On the same day as the 401K announcement, the IRS also announced that the 2012 IRA contribution maximums and income limits.

The maximum IRA contribution did not increase, but the income limits did for both the Traditional IRA and Roth IRA. Here are the details…

2012 Maximum IRA Contribution

The 2012 IRA contribution maximums did not see a similar increase as 401K and other employer sponsored retirement plans, unfortunately.

They will remain the same as the 2010 and 2011 IRA maximum contribution limit at $5,000 for the 2012 tax year.

That’s three years in a row with no changes. I’d be really disappointed if there were no changes for 2013.

The 2012 Maximum IRA Catch-up Contribution

For those age 50 and over, the 2012 IRA catch-up contribution is still the same as 2010 and 2011 at an additional $1,000 over $5,000 ($6,000 total).

You begin to be eligible for the catch-up contribution if you turn 50 during any day in the calendar year.

Roth IRA Income Limits in 2012

IRA’s provide a great way to limit your tax liability in the present (Traditional IRA) and in the future (Roth IRA). There are, however, contribution phaseout limits based on your income that can limit how much you can contribute. The good news is that those limits (tied to inflation) will increase in 2012.

2012 Traditional IRA Income Limits

Traditional IRA income limits vary slightly from Roth IRA’s in that they are tied to whether or not you your employer sponsors a retirement plan for you.

If you do have a retirement plan with your employer:

• Single or head of household: If your MAGI is $58,000 (up from $56,000) or less, you can take a full deduction. If more than $58,000, but less than $68,000 (up from $66,000) – you get a partial deduction. If over $68,000, you cannot take a deduction.
• Married filing jointly or qualifying widow(er): If your MAGI is $92,000 (up from $90,000) or less, you can take a full deduction. If more than $92,000, but less than $112,000 (up from $110,000) – you get a partial deduction. If over $112,000, no deduction.
• Married filing separately: If your MAGI is less than $10,000, you can take a partial deduction. If $10,000 or more, no deduction.

If you DO NOT have a retirement plan through an employer:

• Single, head of household, or qualifying widow(er): Any MAGI permits a full deduction.
• Married filing jointly or separately with a spouse who is not covered by a plan at work: Any MAGI permits a full deduction.
• Married filing jointly with a spouse who is covered by a plan at work: If your MAGI is $169,000 or less, you can take a full deduction. If more than $173,000 (up from $169,000), but less than $183,000 (up from $179,000), you can take a partial deduction. If $183,000 or more, no deduction at all.
• Married filing separately with a spouse who is covered by a plan at work: If your MAGI is less than $10,000, you can claim a partial deduction. If $10,000 or more, no deduction.

If you have not yet started a Roth or Traditional IRA, I house both of mine at TradeKing because there are no account maintenance or inactivity fees, trades are only $4.95, and their customer service is great.

Happy contributing!

2012 Traditional & Roth IRA Maximum Contribution Limits is copyrighted by 20somethingfinance.com without consent to republish.

It’s a great question. And it’s important to get right because there are long-term financial implications.

Usually when people ask me this question, it starts a series of other questions.

So I will do my best to address the original question and some of the other common questions that follow. And I’m curious to see what other questions arise for you.

Roth IRA or 401K?

The quick answer? It depends. When someone asks me this, I immediately follow-up with this question, “What kind of a 401K match does your employer offer?”.

In my 401K match post, I highlighted the following statistics from the National Compensation Survey:

• 49% of employers with 401K plans match 0%
• 41% match a percentage of employee contributions between 0-6% of salary.
• 10% match a percentage of employee contributions at 6% or more of salary.
• The median is a 3% match.

With those statistics in mind, there are two different ways to answer this question:

If your employer matches 0% of your 401K contribution…

Invest in IRA’s first – either a Roth IRA or a Traditional IRA (Roth IRA’s have a buzz about them, but don’t overlook Traditional IRA’s). Max them out. Then invest in your 401K.

Why? You’re not getting a match in your 401K, so there is no benefit to investing in it over an IRA other than the maximum 401K contribution being higher than the maximum IRA contribution. And you’ll have more investment options available to you in the IRA, which can mean lower fees for you. So max out your IRA contribution, THEN invest in your 401K for additional retirement savings and tax benefits.

If your employer matches your 401K contribution…

Invest in the 401K first in order to get the match. That is FREE MONEY that you will not get via IRA contributions. Invest in the 401K until you get the maximum employer match you can possibly get for the year, all the way up to the maximum personal 401K contribution level ($16,500 in 2011) if your employer matches that far. Then invest in your IRA. Once your IRA is maxed out, go back to the 401K.

