If you haven’t, read on.  It just might be the best thing since sliced bread, and I’m not kidding.

Heck, even if you have heard about it, read on.  You might find it explained here in a better way that you have before, and that would mean I’ve done my good deed for the day.

First, what’s the difference?  That sets the stage for why this is such a great idea!

Both the traditional company 401(k) and a Traditional IRA work essentially the same way.  In the case of a traditional company 401(k), whatever you contribute to the plan (and there are legal limits) is taken away from your GROSS INCOME (top line of your 1040 form).

In the case of a Traditional IRA, you are responsible for claiming the deduction if you’re allowed to take it (line 32 of the 2009 1040 form).  In either case, your ADJUSTED GROSS INCOME (AGI) is reduced – that’s the bottom line of the front page of your 1040 form, and that means that you owe less in taxes…..that year.

The downside?  You’ll pay those taxes eventually, as ordinary income, in the year in which you withdraw the money.  If you withdraw before age 59 1/2 , you’ll probably have penalties to pay as well, unless you’re withdrawing to meet one of a handful of hardship reasons.  That’s okay, though, I mean, you earned the money, and you pay the tax.  This is what we call DEFERRING the tax until later, and that works out really well from a math standpoint.  (Unless taxes go way, way up later, too.)

Now, in the case of the Roth IRA, the EXACT OPPOSITE is true.

You get absolutely no benefit at all this year from contributing to a Roth.  None.  Nada.  You pay the tax now for crying out loud.  Oh, but wait, that means….yep, you don’t pay any tax later.  Ever.  Now, that’s really cool, especially if tax rates do go up.

The next part of this is that, if it makes sense and you choose to do it, you can CONVERT your old company’s 401(k) and any existing Traditional IRAs into Roth IRAs, and, no surprise if you’ve been following along, not pay any tax on the new Roth IRA balances in the future.  Of course, the tradeoff is, as above, that you have to pay the tax NOW in order to make the conversion.

Now, that’s always been true since the Roth was invented, so what’s so cool about 2010?

In 2010, you don’t have to pay the tax.

Huh?  Well, okay, you DO still owe the tax, but, you DON’T pay it in 2010 like you normally would.  For this year (and who knows what Congress will do tomorrow) but as of this writing, for this year ONLY, you get to do the following:

Pay ½ of the tax due in 2010 as if you earned it in the tax year 2011 (by April 2012) and,

Pay ½ of the tax due in 2010 as if you earned it in the tax year 2012 (by April 2013).

This is HUGE.  You might have it already covered by a refund or other deductions, and where you would normally have to worry that you couldn’t pay it, that worry is gone, for this year only.

Your situation is not going to be exactly the same as that of your friend or relative, so don’t do what they say.  Even if they’re really smart, they’re not you.  Talk to me, and we’ll figure out together what makes the best sense.

Want to know more?  Let’s talk, and create a plan that’s right for you and your family.

Visit:  http://whattoinvestinnow.com

Email: John@financialideasblog.com

Technorati Tags: 401K, Compound interest calculator, Convert My IRA, how to invest, IRA Conversion, Retirement, Roth IRA, Rule of 72, traditional IRA, young investors

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1.     2..    3…

Okay, here it is – it’s the concern, maybe even fear, that you’ll lose what you have, or if that doesn’t happen, that what you invest will be TIED UP FOREVER, or at least until you get to age 59 1/2, which for many people is the same thing as FOREVER.

On the other hand, if you take the time to do the math, it won’t be much of a stretch for you to realize that not saving and investing won’t get you to where you want to be, so it only makes sense for you to do it.   You only need to go back to a previous blog on this page to read about the Rule of 72 and how that will answer this question.

So, if you’re with me still, let’s get back to those two concerns.  First of all, regarding the “lose what you have” problem, “lose” is a relative concept.  If you are a victim of the Rule of 72 (instead of benefiting from it), then you’ve lost by default, even if your account balance never goes down, year after year.  On the other hand, if you lose in the short term via a really bad year like 2008, then it is what it is – the SHORT TERM.

The SHORT TERM is not FOREVER.

Even when stocks (or mutual funds or bonds) have a bad year, they have never historically had a bad 20 years, so if you put your focus on realistic LONG TERM goals, by which I mean 10 years, 20 years, 30 years or more depending on your age.  Don’t worry about what happened in 2008 or what might happen in 2018, because neither you nor I nor anyone else controls that.  Just do it, as they say.  Once you start, it gets easier.

Imagine, for example, that I worked with you, analyzed your specific situation, and told you that you needed to save $400 a month for the next 40 years.  You might say, “holy cow, that’s a lot of money!”, or “holy cow, that’s a long time!”,  but I guarantee you that if you do it, and the monthly number doesn’t need to go up, in five or ten years you’ll be thinking that $400 a month is nothing and you’ll be ahead of the game.  It just works that way.

So, finally, second, what about the NOW IT’S TIED UP problem?  The truth is there’s only a few ways that your money can get tied up: 1) pre-pay your mortgage, 2) put it in your company 401(k), or 3) put it in a Traditional IRA.

All of those choices MIGHT in the right cases be good ones, but, if you want to guarantee that some of your money IS NOT tied up, then consider talking to me about the advantages you might realize by contributing to a Roth IRA, or if you’ve hit the maximum allowable contributions for the year, using a regular taxable brokerage account.

Chief among those advantages is that, in a Roth IRA, you can withdraw your contributions anytime without penalty, even at ages below 59 ½.  I don’t recommend that as a normal strategy, because doing it will cause your growth to be smaller, but you can do it if you need to, and you won’t pay a penalty.

You WILL pay a penalty if you try to withdraw the growth on your contributions to a Roth IRA in less than five years, but you WILL NOT pay a penalty to withdraw just your contributions, which, under 2010 law, are up to $5,000 per year for those under age 50 and up to $6,000 per year for those 50 and over.

It’s a pretty sweet deal if you know to take advantage of it, and here I am spending the time to tell you about it.  If you’re past that stage of saving and want even better tax strategies, then we definitely need to talk, because there’s more you can do.

Want to know more?  Let’s talk, and create a plan that’s right for you and your family.

Make an appointment to speak with me here: http://whattoinvestinnow.com

or email John@financialideasblog.com

Technorati Tags: 401K, Bonds, how to invest, IRA, learning Stocks, long term investing vs short term, retirement investments, rule, rule of 72, Stocks, stocks and bonds

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