The times are a changin', and so are the tax laws my friends. So today I thought I'd post up a few interesting changes that caught my eye from a newsletter (pdf) forwarded over to me. This tax love comes straight from CPA Lisa Scarazzo, and goes out to all her clients each year.

I wanted to post it all up, but 5+ pages might have bored ya so we stick with a few ;) But mad thanks to Lisa for allowing us to post this up! You can find her & all her awesome accountant skills over at LAScpa.com. Here's what we got:

Ponzi Scheme Losses
A new law is allowing taxpayers to take a theft loss in 2009 for investment fraud. If the taxpayer invested their own cash and the loss is generated from a criminal fraud or embezzlement similar to the Madoff scheme, the loss will be deducted from ordinary income. The loss is deductible in the year it is discovered and not limited to the $3,000 capital loss per year rules.

Converting a Traditional IRA to a Roth IRA
In 2010 anyone can convert money they've already invested in a traditional IRA into a Roth IRA. There will be no adjusted gross income limit for the 2010 year. That is a change from current law where the IRA conversion is not allowed if your adjusted gross income is $100,000 or greater when you convert to a Roth. You will owe tax on whatever amount you have converted from the traditional IRA to the Roth IRA. After paying the tax on the conversion today, you will never pay any tax in retirement or when it is withdrawn. The good news is that if you convert in 2010, the tax bill can be spread over two years. (J - we'll be converting about $900 of the Mrs. traditional over to a Roth this year - woohoo!)

New and Enhanced Home Buyer's Credit
This credit has changed for 2009 into two different credits: 1) Existing Home Owners that have lived in and owned their home for at least 5 out of the last 8 years, and 2) First Time Home Buyers. Both of these credits have income limitations so please check with our office for further details to see if you qualify.

• Existing Home Owners now have the opportunity to purchase a new home if they have owned their current home for at least 5 out of the last 8 years and receive a credit up to $6,500 or 10% of the purchase price of the home. The total purchase price of the home can not exceed $800,000. The new principal residence must be purchased after November 6, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).
• The First Time Home Buyer Credit is available on the purchase of a principal residence for individuals who have not had an ownership interest in a home during the 3-year period ending on the date of the purchase of the new home. This does not apply to home equity loans not used to buy, build or improve the primary residence. The credit is increased to a maximum of $8,000 or 10% of the purchase price for homes purchased between January 1, 2009 and April 30, 2010 and the credit does not have to be paid back to the IRS in the future (this differs from the 2008 $7,500 credit).

Foreclosures & Bankruptcy
In general, if a taxpayer is forgiven or absolved of their debt (credit cards or mortgages), the debt becomes taxable income. The Mortgage Forgiveness Debt Relief Act will exclude debt forgiveness from taxable income if the taxpayer's debt was a mortgage from their principal residence and the debt was used to buy, build, or improve their residence (home equity debt does not qualify). This is for years 2007, 2008, and 2009.

*ALERT* IRS Email Scam
An email is circulating that makes a statement similar to this: "A refund will be issued to you from the IRS if you follow these instructions." This is a scam - the IRS does not send emails to individuals. The IRS only sends correspondence via the U.S. Postal Service. Never open an email that claims to come from the IRS.

Financial Steps to Solvency
Many individuals are looking for ways to financial recovery. Here are my recommendations: (J - links go to my posts, not Lisa's....although would be interesting to see her go into more detail ;) )

1. Cut Spending.
2. Track Expenses & Budget.
3. Increase income (if possible) by taking a second job.
4. Pay off high interest loans & negotiate lower interest rates on loans & credit cards.
5. Pay bills timely and make contact with creditors to set up a payment plan for overdue bills.

I know this isn't the most exciting stuff, but it's all good things to keep in mind! And thought I'd shoot over before everyone's already filed away ;) Thanks again Lisa! For more info and tax tips, check out her full newsletter here: Annual Individual Tax Newsletter 2009 (pdf). *Please always remember to do your OWN research and consult a professional before taking action*

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Get ready for a handful of TurboTax giveaways tomorrow!!

