Roth IRA Account Explained

This Foundation post is dedicated to what I consider the best retirement weapon available – the Roth IRA account. The Roth IRA was championed by Senator William Roth of Delaware and created with the Taxpayer Relief Act of 1997, signed by President Clinton. The primary tax benefit of the Roth IRA, at least the one most lauded, is that your account’s appreciation and earnings are tax free. The tradeoff is in the contributions, which are not tax-deductible.

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.

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Unlock Your IRA: How to Cash Out an IRA Without Penalty

Unlock Your IRAIn general, cashing out an IRA is a bad idea. That being said, and I think I’m contractually obligated to mention that as a personal finance blogger, there are times when you simply have no choice. When faced with certain decisions, you might have to make a few that you know are bad for the long term but necessary for the short term. To cash out an IRA may be one of them.

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.

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 Personal Finance 

Why Naming Beneficiaries Is Important

Editor’s Note: How many times have you opened an account and skipped over the beneficiaries section? I know I do all the time. In fact, any one who has an ING Direct account has skipped over that section because that section doesn’t exist! In this article, Jeff Rose, a CFP in Illinois, shares a chilling tale of how skipping this section could have disastrous consequences you never envisioned.

Three sons were to be equal beneficiaries from their widowed mom’s estate. She had a modest home, about $100,000 in CD’s at the local bank, and $250,000 in an annuity. The mother named the eldest son executor of the estate. The family had always gotten along and the mother never imagined there would be an issue settling her estate, especially since her wishes were spelled out in the will – each son would get an equal third.

Sounds straight-forward enough, right? Wrong.

One minor item was overlooked and it proved to be the catalyst that drove the three surviving brothers apart.

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Three More Reasons To Not Rollover Your 401(k)

401(K)When you leave your job, one of the decisions you may have to make is whether or not you should rollover your 401(k) into a Rollover IRA. The process of rolling over your 401(k) is easy, so don’t let that be a deterrent, and the benefits of rolling over your 401(k) can be pretty substantial. However, it’s not always correct to rollover your 401(k). It was the subject of my Devil’s Advocate post on why you shouldn’t rollover your 401(k) but I thought of three more excellent reasons why you might want to avoid, or at least put off, rolling it over.

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Saver’s Credit: Retirement Savings Contribution Tax Credit

Hand Painted Piggy BankReader TTFK sent me an email this morning about the “Credit for Qualified Retirement Savings Contributions,” also known as the Saver’s Credit, claimed on Form 8880, a tax credit I haven’t covered recently. The Retirement Savings Contribution tax credit is a tax credit, up to $1,000 ($2,000 for joint filers), for contributions you make into qualified retirement accounts. It’s a great incentive for you to save towards your retirement if you’re able to and those who earn less than $26,500 ($53,000 married filing jointly) qualify for some of the tax credit. Unfortunately, if you earn more than that, you don’t qualify.

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Basics of Retirement Investing

Seated Stock TradersFive years, on the first day of my first “real” job, the HR administrator of my company handed me a folder labeled XYZ Company Pension & Retirement Plan. Inside the folder was a description of the company’s pension and 401(k) package, two “things” that meant almost nothing to me. I knew what a pension was but had no clue was a 401(k) was, but the folder seemed to have enough information in it to help me start my own 401(k) company if I wanted to. I made some good decisions about my 401(k), mostly by luck (I put 40% of my money into emerging markets, which was a good choice but I did it for a bad reason – I had no reason!), but you shouldn’t have to.

Retirement investing is not rocket science, it’s just confusing with all the acronyms and the taxability and everything else. The basics, which we’ll cover in this Foundation series article, once you unravel the confusion, are fairly straightforward.

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Ten Easy Year-End Tax Tips

Year-End Tax TipsHave you thought about your taxes lately? Probably not, but this month is probably one of the most important months in tax planning because it’s the last time you’ll have an opportunity to effect any meaningful change to your taxes next year. Once December ends, 2008 is essentially frozen and your taxes will be what your taxes will be. So, what sorts of tax moves should you consider making?