Roth IRA vs. 401K Conclusion

That’s really as simply as I can answer the IRA vs 401K question.

Keep in mind that the maximum contributions for IRA’s and 401K’s are completely separate and independent of each other. This is not an ‘or’ choice. You can invest in both simultaneously, if you’d like. In fact, I’d encourage you to.

Also contributions to one don’t count against the other. One happens to be with your employer (401K) and the other does not (IRA).

Where Can I Get an IRA?

If you haven’t opened your IRA yet, check out my post on how to start an online broker account. TradeKing and OptionsHouse are two of my favorite online brokers for IRA’s.

Related Posts:

• 10 Free Financial Services
• Zecco Review
• TradeKing Review
• Passive Index Investing

Invest in a Roth IRA or 401K? is copyrighted by 20somethingfinance.com without consent to republish.

So I decided to create a (hopefully) fun little true/false quiz to test your IRA ninja qualifications.

This quiz will address some common IRA myths and misunderstandings. Answers are at the bottom. Share how many you got right and which ones tripped you up! Score 9 out of 10 and above, and you are a certified IRA Ninja (and have no excuse not to be using one)!

IRA Ninja Quiz

1. True or False: You cannot contribute to an IRA if you’ve already maxed out your 401K.

2. True or False: You can contribute to both a Roth IRA and a Traditional IRA in the same year.

3. True or False: Married couples that file jointly can combine their IRA funds into a jointly funded spousal IRA.

4. True or False: You can begin withdrawing IRA funds in retirement at age 62, the same age you can start collecting Social Security.

5. True or False: You can withdraw Roth IRA funds at any time without incurring tax or penalty.

6. True or False: It does not matter what income level you are at, you can contribute to an IRA.

7. True or False: The 2011 maximum IRA contribution is $5,000 with a catch-up contribution of an additional $1,000 for those over 50.

8. True or False: The deadline to contribute to IRA’s is December 31 (the final day of that calendar year).

9. True or False: You must contribute to an IRA in order to receive the Retirement Savings Contribution Credit.

10. True or False: Traditional IRA’s give you tax benefits now while Roth IRA’s give you tax benefits in retirement.

Answers to the IRA Ninja Quiz:

1. False: Maximum 401K contributions are completely separate from IRA maximum contributions.

2. True: You can, in fact, contribute to both a Roth IRA and a Traditional IRA in the same year.

3. False: There is no such thing as a jointly funded spousal IRA (although there is a spousal IRA). A married couple’s IRA funds cannot be combined in the same account.

4. False: You can withdraw Traditional and Roth IRA funds at age 59.5, and earlier with some exceptions.

5. False: You can withdraw Roth IRA funds after 5 years in the event of disability or it meets the requirements under the First Home rule, or at age 59.5.

6. False: There are IRA income limits, which phase out what you can contribute (Roth) or deduct from your taxes (Traditional).

7. True: The maximum IRA contribution in 2011 is $5,000, unless you are over the age of 50, in which case it is a total of $6,000.

8. False: You can contribute for a given calendar year up until the tax deadline of the following year.

9. False: You can contribute to an IRA or an employer-sponsored retirement plan in order to claim the Retirement Savings Contribution Credit (income limits apply).

10. True: Traditional IRA’s are ‘pre-taxed’, meaning that they are tax deductible contributions, but you must pay taxes on withdrawals. Roth IRA contributions are post-tax, meaning that you pay taxes now, but can withdraw earnings tax-free at retirement.

Test Your IRA Ninja Skills! is copyrighted by 20somethingfinance.com without consent to republish.

Update: You can still contribute to your IRA’s for the 2011 calendar year until April 17, 2011. However, if you are looking for the 2012 maximum IRA contributions & income limits – I have since posted these as well.

2011 IRA Maximum Contribution Limits

As announced by the IRS a few weeks ago, the 2011 maximum IRA contribution and deduction limits will be the same as 2010 maximum IRA contribution limits, at $5,000 per calendar year. However, there are some slight changes to the phase out limits that I’ll go into.

Everyone should have IRA’s at their side, as they are a great way to limit your tax liability in the present (Traditional IRA) and in the future (Roth IRA). But there are limits on how much you can contribute to each, and those limits have changed slightly for 2011.

