No Money for Your IRA Contributions?

With those tax benefits, you’d think that most people would  be aggressively contributing to their IRAs. However how many people actually maximize their contributions (currently it’s $5000/year)? Why is that the case?

One of the biggest obstacles I hear from people about why they are not contributing money into an IRA is that they don’t have the extra money in their budget. With budgets already tight, they feel like retirement contributions are out of the question.

The good news is that you can make some adjustments to your budget that will help you save for later without drastically sacrificing your budget now.

Finding Money in Your Budget

If you’re looking to jump start or increase your retirement contributions, here are some big ways to find money in your budget.

• Proper Withholding on Paychecks: If you haven’t reviewed your w-4 in awhile, you may want to look at it again. When it comes to withholding on your wages, you could optimize your finances by simply adjusting to what could work best for you. For some, being conservative with their withholding means they can get a bigger refund come tax time, which they can immediately use to fund their IRAs in one swoop. For others, getting more money in their paychecks throughout the years can be the right choice as they set up automatic contributions to keep them on point.
• Take a Week to Shop Insurance: Sometimes we can get into a comfortable habit of staying with the same insurance company simply because we’re used to dealing with them. There’s nothing wrong with being loyal to a good company, just make sure you’re getting value for your loyalty. For us, switching car insurance has cut our premiums by almost half. For my mother, calling around got her current insurance company to lower her bill.
• Consolidate Student Loans: If you qualify for lower rates with a student loan consolidation, you should seriously check it out and run the numbers. The money saved can then be redirected towards your IRA.

None of these adjustments will hamper your budget now, yet they can save you a good amount of money. If possible, once you make the change set up an automatic contribution to your IRA so you can stay on target.

Thoughts on Funding an IRA

I’d love to hear from you about your retirement contributions. How did you find money to contribute to your IRA? What has been the easiest adjustment you’ve made? What has been the hardest?

Build Your Nest Egg and Save on Your Taxes

Don’t ignore the tax benefits of building a nest egg. A 401k and traditional IRA will give you a tax break today by allowing contributions to be considered tax deductions.

You may be getting ready to file your taxes before the April 15th deadline.  You can still make a contribution of up to $5,000 to your IRA ($6,000 if over 50) by the tax deadline and take a tax deduction for the contribution on your 2012 taxes.  You can build your nest egg and at the same time keep more of your hard-earned money.

If you opt for a Roth IRA you won’t see a tax break today, but qualified withdrawals in the future will come out tax free. If Uncle Sam is going to provide a benefit for saving money, take advantage of it.

Use Your Tax Refund to Build Your Nest Egg

After you file your taxes and find out you’re getting a tax refund, you can contribute some of your tax refund to your IRA and get a head start on tax savings for next tax year while growing your retirement.

Contribute a Little More

If you have a 401k at work or you opened up an IRA these vehicles are a great start, and if you’re already contributing something, that’s all the better. The thing is, you can always do more. Chances are you aren’t maxing out your 401k so there’s room for improvement.

You may be thinking that there’s simply no way you can afford to put more away, and it’s true that money is tight in this economy. But you don’t have to feel like you’re taking on another mortgage payment just to boost your retirement savings.

Start small. For example, if you’re currently contributing $200 a month, bump it up to $250. 50 extra dollars a month doesn’t seem like it will help, but over the long run it can be a big difference. Just the extra 50 bucks a month over the next 25 years tucked away in your retirement account will likely add up to $30,000 or more.

Whether you bump up your contributions 20 dollars a month or 200 dollars a month, the idea is to make it a habit every year. When you make a small bump to your monthly contributions your budget won’t take a noticeable hit.

Sure, you might feel the pinch initially, but it doesn’t take long before your spending adjusts and you completely forget about the extra money you’re putting into your nest egg. Now, if you make the same small increase each year it won’t take long before you’re putting a lot of money away toward retirement and you don’t even realize it. You will be thanking yourself when it comes time to rely on that money.

If you aren’t currently building up your nest egg with a 401k, IRA, or even just a savings account, now is a perfect time to start. Just like the advice above about starting small, that’s probably how you’ll want to start for the first time.

If you can’t afford to max out an IRA right now that’s perfectly fine and nothing to be ashamed about. Start with 25 or 50 dollars a month. Sure, that alone won’t give you the retirement of your dreams, but we’re just trying to build a foundation and get into the habit of saving.

Over time you will increase your contributions and it all adds up. Remember, every day that passes is one less day you have to save. You can’t get that time back, so save something, anything, and it will pay big dividends and help you save on your taxes.

Investing has never been easier than today with all the options available for people to really use their savings to achieve the dreams and goals for the future. No savings to become a smart investor? Consider your tax refund to start investing in the stock market like a professional.

According to the IRS, the average tax refund in 2012 was about $2,803 and that is more than enough to open a brokerage account and start investing your savings for the future. In fact you can start investing with a lot less.

It is an interesting year for investors. After the Financial crisis of 2008 and 2009 the stock market has recovered and now we are in what experts call a “bull market”, a market in which prices of company’s stocks are rising and investors are encouraged to buy shares.

The performance of the stock market is remarkable. From the bottom of the market in March 2009 to February 2013, the price of stocks has risen 89% based on the S&P 500, the stock index composed by the leading 500 companies in the US. That represents an impressive average annual return of 17% in the last 4 years.

That return outperforms by far other investment alternatives such as bonds, money market funds, certificates of deposit or real estate. However, there is more risk involved when investing in the stock market. That means the returns change a lot from one month to the next or even from one day to the next.

But the stock market is a good alternative to achieve long term goals such as retirement when the risk is properly managed and balanced with your age and goals.

Your tax refund could be your pass to the world of investments:

-As soon as you get your tax refund this year, go to an investment brokerage firm or even your own bank and open an Individual Retirement account (IRA). An IRA is a vehicle in which you can invest your money and obtain a tax advantage: every dollar you put  in the IRA is reduces  your taxable income so you pay fewer taxes as you invest your savings.

-When you have your IRA, you can pick mutual funds to invest your money in. A mutual fund is a collection of stocks, bonds and cash alternatives. The Mutual Fund manages the money from many investors (hundreds or thousands) and that allows the small investor to have their money managed by professionals.

-You can pick among thousands of different funds with different objectives. There are funds for stocks, for bonds or funds that invest in a mix of stocks and bonds.

-Your selection of the fund depends on the risk you are willing to take with your money. For instance, stocks are riskier than bonds. However, in the long run the annual return for stocks tends to be higher. And you will need a higher return to achieve long term goals like retirement.

-How much risk can you take? It all depends on the time you have to achieve the goal. If you have 20 years for retirement, you can take a lot more risk than if you plan to retire next year.

-The tax refund is only the starting point. Once you open the IRA account you should sign up for automatic investments to contribute every month to the IRA account.

-Your finances are going to be transformed because you will be officially an investor with real long term goals.

- Haven’t filed your taxes yet?  Go online and file your taxes so that you can get your tax refund as soon as possible, make these smart investment moves with your tax refund, and keep more of your hard-earned money.

