New Roth IRA Rules Postpone Income Reporting
On January 1, 2010 the rules for converting a retirement account to a Roth IRA are changing. Currently, people can only convert their accounts to a Roth IRA if they have a modified adjusted gross income of $100,000 or less and must not be filing their taxes as married filing separately. Under the new rules, people will be able to convert their other IRAs to a Roth regardless of their income levels. In addition, their is an option that allows report half the income from your conversion in 2011 and the other half in 2012 rather than reporting all of it in the year of conversion as required under the current rules.
Recession over, what now?
People are starting to say that the recession is over, or finishing up. So if it really is over, what should we do with our finances? Even though consumers are starting to spend some money and again feel comfortable with their money, there is still a long way to go before we are at the employment rates we had before this mess started. So how can we keep something like this from happening again?
The first thing that people need to remember and continue working on is maintaining a small savings. Traditionally Americans have not been savers, however, if we had more savings prior to the economic meltdown, the unemployment troubles and foreclosures would not be as bad.
The second thing to consider is divesting their portfolios. Social security isn’t enough for people to retire on, they need money of their own if they are going to live comfortably during retirement unless they plan on working at least part time for their entire life. Thus, the earlier you start saving for retirement the better. IRAs and 401ks are great ways to start saving towards retirement. However, as we have learned from the financial situation these past few years, nothing is sure. Stocks may go up but they may also go down. Thus, you need to put your money not just in stocks, but also have some in bonds, mutual funds, and other investments such as a family home.
Planning for Retirement
Many people just starting out in the workforce might not be thinking about retirement planning just yet, however, the earlier you start planning and saving for retirement the better off you will be.
Even if you start out putting only a few dollars a week into an IRA or 401k it can still make a difference when compounded over forty or fifty years. The website below allows you to calculate how much you would have when you retire if you put away a certain amount of money each year for retirement. For example, suppose you start with $500 in your retirement account and put in an additional $4,800 a year (only $400 a month) for 40 years. At the end of 40 years when you are ready to retire, the money would grow to $806,000 when you earn an annual interest of 6% on the money.
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Play around with the calculator and see how much you need to invest each year to have what you think you will need to live on when you retire.
Exploring Individual Retirement Accounts
1. Who can contribute?
IRAs are a great way to save towards retirement. Taxpayers younger than 70 1/2 on December 31st are eligible to contribute to an IRA.
2. How much can I contribute?
If you do not have a retirement plan with your employer, you can put $5,000 a year in an IRA ($6,000 if you are 50 or older) into a traditional IRA as long as you make at least that amount of taxable income during the year. Contributions can be made for a taxable year any time from January 1st of that year to April 15th of the following year when taxes are due.
3. What’s the benefit to having an IRA?
IRAs are a great way to save towards retirement. Traditional IRAs allow people to save money with pretax dollars. Roth IRAs allow people to put money into an account with after tax dollars and the money grows tax free. That means that you won’t have to pay taxes on the interest that accrues on your investment. Another great benefit of an IRA is because it is a way to save for retirement the money in your IRA will be protected from bankruptcy.
4. When can I get my money out of the IRA?
Money put into an IRA generally can’t be taken out before you reach 59 1/2 years old without a penalty. However, there are a few instances where the IRS will kindly give you a pass to use the funds before reaching before reaching 59 1/2 without a penalty, these include:
* distributions for the cost of medical insurance while unemployed,
* distributions to buy a home for first time home buyers (this is limited to a distribution of $10,000),
*distributions to pay for a qualified higher education for your education, your children’s education, or your grandchildren’s education.
5. How do I get an IRA?
Talk to someone at your local bank or check out opening an account online through a trading company like Scottrade or Sharebuilder. The process is very simple and only takes a few minutes. Once you set up your IRA you can use the money deposited in the account to invest in stocks, bond, mutual funds or just leave it in your money market account to accrue interest.
Beat the Taxman
It’s getting closer to the end of the year which means the end of the tax year as well. So how can I make a few last minute changes to lower my tax debt?
Charitable Contributions
For those with a little extra cash, this is the best time to make charitable contributions. Not only is that a great way to help others out in need this holiday season, but 50% of the charitable contributions made can reduce your income. The best part, Uncle Sam doesn’t care what time of year you made the contribution. Thus, you can use your money all year long and make a charitable contribution on December 31 and still get the same reduction in income as the person who made a contribution back in January or February. Thus, you get the use of the money for longer but still get the benefit of a charitable contribution.
IRA Contributions
Contributions made to a traditional IRA are another great way to reduce your tax bill. <!– /* Font Definitions */ @font-face {font-family:”Cambria Math”; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:-1610611985 1107304683 0 0 159 0;} @font-face {font-family:Garamond; panose-1:2 2 4 4 3 3 1 1 8 3; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:647 0 0 0 159 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:”"; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:11.0pt; mso-bidi-font-size:10.0pt; font-family:”Garamond”,”serif”; mso-fareast-font-family:”Times New Roman”; mso-bidi-font-family:”Times New Roman”;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-size:10.0pt; mso-ansi-font-size:10.0pt; mso-bidi-font-size:10.0pt;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} –> Individuals age 49 and younger are allowed to contribute up to $5,000 a year and individuals 50 and older are allowed to contribute up to $6,000. These contributions to a traditional IRA are tax free. THus, the money you put into the IRA reduced your yearly gross income. However, you will be taxed when you take the money out of the IRA upon retirement.
Unreimbursed Business Expenses
If your job requires you to entertain clients, keep the receipts. Job related expenses like this should be documented, including who attended the event, what the event was for, and any business discussed. If your company doesn’t reimburse you for these expenses, you can deduct 50% of the expense from your taxes.