Labels: bankruptcy, foreclosure, roth ira, taxes

Maxing out your 401(k) or IRA is just plain awesome. And even more so, maxing out BOTH in the same year! For the first time in my life, I have done just that, and I can't tell you how excited I am (even though I sorta kinda already did in my last net worth update).

I was leery to blog about this in case it came off as too "look at me! look at me!", but a recent comment from Miel at Dinks Finance coaxed me to say a few more words on it - mainly to show that it is, indeed, possible to max out not only your 401(k) for the year, but also your Roth. And the "how" part of it all? Pretty much exactly what Miel left on the previous post of mine:

"...keep stretching yourself and adding on a bit at a time. Back when I first started contributing I thought it was virtually impossible to max out. After we got married I upped my contribution by quite a bit, and then realized I could still get by, so I upped it again. I kept doing this until I maxed out. I was surprised how quickly this happened. It was a great strategy for me and now I max out on auto pilot."

SO. TRUE. Once you get in the mindset and declare to yourself that YES, I WILL MAX OUT it's just a matter of time as to when you do. You start upping it a little here and a little there, and before you know it you're close to maxing-out-land! Now, obviously it requires some hard work and a pretty clean slate to get on this, so if you're not in the right mindset as yet you may want to backtrack a bit.

Some of you have bad health issues, or you're in $50k of debt, or you're spending more than you're bringing in. If this sounds like you, then scratch away the millionaire to-do list and start focusing in on the very basics. Go through all of your expenditures (or hopefully budget!) and pinpoint the areas of weakness. You may have 1 or you may have 5, but either way it's important that you find them so you can work on fixing them. Create a "life plan" and actively work on it! It's only when you clear up a lot of the bad stuff that you can concentrate on upping the good stuff - like your 401(k) and IRAs.

With everything, it all comes down to time and dedication. 3 years ago I couldn't care less about my retirement funds - I liked seeing my paycheck as full as possible, and I didn't have any plans on where it went at all. I had no budget, no real savings, and no ultimate desire to pimp my finances. I was just living and coasting along w/out a care in the world ;) It was fun and it worked for a while (26 years, actually) but sooner or later you have to man up and set things in motion. It's only then that you can really start concentrating on that financial game plan and increase your retirement accounts.

I'm not sure if I totally went off track here, but what I'm trying to say is that you CAN, indeed, max out both your 401(k) and IRA. I did it for the first time this very year, and I can only hope I'll stick with it and report with the same next year. So, if you really REALLY want to save more and work towards that golden retirement, start today! Up that % another point or two, and continue moving it up every few months. With a little time and patience, you'll get closer and closer to your goals :)

Labels: 401k, retirement, roth ira

I don't talk about stocks too much on here, but I thought I'd follow up on Operation Copy Buffett. If you were around back then, you'll remember I wanted to invest in stocks but I hadn't a clue where to start (and I wasn't going to randomly choose for the hell of it like previous times).

So instead, I decided to check out all of Warren Buffett's choices and cherry pick from there :) Some people thought I was an idiot, and others thought it was a great idea. After all, if you're going to copy someone, why not Buffett right? Well, just like I reported in the past, I couldn't be happier with the choices I/he's made. Here's a breakdown of all the stocks I currently own - tucked away in my Brokerage Roth IRA:


[the italicized purchase prices are averages over multiple buys]

What more could a guy ask for? Granted the recent explosion of the market has done wonders to everyone's portfolios (thank goodness cuz we needed that!), but I'd like to think these picks are in it for the long haul. Oh, and in case you're wondering, yes I did throw in some picks of my own including GE & SIRI :) I can't let him do ALL the work, right? haha...I'll continue to play a little myself, but for the most part I don't plan on risking a whole lot.

The majority of my retirement funds come straight from my 401(k) - these stocks are just supplemental to add a little more fun into the game. If I lost 100% of them, it wouldn't affect the overall game plan. It would SUCK BALLS (and the world would probably be ending if those companies all went under) but it's a small % of my overall retirement monies. I just need more action than my mutual funds can provide...