Invertir nunca había sido tan fácil como ahora gracias a todas las opciones disponibles para que la gente  realmente aproveche sus ahorros para lograr los sueños y metas para el futuro.

¿No puede ahorrar para convertirse en inversionista? Considere su devolución de impuestos para empezar a invertir en la bolsa como un profesional.

De acuerdo con el Servicio de Impuestos Internos (IRS), la devolución promedio de impuestos en 2012 fue de cerca de $2,803. Esa cifra es más que suficiente para abrir una cuenta de inversiones y empezar a invertir sus ahorros para el futuro. De hecho, es posible empezar a invertir con mucho menos.

Es un año interesante para los inversionistas. Después de la crisis financiera de 2008 y 2009, el mercado de acciones se ha recuperado y ahora estamos en lo que los expertos llaman un mercado en auge (“bull market”), un mercado en el que los precios de las acciones de las empresas están aumentando y los inversionistas están interesados en comprar las acciones.

El desempeño del mercado de acciones ha sido sobresaliente. Desde el punto más bajo del mercado en marzo de 2009 hasta febrero de 2013, el precio de las acciones aumentó 89% con base en el S&P 500, el índice de acciones  compuesto por las principales 500 empresas de Estados Unidos. Esto representa un impresionante rendimiento promedio anual de 17% en os últimos 4 años.

Este rendimiento supera de lejos a otras alternativas de inversión como bonos, fondos de mercado de dinero, certificados de depósito o inversiones inmobiliarias. Sin embargo, se asume más riesgo cuando se invierte en el mercado de acciones. Esto indica que la rentabilidad cambia mucho de un mes a otro e incluso entre un día y otro.

Pero el mercado de acciones es una buena alternativa para lograr metas de largo plazo como el retiro cuando el riesgo se administra adecuadamente de acuerdo a la edad y las metas del inversionista.

Su devolución de impuestos puede ser su entrada al mundo de las inversiones:

-Tan pronto como reciba su devolución de impuestos este año abra una cuenta de inversión en una firma de corretaje o en su propio banco. Abra una cuenta de retiro individual (IRA). El IRA es un vehículo en el que usted invierte su dinero y obtiene una ventaja de impuestos: Cada dólar que invierta en la cuenta IRA reduce su ingreso gravable y así paga menos impuestos mientras invierte sus ahorros.

-Cuando tenga una cuenta IRA, usted puede seleccionar fondos mutuos para invertir su dinero. El fondo mutuo invierte su dinero en acciones, bonos o alternativas de efectivo. El fondo mutuo administra el dinero de muchos inversionistas (cientos o miles). Esto permite que el dinero del pequeño inversionista sea gestionado por profesionales.

-Usted puede seleccionar entre miles de fondos diferentes con objetivos diversos. Hay fondos para acciones, para bonos, o fondos que invierten en una mezcla de acciones y bonos.

-Su selección del fondo depende el riesgo que esté dispuesto a asumir con su dinero. Por ejemplo, las acciones tienen más riesgo que los bonos. Sin embargo, a largo plazo el rendimiento de las acciones tiende a ser mayor. Y usted necesitará rendimientos más altos para lograr metas de largo plazo como la jubilación.

-¿Cuánto riesgo puede tomar? Todo depende del tiempo que tenga para alcanzar el logro. Si a usted le faltan 20 años para jubilarse, usted puede asumir mucho más riesgo que si planea retirarse el próximo año.

-La devolución de impuestos es sólo el punto de arranque. Una vez usted abre una cuenta IRA usted puede registrarse para realizar inversiones automáticas para aportar cada mes a su cuenta IRA.

-Sus finanzas se van a transformar porque usted empezará a ser un inversionista con metas de largo plazo.

-¿No ha presentado sus impuestos todavía? Puede ir a Internet y presentar sus impuestos para obtener su devolución de impuestos lo más rápido posible, empezar a invertir y hacer que su dinero rinda más.

1.  Don’t Give Up on Last Year Yet

Even though it’s now 2013, there is still time to make some tax moves that will affect your 2012 taxes. One big move I would suggest if it’s available to you is to make a tax deductible contribution to a Traditional IRA. You have up until April 15th or the date you file your taxes to make a contribution for the previous tax year. This move would put more money in your retirement savings and it would be a big deduction from your income, likely lowering your taxes (or increasing your refund) by a nice amount. An IRA can be opened at a variety of places: discount online brokers, banks, mutual fund companies, etc.

2.  Getting a Tax Refund? File ASAP!

If you’re expecting a refund, make an effort to file your taxes as soon as you can. The sooner you get the money the sooner you can put it to work for you in a saving account, to pay down debt, or to spend on that vacation you’ve been wanting to take. Remember, this is your money, so don’t delay.

3.  Know Your Limits

Thinking about the year ahead I like to plan my savings goals for the year based on the published annual contribution limits set by the IRS on retirement, health, and education savings accounts. Each year these limits typically change, so you’ll want to adjust your automatic savings withdrawals to reflect the new yearly goal. For instance, in 2013, the contribution limit on Roth IRAs is going up to $5,500 for most individuals($6,500 if 50 or older). That’s about 458.33 a month for the next twelve months. Be sure to adjust your contributions to reflect this new year amount.

4.  Adjust Your W-4 Withholding

Another adjustment you should potentially make in the new year is to your employer withholding. Pick up a W-4 form and complete it based on your current situation. Big life changes like having a baby and getting married can have a big impact on your withholding, so be sure to keep your employer informed in the new year. The W-4 is your chance to tell your employer how to withhold for federal taxes.  TurboTax W-4 calculator can help you figure out how much you should withhold from your paycheck.

5.  Resolve to Keep Better Records

Finally, make this year the year when you keep better financial records. This will make your tax filing season much smoother. Keeping better track of your financial and tax situation could have a nice impact to your bottom line in the new year.

IRAs

IRAs can be a powerful tool that can help you build your finances, prepare for a better retirement, and get a hefty savings at tax time. However, some people are confused on what they are, how much they can contribute, and the deadline for their contributions. I’ll answer some common questions to help you feel more comfortable using them.

Max Out Your IRA Contributions

When should you start investing in an IRA? As soon as you can, provided that you have an emergency fund in place and don’t have any high interest (>12%) debts.

How much can you contribute to your IRA? For 2011, you can contribute $5,000/year or the amount of your taxable compensation. If you’re over 50, you get an additional $1,000 added to your contribution ($6,000/year). Don’t forget that these are for individuals, so a couple younger than 50 can contribute $10,000 into IRAs ($5,000 each). If you can max out your contributions, then please do so.

With IRA contributions, there are guidelines for the deduction and contribution limits.  If you contribute to your traditional IRA by April 17th, you may be able to claim a tax deduction on your tax return for the amount contributed.  Roth IRA contributions, however are not tax deductible since the qualified distributions are tax-free.

You can contribute to your Roth IRA if your modified AGI is less than:

• $179,000 for married filing jointly or qualifying widow(er),
• $122,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
• $10,000 for married filing separately and you lived with your spouse at any time during the year.

For your traditional IRA, if you or your spouse is covered by a retirement plan at work, your deduction may be limited.

