The end of the year is a good time to review your personal finances. What are your financial, business, or life priorities for 2012? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you can use to realize them. Also, consider these year-end moves.

1. Think about adjusting or timing your income and tax deductions.

If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2011 until 2012, this decision can bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.

2. Think about putting more in your 401(k) or 403(b).

In 2011, you can contribute up to $16,500 per year to these accounts, with a $5,500 catch-up contribution also allowed if you are age 50 or older. Has your 2011 contribution reached the annual limit? There is still time to put more into your employer-sponsored retirement plan.

The IRS has announced 2012 contribution limits for 401(k) and 403(b) accounts, most 457 plans, and the federal government’s Thrift Savings Plan (TSP). The annual contribution limit for each of these retirement plans will be $17,000 next year; the catch-up contribution again maxes out at $5,500.

On a related note, SIMPLE IRA contribution limits won’t change next year. Up to $11,500 can be contributed to a SIMPLE IRA in 2012, $14,000 if you are 50 or older.

3. Can you max out your IRA contribution at the start of 2012?

If you can do it, do it early – the sooner you make your contribution, the more interest those assets will earn. (If you haven’t yet made your 2011 IRA contribution, you can still do so through April 17, 2012.)

The IRS has decided that IRA contribution limits won’t increase next year. In 2012 you will be able to contribute up to $5,000 to a Roth or traditional IRA if you are age 49 or younger, and up to $6,000 if you are age 50 and older (though your MAGI may affect how much you can put into a Roth IRA).

The IRS has also boosted the income limits for a tax deduction for traditional IRA contributions. If you participate in a workplace retirement plan in 2012, the MAGI phase-out ranges will be $58,000-68,000 for singles and heads of households and $92,000-112,000 for couples. (In 2011, those phase-out ranges are set $2,000 lower.) If you own an IRA, you aren’t covered by a workplace retirement plan, and you are married and filing jointly, the 2012 phase-out range is $173,000-183,000 based on a couple’s combined MAGI, hiked by $4,000 from 2011.

4. Should you go Roth between now and the end of 2012?

While you can no longer divide the income from a Roth IRA conversion across two years of federal tax returns, converting a traditional IRA into a Roth before 2013 may make sense for another reason: Federal taxes might be higher in 2013. Congress extended the Bush-era tax cuts through the end of 2012; that sunset may not be delayed any further.

Some MAGI phase-out limits affect Roth IRA contributions. These phase-out limits have been adjusted north for 2012. Next year, phase-outs will kick in at $173,000 for joint filers and $110,000 for single filers. (The 2011 phase-outs respectively kick in at $169,000 and $107,000.) Should your MAGI prevent you from contributing to a Roth IRA at all, you still have a chance to contribute to a traditional IRA in 2012 and then roll those IRA assets over into a Roth.

Consult a tax or financial professional before you make any IRA moves. You will want see how it may affect your overall financial picture. The tax consequences of a Roth conversion can get sticky if you own multiple traditional IRAs.

5. If you are retired and older than 70½, don’t forget an RMD.

Retirees over age 70½ must take Required Minimum Distributions from traditional IRAs and 401(k)s by December 31, 2012. Remember that the IRS penalty for failing to take an RMD equals 50% of the RMD amount.

If you have turned or will turn 70½ in 2011, you can postpone your first IRA RMD until April 1, 2012. The downside of that is that you will have to take two IRA RMDs next year, both taxable events – you will have to make your 2011 tax year withdrawal by April 1, 2012 and your 2012 tax year withdrawal by December 31, 2012.

Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your modified AGI plus 50% of your Social Security benefits surpasses a certain level, then a portion of your Social Security benefits become taxable. For tax year 2011, Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.

6. Consider the tax impact of any 2011 transactions.

Did you sell any real property this year – or do you plan to before the year ends? Did you start a business? Are you thinking about exercising a stock option? Could any large commissions or bonuses come your way before the end of the year? Did you sell an investment that was held outside of a tax-deferred account? Any of these moves might have a big impact on your taxes.

7. You may wish to make a charitable gift before New Year’s Day.

Make a charitable contribution this year and you can claim the deduction on your 2011 return.

8. You could make December the “13th month”.

Can you make a January mortgage payment in December, or make a lump sum payment on your mortgage balance? If you have a fixed-rate mortgage, a lump sum payment can reduce the home loan amount and the total interest paid on the loan by that much more. In a sense, paying down a debt is almost like getting a risk-free return.

9. Are you marrying next year, or do you know someone who is?

The top of 2012 is a good time to review (and possibly change) beneficiaries to your 401(k) or 403(b) account, your IRA, your insurance policy and other assets. You may want to change beneficiaries in your will. It is also wise to take a look at your insurance coverage. If your last name is changing, you will need a new Social Security card. Lastly, assess your debts and the merits of your existing financial plans.

10. Are you returning from active duty?

If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Review the status of your employee health insurance, and revoke any power of attorney you may have granted to another person.

11. Lastly, have you reviewed your withholding status?

-It may be time for a withholding adjustment if…
-You tend to pay a great deal of income tax annually.
-You tend to get a big refund each year from the IRS.
-You recently married or divorced.
-A family member recently passed away.
-You have a new job that pays you much more than your old one.
-You opened up your own business or started freelancing.

