We all know that saving money is really the key to building long-term wealth.  Just this week, I was reading an article by Mark Cuban, discussing how to create real wealth.  Right now Mark Cuban is a really happy guy.  He is the outspoken, charismatic owner of the Dallas Mavericks, and if you weren’t aware, the Dallas Mavericks just humiliated Lebron James and Dwayne Wade in the NBA Finals.

Mark’s primary advice for creating real wealth was simple—save money!  Creating wealth doesn’t happen overnight.  It happens over time, and investing your money intelligently can be huge key to building long-term wealth.  In this article, we are going to discuss an alternative retirement investment vehicle, the Roth IRA.

What Is A Roth IRA?

First of all, the Roth IRA is not really an alternative retirement investment.  I simply call it alternative because it’s not nearly as well known as its more mainstream counterpart, the 401k.  The 401k, of course, is the common retirement account that most employers in America offer employees.  A Roth IRA, however, is a retirement account that you must set up yourself either online through a broker, or through an investment advisor.

The primary advantage of a Roth IRA is that the money you invest accrues tax-free, and you are also able to withdraw your investment gains once you reach retirement age without paying ANY tax!  That is an incredible advantage.  Now, the 401k differs from the Roth because with a 401k, an investor invests pre-tax dollars.  However, when an investor then wants to withdraw money during retirement, he or she will have to pay income tax on that money at their current income tax bracket.

The Roth IRA differs significantly.  With a Roth IRA, an investor invests after-tax dollars, which is why he or she pays no tax when funds are withdrawn in retirement.  If a person wants to withdraw money before retirement age to give a friend or family member a cash loan or a working capital loan, he or she will have to pay substantial fees.  Therefore, it is best to keep this money in the account until retirement unless needed for absolute emergencies.

Traditionally, most investors simply open an account with an investment advisor such as T. Rowe Price or Vanguard, and investment decisions are made for him.  A self-directed Roth is a great option for the more active investor.  If you want to personally manage a percent of your net worth, you can open a self-directed Roth IRA through a popular broker such as TD Ameritrade or E*Trade, and you can then actively manage those investments.

Roth IRA Contribution Limits

This is the major disadvantage of a Roth IRA.  The U.S. government has strict max contribution requirements in place.  If you are interested in a Roth IRA, check with an investment advisor or a broker to find out the most recent regulations.  Generally, a person is allowed to contribute several thousand dollars per year to a Roth IRA, but it depends on a person’s annual earnings.  If you earn too much, then you may not be able to open a Roth IRA.  Again, these regulations tend to change rather frequently, so, just as when you are shopping for a cash loan or a working capital loan, consulting with a professional investment advisor is the best thing to do.

What Can You Trade With A Roth IRA?

The beauty of the self-directed Roth IRA is that it is very flexible.  Currently, you are able to trade stocks, futures, options, and currencies.  Remember trading financial markets carries a significant risk of loss, so make sure that you are always trading risk capital.

This has been a guest post by Jason Hoerr, who began his career as a trader in the most unlikely of places. As a high school English teacher, he was introduced to the concept of trading the forex market one day by the Principal at his school. Drawn by both the intellectual challenge and the opportunity to make money, he immediately began researching and learning everything he could about
currencies, economics, and trading. As his passion for the forex market grew, so did his desire to trade full-time. As his track record continued to grow, he began receiving requests to manage client funds. Today, Mr. Hoerr is trading full-time from his home office in Charlotte, NC.

Need cash?  Thinking about taking an IRA withdrawal?

Think long and hard because you may have to pay  a nice little 10% penalty for early IRA withdrawals!

IRA penalty – Oh yeah, Uncle Sam will love you!

If you are age 59 1/2 or older, you can take an IRA withdrawal without any penalties at all.

If you’re younger than age 59 1/2 you’ll have to pony up for an IRA penalty – unless of course you meet one of the exceptions below.