Don’t worry about figuring out these limitations.  TurboTax easily guides you through the necessary entries and gives you the appropriate tax deduction to maximize your tax refund.

Make it Easy to Contribute

The easiest way to stay on target for your investment goals is to go ahead and automate your IRA contributions. It can be as small as $25/week; the important part if getting you into the habit of saving up for your retirement.

You can also set aside a chunk of any bonuses or windfalls you get this year to deposit into your IRA.

Deadlines for Contributing to Your IRA

2011 is over, but you still have until April 17th to make a tax deductible contribution to your traditional IRA and reap the benefits of a bigger tax refund.

Thoughts on Your IRA

How many of you have continued to contribute your IRA? How has it been doing this year?

Retirement

On the road to retirement, there are some decisions you’ll have which can impact your taxes along the way. Your 401(k) and IRA accounts – should you choose the traditional pre-tax flavor or Roth?  The Roth plan requires post-tax contributions, but allows tax free growth and distribution, in most cases.  If the distribution is the result of a conversion or certain rollover in under 5 years after conversion and you are under 59-1/2, you may have to pay an additional 10% tax penalty.  With pre-tax plans, you contribute to the plans with your funds without any taxes deducted so the distributions are taxable.  So which one do you choose?

One approach to consider is to look at your marginal tax rate, and see how far into that bracket you are. For example, a single filer will be in the 15% bracket from $8,500 of taxable income right until $34,500. If you find that after deductions, exemptions, credits, etc, your taxable income is $38,000, it may not make sense to be in pre-tax retirement accounts for all your retirement savings. Since only the amount above $34,500 is taxed at 25%, by putting exactly $3,500 into a pretax 401(k) or IRA, you’ll reduce your taxable income so the last dollar is taxed at 15%, and none at 25%.

If your company offers a 401(k) with a company match, see if they also offer a Roth 401(k). If not, at least be sure to deposit enough to get the match, and then use a Roth IRA to top off your savings. If the Roth 401(k) is an option, you are usually able to change between this and the standard pre-tax 401(k) on a pay cycle adjustment. The process can be fine tuned a bit by using a traditional IRA and converting some of it to Roth, as needed. A bit of attention to your taxable income and your paystubs and you should be able to take advantage of the difference between these two tax rates.

On the retiring side, you can implement a similar strategy. As a single retiree, finding yourself with a mix of pre and post tax investment accounts, by choosing the pre-tax 401(k) and IRA to make withdrawals right up to the taxable income of $34,500, and Roth or other post tax money for anything above this, you can aim to live right on the edge of 15% through retirement.

With the 2011 standard deduction ($5800) and exemption ($3700) adding to $9500 right off the top, this is about all the median earner needs at retirement. If your withdrawals are a bit lower than this, consider the strategy of converting just enough IRA money to top off that 15% bracket.

It’s not as difficult as it might appear. By looking at last year’s return and adjusting slightly for this year’s numbers, you should have a good idea where 2011 will put your taxable income. Underestimate a bit, and convert just enough IRA money to Roth to hit your goal.

If in April, your return tells you went over, just recharacterize enough to get the taxable income number dead on. This strategy for the just-retired person will help bring that IRA balance down over time to avoid some potentially large RMDs (Required Minimum Distributions) after reaching 70-1/2.  Please note: once you make contributions to a designated Roth account, you cannot later change to a pre-tax account.

Note – the rates I discussed are for the single filer. Take a peek at the page I linked above for the tax table for other filing status, the idea works the same with the numbers adjusted for status.

As long as an individual meets certain criteria laid out by the IRS, this strategy will offer hefty tax savings for individuals and much-needed cash for numerous charitable organizations.

Qualified Charitable Distribution

Tax Law Timeline

The Pension Protection Act of 2006 allowed taxpayers age 70 1/2 and older to exclude from their gross income what would otherwise be taxable distributions from their IRA if they were paid directly to a charity.

This law has been extended for the last 4 years, and is currently extended through December 2011 by the Tax Relief Act of 2010.

This tax legislation extends Qualified Charitable Distributions – an IRA distribution paid directly to a charitable organization from IRAs – through the end of this year. QCDs are excluded from the taxpayer’s gross income for federal tax purposes and may be counted toward an individual’s Required Minimum Distribution (RMD) if those minimums have not yet been satisfied.

Guidelines to Determine Qualified Charitable Distributions

• Individuals must be 70 1/2 years of age or older when the contribution is made.
• Contributions must come from traditional or Roth IRAs. According to the IRS, QCDs cannot be made from employer-sponsored IRAs (Simplified Employee Pensions; SEP-IRAs), Savings Incentive Match Plans for Employees (SIMPLE-IRAs), or from defined contribution retirement plans (for example, 401(k) plans or 403(b) plans).
• Charities receiving the contribution must be eligible to receive tax-deductible charitable contributions; 501(c)(3) organizations. This seems rather obvious, but you need to be smart and research the charity prior to your donation.
• The maximum QCD is $100,000; however, a spouse can also make a $100,000 qualified charitable distribution within the same year if the couple files a joint income tax return.
• The $100,000 max limit doesn’t apply to the overall charitable deduction limit. Therefore, individuals are able to make charitable contributions in excess of 50% of their adjusted gross income.
• The distribution must be a “trustee-to-trustee transfer”. This means that the money doesn’t touch your bank account; instead, it goes directly from your IRA account to the charity that you have chosen. A distribution to a recipient other than a charity will not be tax free, even if that recipient donates the money to a charity.
• Qualified distributions for 2011 must be made by December 31, 2011.

Benefits of This Extension

There are three major areas of benefit when dealing with this tax-free extension.

First, the extension gives an incentive for individuals over 70-1/2 to donate. These incentives could possibly be a deciding factor for many people considering what to do with their IRA distributions.

Although the individuals get a tax break, extending this tax legislation benefits charities who are in need of donations by making it easier and cheaper for donors to give. Remember, charities need funds to continue doing good work around the country and around the world.

Second, the tax relief extension benefits the donor by allowing the exclusion of up to $100,000 of the the QCDs from their gross income in 2011. This is the tax-break highlight of the program extension, especially for this last month of the year.

Third, for those of you who have Required Minimum Distributions, QCDs satisfy RMDs that you would normally be forced to receive from your IRA, just as if you had received an actual distribution from the plan. This means your RMD will satisfy your required distribution amounts as well as give you all of the tax benefits of a qualified charitable distribution.

However, you do not get to deduct QCDs as a charitable contribution on your federal income tax return. That’s double dipping.

Why This Extension Is Important To You

Typically, deductions for charitable cash contributions are limited to 50% of a taxpayer’s AGI. Individuals who want to make a large charitable donations above that limitation are able to do so under this extension.

This is an important tool because the QCD’s exclusion from an individual’s gross income provides a solution for making charitable deductions for taxpayers who are not able to itemize their deductions (i.e. they take the standard deduction).  If you are a taxpayer over 70-1/2, who is lucky enough to have a paid off mortgage, you may not be lucky enough to itemize your deductions since mortgage interest usually plays a big part in you being able to itemize deductions.  If this is the case, paying qualified charitable distributions directly from your required minimum distribution(tax-free) will greatly help your tax situation.

