Four Spring Tune-up Tips for Your IRA

If you have an IRA, or 401(k) retirement plan, you need to review your accounts and make sure it is in "top shape." Wallet Pop.com put together a list of spring tune-up tips for your IRA; you can check out a snippet from their article below or click here for the full list.

1. Total Up How Much You are Saving for Retirement, Then Figure out How to Add More

Get out the calculator and add up how much is going into your retirement accounts every month, including the amount that you are putting into your 401(k) at work and the interest that is growing on your IRA accounts from former employers or self employment. Then look for ways to up the ante. Here are some painless suggestions:

Payroll taxes are reduced by 2 percentage points in 2011. Put that 2% of your income into your savings instead of your pocket.

Save your tax refund.

Make sure you're getting the maximum match from your employer.

2. Consider What Happens When your Life Meets your Money

What would happen if you or your spouse left this life prematurely?

Update your will -- or make one.

Review your beneficiaries. Look at all your accounts, including ones you've had for awhile. You don't want to leave any money to your ex-spouse -- or even to your parents, even though you love them.

More here

Five Rules For Inherited IRAs

Setting up an IRA for yourself can be confusing. However things can get even more complicated when you inherit an IRA. However, as this article from Forbes.com explains, with the right knowledge a family can stretch out the tax breaks of an IRA for decades. They even outline five basic rules for heirs who have inherited an IRA. I have included a few of the rules below, but if you anticipate inheriting a retirement account then I highly recommend going over the full list at Forbes.com.

1. First, do no harm.

If you inherit a retirement account, don't do anything until you know exactly what rules apply. With your own IRA you can take the money out and redeposit it in another IRA within 60 days without penalty. Not so an inherited IRA. All movement of money must be from one IRA custodian to another--be sure to specify a "trustee-to-trustee" transfer. Moreover, unless you've inherited from a spouse, you must retitle the IRA, including the original owner's name and indicating it is inherited, e.g., "Daddy Warbucks, deceased, inherited IRA for the benefit of Little Orphan Annie, beneficiary."

If two or more people are named as beneficiaries, ask the custodian to split it into separate inherited IRAs. That avoids investment squabbles and allows a longer stretch-out for the younger heirs.

2. Beneficiary forms rule.

The beneficiary form on file with the custodian of an IRA controls both whoever inherits the IRA and its ability to be stretched out. If someone other than a spouse is named as heir, they must begin taking distributions from the account by Dec. 31 of the year after inheriting, but they can draw these out over their own expected life spans, enjoying decades of income-tax-deferred growth in a traditional IRA or tax-free growth in a Roth IRA. To give your heirs maximum flexibility, name both primary and alternate individual beneficiaries--say, your spouse as primary and kids as alternates or your kids as primary and grandkids as alternates. Your primary beneficiary then has the option of "disclaiming" or turning down the account, enabling it to pass to the younger alternate.

Continue reading at Forbes.com…

Saving For Retirement On a Part-Time Salary

These days, many Americans assume that saving for retirement is something that only older taxpayers should worry about. However, as I have explained before, you are never too young to begin planning for your future.

Earlier in the week, a college student working only part-time hours wrote into Money Magazine asking if they should start contributing to an IRA. Check out the authors answer below courtesy of CNN.com.

Yes, you almost certainly can. And if you can swing it, you probably should, since contributing to an IRA early in life can be an excellent way to lay the foundation for a more secure financial future.

That's true, by the way, not just for someone in your position, but for high school and college grads starting new jobs, not to mention students with summer gigs.

Although the rules governing IRA contributions can get a bit convoluted (as this IRS publication makes painfully clear), the gist is that as long as you have earned income, you can contribute as much as you make in a given year up to a maximum of $5,000. People 50 and older can do an extra $1,000 catch-up contribution, but that's not going to apply to many college students.

So, for example, if you earn $5,000 or more from your part-time work, you can salt away the max. If you're paid, say, $3,000, then you can contribute up to three grand.

Just to be clear, the dollars you contribute to an IRA don't have to be the same dollars you earn. Let's say, you earn $5,000, but after expenses manage to put only $2,500 into the IRA. If you can come up with an additional $2,500 from other sources, such as savings or a cash infusion from mom, dad or a kind relative, you can throw that money into your IRA account to get you to the $5,000 limit. Any parents looking to help their kids parlay a summer job into a leg up on their eventual retirement security may want to keep this in mind.

Continue reading at CNN.com…

Why You Shouldn't Convert to a Roth IRA

From the Wall Street Journal:

As 2009 came to a close, financial advisers geared up for an expected flood of clients looking to convert their traditional individual retirement accounts to Roth IRAs this year.

Conversions are indeed way up from previous years, thanks to the elimination of the income limit for those wanting to make the switch. But many clients who had expressed interest are deciding not to convert.

Conversion is attractive mainly because withdrawals from Roth IRAs, unlike those from traditional IRAs, are tax-free.

Moreover, Roth IRAs also have no withdrawal requirements; traditional IRAs require investors to begin making withdrawals at age 59½. Several brokerage firms saw conversions by their clients quadruple in the first quarter of 2010, compared with the year-earlier quarter.

However, financial advisers are finding that most clients wouldn't benefit, on balance, from a conversion. Here are the main reasons why:

1. The tax bite is too big.

Clients often come to advisers asking about the Roth IRA conversion opportunity without realizing the immediate tax implications: They will have to pay income tax on any money they move out of a traditional IRA into a Roth account.