Sell your stock losers. Any losses you realize from the stock market, that aren’t offset by gains, can be deducted from your regular income, up to a limit of $3,000 a year. If you’ve been thinking about dumping some losers, now’s the time to do it. If you have more than $3,000 in losses, you can carry those forward indefinitely (until death). More advanced traders may also consider tax loss harvesting as an option as well.

Donate to your favorite charities. Times may be tough but they’re even tougher for charities and philanthropies, who rely on generous contributions to stay in operation. Consider donating money, goods, clothes, your car, anything – to one of your favorite charities so that they can stay operating through these difficult economic times. If you itemize your deductions, you can deduct contributions from your regular income.

Delay bonuses and income. If you can swing it, try to push any additional payments until the new year. If you are paid this year, you have to pay taxes on it in a few months. If you are paid next year, you won’t have to pay taxes on it for an extra year. If your employer withholds taxes on your bonus payments, this is a less valuable strategy. 🙂

Prepay state and local taxes. This one is a little tricky, if you don’t think you’ll be subject to the AMT, consider prepaying your state and local taxes. State and local taxes are federal tax deductions so prepaying them today means you can deduct them today as well.

Accelerate other deductible expenses. If you have a mortgage, consider paying next month’s payment this month. If you pay it this month, you can deduct the interest payment against this year’s income. If you pay for it on January 1st, it’ll have to wait until you file 2009 taxes. This is true of any deductible expenses you may have from student loan debt to medical to your real estate taxes. If you want, you can make the payment with a credit card and then pay off the credit card next month and still have it be deductible for 2008.

Use up your $12,000 gift exclusion. Each year, you are allowed to give $12,000 to someone else tax-free. If you give more than $12,000, then you are subject to what is known as the gift tax. It’s a little backward but it’s a page out of the estate planning book since heirs to an estate are often taxed on that estate. Anyway, if you were planning on giving someone a very generous gift, don’t forget to to do it. Next year the limit rises to $13,000 so you can give $25,000 to someone within a week and avoid the gift tax ($12,000 on December 31st, $13,000 on January 1st). If you are married, you could give someone $50,000 ($25,000 from each spouse).

Beware buying into mutual funds with capital gains distributions. Mutual funds buy and sell stuff all year, then distribute a bit of that at the end of the year. What you won’t want to do is buy into a mutual fund that is set to make a year-end capital gains distribution because you’ll be immediately taxed on that distribution. Imagine a mutual fund that costs $100 a share. You buy it and the next day it makes a $1 per share distribution, lowering the cost per share to $99. You just bought the thing and already are on the hook for $1 per share in taxes. Boo!

Contribute to your retirement. If you aren’t maxed out on your 401(k), or similar, plan, consider doing it because each dollar contributed is entirely deductible. The 2008 contribution limit for your 401(k) is $15,500 ($20,500 if you’re 50 or greater). Another good idea is to contribute towards your IRAs but you have until April 15th to accomplish that.

Get married. Your tax filing status is based on your status as of December 31st, 11:59 PM. If you were married on December 31st, you’re considered married for the year. If that helps your tax situation, you might want to consider it. 🙂

Get everything ready. If you’re due a refund, try to get all your ducks in a row as soon as possible so the government will mail you your refund check ASAP. All you’re really waiting for is the official W-2 from your employer, which they are required to mail out by January 31st, and you should be ready to hit the e-file button.

(Photo: thetruthabout)

 Devil's Advocate 

401(k)’s and IRA’s Are For Suckers

Devils Advocate Logo
This is a Devil's Advocate post.

This Devil’s Advocate comes straight at you and assails the one last bastion of hope for a prosperous retirement – 401(k)s and IRAs. While it probably doesn’t feel that way with the volatility in the market, conventional wisdom says that the best way to save for retirement is tax-advantaged accounts like 401(k)’s and IRAs. The power of having that money grow tax free trumps all other options.

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