the 401(k) isn’t horrible expense-wise, we can do a little spring cleaning and wait for a better time to rollover.

Expenses

She has about $7,000 spread out across nine funds, talk about diversification! She has six stock funds, two bond funds, and a target retirement fund that is a mix of both (but mostly stock):

• T. Rowe Blue Chip Growth Fund (TRBCX) – (Large Growth) – 0.77%
• T. Rowe Equity Income (PRFDX) – (Large Value) – 0.67%
• T. Rowe Equity Index 500 (PREIX) – (Large Blend) – 0.35%
• T. Rowe Mid-Cap Growth (RPMGX) – (Medium Growth) – 0.78%
• T. Rowe Retirement 2040 (TRRDX) – (Large Growth, Medium Intermediate) 0.73
• T. Rowe Small-Cap Stock (OTCFX) – (Small Growth) – 0.89%
• CRM Mid Cap Value Instl (CRIMX) – (Medium Blend) – 0.81%
• Dodge & Cox International Stock (DODFX) – (Large, Value) – 0.65%
• PIMCO Total Return Instl (PTTRX) – (High Intermediate) 0.52%

Composite expense ratio: 0.6946%

The first thing I did was rebalance the portfolio so it was 85% in the Equity Index 500 fund and 15% in the PIMCO Total Return Bond fund. Nine funds was simply too many. The expense ratios for those funds weren’t outrageous but why pay 0.89% when you can pay 0.35%? Even the 0.35% isn’t ideal because you can get a Vanguard 500 Index Fund (VFINX) with an expense ratio of 0.15%, half price!

New composite expense ratio: 0.3755% (-0.3191%)

At first glance 0.3191% may not seem like a lot but it’s $22.33 a year on the $7,000 balance, which is $22.33 not working for you each and every year. Plus, I’d rather have the money in my pocket rather than the pocket of T. Rowe bankers and shareholders if I can manage it.

I haven’t confirmed this but according to the 401(k) literature, there’s a $10 annual administrative fee for each account with a balance under $5,000. Since my wife’s 401(k) has more than $5,000, we aren’t charged the $10 administrative fee. In looking at the transactions over the last 12 months, I don’t see a deduction of $10 anywhere, confirming this.

Simplifying Asset Allocations

By simplifying the allocation, it makes it easier to integrate that into our larger retirement portfolio diversification plans. $7,000 only represents a small percentage of our retirement portfolio. When determining your allocation, it’s best to simplify smaller accounts and do the “balancing” in larger accounts. This way you only need to adjust things in one account, not three or four.

Think there’s anything else I should other than wait for volatility to go down? We’re not losing much by staying at T. Rowe, other than paying slightly more for a fund, but I may be missing something you guys see. Please let me know!

(Photo: jbhill)

Analyzing My Wife’s Old 401(k) from personal finance blog Bargaineering.com.

I Don’t Like Self-Directed IRAs

Self-directed IRAs have grown in popularity over the last year because people are looking for alternatives to the stock market. The volatility in the stock market, coupled with economy uncertainty, has encouraged people to find alternatives and some have turned to some romantic investments like wine, art, real estate, etc. I know I’d invest a little bit of money in LendingClub if I could (Maryland residents are not yet permitted to invest) but I wouldn’t open a self-directed IRA just to be able to invest my retirement on consumer debt.

I don’t like playing games with my retirement assets. Even though social lending networks have exploded in popularity over the last year or so, they’re still relatively new. When Prosper, a competing social lending network, first appeared, people clamored all over the idea. Then, the defaults started rolling in. People will always default on loans, it’s part of the business, but the default rates were higher than the projected rate and investors howled. Unfortunately, default rates sometimes exceed projections (part of the reason why the economy is so bad now, mortgage defaults were higher than anticipated). However, it’s not a big deal when it’s some side investment income on the line… it’s huge if it’s your retirement on the line.