Other areas of importance are that the extension makes this process less time consuming and less expensive. Without utilizing this tax-free extension, an individual would see an increase in paperwork and a decrease in benefits.

Who Should Make Qualified Charitable Distributions?

Typically, there is a limit of 50% of an individual’s Adjusted Gross Income that is available for charitable deductions. Taxpayers who want to make a large charitable donation above that limitation are ideal candidates to benefit from the QCD extension.

Another possible candidate might be someone who desires to make a large charitable donation, but their only financial vehicle is a large IRA balance. In this situation, if the individual took a normal IRA distribution outside of the tax-free QCD extension, they would be subject to fees, taxes, and a litany of other possible consequences (including an increase in taxable Social Security income or a rise in Medicare Part B Premiums).

Other individuals might simply want to donate their entire RMD and still enjoy the tax benefits by making the contribution through the tax-free QCD.

Remember, qualified charitable distributions for 2011 must be made by December 31, 2011.  If you decided to make this thoughtful charitable contribution, it will be indicated on your Form 1099-R.  Don’t worry,  TurboTax will easily guide you to enter the necessary information from your qualified charitable distribution.

Think: bite-sized chunks

To alleviate the anxiety and stress of filing your taxes, get started TODAY! Start by organizing your paperwork, establishing a filing system, reviewing all your documents, and then e-file! It’s really as simple as that.

Skip the tax store

Let’s face it – it’s getting a little late in the season to hire a pro or make an appointment at a tax store.  And the thing is, especially if your taxes are simple (ie: you claim the standard deduction, as 60% of filers do), you don’t need to pay someone to file your taxes! Last year, taxpayers with a 1040 A/EZ spent some $2.5 billion in preparer fees—a total waste of money! Save yourself several hundred dollars, and file on time with the help of a software program – likeTurboTax. After all, it’s what many pros use behind closed doors—at your expense.

Take advantage of all the breaks you’re entitled to

One of the more valuable tax credits just so happens to be one of the many credits that Americans forget to claim: the Earned Income Credit.  For tax year 2010, the maximum credit for a household with three or more children is a whopping $5,666.  Claim it if you’re eligible; after all, a credit reduces your taxes dollar for dollar.

Make contributions to your IRA

One of the best ways to save for retirement and reduce your tax liability is with an IRA.  The maximum contribution limits for 2010 is $5000 for those under the age 50; $6000 for those age 50 and over.  In most cases, you have until April 18^th to make these contributions (even if you’re planning on filing for an extension).

What’s an IRA?

An IRA is an Individual Retirement Account. A regular IRA (contrasted with a Roth IRA, below), allows you to save money on a tax-deferred basis. Consequently, your account grows without an annual tax on its growth and income. Only upon distribution, ideally in retirement, do you pay tax on your regular IRA. Depending on your income, marital status, and ability to contribute to a workplace retirement plan, you might also be eligible to deduct your IRA contribution. (Here are the 2010 and 2011 IRA tax deduction rules.)

What is a Roth IRA?

A Roth IRA is an individual retirement account which creates the opportunity to save on a tax-free basis. While no Roth IRA contribution is ever tax-deductible, the growth of a Roth IRA, subject to fairly minimal requirements, is never taxed – not even during retirement when you might begin your money out. Unfortunately, not everyone can contribute to a Roth IRA, as there are certain maximum income limits (Here are the 2010 and 2011 Roth IRA contribution limits.)

Why Contribute to an IRA?

The tax benefits alone provide an enormous incentive to save for retirement by using a regular or Roth IRA. In addition, because the money is not easily available without income tax implications (and possible penalties), you are less likely to spend the IRA money than you would if the money were in your checking account. Numerous investment options – from mutual funds (including low-cost index funds) to stocks, bonds and CDs – are available via an IRA. As of 2010, you can even reverse a Roth IRA conversion.

Maximum IRA Contributions Limits

In 2010 and 2011, the maximum amount anyone can contribute to their IRA(s) is $5,000. For people who will be 50 or older by the end of the calendar year in question, an additional $1,000 “catch-up” contribution is permitted.

Earned Income Requirement

In order to contribute to either type of IRA, you must have earned income. For this purpose, earned income is defined as money earned via employment or self-employment. The only exception to the requirement you have earned income is if your spouse has sufficient earned income instead. If, for example, you do not work for pay but your spouse makes $30,000, both of you can make the maximum $5,000 contribution to your respective IRAs, since $30,000 exceeds the $10,000 ($5,000 x 2 IRAs –one for each spouse) earned income requirement.

Mixing and Matching Permitted

If you are otherwise eligible for both accounts, you may contribute to both a regular and a Roth IRA. However, the total annual limit of $5,000 ($6,000 if 50 or older), is a combined limit. Therefore, if a 45 year old contributes $3,000 to a Roth IRA, the most he may contribute to a regular IRA is $2,000.

When Can You Contribute to an IRA?

The deadline for an IRA contribution is the tax filing deadline for the year in question. Therefore, you can contribute for your 2010 IRA until April 15, 2011. Note that if you extend your tax return, you do not get an extension of time to make your IRA contribution.

Still, you can contribute to an IRA at anytime. Right now — in January 2011 —you can contribute to both a 2010 and a 2011 IRA. In fact, you can contribute to your 2011 IRA at any time from January 1, 2011 to April 16, 2012 (you get an extra day because April 15, 2012 is a Sunday).

What if You Want to Make a Deductible IRA Contribution But Don’t Have the Money?

Here’s one “trick” to consider. If your IRA deduction would be deductible but you don’t have the money, you can file your tax return indicating your intention to make the contribution by the deadline of the return. (Simply take the deduction as though you have already made the contribution). For example, you can file in February indicating a $2,500 IRA contribution. Let’s say your refund (due, in part, to this tax deduction) will be $2,500 and you receive it in March. As long as you move the money to the IRA before April 15, you’re in business—you’ve found a way to save for retirement without laying out the cash to do so. Want to report your IRA in TurboTax? It’s easy.

Taxes on Your Retirement Saving . . . While You’re Saving

When you save money in a workplace retirement plan such as a 401(k) or 403(b), you receive a tax deduction for your contribution.  Consequently, by putting money away for your future in a 401(k), you also save tax dollars today.  A regular IRA might work the same way, but it also might not. Depending on whether you have a workplace retirement plan available and your modified adjusted gross income (also known as “MAGI” which is IRS-speak for your income, more or less), your regular IRA contribution might be deductible. Learn more about the 2010 rules.

The rules for a Roth IRA are much simple— no tax deduction is permitted for any contribution.

Taxes on Your Retirement Saving . . . While You’re Working

You’ll of course hope your retirement plan money grows during the many years between when you save it and when you take it out to enjoy during your golden years.  As the last few years have unfortunately demonstrated, there’s no certainty such growth will happen. Nonetheless, over the very long term, intelligent investors ought to see significant growth over the decades.