12. Don’t delay – get it done.

Talk with a qualified financial or tax professional today, so you can focus on being healthy and wealthy in the New Year.

Bill Losey, CFP®, CSA, America’s Retirement Strategist®, is a highly sought-after advisor, retirement authority, thought-leader, author and national TV personality. The former resident retirement expert on CNBC’s “On the Money”, Bill has over 20 years experience in the financial services industry and is a Certified Financial Planner practitioner, a Certified Senior Advisor and Certified Retirement Coach. For more information please visit, www.BillLosey.com.

It seemed like a good deed at the time.

Back in March, I helped my sister-in-law, Wendy, set up her first Roth IRA. She knew I was keen on retirement saving, and she asked why a Roth IRA was any better than a savings account. I explained that an IRA offered a tax advantage—you never pay taxes on money withdrawn from a Roth after age 59.5—plus you could invest in assets like stocks and bonds that would likely outperform a savings account over time.

Sounded good to her, I guess, because I convinced her to take $5000 from her savings account and put it into a Roth IRA. She chose a socially responsible investing fund specializing in large US companies. I figured this was fine to start, since the most important variable at this point is her savings rate.

Naturally, I patted myself on the back for helping a young person take that scary first step into investing for retirement. Oh, and I told her not to check her balance every day, because investors who peek a lot tend to make impulsive moves. She followed this advice diligently and didn’t check until this month, when she sent me an email:

“I happened to look at my money when I was on the site changing my address. Why am I supposed to put more in there when I have actually lost almost a thousand dollars in just a few months?”

Oops. Wendy knew perfectly well that investments fluctuate, but I failed to explain—if this can even be explained—that there’s a big difference between reading a book about investing and actually seeing your own money disappear.

So, Wendy, the rest of this column is for you. I’m going to try to convince you that not only is it normal for your investments to take a dive sometimes, it’s actually good news.

Fall in love with a bear (market)

The day Wendy sent that email was the day the S&P 500 hit bear market territory: down 20% from its most recent high. That evening, I turned on my favorite financial podcast, NPR’s Planet Money, and heard reporter Jacob Goldstein say this:

“In the long run, the decline may be good news for a lot of ordinary people: steady, long-term investors who contribute part of every paycheck to a 401(k), and who aren’t planning to retire anytime soon. The bear market means that something you buy every month — stocks — just got a lot cheaper. And every dollar you sock away in your retirement fund today gets you a bigger share of all those future profits.”

Now, I know this sounds like a pitch from a stockbroker. “Don’t worry about that money I lost last month. Send me more money!” But Goldstein is no Wall Street apologist. He’s right, and I’d like to try and show why.

Let’s run some numbers. Say I have $100 a month to invest. Here are two things the market might do in 2012:

Which would you rather see? The first one, right? Your money steadily grows, and the market is up 11% at the end of the year—a good year for stocks. You put in $1200 over the course of the year and end up with $1264 at the end. Not bad at all.

But if you’re contributing every month, like most people, the stomach-churning Bumpy Ride graph is actually better news. For most of the year, you get to buy “on sale.” This time, our $100/month investor ends up with $1529!

I have no idea what’s going to happen to the stock market next year; I made these performance charts up. But that “bumpy ride” graph sure looks a lot like actual stock market performance over the past three years. During this time, I kept contributing every month. (Yes, my wife and I were lucky enough to remain employed.) And my portfolio, which includes both stocks and bonds, returned an average of about 10% per year.

By “average,” I mean my portfolio went into the toilet in 2008-2009, and I had the opportunity to buy shares at toilet prices. In the last couple of months, I’ve been happy to get to do it again.

Some questions and answers

If I were Wendy, I would raise three objections to this argument.

How do we know stock prices are going to go back up? Couldn’t the Dow drop to 5000 and stay there until I retire?

Yes, it could. It hasn’t happened in US history—yet—but it did happen in Japan, where the Nikkei 225 hit nearly 40,000 in 1989 and currently sits below 10,000. This is a good argument for international diversification: investors who own only US stocks are taking unnecessary risk if we turn into Japan. (If this scenario involves soba noodles and sashimi, however, I’m okay with it.)

What if every stock market has lousy performance for the next 30 years? Unlikely but possible, and a good reason to own assets other than just stocks. More on that in a minute.

Why do I have to keep my money in stocks while the market is going down? Couldn’t I sell my stocks, stick that money back into a savings account, and buy back in when stocks are cheap?

That would be great, wouldn’t it? It’s called market timing, and the evidence is overwhelming that nobody can do it reliably. Vanguard published an amazing simulation that lets you decide when you’re going to get in and out of the market—and then shows you, in nearly every scenario, how much money you would have lost by playing this game.

As Larry Swedroe, author of the Wise Investing series, puts it, “There is never a green light that goes off to let you know it is safe to get back in.” Losing money some of the time is part of investing, period.

Okay, I get it, but watching 20% of my money disappear is just too painful.

So own a hearty serving of bonds in addition to your stocks. “Even when you’re young, it’s okay to invest more conservatively,” says Tim Maurer, a certified financial planner and coauthor of the new book The Ultimate Financial Plan. “If your personality is such that if you put $5000 in the Roth and it goes down 20% in three months, and that is going to freak you out, there’s absolutely nothing wrong with adjusting your strategy.”