I recognize LendingClub’s claim that investors have earned 9% annually. I recognize that the self-directed IRA is through a fairly reputable firm (EntrustCAMA is a subsidiary of The Entrust Group, a 25-year old self-directed IRA administration firm). I also recognize that I am far more comfortable investing in the topsy-turvy stock market, especially with the sale going on now, than in something with a 20 month history. Whether or not this is appealing will have to come from your own experiences and comfort level. I know that I’d be willing to invest some side cash with LendingClub but my retirement assets? No thanks.

About Lending Club’s Self-Directed IRAs

But, let’s say you are interested, should you do it? Let’s take a look at their fees.

No account opening fees and a flat $250 annual account maintenance fee starting in 2010. Compare this to EntrustCAMA”s typical fee schedule and you’re getting quite a deal. According to their IRA application form (page 4 lists fees) there are two main fee options – one based on your investments and one based on account balance. In both cases, there’s a $50 account opening fee. Then option one, the number of asset investments based option, charges you $250 per investment per year. Option two has a percentage schedule based on your account value, with a minimum of $125.

Just because it’s cheaper than standard doesn’t make it a great deal. $250 on a $5000 balance is a whopping 5%! That’s a huge hurdle to overcome each year. Even if you were to contribute the maximum $5,000 for 2008 and $5,000 for 2009, the $250 still represents a 2.5% weight on your IRA. And if you ever want to close your account, it’ll cost you a little bit:

Partial or full termination, which includes transfers of assets from your account to anyone, is calculated on one-half of one percent of the asset
value of the amount transferred, plus sale transaction charges for each asset. This includes lump sum distributions, but does not include
normal eligible distributions. Minimum fee for this service: $150. Annual record keeping fees are not prorated when an account closes.

It’s up to you to decide whether you should open a self-directed IRA and invest in notes at LendingClub but I’m going to pass on this offer.

Lending Club Offers Self-Directed IRAs from personal finance blog Bargaineering.com.

You Can’t Stay On Top Of The Process

When you rollover a 401(k) into an IRA, the process is simple but you have to stay on top of it. With how chaotic things have been lately, whether it’s the market or with your job, the biggest thing to keep in mind is that you need to be able to complete the process without losing anything. The whole thing should take less than two weeks but if you misplace the check or otherwise forget to make the deposit, you could be in for even greater headaches.

You Can’t Borrow From An IRA

The biggest reason why you shouldn’t rollover your 401(k) into an IRA is because you can borrow from a 401(k) and you cannot borrow from your IRA. With the 401(k), you can borrow funds and pay yourself back the interest. The loan is not as awesome as it sounds, since your money won’t grow (or fall, given our current stock market!), but a 401(k) loan may be better than many other types of loans out there. With an IRA, you can’t borrow from it at all. There is a small loophole that will give you what is effectively a 60 day loan (when you rollover the IRA from one account to another, you have 60 days to deposit the funds, so it’s effectively a 60 day loan) but not something you want to use if you aren’t sure if you’ll be able to pay it back (if you don’t deposit it within 60 days, it’s considered an early withdrawal and subject to taxes and penalties!).

Volatility

One downside of the rollover process is that your 401(k) plan administrator will usually mail you a check that you have to mail to someone else. It takes a few days to cut the check, it takes a few days to make it to you, and then it takes a few days for you to mail it to your IRA. A lot can happen in that approximately ten business day window, your retirement assets are frozen in time until you get them back in. If the market falls tremendously, you will be happy; if the market jumps tremendously, you’ll be furious. A good way to see when volatility has gone down is by looknig at the VIX, a measure of the trader’s estimate of the market’s volatility over the next 30 days. The higher the number, the more volatile. The current VIX is somewhere in the 50s, which is less than the highs in the 80s several months ago, but more than the 10-20 range it had the last few years (the last time the VIX was this high, it was the dot com boom and bust). Unless your 401(k) is atrocious in fees, which it probably isn’t, or you have some compelling reason to rollover, I’d hold off until the market calms down… whenever that is.