IRS publication 590 lists these exceptions to the 10% penalty for an early IRA withdrawal:

1. You take an early IRA withdrawal and you have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

If you have a lot of medical debt, you may be able to take out IRA money without that 10% penalty.  Remember, medical expenses must be higher than 7.5% of your adjusted gross income.

2. You can take an early IRA withdrawal for medical insurance

As long as your IRA distribution is not more than you paid for medical insurance you will not have to pay a 10% penalty if the following applies:

• You lost your job
• You received unemployment for 12 consecutive weeks because you lost your job
• You receive the IRA distributions during the year you received unemployment or the following year
• You receive distributions no later than 60 days after you’ve been re-employed

3. You can take an early IRA withdrawal if you are disabled.

Bad news – you’re disabled.  Good news – no penalty.  Not sure I’d really want to qualify for this one, but it is there.  Be sure to file a special tax form with your 1040 that lets the IRS know that you are disabled!

By the way – it’s a good idea to check out disability insurance before you become disabled too!

4. If you are the beneficiary of a deceased IRA owner, you can take an IRA withdrawal.

Ok, so Uncle Ritchie leaves you his IRA and you’d like to go buy a new 5 Series – no penalty!

5. Your IRA withdrawal consists of receiving distributions in the form of an annuity.

Basically what the IRS means here is that you must take “substantially equal period payments”  – in other words a set amount per year for either a) five years or b) til 59 1/2, whichever is longer.

6. Your IRA withdrawal is not more than your qualified higher education expenses.

Alright, so you’d like to use your IRA money for college savings!  Great news – your IRA withdrawal (as long as it is not more than your tuition) can be taken penalty free!!

7. Your IRA withdrawal is used to buy, build, or rebuild a first home.

First home.  That’s the key here.  Not your second, third or fourth – it’s your first home and you are buying, building or rebuilding – then you can take an IRA withdrawal penalty free.

Guess what though – a first-time homebuyer is actually defined as a homebuyer who has not lived in a main “purchased” home for the preceding two years.

So, if you owned a home, sold it and rented for over 2 years and then decided to buy again – you’d qualify!!

8. Your IRA withdrawal is a qualified reservist distribution

A qualified reservist distribution is met if:

• You were ordered or called to active duty after September 11, 2001
• You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a  reserve component
• The distribution is from an IRA, 401k or 403b plan
• The IRA withdrawal is made no earlier than the date of the order or call to active duty and no later than the close of the active duty period

These exceptions have some qualifiers on them so it’s important to look at the IRS publication to make sure you fit into one of these categories before you take the money out.

Also, don’t fall into the trap thinking that these exceptions are for taxes!  You still have to pay taxes on any withdrawal you take out.  The exception is for the penalty only!

So there you have it, 8 ways to avoid the penalty for your IRA withdrawal!

This post was included in the Tax Carnival #75!

I should do a post of the most commonly asked questions I get when talking about personal finance with folks.

How much interest is your IRA paying would probably rank in the top five for sure!

Or you could phrase it this way – what are your IRA rates these days?  Or even, What’s the best IRA you’ve got?!

My guess is that this question originates from folks investing into bank IRA CDs.

Obviously with CDs, the interest rates bear whatever the going rates are in the market.  After so much time investing IRA money into bank CDs, it’s natural to ask what are your IRA rates.

This is a common misconception, and one that I’ll dispel for you today.

IRA’s Don’t Pay Rates, CDs and Savings Accounts Do

If banks are using lingo with their customers like, “Our IRA rates are the best in town!”, they need to stop!

It’s creating confusion.  IRA rates are a misnomer.  IRA’s don’t pay rates, CD’s and savings account do!

I did a quick search for “IRA Rates” and there was even a very well-known bank advertising their Attractive IRA Rates!!

No wonder the financial industry gets a bad rap, it’s confusing.

Personal finance can be confusing enough, let alone something simple like this.

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IRA’s Are Like a Parking Garage

Think of a parking garage a second.  Some garages make you pay on the way in, while others make you pay on the way out.