How do taxes affect such growth? Thanks to a concept known as tax-deferral, none of your retirement plan money is taxed while it grows. Said another way, you’ll pay no tax on the money your 401(k) or regular IRA earns during your working career.  Furthermore, there’s no limit to how much it earns; you’ll still pay no tax on the growth.  However, should you take out even a single dollar from your plan prior to retirement, you’ll owe income tax. You might even owe a penalty tax on such an early distribution.

Keep in mind you can get some of your money out of your Roth IRA without paying income tax.  However, because of the long-term upside of Roth IRAs discussed in the next section, you’ll want to avoid doing so. (Retirement plans are for saving for retirement—the government gives you pretty big incentives to use them that way. Take advantage.)

Taxes on Your Retirement Saving . . . While You’re Retiring

I’ve heard spending one’s retirement plan funds is much more enjoyable than putting money in them.  Makes sense; after all, it’s why you’ve saved all along. If there’s a downside to the “harvesting” on your retirement plans, it’s that during retirement is when you begin to start paying for those tax breaks you received earlier.  Still, there are a few very important distinctions between how the various retirement plan distributions are taxed.

Distributions from regular IRAs and 401(k)s are taxed as ordinary income. In English, this means you’ll pay normal federal income tax (state income tax too, depending on the rules for the state in which you live), based on the amount you take out of your accounts.  Once you reach age 59 ½, you can take out as much as you want without any early distribution penalty. However, you do not need to start distributing money from your regular IRA and 401(k) plan at that time. In fact, not until after you reach age 70 ½ must you begin to take from those accounts From that point forward, you must take your required minimum distribution from your qualified retirement plans or face a significant penalty.

One retirement plan really shows its dramatic upside during retirement. Recall how a saving contribution to a Roth IRA provides no upfront tax deduction.  In retirement, however, distributions from Roth IRAs are not subject to federal income tax.  Consequently, the potentially enormous growth over the many years between saving and retirement is never taxed.  Furthermore, Roth IRAs are not subject to required minimum distributions, so you can leave your money in the plan until you need it.

Who says you can’t get something for nothing?  Now, let’s just hope the rules don’t change between now and when you retire.

Get more tax tips about retirement.

If you have a 401(k) available to you it’s still one of the best and easiest ways to put money away for retirement. It’s easy because it’s done at the payroll level, meaning you don’t have to worry about making deposits or calculating tax deductions at the end of the year. It’s beneficial because it significantly reduces your current taxable income and grows tax-deferred. If you think getting a tax refund is great, consider this. At the 25% tax rate, every $1,000 you put away for retirement, you will pay about $250 less in federal taxes. It’s still your money, but instead of directing it into your bank account you’re just tucking it away in an account earmarked for retirement but paying fewer taxes in the process.

More Than the Stock Market

The biggest objection I hear from people is that they don’t want to put money into their 401(k) because they don’t trust the stock market. To be honest, that’s a pretty lame excuse. That’s because virtually every 401(k) out there gives you a variety of investment choices, some of which have nothing to do with stocks. From money markets to bonds, you’ll almost always have an option to invest your money somewhere that doesn’t involve stocks if you choose to do so.

So, don’t use the recent stock market volatility as an excuse to not save for retirement. You can probably still put money away into a 100% guaranteed fund if you want. Dust off your 401(k) investment options brochure and look at what’s available to you if you have some reservations about putting money into your 401(k).

Don’t be Afraid of Withdrawal Restrictions

After complaining about the stock market the next thing I usually hear is something to do with how the money is tied up. It’s true that the money isn’t going to be as easy to get your hands on as the money you have in a savings account, but it’s not supposed to be easy. If people could tap into their retirement funds with an ATM card, nobody would ever be able to retire.

That being said, the restrictions aren’t all that bad and your money isn’t locked up forever. Money can generally be withdrawn from a 401(k) on six different occasions:

• Termination of employment
• Disability
• Reaching age 59 ½ (or 55 in some cases)
• Retirement
• Hardship
• Death

Usually, when you find yourself in a position that forces you to look towards your retirement plan for money, it’s one of these reasons. Sure, you might be bummed to learn that you can’t dip into it whenever you want to buy a new car or take a long vacation, but that’s what your other savings accounts are for.

Finally, there’s often the ability to take a 401(k) loan. More than 65 percent of all plans have a loan provision, so you have one more way to access your money if you really need it. While you still don’t want to tap into retirement savings if you don’t have to, a loan is usually a better option than a straight distribution because you aren’t assessed a penalty (as long as it’s paid back) and you actually put money back into the account to repay the loan.

Taking Advantage of Your 401(k) in 2011

As the new year approaches, you should consider how to take advantage of your company’s 401(k) in 2011 if you have one. If they offer a match, it’s a no-brainer and you should contribute enough to at least get the match. That’s free money and in most cases it’s like getting an instant 50 or 100 percent return on your money. Even if they don’t have an employer match it’s still a good idea to save. You’ll only help build your nest egg while receiving some tax breaks in the process. For most people, the contribution limit should be $16,500 with a $5,500 catch-up provision for those over 50. This is a generous limit considering the annual IRA contribution is just $5,000.

First, we have to understand the fundamental differences between these accounts. First, the Traditional IRA, Roth IRA, and 401(k) plans fall into two broad categories: pre-tax and after-tax. The Roth is the only one of the three that operate on an after-tax basis. What this means is that contributions to a Roth IRA are made with after-tax dollars, thus there’s no tax deduction on these contributions. Because of that, the Roth allows you to make tax-free withdrawals in retirement. Both the Traditional IRA and 401(k) type plans are pre-tax, meaning your contributions are made before taxes are calculated. These contributions therefore reduce your taxable income in the year they are made which means a lower tax bill. Unlike the Roth IRA, distributions in retirement are then taxed as ordinary income.

While taxes are the big difference here, there are a few other things to consider. IRAs have annual contribution limits of just $5,000 while the 401(k) allows up to $16,500 each year. There are also differences with each plan in terms of investment options, withdrawal rules, and so on. But for this exercise we’re going to focus mainly on the taxes.

To Roth or Not to Roth

Most experts agree that younger adults are the best candidates for the Roth IRA. This is because younger workers tend to make less than they will in the future, therefore they are in a lower tax bracket now than they might be a few decades from now. If you’re a single filer earning $50,000 a year, that puts you at the 25% tax rate. The argument here is then assuming that because tax rates are at a historical low point, you’ll probably be paying taxes at a higher rate in thirty years once you do retire. So, you’re basically giving up a 25% tax break today in order to see a greater tax break in the future.

If your tax rate does indeed increase in retirement, then the Roth is going to allow you to see the biggest net gain in terms of income tax paid. But what happens if you find yourself in a lower tax bracket when you retire? We have no idea what will happen to taxes over a long period of time or even know what our income will be, so it’s a real possibility. Then, the benefit of a Roth IRA isn’t as significant. You could be giving up a 25% tax break today only to see a 15% tax break in retirement.

Of course, there are some additional benefits to a Roth IRA such as the elimination of the Required Minimum Distribution (RMD) and no age limit on contributions, but looking at the tax situation alone leaves a lot of unanswered questions and anything can happen over the course of a few decades.