Whether you rollover your 401(k) or wait, either option is better than cashing out.

(Photo: urbandata)

Three More Reasons To Not Rollover Your 401(k) from personal finance blog Bargaineering.com.

Short answer: Anywhere, just open one! If you want mutual funds, open an account with the company that offers the funds you want, like Vanguard, Fidelity, etc; because they will let you buy and sell the funds for free. If you want stocks, open an account with a company that offers the lowest fees.

Minimize Fees

The best brokerage for an IRA is the one that will charge you the least amount in fees. Since you are only allowed to contribute a limited amount into your IRAs, the importance of minimizing expenses is exceptionally magnified. The contribution limits for Traditional and Roth IRAs for 2009 is $5,000 (+$1000 if you’re aged 50+). With a taxable brokerage account, you can always contribute more and pay the fees out of your pocket. You can’t with an IRA, once you pay the fee, you lose the tax advantaged status of those dollars forever. If you have to pay an $50 administrative fee, you’re automatically losing 1% each year.

1% may not seem like much, but over forty years, the difference between earning 5% and 4% is staggering. On $1,000, the investor earning 5% will have over $7000 after forty years; the investor earning 4% will have $4800.

• Vanguard: All my retirement investments are with Vanguard (with the exception of my Solo-401k, because Vanguard didn’t offer one at the time) because I like the inexpensive mutual funds they offer. Vanguard IRAs do not charge account service fees if you sign up for paperless statements (”e-service package.”).
• Fidelity: Fidelity IRAs do not charge brokerage account fees, according to their front page. I don’t have an account so I can’t confirm this. One benefit that Fidelity has over many of its peers is that you can open a Fidelity AMEX card and get 2% cashback contributed to your IRA.
• TradeKing: They charge $4.95 per stock and option trade, $14.95 per no-load mutual fund purchase and sale (this is why going direct to the fund company is better). They do not charge an IRA annual fee but they do charge transfer out fees and termination fees (full fee schedule).
• E*Trade: They charge $12.99 a trade, almost 3X TradeKing, but on no-load, no-transaction-fee funds they will not charge you a transaction fee (otherwise it’s $19.99 on the other transaction fee funds). I listed them because they may not offer cheap stock trades but they do offer cheap mutual funds, so if you want both, this might be a good way to get it.
• TDAmeritrade – They offer slightly cheaper trades than E*Trade, $9.99 (regardless of account balance or trade volume), and they do not charge any hidden fees, maintenance fees, or inactivity fees. If you want mutual funds, you will pay $49.99 if they are no load funds that aren’t on this NTF fund list. It’s pricey on mutual funds, but I wanted to throw another option out there.

Investment Options

Ever broker will offer the same investment options. The typical retirement menu will feature stocks, bonds, and mutual funds. If you want to go strictly with mutual funds, go direct to the mutual fund company because they will give you the best prices. If you want only stocks, open an account with a broker that offers cheap trades and no account fee. If you want both, then it gets to be a little tricky. E*Trade is one of the few reputable award-winning brokers that won’t charge you a transaction fee on some no-load mutual funds. I haven’t exhaustively reviewed this

Check Minimums

The one downside of going direct to mutual fund companies is in the minimums. Vanguard requires a minimum of $3000 and then additional investments have a minimum of $100. Fidelity has a $2,500 minimum but they will waive it if you enroll in automatic contributions of $200 per month (or $600 per quarter). The brokers will usually have low or no minimums (E*Trade has no minimum, TDAmeritrade has a $500 minimum).

Ignore Promotions

E*Trade’s current promotional offer is 100 commission-free trades on stocks and options within the first thirty days. Ignore it. These are retirement assets you won’t access for decades, many of the free trade promotions will only distract you from the broker characteristics that matter – investment options and fee schedule. TDAmeritrade offers 30 days of commission-free trades when you open an account with $2,000 – don’t be distracted.