As a young investor, the best way to do this is to choose the mutual fund equivalent of high-water pants: a target-date retirement fund (TDF) designed for people older than you. TDFs hold a diversified mix of US stocks, international stocks, and bonds, so you don’t have to juggle or meet the minimum balances for multiple funds. As the fund gets closer to the target date, it holds more bonds and becomes less risky.

For example, say you’re 30 and hope to retire in 2046. Instead of choosing a 2045 target-date fund, which probably holds 90% stocks, it would be absolutely fine to choose, say, a 2020 fund holding 65% stocks. The fund company isn’t going to card you, and people on the street can’t see your mutual fund choices—unlike your pants.

Last week I sat down with a friend to help him establish his first Roth IRA. Right off the bat, I warned him that investments go up and down. “Uh, yeah, I know that,” he replied. But next time the market takes a dive, I expect to get the email anyway.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.

Photo: iStockphoto

Recently I wrote about how to simplify your portfolio down to three basic low-cost index funds. I assumed that a couple would have four retirement accounts: two 401(k)s and two IRAs.

Reader Jason asked why we couldn’t simplify this even further:

Why should you have an IRA and a work portfolio? Depending on your match situation should you go all in at the work 401(k) and get the best match?

Jason, you should always contribute enough to your 401(k) to get the maximum employer match. This is the only thing that literally everybody in the personal finance game agrees on. If we ever make contact with intelligent alien life, the first thing financial planners will ask the aliens is whether they’re maximizing their employer match.

But there are still plenty of good reasons to have an IRA in addition to your 401(k) (or 403(b), or 457). I spoke with two certified financial planners, and we came up with five good reasons.

1. Your 401(k) sucks

Too many 401(k)s are stuffed with expensive mutual funds designed to transfer money from your paycheck to a fund manager. Large companies tend to have great 401(k)s. Small companies? “I work with employees of many different types of companies, many of which are small,” says Dave O’Brien, a certified financial planner in Richmond, Virginia. “Your plan is probably expensive as all get-out.”

How can you tell? Each fund in your plan has an expense ratio, expressed as a percentage. If a fund’s expense ratio is 1 percent and you have $1,000 in it, you pay $10 this year in expenses. Over time, this adds up.

Your 401(k) is required to disclose this information, and more than 1 percent in expense ratios is too expensive. Good 401(k)s offer funds that charge less than 0.1%. Also, look for those five-letter mutual fund ticker symbols. “If there’s no ticker symbol, that’s a red flag,” says O’Brien, who also consults with companies designing 401(k)s. Missing tickers often indicates that your 401(k) is run by an insurance company rather than an investment company–and that often indicates high costs.

If your 401(k) stinks, you should still hold your nose, look for the best funds of the sorry bunch, and contribute up to the match. After that, though, put the next $5,000 into your IRA, says O’Brien. “Get the employer match, then put your money elsewhere,” he says. “Go for one of the low cost places—Vanguard, Fidelity.”

2. You can “tax diversify” by having both a 401(k) and a Roth IRA

Gallons of virtual ink have been spilled debating Roth vs. traditional IRA. Here are two typical arguments:

• -You should use a Roth IRA. Taxes are sure to go up and you should pay them now and get it over with.
• -You should use a traditional IRA. Take the tax break now before Congress changes its mind and starts taxing Roth IRAs.

Unfortunately, it’s impossible to know in advance which will be better unless you can foresee your own future and read the mind of Congress, which does not, technically, have a mind. “We don’t really know what is coming down the pike,” says Tim Maurer, a CFP with the Financial Consulate in Baltimore.

If you have a traditional (non-Roth) 401(k), as most people with 401(k)s do, it works like a traditional IRA: you pay no taxes when you put money in, only when you take it out. Combine that 401(k) with a Roth IRA, which works the opposite way, and you have a chocolate and peanut butter scenario: two great tastes, etc. Once you’re retired, you can withdraw the money in whatever way will make the IRS least flush: Roth first, 401(k) first, or some combination.

Furthermore, says Maurer, a Roth offers flexibility that a 401(k) doesn’t, because you can withdraw Roth contributions (but not interest) at any time without penalty. That money can be used for an emergency, college tuition, or a house down payment. He’s not saying you should steal from your retirement to buy these things, obviously. But if you need to take an early withdrawal, having a Roth to take it from is a lot better than being saddled with a 401(k) loan or a 10% penalty and tax bill. “The fact that the Roth exists, and that you can tap it if you absolutely need to, makes it a more attractive option,” says Maurer.

3. Your current 401(k) doesn’t allow incoming rollovers, and you have an old 401(k) (or two, or three) to consolidate

An incoming rollover is when you take money from an old 401(k) and put it into your current 401(k), with no penalty or tax consequences. Only some plans allow incoming rollovers, and it’s usually a bad idea. If you have a lousy, expensive 401(k) like Dave O’Brien warned you about, why would you put more money in there than you have to? This silo is rat-infested? Great, let’s store all our grain there!

But keeping money sitting around in old 401(k)s is also a bad idea, because those plans are probably just as expensive, and it makes it hard to understand your overall portfolio. You can do a direct rollover into an IRA, pay no tax, and have access to low-cost mutual funds at any major fund company.