Since changes took place in 2010 that also allow people who didn’t qualify for a Roth IRA in the past because of income to now convert their Traditional IRA into a Roth IRA, it’s worth mentioning that this conversion isn’t right for everyone. A lot of experts are urging people to make the conversion, but what a lot of people ignore are the taxes due on the conversion. In fact, paying tax on the Roth IRA conversion with account assets can actually be worse than not doing the conversion at all, so keep that in mind if you are thinking of doing a conversion.

Beyond Taxes

While calculating your tax burden is the primary factor in deciding what retirement account to use, there many other things you need to consider. First and foremost are contribution limits. Whether you choose a Roth IRA, Traditional IRA, or both, your limited to just $5,000 per year total. While that’s a great start, you’re likely going to want to save even more as your budget and time allows. So, the most likely scenario is utilizing a few accounts. For example, you may want to contribute $10,000, so you may contribute $5,000 to your employer’s 401(k) and $5,000 to your Roth IRA each year. This accomplishes two very important things.

First, it allows you to save more money for retirement. Second, you’re diversifying your tax burden. Just like you diversify your investments, you also want to diversify your taxes. By having your nest egg divided up into both a taxable and tax-free account you’ll hedge your bet somewhat regardless of how tax rates turn out in the future, plus you will have the flexibility to plan your withdrawals from each account so that you can maximize your income and minimize taxes in retirement. Finally, it’s also giving you a bit of a tax break today while you’re still putting funds aside that will give you a tax break in the future.

As you can see, there’s no silver bullet account. While the Roth IRA will generally provide the most benefit to a younger employee making less now than they expect to in the future, we’re also grappling with a lot of unknowns that can transpire over the next thirty years. So, just like you wouldn’t put all of your eggs into one investment basket, it’s also a good idea not to put your whole nest egg into one type of retirement account.

Don’t worry, all is not lost, there are some very real options to lower your tax bill. Before we look at some options to reduce your tax liability for actions taken in 2010, you should check and double check your records to determine what actions that you took prior to January 1, 2010 which may lower your obligation to the United States Federal Government. Luckily, Turbotax guides you through 350 deductions.

Reduce your 2009 Tax Bill with 2010 Actions

Contributing to Your IRA

Contributing to your IRA, today, can reduce last year’s tax liability.  Publication 590 from the IRS states it very clearly, if you are otherwise eligible for an IRA then,

Contributions must be made by due date. Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2009 must be made by April 15, 2010, and contributions for 2010 must be made by April 15, 2011.

By contributing to your IRA by the defined contribution due date you are lowering your taxable income and thus possibly lowering your tax

liability.

Enter into a Contract to Buy A  Home

Despite the ridiculous push by real estate agents as well as builders I am not advocating buying a house just for a tax credit.  However, as the IRS states very clearly in their First Time Home Buyer’s Credit Memo,

The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 for purchases made in 2009 before Dec. 1. However, the new Worker, Homeownership and Business Assistance Act of 2009 has extended the deadline. Now, taxpayers who have a binding contract to purchase a home before May 1, 2010, are eligible for the credit. Buyers must close on the home before July 1, 2010. [Added Nov. 12, 2009]

While it is very unlikely you can close prior to April 15, you may be able to enter into a contract for that home.  Again, this isn’t a reason for making that offer, but it may be a reason you make the offer tomorrow rather than in 4 weeks.

Contribute to your Health

Depending if you are otherwise eligible or have a Health Savings Account or Medical Savings Account you can contribute to that account to

reduce your taxable income.  Specifically, in Publication

969 the IRS, lets you know that,

You can make contributions to your HSA for 2009 until April 15, 2010. If you fail to be an eligible individual during 2009, you can still make contributions, up until April 15, 2010, for the months you were an eligible

individual.

Your employer can make contributions to your HSA between January 1, 2010, and April 15, 2010, that are allocated to 2009. Your employer must notify you and the trustee of your HSA that the contribution is for 2009. The contribution will be reported on your 2010 Form W-2.

You can make contributions to your Archer MSA for 2009 until April 15, 2010.

These are just three examples of how to reduce your taxable income, while benefiting your future.

AGI

Your Adjusted Gross Income is key to figuring out your taxes, but computing it can be tricky. Thankfully, TurboTax takes care of the legwork for you. The AGI includes your income, minus certain deductions such as alimony, interest for student loans and contributions to a retirement account.

AMT

The Alternative Minimum Tax was originally designed to tax the 150 most wealthy Americans back in 1969. But because the AMT was never indexed for inflation, millions of people pay it today. A temporary patch for 2009 returns sets the AMT exemption at $46,700 for single filers and $70,950 for joint filers.

Here’s how I describe the AMT: It’s a bizarre parallel tax universe in which you lose most of your valuable tax deductions, including the standard deduction along with state and local taxes. Overall, some 4 million taxpayers are expected to pay $35.5 billion in AMT in 2009, at an average of about $8,400 each, according to the Tax Policy Center.

It’s pretty hard to avoid the AMT, if you stuck in this tax trap—I know this firsthand. We’ve been paying the AMT for nearly a decade.

EIN

If you work in corporate America, your employer has a nine-digit Employer Identification Number. And this number is key to making online tax filing easy. With this number you can import your employment tax information directly into TurboTax.

EITC

The Earned Income Tax Credit is designed to give the lower-paid workers—I like to refer to them as the worker bees—a chance to lower their taxes or claim a refund. To get the credit, your income cannot exceed $13,440 if you are single and have no children. (The income threshold is $18,440 if you are married and filing with your spouse). If you fit the bill, you are eligible for a $457 credit.

Those little (or not-so-little) bundles of joy living in your home make this tax credit even more valuable. Depending on the number of children you have, the credit increases from $3,043 (one child) to $5,657 (three kids or more), But you cannot earn more than $43,279 if you are single and $48,279 if married and filing jointly with three or more qualifying kids.

Overall, the EITC was responsible for helping Americans realize $49 billion in tax credits in 2008.

FSA

A Flexible Spending Arrangement lets you save pretax money for qualified health-care services every year. They are typically a use-or-lose proposition, though, so it is important to set a careful estimate of your health-related expenses. If you end up with a lot of money left in your FSA at the end of the year, consider donating medical supplies to a local school or clinic.

HSA

As the cost of health insurance continues to climb, more employees are opting for Health Savings Accounts. These high-deductible health plans (HDHP) let employees make contributions to a savings account with pretax dollars. While your employer may or may not contribute to the account, any money you do not use can continue to grow, similar to a retirement savings plan.

For the 2009 tax year, HSA holders can deduct up to $5,950 if the account is for family coverage. And if you are 55 or older, you can add another $1,000.

IRA

An Individual Retirement Arrangement is one of the best—and simplest—ways to save for retirement, especially if you don’t have an employer-sponsored retirement savings plan. Since your savings are tax-deferred, IRAs also help reduce your overall taxable income. If you discover that you have a big tax bill, you may be able to open a traditional IRA for the corresponding tax year to minimize your financial burden. But, like everything related to taxes, there are bells and whistles.

If you are under age 50, the maximum amount you can stash in a traditional IRA for 2009 is $5,000. If you are older than 50, the contribution cap rises to $6,000. But you also have to meet certain income restrictions to get the tax benefit of an IRA. For example, if you are married filing jointly, your modified adjusted gross income must be $89,000 or less to get the maximum deduction.