Continue reading at WJS.com…

Get Money Out of Your IRA Early. No Penalty. No Problem.

From MoneyWatch.com:

As April 15th approaches, CBS MoneyWatch is publishing daily tax tips. See the full list here, and be sure to check back frequently for the latest advice from our experts.

When it’s time to take money out of your 401(k) or IRA, the magic number is 59 ½. That’s the age at which you can withdraw money from a retirement plan without handing the IRS a 10% bonus on top of the regular taxes you will owe. Everyone knows that, right?

Judging from the mail I get, everyone does indeed. But what not everyone knows is that the age 59 ½ rule has more loopholes than Tiger Woods’ marriage contract. For most practical purposes, the penalty-free retirement age in a 401(k) is 55, and it can be lower still for an IRA. Early retirement, medical emergencies, job loss, early retirement, college education, a home purchase-all qualify as exceptions that can make your retirement money more available than you thought.

Here’s how it works:

Separation from service after age 55 (401(k) only) your 401(k) money becomes yours without a penalty if you leave your job after age 55. It doesn’t matter whether the departure was your idea or your employers’, or whether you permanently go fishing at that point or find another job the next day. You just need to “separate” from your employer.

Yes, you still have to pay regular income taxes on the money you pull out, but you’d owe those no matter when you took the money. Just be careful not to roll the money over into the 401(k) at your next job (if there is one) or into an IRA. Either move would put you back on the penalty track.

Roth 2010: Should You Convert?

Last week I posted this entry discussing changes to IRA’s in 2010. A few days later an associate of mine sent me a link to this article on NCPA.org taking a more detailed look at who would benefit from a Roth IRA conversion. Like any major financial decision, converting your IRA is a big step and you should probably talk to a financial advisor before making the conversion.

Who Would Benefit from a Roth IRA Conversion?

Ostensibly, the benefit of conversion is that the taxes are paid today at a known rate, instead of in the future at an unknown and possibly higher rate. But deciding whether to convert a traditional IRA to a Roth IRA depends largely on the ability to pay the taxes that are due when the conversion takes place. For 2010 conversions, individuals have two years to pay the income tax due. A Roth IRA conversion is ideal for anyone who:

Can pay the taxes using money from nonretirement funds.

Expects that their federal income tax rate when they retire will be much higher than it is today - because their income will be higher and the burden of government will be higher.

Faces little to no federal income tax burden today - so that a conversion would cost very little to complete.

Taxes on a Roth Conversion.

Suppose you convert a traditional IRA to a Roth but take a distribution from the traditional IRA account in order to pay the taxes. Is it worth it? That depends on your current marginal tax rate, income level and how many years you are from retirement. Consider that a distribution from the IRA to pay taxes on the conversion is subject to a 10 percent penalty in addition to federal income taxes if you have not reached 59-and-one-half years.

With these considerations in mind, the table shows the cost of converting $25,000 from a traditional IRA to a Roth IRA and using money from the account to pay the taxes.

Why It May Pay To Convert to a Roth IRA

From the Wall Street Journal:

Investors and financial advisers are preparing to take advantage of a new tax law that makes it easier to gain access to Roth IRAs—even if it means breaking a sacrosanct rule about Roth conversions.

Starting, Jan. 1, the $100,000 income limit disappears for converting traditional individual retirement accounts and employer-sponsored retirement plans to Roth IRAs, one of the biggest changes on the IRA landscape in years. Roths, of course, have long been viewed as one of the best deals in retirement planning; after investors meet holding requirements, virtually all withdrawals are tax-free.

Just how many investors will make the leap is unclear. Converting to a Roth can be expensive; it requires paying income tax on all pretax contributions and earnings included in the amount converted. What's more, financial advisers have long argued that converting makes sense only if an investor can pay the tax from funds outside the IRA itself - an admonition that seemingly limits the strategy to the very wealthy.

That said, some financial advisers say growing numbers of their clients are leaning toward a Roth conversion, even if they have to tap their traditional IRAs to pay the taxes. The primary reasons: new, contrarian analyses of taxes and conversions—and a desire to gain more control over nest eggs in the years ahead. With a traditional IRA, investors must begin tapping their accounts after reaching age 701/2, which increases taxable income. With a Roth, there are no required distributions, giving retirees more flexibility in managing their investments and cash flow.

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Save on Your Taxes with New IRA Rules

With new rules on IRA’s, there are even more ways for you to reduce your tax liability. MainStreet.com published an article on how you can take advantage of these new laws to legally lower your tax bill. I’ve included a section of their post below, but the entire story can be read here.

A change in tax rules, which will allow savers at any income level to take advantage of Roth IRAs, could mean a lower tax bill for you come January.

Currently, retirement savers who make more than $120,000 including certain deductions can't convert their funds to a potentially tax-advantaged Roth IRA. Traditional IRAs and 401(k) funds are taxed on their way out (when you take a distribution), while Roth IRAs are funded on the way in, with after-tax money. The distributions are then tax-free.

As of January 2010, the income cap preventing those with a modified adjusted gross income of more than $120,000 a year (or $176,000 or more if you’re married and filing jointly) from converting their retirement savings to a Roth IRA will be lifted, according to a report in The Wall Street Journal.