Think of your IRA like a parking garage.  You either pay your taxes on the way in, like in a Roth IRA; or you pay your taxes on the way out – when you withdraw your money like with a Traditional IRA.

Also, what kind of vehicles can you park in that garage?  Only Chevy’s?  Fords?

No, you can park any kind of car you want in that garage.  Do you want to park stocks in that garage?  Maybe you want to park CD’s in that garage.

The kind of vehicle you park in that garage determines your IRA rate, not the IRA itself.  Stocks, bonds, CDs, cash – that’s what gives you your IRA rates.

IRA’s Determine How Your Money Will Be Taxed

IRA’s don’t pay rates – they simply allow your investments to be parked in a pre-tax or after-tax way, in other words, IRA’s determine how your money will be taxed.

Let’s go back to the parking garage analogy.  If you park your vehicle in the “Pay First” garage, you will have already paid your taxes up front.  So when you exit the garage and pull your vehicle out you do not have to pay again – you’ve already paid them.

That’s what a Roth IRA does for you – it allows you to put in after-tax money, lets it grow tax-deferred and then allows you to pull your money out completely tax free.

On the other hand, a regular IRA says you can come on in to the garage with no payments up front, but you’ll have to pay to get out of the garage.

When you withdraw your IRA in retirement, you’ll have to pony up for the taxes!

It’s good to park in different garages, that’s called tax diversification.  Which IRA account is best for you?  That’s a post you can check out here.

So, next time you hear someone mention IRA rates, gently explain to them that IRA’s don’t pay rates, CD’s and savings accounts do.

So we are about halfway through 2010!  Hard to believe isn’t it?

Although some of the buzz has seemingly died down about the year of the Roth IRA Conversion, there is still some controversy regarding whether folks should convert their Traditional IRAs to a Roth.

For those of you wondering what exactly is a Roth IRA,  Well, here are the basics:

A Roth IRA is funded with after-tax contributions; the money grows tax-deferred; and withdrawals are TAX FREE!

In other words, you use money you’ve already paid taxes on to fund the Roth, and provided you meet certain qualifications you never have to pay taxes on that money again!

What is a Roth IRA Conversion?

A Roth IRA conversion then is withdrawing money from a Traditional IRA and putting it into a Roth IRA where it will grow tax free.

Sounds good right? 

Well, the problem is that whenever you do this you have to pay taxes on the amount you withdraw from your Traditional IRA. 

So, let’s say you are converting $5,000 from your Traditional IRA — you would have to tack on 5G’s to your income for the year and pay tax at whatever rate you are at.  It’s as if you earned an additional $5,000 of income for the year.

As many of you already know, one big change for 2010 is that anyone can convert to a Roth regardless of income level. Previously, if you made over $100,000 you could not convert to a Roth.

If you convert in 2010, you now have a choice to pay all of your taxes in 2010 or average the taxes owed on the conversion over two years (i.e. pay in 2011 and 2012).  Uncle Sam is giving you a choice on when you pay your taxes.

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Don’t forget though that 2010 is the last year for the current low income tax rates. The current law plans for higher tax rates in 2011 — so, if you chose to average your tax payments over the two year period in 2011 and 2012, you might get hit with higher tax rates.   That Uncle Sam – he’s always got an angle doesn’t he?

Should You Do a Roth IRA Conversion?

Back to the question at hand.  Should you perform a Roth IRA Conversion in 2010? 

Usually the answer to such questions is “it depends”.  This might be a great year to convert your money to a Roth and potentially pay lower taxes than you would normally if you are in a lower bracket due to retirement or a layoff and you’ve got some cash on hand to cover your taxes! 

This is important because if you are under 59 1/2 and use your IRA to pay the taxes on the conversion you’ll get whacked with a 10% penalty on top of the taxes!