Free trades sound good, but lower fees are far more important. An investor with $900 growing at 5% for forty years will have $6335; an investor with $1000 growing at 4% for forty years will have $4800. At best, the 100 free trades offer is meaningless. At worst, it’ll cost you thousands of dollars.

Awards

I don’t think you can assess how good a broker is through awards, but I can say that I read the criticisms very closely whenever they are published. I recapped the 2008 Smart Money best brokers report but each one of the brokers has their own page listing their awards.

Where do you have your IRAs? Any recommendations or other “gotchas” to look out for?

(Photo: dawnzy)

Which is the Best Broker for an IRA? from personal finance blog Bargaineering.com.

I’m not a retirement nor an investing expert but I can say that your biggest concern shouldn’t be the performance of the market, it’s the volatility. With the various indicies gaining and losing large single-digit percentage points on a daily basis, it’s the volatility that is the big concern. A rollover takes time. Depending on how quickly or slowly you, your 401(k) administrator or your Rollover IRA administrator is, you could be left waiting for many days on the sideline as your 401(k) assets as liquidated, transfered to you, then transfered to the Rollover IRA. In that time, the market could go down big, go up big, or go sideways pretty erratically. My point is that the volatility is unpredictable, so on that basis alone, without any other compelling reason, I’d stand pat for now.

The concern that you’re “selling low and buying high” isn’t valid for your 401(k) because there is no concept of cost basis. Your 401(k) grows or shrinks based on your decisions but it doesn’t matter whether, by luck or skill, you’ve doubled it in value. The only thing that matters is how much you withdraw in retirement and that’s taxed as income at your marginal tax rate. How much you contributed plays no factor and there’s no such thing as “profit.”

Unless your 401(k) is so horrible that it’s costing you money, I’d wait. If you’ve got it in your head that you want to take a breather from the market, a horrible idea, you could always execute the rollover and hold onto the check for 60 days before depositing (if you hold onto the check for 61 or more days, it counts as a premature distribution and you’ll be taxed on it plus a 10% penalty). That would put you on the sideline for 60 days, which, again, is something I don’t recommend. Retirement isn’t something you should be tweaking and timing the market with, slow and steady wins the race.

Should I Rollover My 401(k)? from personal finance blog Bargaineering.com.

If you’re like me, about forty years away from retirement, the answer is that you should do nothing differently. Make your regular contributions, check your asset allocations, and do something else with your time. A lot can happen in forty years so you shouldn’t do anything rash like liquidate all of your assets. We had a recession in the 80’s, a mere twenty years ago, and since then we’ve seen the longest bull market period in a very long time. Trying to time the market is a fool’s errand and, honestly, your time is better spent enjoying life rather than fretting about your balance sheet.

If you’re slightly closer to retirement, say ten years away, now’s a good time to adjust where your new contributions are going and go towards a more conservative allocation. I wouldn’t liquidate your equity positions but any new money should go towards conservative investments that will lower the amount of volatility you’re exposed to. Check out the1-year chart of the CBOE Volatility Index, an index that tracks the 30-day volatility of the S&P 500 index using a variety of investment vehicles. Note the fact that since August, that index has been going insane. The enemy of a retirement in the near future is volatility. While I wouldn’t sell everything off, I would adjust my contributions to lower the volatility by going with safer investments.

If you’re a year or so away from retirement or in-retirement, hopefully your exposure to equities is limited. Either way, chances are your investment portfolio went down along with everything else. For retirees, I don’t know what the right answer is except that you might want to consider getting some supplemental income to buy more time until the market has an opportunity to somewhat correct itself. I would liquidate enough funds, from equity positions, to make it through the next three to five years and keep the rest as is. But remember, I’m 28, so I would take that advice with a very large grain of salt.

Do you have any better advice?

(Photo: silvaazniv)

My 401(k) Is Losing Money, What To Do? from personal finance blog Bargaineering.com.