My portfolio is far from being perfect, or stable, (always best to consult with a professional - don't just do what I do!) but I thought I'd share as it's always cool to hear how others are trying to reach their goals as well. With everything in finance, it comes down to personal preference and game plans. Are you guys rockin' out anything good?

Labels: investing, roth ira, stock market, Warren Buffett

Once you're contributing up to your company's 401(k) match, do you continue upping the % or do you jump to the IRA?

This is one of the questions I get asked the most as a PF blogger (the other is probably how to start blogging or the order to pay off credit cards), and it usually comes down to personal preference. Since I mostly respond back the same way all the time, I figured I'd copy & paste the question and my answer below and see if maybe YOU have some better advice on it this time around? That way I could refer them back to this post in the future :) Here's the question from Mr. Wants-to-take-advantage-of-retirement-plans:

"I'm like you, turned 30 this last year, and getting my finances in line (I'm in the black, which is a good thing, but I can do better)....got a question for you regarding 401k's and IRA's. I currently participate in my companies 401k program, but I am only contributing the amount that the company matches (i.e. 60% on my first 6%...). However, my 6% doesn't even get me close to my annual maximum ($16,500 or so... whatever it is...(J: Yup, that's correct!)).

Would you suggest hitting the $16,500 in my 401k before setting up a separate IRA account? Or would you just contribute to the 401k up to the employer match amount, and then max out an IRA each year?"

First of all, GOOD WORK on matching up to that 6% already - 90% of people never even consider it. Second, I like that you're asking this as a lot of people wonder the same thing (me too, at times) and to be honest it's a tough call. You're right in that I'm not a professional, so I can only tell you what I would do in your shoes :) And that would be to compare the funds available in your 401(k) vs. the IRA, or even better, Roth. The Roth is the bad boy these days and much more pimped out than the Traditional - but still do your research to make sure it works for ya.

But back to the funds. *Most* 401ks from smaller companies usually suck as the funds to choose from aren't as good as if you had the open-sea of EVERYTHING out there like you do with IRAs. My company has a great match at that 100%, but the funds are pretty shitty from what people tell me. So, if I were only getting the 6% match then I'd do that, or maybe even up it to 10% to keep it even (I always round up) and then work on maxing out my Roth. This way, you could pick much better places to put that money and in all types of products - mutual funds, stocks, bonds, whatever you want really. It might depend on which institution you go to open one up, but it's nothing Google can't help you with. I'd start at Fidelity or Schwab and go from there. (Or, USAA if you qualify - that's who I use for my Roth) .

Not only should your money get into better places this route, but you hit that max a lot quicker giving you that feeling of Awesomeness. The Roth & Traditional IRA max out at 5k this year, so you could break up the payments from now until the end of the tax year to make sure & evenly distribute the money until maxed. In all honesty, you've already gotten 80% of the smart investing part down as either route you take is bad ass :) But that's what I'd do - keep your 401(k) contributions to 6-10%, and throw the extras into an IRA. What would you guys advise?

Labels: 401k, advice, reader mail, retirement, roth ira

I finally took the plunge and sold off all our EE Savings Bonds! I'll be sad to see them go, but I sure won't miss the minuscule interest ;) Plus, it's been on my to-do list ever since March's net worth review, so it feels good to finally cross it off now. In fact, it also spurred accomplishing another item on that list - opening up a Roth IRA for the Mrs.