IRAs come in several distinct flavors: while traditional IRAs help cut your tax bill now, it makes sense for some folks to use Roth IRAs which require you to pay your taxes upfront. In 2010, the once-restrictive rules for Roth eligibility are shifting in a big way. Here’s a rundown of the changes.

MSA

A Medical savings account is mainly used by self-employed folks or employees of small businesses along with their spouses and dependents. They are similar in scope to HSAs–you can accumulate savings for medical expenses tax-free. The money you save is portable if you change employers.

MFJ

Married couples have the option to file their taxes together or separately, but most save thousands of dollars by filing jointly (married filing jointly). That’s because filing separately disqualifies you from some of the most significant tax credits and deductions which include the EITC (above) along with valuable childcare and dependent care deductions.

MFS

While it usually makes sense for married couples to file their taxes together, there are a few exceptions to this rule-of-thumb. You’ll want to use the married filing separate tax status if your spouse is in trouble with the Feds and hasn’t paid taxes in a while. (I actually know a couple who encountered this problem. NOT good.) Married couples should also consider filing separate returns if one of you has a huge tax bill and the other could get a refund. Here’s some more information about marriage and taxes from TurboTax.

SIMPLE

In addition to traditional IRAs and Roth IRAs, there is also the Savings Incentive Match Plan for Employees. SIMPLE IRA plans are a favorite retirement savings vehicle for small businesses (100 employees or less) because they are actually fairly easy to set up. Employees and employers can make contributions to traditional IRAs, although there are limitations.

OIC

The financial crisis has left a lot of taxpayers with big bills and little financing options. An Offer in Compromise is an agreement between a taxpayer and the IRS to settle a taxpayer’s tax debt for less than the full amount owed. But the reduced equity taxpayers have in their real estate holdings may complicate the deal.

To decode more taxcronyms, check out this handy, dandy IRS tip sheet.

Just who qualifies as a middle class these days? The Middle Class Task Force says that the majority of Americans describe themselves as middle class or working class. “Middle class families are defined by their aspirations more than their income,” its report says. Those aspirations include home and auto ownership, retirement security and college education for children.

To help American’s achieve those goals, the Obama administration has come up with several tax proposals. The president addressed these initiatives in his State of the Union address:

Automatic Retirement Savings for Workers

Roughly half of the American workforce—some 78 million workers—does not have a retirement plan at work. The administration would like their employers to automatically enroll employees in a tax-deferred retirement plan, known as a workplace IRA.  (Employees will be able to opt-out of the plans.)

Contributions to these plans will be voluntary for workers. The smallest firms—although the White House didn’t specify how small—would be exempt.

To encourage workers to save in these automatic plans along with other qualified retirement accounts, the Savers Tax Credit will match contributions. The proposal calls for matching 50% of the first $1,000 of retirement contributions by families earning less than $65,000. There’s a partial credit for families earning up to $85,000.

The automatic retirement savings is based on a large body of research in the area of behavioral finance that shows people save more when decisions are made for them. A study from the Employee Benefit Research Institute finds that employers adopting automatic enrollment in their 401(k) retirement plans have also generally increased the “employer match” to participant’s accounts—in some cases, by a significant amount.

Boost Childcare and Dependent Care Tax Credit

There is some additional tax relief for an estimated 38 million Americans who are providing unpaid care to an aging relative. And many of them are part of the sandwich generation—they are also caring for their children while looking after elderly family members. The administration wants to practically double the child and dependent care tax credit for families earning less than $85,000 a year. (Credits will rise from 20% to 35% of qualifying expenses.)

Almost all eligible families making under $115,000 a year could see a larger credit, too. Families could claim up to $3,000 in expenses for one child or $6,000 for two children. The maximum credit for a family with two children making $80,000 a year would increase from $1,200 to $2,100.

Student Loan Relief

Recent college graduates are often saddled with more than $23,000 in debt. In a tough economy with few jobs, they are struggling to pay off their student loans. The administration is calling for a cap of student federal loan payments to 10% of a student’s income (above a basic living allowance).

Here’s how it works: the monthly payment for a single borrower earning $30,000 who owes $20,000 in college loans would be $115 a month – as opposed to $228 a month under the standard 10-year repayment plan, according to the plan. The income cap could cost the government about $1 billion over the next five years, estimates Mark Kantrowitz of Finaid.org.  “This proposal would yield meaningful repayment relief to hundreds of thousands of borrowers whose federal student loan debt exceeds their income,” Kantrowitz says. “It would cut their monthly payments by one-third and forgive the remaining debt sooner.”

You can find more information about the tax proposals from this White House Fact Sheet.

Here’s how it works: All the money you contribute to your traditional IRA between now and April 15, 2010 can be deducted from your total income for tax purposes. Example: If you make $50,000 and contribute $5,000, you’ll only be taxed on $45,000 of income for 2009. The government is giving you a nice tax incentive. By saving for your future, you actually save on taxes now (income limitations do apply). Plus, your money grows tax deferred. The only time you have to pay taxes on it is when you withdraw the money in retirement. Wanna know more? Jim Wang of Bargaineering.com pulled together a short overview video for our fans thirsting for more IRA know-how:

A note about the Roth IRA: The Roth IRA is a great way to save for retirement too (as opposed to the traditional IRA). The difference is that with the Roth you contribute to it with after-tax money, so you don’t get a tax deduction now. You do, however, get away with the money scot free when it comes time to withdraw it in the future. You’ll never pay taxes on it again – you’ve already paid them.

Get a 2009 credit for a home purchased in 2010

There’s another way to beef up your 2009 refund by doing something in 2010: Buy a house. OK, admittedly, this is more complicated than sending a check to your brokerage account for an IRA. However, if you’re in the market, don’t miss this one. First-time homebuyers can get an $8,000 credit on their 2009 taxes by buying right up through April 30, 2010. In fact, as long as you got under contract by April 30, you have until June 30, 2010 to close (you may need to amend your return in that case). Income limitations (on the order of $125,000 for singles) do apply.

Additionally, if you’re not a first-time home buyer, you could be eligible for a credit of up to $6,500 if you’re a “long-time resident.” That means you must have owned and lived in the same home for five years prior to buying and moving to your new home.

Looking ahead to 2010

If saving money is part of your New Year’s resolutions, now is the perfect time to think ahead for next year. A little bit of conscious effort now can make a big difference for your 2010 taxes. Here are some examples:

Start keeping track of charitable contributions now. They all add up. Make sure you get receipts anytime you donate clothes, goods, or cash to charities. A paper trail is a great way to keep records the way the IRS wants you to and it keeps you from forgetting what you donated so you can be sure to deduct your contributions.

Adjust your W-4 to get more money now. There’s a little payroll form called the W-4 that allows you to adjust how much your company takes out of your paycheck to give to the government. If you know you’re going to have bigger deductions in 2010 or if you usually get a big refund, you can adjust your W-4 to get more money in your pocket now. After all, a refund is your money, which Uncle Sam has held in safekeeping for you all year long. When you get a refund, you’ve overpaid and you’re getting change back.