2011 Roth IRA Income Limits

• Married filing jointly or qualifying widow(er): If your modified gross adjusted income (MAGI) is $169,000 (up from $166,000 in 2010), you can contribute up to the $5,000 max. If at least $169,000 up to $179,000 (both up $3,000 over 2010), your contribution limit is phased out (see IRS publication 590). If $179,000 (up from $176,000) and above, you cannot contribute to a Roth IRA.
• Single, head of household, or married filing separately and you did not live with your spouse at any time during the year: If under $107,000 (up from $105,000 in 2010), you can contribute up to the $5,000 maximum. If at least $107,000 up to $122,000 ($120,000 in 2010), your contribution limit is phased out. If $122,000 and up, you cannot contribute to a Roth IRA.
• Married filing separately and you lived with your spouse at any time during the year: If MAGI is between $0 and $10,000, your contribution limit is phase out. If $0, you can contribution up to the $5,000 maximum ($6,000 if over 50 years old). If $10,000 and above, you cannot contribute to a Roth IRA.

Traditional IRA Income Limits

What is the IRA Catch-up Contribution Maximum?

For people over the age of 50, there is a ‘catch-up’ contribution that equals a combined $6,000 (an additional $1,000).

What if I have a Roth & a Traditional IRA – Does that Double the Contribution Limits?

No. The contribution limits are the combination of the two, and you can have both, if you’d like. It’s a smart strategy to have both available to you because it allows you to diversify your tax strategy. Traditional IRA’s allow you to get a tax break now, while Roth IRA’s result in a tax break in retirement.

Where to Start an IRA

I have both my Traditional and Roth IRA at TradeKing, because the IRA’s have no fees and their trade prices are only $4.95.

IRA Discussion:

• How much do you plan on investing in your 2010 IRA contribution?
• What about your 2011 IRA contribution?
• Do you have both a Roth and Traditional IRA? Which do you contribute to more?

Related Posts:

• 2010 Roth IRA Conversion Rules
• 8 Personal Finance Spring Cleaning Ninja Moves!
• The Complete Guide to Choosing Between a Traditional 401K and a Roth 401K
• Choosing Between a Traditional 401K and a Roth 401K, Part II: How will my Choice Effect Early Retirement?

IRS Maximum Traditional & Roth IRA Contribution Limits for 2011 is copyrighted by 20somethingfinance.com without consent to republish.

Roth IRA conversions in 2010 are of special significance due to some unique tax circumstances and rule changes. If you’ve considered making a Roth IRA conversion from a traditional IRA and have worried about the tax implications, or haven’t been able to contribute to a Roth in year’s past due to high income levels, you’ll want to pay close attention.

There is one big tax rule related to conversions that only takes place in 2010 and others that are new this year that make it a special year for a conversion. Before getting into why 2010 is so significant, let’s first cover what a Roth IRA conversion is and why you might want to consider it in the first place.

What is a Roth IRA Conversion?

A Roth IRA conversion is actually a rollover from a Traditional IRA to a post-tax Roth IRA. Roth IRA’s are an attractive investment vehicle because all earnings are tax-free upon withdrawal in retirement. Many big proponents of Roth IRA’s advocate for them because they think tax rates will increase in future years and if you expect your tax bracket in retirement will be higher than it is now it might also make good sense to convert, because you don’t have to pay future taxes in retirement on Roth IRA’s.

The Drawback: Tax Liability Now

The drawback to converting from a Traditional IRA to a Roth IRA is that you must pay taxes on the conversion amount, when you make the conversion. You’re taxed at whatever your tax rate is for that year. Because you didn’t pay taxes up front with the Traditional IRA, you pay taxes on the amount going to your Roth (which you would have done in the first place had you originally contributed to your Roth).

If you don’t have significant savings on hand immediately, this can be a huge impeding factor that might cause you to shy away from a conversion altogether. It’s usually wise to save ahead of time so that you have enough cash on hand to pay for the conversion taxes. Now, let’s get in to why 2010 is a big year for Roth conversions.

The Three Big Roth IRA Conversion Changes in 2010

1. Roth IRA Conversion Income Limit Restrictions Removed

Prior to 2010, you could not convert from a traditional IRA to a Roth IRA if your modified gross adjusted income (magi) exceeded $100,000. In 2010 (and beyond), that rule has been eliminated.