I was speaking my accountant a few weeks ago when we began discussing retirement options. One of the ideas we discussed was to contribute to a non-deductible Traditional IRA with the plan of converting it into a Roth IRA in 2010. Prior to 2010, if you earned more than $100,000 MAGI, you cannot convert a Traditional IRA to a Roth IRA. This limit is the same whether you’re married or single (boo!). Starting in 2010, that rule disappears so anyone of any income can convert (more on the 2010 traditional IRA conversion income limit loophole).

Right now, my wife and I cannot contribute to a Roth IRA and so we lose access to one of the greatest retirement vehicles available. Fortunately she has access to a 401(k) and I have access to a SEP-IRA, so we do have pre-tax retirement accounts; we just don’t have post-tax vehicles like the Roth IRA. So how do we get some? Use that loophole!

Here is our strategy to take advantage of the 2010 rule change, we will both contribute to non-deductible Traditional IRAs and then convert them, nearly tax free, to Roth IRAs in 2010. It’s nearly tax free because we would still be responsible for taxes on any appreciation the IRAs saw. In talking with my accountant, this strategy works but he gave me some pointers to ensure we don’t run into any headaches.

• Separate the Traditional IRAs from any other retirement assets. He advised that we open separate accounts from both each other (this is required, you can’t have a joint IRA) and from any other retirement assets. This will give us the greatest flexibility in the future. If we were to mix our non-deductible Traditional IRA with my SEP-IRA (I took a deduction for those contributions), I can’t decide to convert just the “non-deductible” part of that mix.
• Remember to file IRS Form 8606. My accountant said that a lot of filers who go the DIY route often fail to submit this form and this can cause big headaches down the road. Form 8606 covers non-deductible IRAs and it’s the only way you can tell the IRS that you contributed to a non-deductible Traditional IRA; they won’t know otherwise. Deductible IRA contributions are recorded as a deduction and the IRS doesn’t care about Roth IRAs.
• You don’t have to convert all at once. This is more an explanation of the rule than advice on what to do but you don’t have to convert all the assets in one shot. You can spread it across two years. This wouldn’t matter to us for our non-deductible Traditional IRAs but if we opt to convert any of our Rollover IRAs, we could spread the damage across two years.

Now we have to hope that the rule doesn’t change or those non-deductible Traditional IRA dollars will be taxed again… in 40-something years.

Has anyone else looked into this?

(Photo: dawnzy)

Roth IRA Workaround: 2010 Conversion Limit Loophole from personal finance blog Bargaineering.com.

First, our little suburban area of Columbia is designed for biking. All the little shopping centers and parks and lakes are separated by an intricate network of walking and bicycle paths. On Wednesday, I rode around a nearby lake, through some paths, and popped out beside a little shopping center with a Subway to eat lunch with my wife and her co-worker. On the way back, I did some exploring and easily found the right path to take if we ever want to bike to our favorite Chinese restaurant, Hunan Manor, as well as our gym. Forget walkability scores, bikability is where it’s at.

The second reason is that I work from home and find myself doing a lot of intra-city driving to places where I am taking small roads. Why not replace the use of my car with a bike? Lower my already relatively small carbon footprint, get some exercise, and enjoy the fresh air! I’m not ready to sell my car but I’m certainly going to be using it less and less now that I have a bike.

The bikes were a good $200 a piece. While in the pantheon of bicycles, $200 is considered cheap, in the pantheon of bicycles I’d be willing to buy, $200 was about the limit. I understand that you get what you pay for and a “good bike” costs in the thousands, but I don’t know and cannot appreciate the difference. My wife doesn’t know and cannot appreciate the difference. For now, we can enjoy the heck out of our $200 bikes and then upgrade if necessary. We are acting our age financially.

For security, we bought two OnGuard Bulldog STD 5010LM Bicycle U-Locks as they were the highest rated sub-$30 lock by Scott Elder of Slate.com. He wrote about his experience trying to break into a whole bunch of bike locks and this one was the best of the bunch under $30. Again, you can spend much more for a beast of a lock (and those with $5000 bikes should buy a beast of a lock), but these should fit our needs just nicely.