Get paid to be green. Current tax laws allow you to take some great deductions for energy-saving home improvements. You can take up to a $1500 total credit in 2009 and 2010 for items like energy-efficient windows, skylights, central air-conditioners, insulation, and a lot more.

You can also take a whopping 30% off the cost of things like solar electric systems and wind turbine energy systems with no caps on the credit. For example, if you put in a $50,000 solar electric system, you could take a tax credit for $15,000. It really pays to be green!

Shouldn’t you be working to be financially fit as well? Or, if you resolved to do so, what are you waiting for?

Here are 13 things you can do in 20 minutes to get financially fit in 2010:

1. Open Up A High-Yield Online Savings Account. Brick and mortar banks pay almost nothing these days. With most online savings accounts you can actually see your money growing and earning interest. This added incentive helps keep you going on your path to savings.

2. Re-Allocate Your Retirement Accounts. Check up on your IRAs and 401(k)s and any other accounts you may have to make sure you are sticking to an allocation plan. Many companies will let you set up an email alert when your accounts exceed a specified percentage and remind you to re-allocate your retirement plan. This helps you you retire well.

3. Up Your 401(k) Contributions to the Company Match. The company match is free money for your retirement. Really. Think your salary isn’t enough? Add the company match to it, it’ll look better. And your contributions are pre-tax which means if you are taxed at say, 25%, a $100 contribution really only costs you $75 in your paycheck.

4. Set Up an Automatic Savings Plan. Create a savings goal. Now divide that number by 12 months. Set up your online high-yield savings account (see item #1) to withdraw that amount every month. Voila! Automatic savings. Too often we say we are going to save but by the end of the month the money is spent. Make it automatic to make sure your savings happen. Don’t even give yourself a chance to get your hands on that pre-set amount, send it straight to savings.

5. Call Your Credit Card Company to Lower Your Interest Rate. How is your account? Have you been paying on time? Are you carrying a balance? If so, give your credit card company a call and ask to have your interest rate lowered. Most times they will oblige, especially if you tell them you have an offer for a better rate with another card. This could easily save you hundreds, if not thousands, on your credit card balance as well as help you pay it off sooner.

6. Contribute to An IRA. Try to contribute the maximum that you can. If done before April 15th you can still contribute for 2009. A Traditional IRA means you get tax breaks now. A Roth IRA gives you tax breaks when you retire. TAX BREAKS!

7. Donate Old Books and Clothes. Man, do our closets pile up with stuff we don’t use anymore. You too? Head to the local library and donate your old books. Ask for a receipt so the books can later be written off at tax time. Take your clothes to the Salvation Army or another charity. Get a receipt there too – donations are deductible.

8. Set Up A Bill/Pay Calendar. Late bill payments not only cost you cash but they can beat up your credit score too. Use a free application like Google Calendar to set up bill due date reminders for all of your bills. This can help you stay on top of your bills and can remind you if a bill got lost in the mail. Or, free budgeting software like Mint.com can send bill reminders for you, while also helping you easily set up budget, with alerts for when you overspend on clothes, food, or wherever you want to save money.

9. Use Tax Software (like TurboTax) for Your Taxes. When I started filing taxes I used to do them myself (ok, computers weren’t used as much either but that’s another issue). It would take my quite a while making sure I had every form and reading through all of the instructions then I started using tax software. Like butter! It was so much easier and quicker than doing my taxes on my own. Plus, you can save almost $200 by choosing tax software over an accountant.

10. Adjust Your W-4. Do you get a big tax refund every year? You know that’s a tax-free loan to the government right? And you could have that money in your paychecks instead? Adjust your W-4 withholding so your tax refund is less and you get more money in your paychecks now! Know what? You can put the difference in your online savings account (Item #1) as part of an automatic savings plan (Item #4).

11. Get Your Free Credit Report. You are allowed to get one copy of your credit report for free from each reporting agency once a year (three agencies). Mark your calendar in four month intervals and check one report each time to make sure all of the information on it is accurate. Mistakes on your credit report can cost you big time on your credit score, which can affect everything from loan rates to insurance costs to getting a job.

12. Collect Your Loose Change In A Jar. Toss your daily pocket change in a jar. When it fills up cash it in (look for a free service). You may find you saved up over $100 with very little work!

13. Make a List Before Food Shopping. Ever go food shopping with an idea for what you need then come home with $300 of groceries and still forgot stuff? I have. Write a list and keep to it. It will keep you focused on buying what you need and keep you from getting the extra. It also helps to cut down trips to the grocery store when you forget something and start the whole process of getting what you don’t need all over again.

There you have it – 13 things you can do in 20 minutes to get you financially fit in 2010.

What else can you think of?

NOTE: If you make a contribution in 2010 before the April 15th deadline, be sure to tell your broker that you want the contribution to be for the 2009 tax year. By default, they will put it towards 2010 unless you tell them otherwise.

Roth IRA vs Traditional IRA

When it comes to IRAs, there are two major flavors – the Roth IRA and the Traditional IRA. With a Roth IRA, your contributions are not tax deductible but the account balance grows tax free. When you begin withdrawing money in retirement, you are not taxed on the disbursements. With a Traditional IRA, your contributions are tax deductible but you are taxed when you begin withdrawing money in retirement. You either pay the tax today, with a Roth, or you pay a tax in retirement, with a Traditional IRA.

The general idea is that a Roth IRA is valuable if you believe your income tax rate in retirement will be higher than your current rate. If you believe the reverse is true, then you would prefer a Traditional IRA because you get tax benefits immediately. Another school of thought argues that since it’s impossible to determine where the tax brackets will shift, it’s most important to diversify your tax profile. Finally, given the contribution limits on Roth IRAs, it might make more sense to take advantage of it today because you might not be able to tomorrow.

IRA Contribution Limits

IRA contribution limits are the same for Traditional and Roth IRAs. For 2009, you can contribute up to $5,000 total. If you are age 50 and above, you can contribute a maximum of $6,000. This amount is shared between the two types of accounts, so if you want to contribute to both then the sum can’t be greater than your limit.

Roth IRAs have an additional income restriction. If you are single filer, you can contribute the maximum as long as your adjusted gross income is under $105,000. If you earn between $105,000 and $120,000, your contribution maximum will be adjusted based on how much above the lower limit you earn. If you earn over $120,000, then you cannot contribute to a Roth IRA.

For example, if you have an AGI of $110,000, or 33.3% into the phaseout, then you can only contribute 66.7% of the $5,000 limit – or $3,340. (it is always rounded up to the next higher $10 increment, or $200 if the amount is less than $200)

For married filing jointly, the two limits are $159,000 and $169,000.

2010 Roth IRA Conversion Loophole

Starting next year, anyone will be able to convert a Traditional IRA to a Roth IRA. Today, that conversion is only permitted for individuals earning less than $100,000. This is a big deal for people who can’t contribute to a Roth IRA because of the income restriction. If you are one of those individuals, read up on the Roth IRA conversion rules to be prepared.

Jim writes about money at his personal finance blog Bargaineering.com.