2. High Income Earners Can Now Avoid the Roth IRA Income Limits

Roth IRA contributions have income phaseout limits. This prevents high wage earners from being able to contribute to Roth IRA’s. However, those same high earners with traditional IRA’s can now get into Roth IRA’s through the backdoor via the aforementioned $100,000 conversion income limit restriction being removed.

These converters, however, will not be able to contribute new funds directly to a Roth IRA. They’ll have to move funds over via a conversion in any year that they want to put funds into a Roth IRA.

3. Spread Out your Tax Liability Over 2011 and 2012

Unique only to 2010 conversions, you are able to choose between paying taxes on your converted dollars on your 2010 tax return, or spread out the payment in 2011 and 2012 (50% on each year’s tax return). This way, if you don’t have the savings immediately at hand or don’t want to deplete  your emergency savings, you can spread out the tax liability to 2011 and 2012. In other years (including starting again in 2011), you have to claim the conversion amount as ordinary income for that tax year.

Note that it is recommended that you pay the tax liability with saved non-retirement dollars versus pulling funds from your IRA, which kind of defeats the point of the conversion in the first place.

Things to Note on IRA Conversions:

• Carefully consider this move before you make it. If you’re thinking about making a conversion, it is one of those times that it might pay off to speak with a CPA, CFP, or other certified professional. There may be a number of situations where making a conversion does not make good financial sense.
• The conversion rules also apply to employer plans such as 401k’s.
• The conversion itself shouldn’t cost anything, minus a few trading or account closing fees. Excluding the taxes, of course. Any discount broker, such as TradeKing or Zecco could help you do it (note: I have my Roth IRA in TradeKing because they don’t charge annual fees).

Roth Conversion Discussion:

• Have you (or will you) make the Roth IRA conversion this year? Why or why not?
• If you are making the conversion, are you spreading it out over 2011 and 2012?

Related Posts:

• 2011 IRA Maximum Contributions
• 2012 Maximum IRA Contributions

2010 Roth IRA Conversion Rules: What’s the Big Deal About 2010? is copyrighted by 20somethingfinance.com without consent to republish.

IRA’s are a phenomenal way to limit your tax liability in the present (Traditional IRA) and in the future (Roth IRA). In fact, the IRS views them as such a benefit that they put rules in place to ensure that if you have too high of an income,  your IRA contribution maximums or deductions will begin to phase out and disappear altogether.

This is where modified adjusted gross income (MAGI) comes into play, which I just wrote about in exhaustive detail (I should have quizzed).

Since it is still before the 2011 tax deadline, it is important to know both the 2011 and 2012 IRA income limits.

IRA’s provide a great way to limit your tax liability in the present (Traditional IRA) and in the future (Roth IRA). There are, however, contribution phaseout limits based on your income that can limit how much you can contribute. The good news is that those limits (tied to inflation) will increase in 2012.

2011 Roth IRA Income Limits

In regards to IRS Roth IRA income limits, your modified adjusted gross income (MAGI) determines whether or not you can contribute to a Roth IRA. Here are 2011 IRA income limits in place, by filing status:

• Married filing jointly or qualifying widow(er): If your modified gross adjusted income (MAGI) is $169,000 (up from $166,000 in 2010), you can contribute up to the $5,000 max. If at least $169,000 up to $179,000 (both up $3,000 over 2010), your contribution limit is phased out (see IRS publication 590). If $179,000 (up from $176,000) and above, you cannot contribute to a Roth IRA.
• Single, head of household, or married filing separately and you did not live with your spouse at any time during the year: If under $107,000 (up from $105,000 in 2010), you can contribute up to the $5,000 maximum. If at least $107,000 up to $122,000 ($120,000 in 2010), your contribution limit is phased out. If $122,000 and up, you cannot contribute to a Roth IRA.
• Married filing separately and you lived with your spouse at any time during the year: If MAGI is between $0 and $10,000, your contribution limit is phase out. If $0, you can contribution up to the $5,000 maximum ($6,000 if over 50 years old). If $10,000 and above, you cannot contribute to a Roth IRA.

2012 Roth IRA Income Limits

2011 Traditional IRA Income Limits for Deductions

There are no income limits dictating what you can contribute to a Traditional IRA. However, their are limits as to what you can deduct from your taxes. And what good are Traditional IRA’s if you can’t get a tax deduction when contributing to them?

Traditional IRA income limits vary based on whether you are covered by a qualified retirement plan at work (i.e. 401K) or not. Let’s divide up the two.