And oddly enough, converting the bonds literally only took 17 minutes! It took me some time to actually *find* a bank that would do it right there in person (you win Bank of America!), but it was well worth it in the end. This is how it went down:

- Walked into Bank of America (with a smile)
- Explained to the teller what I wanted to do. (with a smile)
- Signed and addressed the backs of all bonds in front of her. (no smile as it was pretty tedious)
- Got handed the $749.54 in cash and a printout of the transactions! (*huge smile*)

Again, if you're considering converting any paper bonds yourself, do check around and see if you can find a bank locally that will handle it for you. I came super close to just doing it online with Treasury Direct and it did NOT look fun. We're talking 1-2 weeks just to open an account (you do it online and then they mail you a card to activate/confirm your identity in the future), and then another 2-3 weeks to get them all converted (you have to physically mail them over and wait for a response)! I'm sure the process only takes seconds if you're converting electronic bonds only, but I'd hate to imagine what would happen if you filled out the paperwork wrong and/or it got lost in the mail :(



Okay, so now we're $749.54 richer and ready to go spend it, right?! Hah! Where do you think you are? ;) If there's one thing I've learned over the years, it's to keep re-investing your earnings and to make sure to do it fast. The longer that cash sits in your account, the higher the odds of it not going anywhere - or worse, being spent! (something the old me would have LOVED to do)

Needless to say, I had a plan for every last penny before it even hit my grubby little hands: our Roth IRAs. I really think we'll earn a helluva lot more in stocks & mutual funds over the long run (the key factor) than we will in bonds, even though I certainly see the benefits of them. So $496.54 of the total is going to help max out MY Roth, since most of the bonds were issued to me over the past 29 years of growing up, and the remaining $253 will go into the Mrs' Roth - being leftover of the $500 wedding present bond we got last year which will unfortunately never grow to fruition ;) I sorta feel bad for that one, but I'm an "all or nothing" kinda guy these days and I don't want 1 single paper bond laying around to worry about, ya know?

That said, I'll def. miss the nostalgia of those old boogers. The bonds dating back to the 80's were so COOL looking! I remember thinking how rich I was when I was a kid ;) It was like sitting on 3 Nintendo Game Boys! haha...oh well, can't hold on to them forever. I'd much rather have plumper IRA's to look forward to now.

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PS: If you want to learn more about the bonds you have, you can check them out at Treasury Direct w/out creating a login or anything - they're excellent for tracking their worth and all :)

Labels: bonds, investing, roth ira

Yup, just opened up my very own Brokerage Roth IRA with USAA today! And, as usual, it went swimmingly. They answered all my questions, took the time to explain everything to me, and even opened it up 1-2-3 over the phone for me. Total call time? 14 mins. 37 secs. (hotness!)

They even helped me to xfer my target mutual funds from my regular Roth into this new Roth, allowing me to keep everything into one account! I'm telling you, I really should work for that place - I've now technically got 13 accounts opened with them! haha....although i'll drop the other Roth here shortly to keep things nice and clean.

So, why the big move now? To purchase those stocks I was talkin' about the other day! Yup, I figured the only way I'll be able to play the game correctly is to consider these new stocks as "retirement" funds. That is, I pick them up and then keep them for a while instead of buying and selling all over the place. And for ME, that means having them live in my Roth IRA.

Up until the other day, it never dawned on me that I could purchase individual stocks and keep them in my Roth account. I was just so used to thinking about mutual funds when it came to retirement accounts (cuz that's what the media and every other person out there talks about). But, with a Roth IRA, You can invest in anything you'd like! Mutual Funds, individual stocks, cds, money markets, you name it. The Roth is just your vehicle to get you there, sorta like a "catch all" account for investing.

The thing was, however, was that the original Roth I initially set up was only made for mutual funds, so I had to change it over into a "Brokerage Roth" in order to have trading capabilities as well now. From this one account, I can now choose whatever my heart desires :) All under the same imposed Roth Limits of course.

But what's even MORE awesome is that I don't have to worry about the taxes from it all!!! I don't know about you, but the idea of dealing with taxes in itself is enough to steer me away from investing sometimes :( But since the money flowing into this account is already taxed by Mr. Obama & crew, the need to hit 'em up again goes away! When it's time to cash out 30 years from now, all deposits & gains will be 100% tax-free :)

Needless to say I am one excited little puppy over here. I've got the game plan all set up, the mechanism now in place, and now all I need are the right stocks! haha...that's all.