Occasionally, however, an incoming rollover makes sense. “It’s a good idea if your new employer’s retirement plan offers you broad diversification, total transparency, and low cost,” says O’Brien. The quintessential example? The federal government’s Thrift Savings Plan ( TSP ), the country’s best 401(k), available to federal employees and members of the armed forces. “You can’t get better than TSP,” says O’Brien. And it allows incoming rollovers.

4. You’ve maxed out your 401(k) and still have more money to save

Self-explanatory, right? The maximum 401(k) contribution for a person under 50 is $16,500. For 50 and over, it’s $22,000. If you contribute more than this, you’re the LeBron of savings. You probably also make too much to contribute to a deductible IRA, so look into doing a backdoor Roth.

5. You might learn something

A 401(k) offers a default investment option and advice from the plan administrator. An IRA at a discount fund company offers neither. This is your opportunity to learn a little bit about investing. Curl up with a good book, like Burton Malkiel and Charles Ellis’s Elements of Investing, and 100 pages later, you’ll be pissed off at your overpriced 401(k) and ready to take charge.

I believe in you. So does Tim Maurer. “If we can’t be trusted with our own dollars,” he says, “we’re going to have a retirement without prosperity.”

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.

Tax season is over. It’s time for some portfolio spring cleaning. Let’s Roomba this sucker.

We’ve told you before why it’s important to roll over your old 401(k)s and other workplace retirement plans into an individual retirement account (IRA). It usually saves you a bundle on fees and expenses. It gives you access to better investment options. It makes your portfolio more comprehensible and easier to manage. And Mint can get you started. If you’ve worked a bunch of jobs (who hasn’t?) and left a mess of 401(k)s, 403(b)s, and SIMPLE IRAs in your wake, now’s the time to consolidate them. Get it over with.

Even if you’ve been diligent about rolling over old plans, however, you’re probably holding too many mutual funds. Walk into the office of a financial advisor—especially one who works on commission, and you’ll probably be talked into splitting your money among six, ten, twelve funds (I’ve also seen fee-only advisors do the same).

Why do they do this? One reason is that it reinforces the idea that investing is too complicated for you to handle yourself, and you should leave it to the experts who understand the difference between growth stocks and midcap stocks and international REITs and junk bonds. So when it comes time for annual rebalancing, you need to go back to the advisor. Bring your wallet.

Well, this is (to use a technical term) horse poop. We’re going to wean you down to the only funds you really need to get the job done.

Cut the clutter

Assuming you and your spouse work for The Man (i.e., you’re not self-employed), here’s what you should have in your bag of tricks when you’re done rolling over:

• Two workplace retirement plans (one for each spouse)
• Two IRAs (one for each spouse)

If you’re single, your investing life is that much simpler. But don’t you long for someone to practice asset allocation with in your twilight years? Don’t answer that.

Now it’s time to decide what mutual funds to put in those accounts. For recommendations, I turned to certified financial planner Allan Roth, author of How a Second-Grader Beats Wall Street and writer of the Irrational Investor blog. You only need three funds, says Roth:

• A US stock index fund
• An international stock index fund
• A total bond market fund

“Those are the three core funds that I get clients as much into them as possible,” says Roth. “These three funds are far more diversified than your 43 funds you have now.”

(If you’re not sure how much to put in stocks and how much in bonds, let me direct you to MintLife’s ever-useful column, The Lazy Portfolio.)

The office

Start with the workplace plans. You’re at the mercy of your pointy-haired plan administrator for fund selection here. A typical 401(k) has a terrifying list of funds with names that make German wine labels look comprehensible. All you care about, however, is what’s cheap. Every fund has an expense ratio which tells you the percentage of your money paid to the fund administrator every year. Look for the word “index” and find the stock and bond index funds with the lowest expenses.

Why? As Morningstar put it, “In every single time period and data point tested, low-cost funds beat high-cost funds.” Morningstar is the company that gives star ratings to mutual funds. In its own study, Morningstar found low expense ratios were a better indicator of success than a high star rating in 58 percent of the test cases. In a workplace plan, an expense ratio under 1% is acceptable, under 0.5% is good, and under 0.2% is awesome.

You don’t have to hold all three kinds of funds in your 401(k). My wife’s retirement plan, for example, has excellent stock index funds and a lousy bond fund. So we hold almost entirely stocks in that plan and bonds in our Roth IRAs. The key is to diversify overall, not within each account. “It’s the total portfolio that matters,” says Roth. This also makes it easier to hit the minimum opening balance for the best funds, which is often $3000 or more.

Inviting IRA to the party

For the IRAs, you have your choice of any funds offered by your mutual fund provider. Roth recommends the following Vanguard funds, but all major mutual fund companies have competing index funds:

What about ETFs? What about adding real estate, small-cap value, or commodities? “If you want to, you can specifically tailor your portfolio in various ways beyond those three funds. But you don’t have to,” says Mike Piper, author of many books on investing and writer of the Oblivious Investor blog. “Those three funds are really all you need.”

Now you can get back to the important things in life, like thinking of more “asset allocation” puns.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster. Mad props to his two favorite investing books, The Elements of Investing and The Bogleheads’ Guide to Investing, for inspiring this column.

Photo: WisDoc

For more than 10 years, a unique investment vehicle has given some people the chance to accumulate huge amounts of wealth. But until January of this year, many others didn’t have access to what may prove to be the most important investing tool you’ll ever find.