If Covered by an Employer Sponsored Retirement Plan

We’ll break this down by filing status again:

• Single or head of household: If your MAGI is $56,000 or less, you can take a full deduction. If more than $56,000, but less than $66,000 – you get a partial deduction. If over $66,000, you cannot take a deduction.
• Married filing jointly or qualifying widow(er): If your MAGI is $90,000 or less, you can take a full deduction. If more than $90,000, but less than $110,000 – you get a partial deduction. If over $110,000, no deduction.
• Married filing separately: If your MAGI is less than $10,000, you can take a partial deduction. If $10,000 or more, no deduction.

If you DON’T have a retirement plan through an employer:

• Single, head of household, or qualifying widow(er): Any MAGI permits a full deduction.
• Married filing jointly or separately with a spouse who is not covered by a plan at work: Any MAGI permits a full deduction.
• Married filing jointly with a spouse who is covered by a plan at work: If your MAGI is $169,000 or less, you can take a full deduction. If more than $169,000, but less than $179,000, you can take a partial deduction. If $179,000 or more, no deduction at all.
• Married filing separately with a spouse who is covered by a plan at work: If your MAGI is less than $10,000, you can claim a partial deduction. If $10,000 or more, no deduction.

Who said tax law was easy (or fun)?

2012 Traditional IRA Income Limits for Deductions

The 2012 traditional and Roth IRA income limits have both increased.

If you do have a retirement plan with your employer:

• Single or head of household: If your MAGI is $58,000 (up from $56,000) or less, you can take a full deduction. If more than $58,000, but less than $68,000 (up from $66,000) – you get a partial deduction. If over $68,000, you cannot take a deduction.
• Married filing jointly or qualifying widow(er): If your MAGI is $92,000 (up from $90,000) or less, you can take a full deduction. If more than $92,000, but less than $112,000 (up from $110,000) – you get a partial deduction. If over $112,000, no deduction.
• Married filing separately: If your MAGI is less than $10,000, you can take a partial deduction. If $10,000 or more, no deduction.

If you DO NOT have a retirement plan through an employer:

• Single, head of household, or qualifying widow(er): Any MAGI permits a full deduction.
• Married filing jointly or separately with a spouse who is not covered by a plan at work: Any MAGI permits a full deduction.
• Married filing jointly with a spouse who is covered by a plan at work: If your MAGI is $169,000 or less, you can take a full deduction. If more than $173,000 (up from $169,000), but less than $183,000 (up from $179,000), you can take a partial deduction. If $183,000 or more, no deduction at all.
• Married filing separately with a spouse who is covered by a plan at work: If your MAGI is less than $10,000, you can claim a partial deduction. If $10,000 or more, no deduction.

Why Are IRA Phaseout Limits Important?

You have an ability to influence whether or not you can deduct your taxes (in a traditional IRA) or contribute to a Roth IRA based on how you impact your MAGI. If you are getting phased out or over the limit, you can look for ways to decrease your MAGI so that you can take advantage of the great benefits that both IRA options offer. Just don’t wait until it’s too late.

On the flip side, you can even get an additional savers tax credit if your MAGI is low enough.

Related Posts:

• 2012 IRS Maximum Allowed 401K Contribution
• 8 Personal Finance Spring Cleaning Ninja Moves

Traditional & Roth IRA Income Limits is copyrighted by 20somethingfinance.com without consent to republish.

So, what I’m going to do in this post is highlight what each of these terms mean, where you will encounter them, and why they are important to know so that you can refer back to this post in the future when the ambiguity returns.

Gross Income (aka Gross Earnings)

We’ll start with the easy one. Gross income is simply the total money, or income, that you receive per year before any deductions and taxes are taken out. Gross income is also referred to as ‘gross earnings’, ‘total income’, or simply ‘gross’. At first, you might just think, OK, it’s my salary, simple enough. Not quite. The IRS factors all of the following income sources into your gross income, and it runs from line 7 to line 21 of your 1040. Gross income is the net sum of the following:

• wages
• salaries
• tips
• taxable interest
• ordinary dividends
• taxable refunds, credits, or offsets of state and local income taxes
• alimony received
• business income or loss
• capital gains or losses
• other gains or losses
• taxable IRA distributions
• taxable pensions and annuities
• rental real estate
• royalties
• farm income or losses
• unemployment compensation
• taxable social security benefits
• and other income

All of these income sources add up to the ‘total income’ amount on line 22 of your W4.