Let’s take a look at some things to consider:

Factors to Consider for Your Roth IRA Conversion

• Do you have money to cover your tax liability?  Having cash on hand to cover your taxes will help soften the blow, and you certainly don’t want to pay taxes with the money you are converting.
• Will the money you convert push you into a higher tax bracket?  If so, you probably don’t want to do it.
• Do you have non-deductible contributions in your IRA?  No taxes are due on the non-deductible portion.  *There are some additional factors about non-deductible IRAs that I covered in a post at Bible Money Matters.
• Are you planning on applying for financial aid for yourself, your spouse or your child?  Better think twice about the conversion – conversion income counts on your application.

Ultimately, whether you convert your Traditional IRA to a Roth will not determine your retirement success, there certainly are other things to consider to help you make a great run at retirement. 

So which retirement account is right for you?  Consider the above  factors, your overall situation and the Roth IRA conversion rules to determine whether the Roth IRA conversion makes sense for you in 2010.

This was a post I originally wrote for ChristianPF.com and adapted here for my site.

“Mr. Jones, we appreciate your work for us, but unfortunately there’s just not enough room in our budget for you.

Here’s a packet of information regarding your retirement account.  Please look this over and have a decision made about your 401k plan by the 31st.”

Ever hear these words?

Maybe your company didn’t sound as nice, but the result was the same.

Or – perhaps you left on your own terms and are embarking on a retirement journey or looking for a new career path.

Any way you slice it, there is one question that remains:

“What should you do with your 401k plan?”

Let’s take a look at four options to help you make an informed decision on what you should do with your 401k plan upon retirement or separation from service whether you have a million dollars or several thousand.

Leave Your 401k Plan With the Current Company

Generally, you can leave your 401k with your current company – or should I say your previous employer.

But this isn’t always the case.  Many times, companies want you to get those funds out of there because of costs to them.

If your company does allow you to leave it – then you can just keep your 401k plan with the same custodian, use the same investments and keep things as is.

Advantage:

It’s easy, generally cost effective and doesn’t require much thinking on your part.  Just keep the status quo.

Disadvantage:

You have your money with your former employer’s custodian.  That could possibly make for some discomfort – even though your employer legally can’t do anything with your money, some folks would rather cut ties completely.

Your money is invested with whatever custodian your company chooses – and they can change whenever they want, to whomever they want.  That means your funds could change simply because your former company wants to change.

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Take a Distribution From Your 401k Plan

You could take money out of your plan, have a check cut and sent directly to you.  Perhaps you need the cash and are more worried about making ends meet with the loss of your job than you are about preserving your retirement future.

Advantage

Access to cash if you need it within a relatively short period of time.

Disadvantage

If you are under age 55 when you retire or separate from service there is a 10% penalty for early distribution.  

If you are over 55 that is waived.  Yes, you read that right – age 55. This is called the age 55 Exception where the IRS allows you to take a distribution from a 401k provided that you are age 55 at the time of your separation from service and that you leave your 401k at your company – in other words you cannot roll it to an IRA first and then take distributions and expect to avoid the penalty.

There is also a mandatory 20% tax withholding from your custodian, which they will send to the IRS for you.

Take Your 401k Plan With You to Your Next Employer

One option you may have is to take your 401k plan with you to your next job.  You’ll have to check with your new employer to find out if this is allowable, but generally speaking many plans will let you transfer that old 401k into the new plan.

Advantage

Easy.  Combining your funds helps with compounding interest earned on that 401k balance.  There are no tax consequences.

Disadvantage

The new company may not have the greatest 401k plan available.  There may not be a good variety of funds.  Again, the custodian can be changed at the employer’s discretion, which means you still don’t have much control over your funds.

Roll Your 401k Plan Over to an IRA

You can do a direct rollover to an Individual Retirement Arrangement or IRA.

Advantage

You are in the driver’s seat.  The money is in your own account which you have discretion.  You can make changes, you can make the investment choices, you can pick the custodian or brokerage company that you feel most comfortable.