That tool is the Roth IRA, and although the name suggests that the Roth is primarily a method to invest for your retirement, it is flexible enough to serve a number of other purposes as well. From giving you a way to save for shorter-term goals to protecting your assets for future generations to come, the Roth IRA is so valuable that you won’t want to miss out on the chance to use it in your own financial planning.

Let’s take a closer look at exactly what the Roth can do for you — and why it’s getting so much attention right now.

What makes Roths great

Right now, it’s hard to remember when financial innovation didn’t automatically conjure up feelings of skepticism and distrust. But back in the late 1990s, when the Roth IRA was first created, it ushered in a new way to think about saving for retirement.

Until then, retirement investing was all about tax deferral. Traditional IRAs and 401(k) plans allowed savers to set money aside for the future, giving many of them a current tax break on their contributions. In other words, the government essentially paid you back for part of what you put into a retirement account in the form of a tax deduction. Depending on your tax bracket, that deduction could be extremely valuable as a current benefit, irrespective of whether saving for retirement was your primary goal.

The trade-off, though, was that when you actually used the money, you had to pay taxes on what you took out. From one perspective, then, the U.S. government shared in your investment gains and losses. If your IRA skyrocketed in value, then the IRS would collect more tax. Just look at some of these examples:

Source: Yahoo! Finance. Assumes taxpayer is in top current tax bracket of 35%. Prices from January 1990 to January 2010.

Those tax figures represent a darn good return for the U.S. Treasury, especially when you consider that the upfront deduction on the original $2,000 only cost them $660 or less in tax revenue.

The Roth IRA turned that logic on its end. Rather than giving you a current incentive to save, the Roth pushed the incentive far into the future by making all the growth within your account tax-free. And if you decide to convert an existing traditional IRA into a Roth, then it’s even more obvious that the Roth is a different animal than traditional retirement accounts — because you have to pay tax on the amount you convert.

Opening the door

Until now, though, many investors have been locked out of the Roth IRA. Income limitations prevent many high-income investors from using a Roth IRA, either through annual contributions or by converting existing IRAs to Roths.

Now, though, those income limits on Roth conversions have disappeared. And although high-income earners may still not be able to make their $5,000 annual contribution to a Roth, anyone who has a traditional IRA can choose to convert now.

So the big thing that everyone’s asking right now is this: Should you convert to a Roth?

For the answer to this question, read our story Understanding Roth IRA Conversions.

This article was originally published as The Roth: An Amazing Opportunity on Fool.com

Photo: oskay

The opportunity to convert an existing regular IRA to a Roth IRA may be the single biggest upside to the stock market’s extended slide. The younger you are and the more aggressive your investment strategy, the more likely it is that a conversion to a Roth IRA will make sense for you.

You may already be aware of the key difference between a regular IRA and a Roth IRA.  At a very high level, a regular IRA provides for tax-deferred growth whereas a Roth IRA gives you tax-free growth. All else equal, we’d all prefer tax-free growth, of course. Here’s everything you need to know about Roth Conversions

Contributions to a Roth IRA are limited and are not deductible

Trouble is, income limitations prevent everyone from being eligible to contribute to a Roth IRA. During 2009, if you’re single and make more than $120,000 ($176,000 combined with your spouse, if you’re married), you can’t contribute a dollar to a Roth IRA. Furthermore, those who can make a Roth IRA contribution can’t deduct it – that’s your key upfront sacrifice for the many future years of tax-free growth.

A Roth Conversion allows everyone access to a Roth IRA

Let’s first define what a Roth conversion is: the transformation of your retirement account from tax-deferred to tax-free status. You effectively move money from an existing regular IRA or former employer’s 401k account into your Roth IRA. The cost to do this conversion is the payment of regular income tax on virtually the entire amount you convert.  (You’ll pay tax on 100% of the converted amount unless you previously made non-deductible contributions).

Roth Conversion restrictions are going away

Through the end of 2009, conversions are only available to those people who earn less than $100,000 and have filing statuses other than married, filing separately. However, both of those restrictions are eliminated at the end of the year. As a result, anyone who wishes to contribute to a Roth IRA but whose income level is too high can make a 2009 contribution to his/her regular IRA and simply convert part of their account in 2010.

Why converting your Roth IRA could make sense today

If you’re confident your 2009 adjusted gross income will be less than $100,000, you don’t have to wait until 2010 to convert.  Furthermore, you can take advantage of market downturn, as I referenced earlier.  Here’s a simple example:

Say you invest in stock and you accumulated 300 shares of Johnson & Johnson stock (JNJ) over the years. If you converted your shares during April of 2008, when JNJ was trading at about $67 per share, you’d have converted $20,100 of stock. Assuming you were in the 25% tax bracket, you would have owed about $5,000 in taxes on the conversion.

In April 2009, JNJ was trading at about $51 per share. If you converted the stock then, you would have converting $15,300. If you were in the same 25% tax bracket, you’d owe just over $3,800 in tax, not $5,000, for a permanent tax savings of $1,200. In either conversion, you retain ownership in the long-term potential price appreciate of JNJ, yet in the latter case you’ve successfully timed the market from a tax perspective.

It’s certainly possible that stock prices could go lower from here and that a further delayed conversion could be even more lucrative from a tax perspective.  Nonetheless, a conversion could make more sense for you today than at any time previously.