Adjusted Gross Income (AGI)

Thankfully, we aren’t taxed on gross income. We get to subtract a number of deductions. Your gross income minus all of these deductions is what becomes your adjusted gross income (AGI) or Net Income. What deductions do you get to subtract? Why, thank you for asking. The following deductions make up lines 23-35 of the first page of your 1040:

• educator expenses
• individual business expenses
• health savings account (HSA)
• moving expenses
• one-half of self employment tax
• self-employed SEP, SIMPLE, and qualified plans
• self-employed health insurance deduction
• penalty on early withdrawal of savings
• alimony paid
• the IRA deduction
• student loan interest deduction
• tuition and fees deduction
• domestic production activities deduction
• Archer MSA deduction

The sum of these deductions adds up to line 36 of your 1040. To get your adjusted gross income, you subtract line 36 from line 22. Your adjusted gross income is what’s left, and it goes in line 37. If you use Turbotax or HR Block, it probably didn’t occur to you how these actual terms related to your 1040. Neither the standard deduction or itemized deductions are factored into your adjusted gross income.

Modified Adjusted Gross Income (MAGI)

Modified adjusted gross income (MAGI) are important because they are used to calculate income phaseout limits that indicate what your Roth IRA, SEP IRA, and traditional IRA maximum contribution limits are. And doing things to reduce your income such as increasing to the maximum 401k contribution, might actually lower your overall MAGI and allow you to contribute more to your IRA’s.

The IRS defines MAGI as:

AGI without:

• Any passive loss or passive income, or
• Any rental losses (whether or not allowed by IRC § 469(c)(7)),  or
• IRA, taxable social security or
• One-half of self-employment tax (IRC § 469(i)(3)(E)) or
• Exclusion under 137 for adoption expenses or
• Student loan interest.
• Exclusion for income from US savings bonds (to pay higher education tuition and fees)
• Qualified tuition expenses (tax years 2002 and later)
• Tuition and fees deduction
• Any overall loss from a PTP (publicly traded partnership)

Also, in order to qualify for the retirement savings contribution credit,  you must have an adjusted gross income under these limits:

• $55,500 (married filing jointly),
• $41,625 (head of household), or
• $27,750 (single, married filing separately, or qualifying widower)

There you have it – gross income, adjusted gross income, and modified gross income in a nutshell. I’ll be referencing these terms in some upcoming posts. No quizzes at the moment.

Adjusted Gross Income (AGI) Vs. Modified Adjusted Gross Income (MAGI) is copyrighted by 20somethingfinance.com without consent to republish.

What is a Roth 401K?

It’s essentially a combination of some aspects of a Traditional 401K and a Roth IRA. With a Roth 401K, you can contribute the same contribution amounts as a Traditional 401K, only it is is after-tax dollars (like a Roth IRA). Your contributions and your earnings grow tax-free and are not taxed upon distributions or withdrawal in retirement.

What is the Difference Between a Roth 401K Versus a Traditional 401K?

Roth’s 401K’s  are post-tax, traditional 401K’s are pre-tax. Roth contributions are taxed now, Traditional contributions are taxed in retirement. It’s as simple as that.

What is the 2010 Roth 401K Maximum Contribution?

Much like with Traditional IRA and Roth IRA’s, it is a combined contribution total. The IRS Roth 401K maximum contribution level is the same as the Traditional 401(k) contribution maximum – $17,000 for the 2012 tax year.

Are Roth 401K Matching Funds Also Post Tax?

No! This was the biggest question I had when starting a Roth 401K. I thought to myself, “hmmm… if I contribute to the Roth vs. the Traditional, then my matching funds will be higher because they are in after tax dollars”. Nice try. Your employer’s matching Roth 401K contributions are in pre-tax dollars.

This means that a Traditional 401K will be opened for you by your employer, if you didn’t already have one – and pre-tax matching funds will be placed in it. An employer CANNOT contribute after-tax matching funds to your Roth 401K. Bummer, I know.

What is the Roth 401K Catchup Contribution?

Same as the Traditional 401K. You can contribute an extra $5,500 to your Roth 401K (for a total of $22,000) if age 50 or older.

Can a Roth 401K rollover into a Roth IRA?

Yes, much like a Traditional 401K can rollover into a Traditional IRA (or Roth with taxes paid), you can roll over a Roth 401K to a Roth IRA. And you should probably do this whenever you leave an employer because Roth IRA options from discount brokers like Zecco and TradeKing are usually greater, and with lower fees than 401K plans.