Do you own a bike? Any tips or suggestions?

We Bought Schwinn Midtown Bikes from personal finance blog Bargaineering.com.

Inevitably, they learn about how they can borrow (or worse, withdraw and be penalized) from their 401(k) to help with the purchase of their first home. This leads right into the second deadly sin of personal finance:

Don’t Raid Your Retirement Funds

Remember when you were a kid and your parents planned a vacation? Part of the fun of the entire vacation was the anticipation of going on a trip. The excitement the night before as you couldn’t sleep, the energy you had packing for the journey, and the planning of events beforehand. In talking to colleagues, retirement is very much like that. You plan new hobbies to try, new events to attend, and new places to see. When you raid your retirement fund, you put all that in jeopardy. You have to slide back the day you hope to retire. It’s devastating and demoralizing.

Sometimes you can’t help it. A lot of people who hoped to retire last fall are continuing to work because their retirement investments fell. I’ve chatted with at least one person who thinks they’ll have to work a few more years just to get back because they were over-exposed to equities. In his case, he was too aggressive and he came up craps on the roll of the dice. With so many other potential problems, why make things harder for yourself by stealing early from the cookie jar.

You need that money if you ever want to stop working. As Gary Bonner, a contributor of BFP, once wrote in Making a Living? Or, Making a Life?: “no one has ever laid on their death bed saying ‘I wish I had spent more time at the office.’” We want to stop working as much as we want to have a new television, or a new pair of shoes, or a bigger house. However, every single time you take money from your retirement fund, you’re extending the time you have to spend at the office.

$1 today is ~$22 in forty years. At a conservative 8% annual appreciation, every dollar you take out now is worth $21.72 in forty years. Twenty-two bucks may not seem like a lot but you have to think of it as a multiple of twenty-two. $100 is $2,200. $1,000 is $22,000. Is the sacrifice worth it? In most instances, no. There is no clear cut answer in the rent. vs. buy question. With so many different situations and scenarios, you can’t clearly say that one is vastly superior to the other. But I can say, without a shadow of a doubt, you will need your retirement funds in retirement and every dollar you take today will steal $21.72 from you in forty years. That’s just math.

Like everything else, it’s not black and white. If you have a major medical emergency and it’s exhausted your insurance and your emergency fund, you won’t have any choice. You will have to raid your retirement fund. My opinion is that it better come to that and I will have to be in very desperate shape before the retirement fund comes into play.

7 Deadly Sins of Personal Finance: Raiding Retirement from personal finance blog Bargaineering.com.

My tentative plan is to create a Will with Suze Orman’s system and then get it reviewed by a lawyer. By having at least a draft, you save a ton of money on the hours that would’ve been spent preparing it. What makes this even better is that the kit is free for a limited time (meaning I have no idea how long it’ll last).

Suze Orman recently gave away her Will & Trust Kit to viewers of her show and you can get it by following these instructions:

1. Go to SuzeOrman.com
2. Click on Will & Trust Kit in the left sidebar menu
3. Click on the orange Gift Code button and enter “people first“

And now you have access to the Suze Orman Will & Trust Kit absolutely free.

Account Signup

Account signup was a cinch and took about ten minutes (but I type fast). You’ll have to put in a bunch of information such as your name, SSN, DOB, gender, address, phone, marital status, spousal/partner information (if necessary), value of assets, and answer a few questions about trusts. The system is very TurboTax-like in how it asks you questions rather than simply listing choices.

Throughout the screens, there is audio that you can listen to for additional information and guidance. There each only a few minutes long and I found them very informative. If you’re not in the mood to listen (or you can’t), you can also read a transcript of the audio underneath it.

Handling Personal Information:
With respect to personal information, you have three options to choose from when you first setup your accountL

Complete Save & Protect: All information you enter will be automatically saved.