Take advantage of your youth

The big upside of voluntarily paying taxes (since you don’t have to convert), is the tax-free appreciation of your converted investments.  The longer the amount of time you have until you plan on taking your money out (ideally retirement), the greater the odds that a Roth IRA conversion will make sense.

In addition, the better your investment performance between now and retirement, the greater the upside of converting to a Roth IRA. Still, it makes sense to run the numbers.  Importantly, it seldom makes sense to convert to a Roth IRA if you don’t have the money available to pay the tax on conversion.   Using money from your IRA to pay the tax almost never makes financial sense.

Keep in mind that it’s not an all-or-nothing proposition. If you want to convert your retirement account but just don’t have the funds set aside to pay all the taxes, consider converting some of your account.  You can always do some more next year.

Michael B. Rubin is the author of Beyond Paycheck to Paycheck and the blog of the same name. He is the President of Total Candor, a financial planning education company.

(NathanFromDeVryEET)

Tax season is almost over but there’s still time to maximize the tax benefits of your 401k(s) and IRA(s). Before you can begin reaping the potential benefits however, you’ll need to ask yourself a few questions relating to your current station in life and where you’d like to be come retirement age.

1. Do you plan on working to the age when you can withdraw retirement funds penalty free or retire early?
2. Do you need the benefit of tax deductions right now due to a tough financial situation?
3. Are you in a higher tax bracket right now than you think you will be in retirement?
4. Do you think your lifestyle will be less or more expensive in retirement?

Without an answer to these tough questions, it is very challenging to know whether to invest your retirement savings through the traditional or Roth options available to you. And what about an SEP IRA? When can that come into play?

When it comes to choosing the retirement account that makes the most sense for you, there are some general tips you can follow. Your answers to the previous four questions will only enhance your ability to get the most out of these tips.

1. Get Free Money First
Before considering an IRA, you should first make sure that you are getting the maximum benefit out of your employer’s 401k plan. What this means is that before contributing funds to any IRA, you should get the maximum match from your employer in your 401k. If you’re not sure what that amount is, you have some homework to do. Once this maximum match has been achieved, you can move over to IRA’s.

2. Know Your Limits
They can change annually so it’s worth checking. For 2009, the IRS maximum allowed contribution per individual for 401k’s is $16,500, with an additional catch-up contribution for those 50 and older. For both IRA’s, it is $5,000 (combined per individual), with a catch-up contribution of an additional $1,000. In 2010 and beyond, limits are indexed to inflation.

3. Understand What a Tax Deduction is
Every dollar you contribute to a traditional 401K or IRA is a dollar taken off the top of your taxable income for the present year. For instance, if I earned $40,000 this year and maxed my traditional IRA and 401k contributions, my taxable income would be $18,500 versus $40,000 ($40,000-$16,500-$5,000 =$18,500). If I’m in the 15% tax bracket, this would shave $3,225 off of my $6,000 tax obligation for the year.

4. Understand the Term ‘After-Tax’
Both the Roth 401k and IRA options are ‘after-tax’. This means that your contributions are after taxes have already been subtracted. You are getting taxed today, for the benefit of not being taxed when you start getting distributions later on. With the traditional options, you are getting the benefit of not being taxed today, but you will be taxed on your distributions later on.

5. Understand the Trade-offs
If you plan on retiring early, opting for the traditional options versus the Roth can allow you to save your tax cuts towards this goal, if you are disciplined enough to do so. But there is always a catch, right? You will have less money in retirement because you are taxed on your distributions through the traditional.

6. Know Yourself
If you plan on traveling the world and living lavishly in retirement, it makes sense to take the tax hit now with the Roth options so that you have more money in retirement. If you plan on living humbly in retirement (after all, any mortgages should be paid off by then), then you may want to take the tax hit down the road.

7. Understand Your Current Situation
If you are making a fair wage but are drowning in debt and will be in the red for the year, then it would rarely make sense to opt for the Roth options when you could be getting the tax benefits of the traditional options today, which could be a life saver for you.

The Third Option

We’ve discussed Roth and traditional options fairly extensively, but have not yet discussed the SEP IRA. The circumstances allowing you to contribute to an SEP IRA differ from the traditional and Roth IRA options. You may open an SEP IRA if you have self-employment income from freelance or other work. Other than contribution limits, SEP’s pretty much operate in the same way as traditional IRA’s.

As we discussed in the previous IRA article, SEP’s are a highly desired option for the self-employed who have already maxed out on their traditional and Roth contributions, yet still want additional tax deduction benefits. The maximum dollar allocation is $49,000 in 2009.

For more of GE Miller’s writing, visit 20somethingfinance.

To learn more about contributing to an IRA, visit Mint’s IRA Advisor.

(source: cowbite)

Choosing where to put your personal retirement savings can be a difficult choice. What do Roth and SEP even mean? Hopefully, the summary and comparative visual chart that follows will help to take the stress out of choosing where your retirement funds should be located and reaffirm the decision for those who have already made the choice.

The Traditional IRA

A traditional individual retirement account (IRA), is a retirement investment account that allows you to save up to an IRS set level each year towards your retirement ($5,000 is the maximum in 2009). Any contributions you make to a traditional IRA can be deducted from your taxes, however, you must pay taxes on your distributions when you withdraw money (contrary to a Roth IRA). Distributions can be made without penalty at age 59 and 1/2. Traditional IRA’s differ from Roth IRA’s, which allow you to get distributions tax free in exchange for contributing post-tax funds.