Can you Move Money from a Roth 401K to a Traditional 401K?

No. And you’d never want to. Post-tax funds are always worth more than pre-tax funds.

Roth 401K Contributions Withdrawal Rules

You can withdraw before retirement without tax and penalty if your account is at least 5 years old. There are some exceptions, including disability that would allow you to withdraw early without penalty. And there are some funny rules around earnings to contributions, so check with a CFP on this one if you are considering it.

Roth 401K Discussion

• Does your employer offer the Roth 401K?
• Have you signed up for one?
• If you have the option of a Roth 401K and a Traditional 401K, which are you contributing the most to?

Roth 401K Contibution Maximum Contribution & Comparisons to Traditional 401K is copyrighted by 20somethingfinance.com without consent to republish.

Something about this season always makes me want to de-clutter things, particularly my finances. Here’s a list of the things that I’m doing this Spring (and typically do every Spring) to keep my finances in order. All can be accomplished in an afternoon. It will be time well spent.

1. Shred Old Financial Documents

De-cluttering your finances starts with reducing paper clutter. I’m conservative in keeping tax records going back 7 years and about 1 year on everything else. Beyond that, I have been shredding everything. I recently shredded enough documents to fill 5 paper grocery bags! I’d recommend getting a cross-cutting shredder that shreds 8 or more pieces at the same time and also shreds old plastic cards, like the Fellowes Powershredder. If you’re throwing this stuff in the trash, un-shredded, you’re leaving yourself vulnerable to identity theft and fraud.

2. Check your Free Credit Report and Clean Up Any Discrepancies

AnnualCreditReport.com (the real-deal website, mandated by the federal government) offers you three free credit reports annually. Space them out every 4 months to check for discrepancies and avoid taking any unnecessary credit score hits. For more on annualcreditreport.com, check out my post on how to make the most out of these free credit reports.

3. It’s Budget Cleanup Time!

Yes, I know you didn’t want to hear this one, but it’s oh so important. I wrote a pretty comprehensive post that includes a budget spreadsheet that I designed and used personally. Check it out, and see where the holes in the bucket are. Then plug them ASAP.

4. Stop Settling for Paltry Interest Rates on Short-Term Cash Holdings

For your emergency savings fund and other short-term cash holdings, you might as well earn best in industry rate yields on your savings. Right now, that is around 1.25%, but it changes frequently. The 5 online banks that I usually see at the top of the list for savings rate yields are Discover Bank, Ally Bank, EverBank, and Ing Direct. All offer a pretty comprehensive product offering if you want to expand beyond a savings account.

5. Move Long-Term Investment Funds From Savings & Checking Accounts to Investment Accounts

I give myself low marks for letting long-term investment funds sit in my bank account. With the market run-up, I missed out on thousands of dollars worth of capital gains because I simply wasn’t keeping up on moving those assets over to investment accounts. Don’t get caught sitting on interest rates of 1% or below and having inflation eat away at it.

6. Consolidate Your Brokerages

Having too many brokerage accounts is a great way to easily lose track of your financial allocations. I recently switched my IRA from ETrade to TradeKing. More recently, my wife rolled over her Roth and Traditional 401K from her last job to a TradeKing Roth and Traditional IRA. TradeKing offers IRA’s without annual fees or inactivity fees. And trades are just $4.95.

For non-retirement accounts, I moved my funds from Scottrade to Zecco last year. I give Zecco high scores for having zero annual fees, no inactivity fees, and free trades (however, they do charge an annual fee for IRA’s, which is why I prefer TradeKing for that).

7. Re-Allocate Investments

Once you have consolidated brokerage accounts, it’s time to do a little re-allocation. With the market having the run that it has had, now would be a great time to go through  your stocks, mutual funds, and other investments and make sure that the asset allocation is re-distributing to the correct portions. This might require moving some money around. In my case, it also means moving my accounts around.

8. Get the Best Debit & Credit Card Rewards

First off, cancel any credit cards you are not paying in full each month. Glad we cleared that up. If you ARE going to effectively use a credit card, make sure it is one that is giving good rewards. I average about 2% cash back on the TrueEarnings Card from Costco and American Express (check out my Costco American Express review for more info).

I also get 6% cash back from the best grocery rewards card on the market, the American Express Blue Preferred card.