Limited Save & Protect: The program will not save Social Security numbers or Dates of Birth; all other information will be saved.

No Save & Protect: None of the information you enter will be saved. Each time you use the Kit you will need to re-enter all information.

I chose the second option, Limited Save & Protect simply because I don’t know how secure Suze Orman’s site is. I trust companies like H&R Block and Intuit with that information when I prepare my taxes because they’ve been around longer but I don’t know about Suze Orman (her site does appear secure and I honestly have no doubts about it). Plus, it saves everything except Social Security and Date of Birth, those are easy enough to enter as needed.

Revocable Trust or Only a Will?

Here’s where the “TurboTax” like walkthrough during account signup comes in handy. About 80% through, there’s a question as to whether you want a Revocable Trust or Only a Will? Knowing nothing else and had I been given no guidance, I probably would’ve chosen Only a Will because I don’t know what a Revocable Trust is. However, based on net estate value and guidelines for my state (and other factors), I’ll want a revocable trust in addition to a Will (anyone with over $30,000 of assets in Maryland is recommended to use a revocable trust).

Documents

Following the account signup, I was presented with a list of four documents I’ll need to produce:

• Advanced Directive & Durable Power of Attorney for Health Care
• Revocable Trust
• Will
• Financial Power of Attorney

I don’t know how many documents there are in total but I suspect Advanced Directive & Durable Power of Attorney for Health Care, Financial Power of Attorney, and Will are shown to everyone; Revocable Trust is shown to those who feel their individual characteristics warrant it. (plus, there’s a menu up top and there isn’t much room for any other documents to be listed!)

Will

For the sake of brevity, I’ll only discuss how the Will part works but the creation of the other documents works in the same way. When you click on the Will tab you’re directed to a page that lists all the pieces of a Will. The will consists of the following five parts:

1. Will – “A will is a legal document that states where you want your assets to go after your death and what you want done with your remains.”
2. Letter to Your Executor – “If you want certain items of personal property to be given to specific people, you can simply write a letter to the Executor of your will about your wishes.”
3. Final Instructions Form – “Use this form to let your loved ones know your wishes regarding your funeral, burial, or cremation.”
4. What to Do When Someone Dies Checklist – “Review this checklist now and when the unexpected occurs you’ll know the necessary steps to take to make the proper final arrangements for your loved one.”
5. Funeral Cost Worksheet – “Funerals and burials are among the most expensive purchase older people make. When the time comes to make funeral arrangements, if you only contact on funeral home you may pay too much for services. To help you compare the costs of up to three different funeral homes, we have provided this calculator.”

As you can see, some of the documents are documents you need to create while others are simply useful tools. The will creation menus were quite thorough in what it asked from whether you wanted a traditional Will or a blended family will, how you wanted your remains treated (cremation/burial/donation? embalming?), selecting an executor & an alternate, cash gifts, personal property gifts, contingent beneficiaries, and a few other questions.

After about a dozen questions and ten minutes, I had a draft version of my will. The draft was slick and took advantage of the fact that I was viewing it in a browser because all the important parts were hyperlinked. I could click on it and change information as needed.

But you’re not done… for it to be valid, you need to print it, sign it, notarize it with a witness, and do all the legal legwork involved in making it a valid legal instrument. However, I bet you it’s a lot cheaper to start with this draft than it would be to sit with an estate lawyer and have them ask you these questions. Here’s the first paragraph of the product’s disclaimer (emphasis theirs):

This product provides information and general advice about the law, but laws and procedures change frequently and they can be interpreted differently by different people. For specific advice geared to your specific situation, consult an expert. No book or form of other published material is a substitute for personalized advice from a knowledgeable lawyer licensed to practice law in your state. THEREFORE, CONSULT YOUR ATTORNEY.

So, I would start with this and then talk to an estate attorney to finalize. Heck, it’s free and lawyers are never free.

Suze Orman’s Will & Trust Kit Review from personal finance blog Bargaineering.com.