One very nice aspect of traditional IRA’s is that you can contribute for the previous tax year up until the tax filing deadline of the present year (i.e. you can contribute and get a tax deduction for 2008 up until the April, 2009 tax deadline for 2008′s taxes). You cannot do this with a Roth IRA.

The Roth IRA

A Roth IRA is a retirement investment account that allows you to save up to an IRS set level each year towards your retirement. The ‘Roth’ in ‘Roth IRA’ simply comes from its legislative sponsor, William Roth, and has no definitive quality. Any contributions you make to a Roth IRA are after tax, however, you do not have to pay tax on your distributions when you withdraw money in retirement. Distributions can be made without tax and penalty at age 59 and 1/2. Any contributions to a Roth IRA may be withdrawn tax free. It’s money that you’ve already paid taxes on, after all.

Roth IRA’s differ from traditional IRA’s, which allow you to deduct taxes when you contribute funds in exchange for having to pay tax on distributions down the road. It’s also worth noting that you can contribute to both a traditional and Roth within the same calendar year, but the $5,000 max is combined. In other words, you can’t be sneaky and contribute $5,000 in each for a total of $10,000.

The SEP IRA

An SEP (Simplified Employee Pension) IRA is a type of retirement account that an employer or someone who is self-employed can establish. SEP IRA’s have the same contribution limits as Keogh plans and contributions are tax deductible. You may open an SEP IRA if you have self-employment income from freelance or other work. Other than contribution limits, SEP’s pretty much operate in the same way as traditional IRA’s.

The maximum amount that you can contribute to an SEP IRA is capped at 25% of an employee’s compensation. The maximum dollar allocation is $49,000 in 2009, with the maximum considered compensation being $245,000. Because of this, it is a highly desired option for the self-employed who have already maxed out on their traditional and Roth contributions, yet still want additional tax deduction benefits.

A Comparison Between the traditional, Roth, and SEP IRA’s

Conclusion

There’s still time to benefit from contributing to an IRA before the end of tax season. If you contribute within the next 19 days you may qualify for a tax deduction of up to $1500. Mint’s IRA Advisor can walk you through the questions you need to ask yourself in order to know if you qualify and help you determine which IRA is right for you.

For more of GE Miller’s writing, visit 20somethingfinance.

(ckaroli)

It’s crunch time. We are less than a month away from the tax deadline, but if you have not filed your 2008 taxes yet, you’re definitely not alone. According to the IRS, 1 in 5 taxpayers don’t file their taxes until the final week ahead of the April 15 deadline. Last year, 27 million taxpayers waited until the final minute before the tax deadline.

Filing your taxes early is definitely encouraged, but if you’re one of the many who has not yet filed, you may be surprised to know that there are a still few ways to maximize your tax return. Some of these tips are geared towards allowing you to get your return quicker or holding onto your payment longer so that you may invest it however you decide. Other tips are actually designed to increase your tax deductions from the 2008 year.

Contribute to a Traditional IRA

For those making last minute attempts to reduce their tax payment, or get a bigger refund, you can contribute to your traditional IRA up until April 15th. You can contribute to a Roth IRA as well, but it won’t impact your tax return. Additionally, if you have an SEP or a Keogh IRA, you will get a filing extension to October 15th. To qualify for the full annual IRA deduction this year you must either:
a. not be eligible to participate in a company retirement plan
b. have adjusted gross income of less than $53,000 if you are single, or $85,000 or less for married couples filing jointly.

E-File your Taxes

If you e-file your federal return and request direct deposit, you can expect to receive your return within 10 business days. Additionally, e-filed returns are much less likely to contain errors. E-files are accepted or rejected within 48 hours and have an error rate of 1 percent versus an error rate of 20 percent for paper returns. You won’t get more money, but you’ll get it sooner so that you can invest it however you prefer.

Hold on to your Cash

Owe money on your return? File now and hold onto your cash. You can now have your payment drawn electronically on April 15. You can also use a debit or credit card (may result in a transaction fee) if you prefer. Don’t make this a strategy in future years, as those who owe over $1,000 generally have to pay a tax underpayment penalty.

Get a Second Chance at Last Year’s Stimulus

If you didn’t receive a full $1,200 (married joint filers) or $600 (individual filers) – plus $300 per child, then you may have a second chance to claim last year’s stimulus rebate. Calculate the credit using the worksheet on page 62 of your 1040 instruction package. You can then enter the amount on line 70 of your tax return.

Itemize your Taxes

The standard deduction in 2008 is $5,450 for singles and $10,900 for married couples filing jointly. But you’re not ‘standard’, you’re above standard. Itemizing your tax deductions can have a huge impact on your tax return. If you are self-employed, have a home or mortgage, or have a lot of out-of-pocket medical expenses, you may have a good shot at saving more through itemized deductions than taking the standard deduction.

For more of GE Miller’s writing, visit 20somethingfinance.

If you’ve been contributing to a 401k and socking away money for retirement, you probably think you have enough. But you’d better brace yourself for the shocking truth. Unless you’ve taken into account how old you were when you started on your retirement plan, you most likely don’t.

The bottom line is that most people don’t really know how much they’ll need for retirement and without knowing that how can you be sure you’re on the right track to get there? Consider that the average American works hard and plays hard, but reaches age 65 with a median 401k balance of $110,000. Is this enough?