Additionally, if you are using a debit card, you might as well get cash back on it as well. That’s where PerkStreet Financialcomes in. They offer a Visa® Debit Card that actually pays you back at a rate of 1% (versus the standard 0.4%). PerkStreet is currently offering a special promotion of 2% cash back for the next 4 months. Additionally, you are eligible for a bonus $50 just for funding your account with $250 and making 25 transactions in the first 90 days. Not bad!

What are you Doing to Spruce Up your Finances this Spring?

8 Personal Finance Spring Cleaning Ninja Moves is copyrighted by 20somethingfinance.com without consent to republish.

So what are some realistic and strategic goals once you reach 30? I’ve been thinking about this a lot lately. The thirties are an interesting time period. Ideally, you start to advance in your career and begin hitting your peak earning years, you may have a house, start a family, and you generally have a completely different set of financial goals than when you do in your twenties.

Much like I did on my twenties post, I’ll cover some basic goals along with goals that would win you extra points. Remember, these are goals to strive for, they won’t be hit by everyone.

1. Retirement: Max Out your 401K

I’ve max out my 401K for the last few years and plan on doing it every year in my thirties. Why max it out? Well, for starters, if you’ve been doing it already, you know what it takes and should have no problem doing it as your income continues to grow. If you haven’t been, your thirties might begin to provide enough of an income for you to consider it. Don’t wait until your 40′s to start savings significantly for retirement. By then, it might be too late to use the power of compounding capital gains to have a huge impact by retirement.

Not sure what the IRS maximum 401K contribution is? Click that link to find out.

• Bonus Points: Starting to contribute to your IRA in your twenties should be a goal. In your thirties, there’s more at stake. In addition to maxing out your 401K, also try to hit your IRA maximum contributions by maxing out your traditional or Roth IRA.

2. Debt: Pay Off All Non-Mortgage Debt

This would include credit cards, auto, and other high-interest unsecured loans as well as student debt. High-interest loans are the equivalent of a dam that’s about to break. It’s starts off as a little drip and as time goes by it turns into a steady stream and finally, it breaks down the wall altogether.

• Bonus Points: Pay off your mortgage. Carrying significant mortgage debt into your forties and fifties leads to you being very dependent on your primary source of income to keep the house, most notably, your day-job. As we all know, hardship can happen anytime. Having to foreclose on a house at that stage of life makes recovery for a comfortable retirement very difficult.

3. Emergency Savings: Maintain an Emergency Fund Equal to One Year’s Worth of Living Expenses

In a span of ten years, the country will probably going to go through an economic recession or two. In such times (and even outside of them), you or your significant other may be at risk of losing your job. You also may become more prone to disease or other medical hardship as you age. When my wife was laid off last year, our emergency savings fund helped save the day. Protecting your future goes a long ways towards peace of mind.

A lot of financial gurus recommend six months worth of emergency savings, but after this recession, I’d feel a lot more comfortable with a year.

• Bonus Points: Earn interest on your emergency fund through a high-yield savings account through an online bank, such as Discover Bank, Everbank, Ing Direct, or Ally Bank.

4. Protect: Protect your Loved Ones with Term-Life Insurance

A lot of us will continue or begin long-term relationships and possibly start families in our thirties. If someone you know is even partially dependent upon your income to live comfortably, then you should be taking a look at covering yourself with a term life insurance policy. Term life insurance is the ‘discount broker’ of life insurance – you cut down on fees and pay for only what you need.

• Bonus Points: Acquire long-term disability insurance as well.

5. Protect your Legacy: Fulfill your Legal Obligations to Others

Create and maintain a living will, living trust, durable power of attorney, and a will. If you are to become medically incapacitated or pass away, these legal documents can protect your loved ones on a financial and emotional level. You owe it to them.

You can go through an attorney to complete these legal documents, but that can be costly, particularly if you frequently update them. I’d recommend checking out Quicken WillMaker Plus 2012, which has fill-in-the blank templates for all four documents and many other legal documents that you might find useful.

• Bonus Points: Don’t die in your thirties. Oh, that’s just wrong, isn’t it? Have a little sense of humor!

Personal Finance Goals for your Thirties Discussion:

• What goals did you create/complete while in your thirties?
• If you’re in your twenties are you a step ahead on completing some of these goals?
• What financial goals do you have for your thirties?

Related Posts:

• 8 Personal Finance Spring Cleaning Ninja Moves!
• How to Improve your Credit Score

5 Personal Finance Goals for your Thirties is copyrighted by 20somethingfinance.com without consent to republish.