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PS: In case you're wondering, and I know a few of you are, the cost for each trade placed with this Brokerage Roth @ USAA is $11.95 - a lot higher than Sharebuilder, E*Trade, and some others. Since I'll only be placing a few trades each year though, it's not that big of a deal for me. I'd much rather have all my accounts in one place and easily accessed :) Oh, and I pay no monthly fees.
PPS: Here's a pimp list of the "best brokerages" out there if you're interested in checking some out.

Labels: retirement, roth ira, stock market, USAA

You all know how much I LOVE my 401(k), but what about our friend the Roth IRA? Both investing vehicles are sexy in their own way, but how do you know when to use one over the other?

The answer to these questions always lies within the situation at hand - and it just so happens we've got one today. The odds? ;) A fellow reader hit me up recently and wanted to know what we thought about her dilemma. Here's what she sent:

"I graduated from college in December and am in my first "real" job with benefits. I am a teacher. I am required by the union to contribute to the teacher's pension. In addition to this, I have the option to have a 401(k) and the employer does not match contributions. My thought is to skip the 401(k) and simply open a Roth IRA. Is this a good thought? In any circumstance would I want to pick a 401(k) over a Roth IRA? (Besides the obvious employer matching) What made me start thinking this path was an article I read on Kiplinger about Roth IRAs and one of the benefits is that you can use it to help save up for a first home, and this is another goal in the somewhat near future of my life."

First off, I'm impressed you are already thinking of this at a young age! Good for you. This topic has been debated like crazy amongst the finance world, but it really comes down to your goals here. Both 401(k)s and Roth IRAs are awesome as hell, and both have their pros and cons. For anyone who's not familiar with them, here they are in a nut shell:

401(k)s - All money that goes here are pre-tax, meaning not taxes come out while investing. This is great in that you have MORE money to invest and accumulate over time because you have that additional 25% (or whatever your tax rate is) earning money for you. 401(k)s are also great in that your employer will usually match you up to a certain % (as mentioned in your email) meaning you get FREE money. On the flip side, you have to pay taxes on this once you start drawing out the money in retirement. You will also get charged up the a$$ if you take any money out before you're eligible. There are some sneaky ways here and there where you could, potentially, take out some money w/out incurring this wrath, but I wouldn't advise it.

Roth IRAs - Another investing tool that allows you to save for retirement, and sorta like the opposite of 401(k)s in that you get taxed UP FRONT, but you never have to pay a tax again down the road! So say you drop in $5k and then leave it alone. In 30 years that $5k can become $20k and you don't have to pay a cent on that $15k of earnings :) On the flip side, you can only put in a certain amount each year ($5k for 2009 if you're under 49 vs $16.5k for 401ks ), and you can't make over a certain amount of money (a bit over $100k)

But back to your question. Whether you choose a 401(k) or a Roth IRA comes down to your future plans. If you want to invest for RETIREMENT, meaning you won't touch it for 30+ years, then I'd open up both a 401(k) and a Roth and leave it alone (you can add more to one over the other, but I always suggest having both).

In your case, it looks like you will probably need this money for a down payment on a house sometime soon. So dropping $ in a 401(k) is def. not the way to go (after you contribute up to your employer match to get that FREE money). In fact, I probably wouldn't even go with a Roth either since its main use is for retirement funds as well. If it were me, and I were definitely getting a house in 3-5 years, I'd throw the main chunk of extra money into a high-earning savings account like ING or another online bank since you'll be dipping into it soon.

That being said, you'll probably end up opening up a retirement account anyways cuz it looks like you really want to ;) In that case I'd recommend going with a Roth. While it's not designed to be used like that, at least according to my accountant when I asked her last year, you *can* take out any $ you have contributed at any time w/out incurring any fees or taxes - you just can't take out any interest earned. (there are certain situations where you CAN take out all of it - like a home or hardship - but you have to make sure the account's been open for at least 5 years. I'd talk it over w/ a professional)

So if you want to save save save and then take out the contributions when you need that down payment, the Roth is the better option here between the 2. Would you all agree?

Labels: 401k, reader mail, retirement, roth ira