That depends. You’re going to need a bigger nest egg than you probably think – 10/10/4 is a handy principle you should learn.

What is 10/10/4 and how can it help?

In short you need to save at least 10% of your income for retirement. You need to have a nest egg lump sum which is 10 times your annual earnings upon retirement. Finally, you should withdraw up to 4% of your next egg in retirement to avoid outliving your money.

Put simply, 10/10/4 is a strategy that takes into account which leg of the journey toward retirement you are on and provides appropriate recommendations along the way. It’s easy to remember and can be put into practice at any time.

Rule #1

If you are in your 20′s now is the best time to start contributing to your eventual retirement. The first “10″ in 10/10/4 refers to the idea of contributing 10% per year to your 401k or IRA.

At age 25, only saving 10% of your income per year into a 401k or IRA, is required to replace 70% of your pre-retirement income, and at age 20 it’s only 8%. Note this includes any company matching, so if your employer matches 2% for example, you would only need to save 8% per year. At age 20 or 25, time is on your side.

If you did start saving at age 20 or 25, go out and celebrate, you are on the right path already. You can enjoy 90% of your income today and save 10% for tomorrow – this will take some sacrifice, but it’s doable.

However, most of us did not do that early enough.

Missing this “window” is all too common. After many years go by, you will eventually wake up and look around, and see time is the real problem. The closer you get to retirement, the harder it gets to save for it.

For example, if you start saving for retirement at age 35, you would have to save 17% of your income to achieve the same goal, a daunting task. At age 45, the percentage of your income you would have to save is 31%, which, for most of us is essentially impossible.

All of these questions assume you start at a set age and continue to save at a set rate. But in reality, life is much more complicated.

For example, what if you start saving at age 25, then move to another job; stop saving for a few years and then start again? In other words, what if your savings are not linear?

There is no calculator we have ever found that will model this real world possibility of skipping years, or playing catch-up very fast without making the estimation process extremely cumbersome.

This is where the second “10″ comes in. This means that if you missed rule #1, and your life got complicated, then you must save enough to reach rule #2, which is often much harder than starting early.

Rule #2

Rule #2 says that, by the time you are 65, you will need 10x your income immediately prior to retirement to retire at the level you want. Therefore, say you plan a lifestyle of living in the south, on a beach, but with health care coverage, some travel and a few hobbies. You’ve calculated that will require $100,000 in yearly income.

Therefore, you will need 10x that income, or $1,000,000 at age 65. The second “10″ gives you the proper perspective.

Even if you get your target income down to $80,000 before taxes, you will still need $800,000 at age 65, significantly more than $110,000.

Rule #3

Okay, now you are ready for the third and final level of 10/10/4, so what is the “4″? The “4″ means 4% is all you can take out – especially in the early years of retirement and still have confidence that your money will last throughout retirement. If you plan to take out more in the early years, you could have a big problem in volatile market times such as those we are experiencing now.

The issue is the fluctuations in the stock and bond markets are a natural occurrence. Therefore if you retire at age 65, and have 60% in equity and 40% in bonds (a moderate investment allocation), you might still have 30 more years to live and no job because there are not a lot of jobs of jobs available for a 65 year old. Yes, the problem is that we live too long after age 65 – health care advances have been too successful.

The related problem is the wide range of normal volatility in these stock and bond markets and the fact that you may end up retiring in some very difficult times for returns, such as 2000, 2001, 2007, or 2008. If the markets are in decline right at the time you retire, it is going to be much more difficult than anticipated to make ends meet.

The experts look at all the probable outcomes and the models show that a 4% withdrawal rate in the early years is the maximum rate that will preserve capital with normal volatility, until you have been retired for 5-10 years. That means that if times are really rough in the first few years that you retire, and your target was $1,000,000, you might really have to live on 4%, or $40,000 per year until you get through the bad years. That is the realty for many people who have retired recently.

Think of 10/10/4 as 3 windows into your life plan. If you are fortunate enough to have succeeded in hitting the first “10″ (saving 10% of our income and you started in your 20’s) and the second “10″ (on track to hit 10 times your income goal at age 65), then to be sure of a secure retirement work on this third and final goal, “4″.

There are practical ways to live for a few years on 4% of your retirement balance if times are tough in the early years of your retirement. You may want to work part time if needed by obtaining a skill that does have a market at age 65. Perhaps you can turn a hobby such as photography or playing a musical instrument to your financial advantage? Or build an extra cushion in your balance for these contingent years if you retire and then experience some bad stock and bond market performance in your first few years.

10/10/4 is a tool you can use at any age and it will serve you well. If you are in your 20’s sign up for 10% in your 401k or IRA and think of the 90% you get to enjoy today. Live 90% today and 10% tomorrow. You will have to make a few sacrifices but you can do it.

If you are in your 30’s or 40’s you are starting to see the problem. If you do not see progress toward the 10x goal, usually because you started too late, or skipped some years, then you will have to save much more now to catch up.

That’s why it’s so important to make sure you aren’t leaving money on the table. If you’re in your first job, make sure you are enrolled in your employer’s 401k plan. If you’ve just changed jobs, don’t leave money sitting in your previous employer’s 401k account. Instead, move it into an IRA rollover account where you have more control over fees and more investment choices.

Start today because your future depends on it.