You don’t have the company limiting your investment options.  You can invest into pretty much anything you want.

You can even open a Roth IRA and do a Roth IRA Conversion on the money if you wanted to – you are making decisions, not your employer any more.

There are no tax consequences to performing a direct rollover.

Disadvantage

This requires a bit more work on your part.  For example, you’ll need to research a custodian, research investments – whether it is stocks, mutual funds or ETF’s.   You’ll need to essentially manage your own account unless you hire a professional to help you, which of course you’ll have to pay fees to do so.

The 401k generally allows for creditor protection in a bankruptcy or by plaintiffs in a civil lawsuit. IRA funds, however, are limited in their protection and the rules differ from state to state.

What Are Your Thoughts?

As you can see, there are some decisions to make once you leave your job. Some of these are more advantageous than others, so be sure you do your homework and figure out what’s best for you for your retirement.

Readers, what would you do – or what have you done in this situation?

Retirement is a fascinating topic don’t you think? 

Millions of people long for it, plan for it and obsess over it.

On a daily basis, people ask themselves questions like these:  when can I retire?; how much money do I need to retire?; and which retirement account should I be saving into as I get ready for that big day?.

The last question is what we want to tackle today – which retirement account is right for you?

We certainly won’t cover every single type of retirement account out there today, but I do want to tackle the big four – 401ks, Traditional IRAs, Non-Deductible IRAs & Roth IRAs to see which one(s) make sense for you.

Let’s take a look:

401k Retirement Account

401k legislation was written in 1978 and finally passed in 1980.  401k’s allow employees to choose to receive deferred compensation rather than direct compensation.  That compensation gets put into a 401k account that is invested.

401ks are tax-deferred retirement savings accounts.  Basically they allow you to reduce your taxable income, which gives you a tax-break now.

They also grow tax-deferred – meaning you are not taxed on the growth of the investments each year.

When you pull the money out in retirement, however, you must pay the Piper!  Uncle Sam will ask for all that deferral to be taxed.

Every dollar you pull out will be included in your taxable income for the year – it’s as if you earned that money. 

401ks – The Right Retirement Account for You?

401k retirement accounts are right for folks who like having an easy way to save for retirement (deductions are taken from your payroll), who want to reduce their taxes now and who are getting an employer match on their 401k contributions.

Traditional Individual Retirement Account (IRA)

A Traditional IRA works much the same way as a 401k except for the payroll deduction.  The limits are much lower in terms of what you can contribute as well.

If you are covered by a retirement plan at work and making between $56,000 and $66,000 for singles and $89,000 and $109,000 for joint-filers then the deductibility of your contributions are phased out.

That means you cannot deduct the entire amount of your contributions from your income. 

If you are making under that amount or you are not covered by an employer retirement plan at all, then you are able to fully deduct your IRA contributions.

Traditional IRAs – The Right Retirement Account for You?

A Traditional IRA is a great retirement account for those who may not have a 401k or other employer plan, or who perhaps do have one, but are making less than the phase-out limits and want to get tax advantages now.

Roth Individual Retirement Account (IRA)

Roth IRAs are Individual Retirement Accounts that do not give you a tax break up front.  Rather, they allow you to put in after-tax money, which then grows tax-deferred.

When you reach 59 1/2, you can take out your contributions and your earnings completely tax-free!

Like the Traditional IRA, the IRS has phase out rules for Roth IRAs.  For single filers, your Roth IRA contributions are phased out when your Modified Adjusted Gross Income (MAGI) is between $105,000 and $120,000.  Above $120,000 you are ineligible for a Roth IRA contribution.

For married filers, the phase-out limits are between $167,000 and $176,000 and above that you are ineligible for contributions.

Roth IRAs – The Right Retirement Account for You?

Who should open a Roth IRA?  Basically anyone who falls under the phase-out limits, wants to diversify themselves from a tax-standpoint and has ran the numbers and feels that income or tax rates will be higher in the future and their potential for tax savings is greater down the road than it is now.

Non-Deductible Individual Retirement Account (IRA)

A Non-Deductible IRA is simply an IRA that you contribute to when you are phased out of your deductiblility.  Remember how we said that if you are covered by an employer plan and make too much money you can’t deduct your contributions? 

A Non-Deductible IRA is the result.

Last year I would never have given the non-deductible IRA a second thought.  It made very little sense to contribute to them. 

This year, however, it may make a lot of sense for folks.  Here’s why:

The income limits for Roth IRA conversions have been lifted, meaning anyone can convert money to a Roth IRA!

I won’t get into the details of this strategy here, since I talked about covnerting non-deductible IRA contributions at length in this post - but quickly, here is the strategy:

Make Non-Deductible IRA contributions (no tax write off); convert those contributions to a Roth IRA (no taxes owed); let your money grow tax-free in the Roth IRA (no taxes owed) and then pull out the money in retirement (no taxes due!)

Non-Deductible IRAs – The Right Retirement Account for You?

This strategy is right for those who make too much money to simply contribute to Roth IRAs, but still want to take advantage of tax diversification by getting money into a Roth.

Which Retirement Account is Right For You?

Readers, let’s hear from you – which is your favorite retirement account and why?

By now you’ve all heard of the opportunity for Roth IRA conversions right?

Ok, but maybe you are unsure what a Roth IRA conversion is all about.

Let’s dispel any myths about this and take a look at exactly what’s going on for this year for Roth IRA conversions.

This post will be more of a lesson in what’s happening than a post to convince you one way or the other to do it.

So let’s jump in!

What is a Roth IRA

First, let’s start with the basics.  I run into quite a few people who are unaware of what a Roth IRA even is.  Most everyone has heard of it, but are simply unsure how it works.

So,  What is a Roth IRA ?  Here’s the basics:

A Roth IRA is an Individual Retirement Arrangement that is funded with after-tax contributions; the money grows tax-deferred; and withdrawals are TAX FREE!

Think of it this way – already taxed money goes in – and comes out completely tax free.

It’s a pretty sweet deal if you qualify, meet specifications and figure that your tax rate will be be higher in retirement than it is right now!

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What is a Roth IRA Conversion

What if there was a way to take money from a fully-taxable account and put it into a tax-free account for life!?

That’s exactly what a Roth conversion is. 

You are taking money from a Traditional IRA and transferring it, or converting it to a Roth IRA. 

So what happens is you get money out of a position that will be taxable to you in the future and get it into an account that will never be taxed again!

Sounds like a pretty sweet deal right? 

Uncle Sam Will Love You and Your Roth Conversion

The problem is that whenever you do this you have to pay taxes on the amount you withdraw from your Traditional IRA for the Roth conversion.

*Uncle Sam pumps his fists!

So let’s say you want to convert $10,000 from your Traditional IRA – you would have to tack that on to your income for the year and pay tax at whatever rate you are at. 

It’s as if you earned an additional 10 large for that year!

What Changed in 2010 Regarding Roth IRA Conversions

One big change for 2010 and beyond is that anyone can convert to a Roth regardless of income level. 

Previously, if you made over $100,000 you could not convert to a Roth. 

Uncle Sam wants tax revenue!  So I’m surprised it’s taken this long to change that rule, but this is the first year.

The other big change for 2010 is that you have a choice to pay all of your taxes in 2010 or average the taxes owed on the Roth IRA conversion over two years ( i.e. pay in 2011 and 2012). 

Uncle Sam gives you a choice on when you pay your taxes.

But don’t get fooled, the current tax law plans for higher rates in 2011 - so you’ll possibly be paying for your Roth IRA conversion at higher tax rates!

*Uncle Sam rubs his hands together with a grin!

Things to Consider for a Roth IRA Conversion

 How you will pay the taxes – you don’t want to pay out of your IRA money, so be sure you’ve got some extra cash on the side to pay for it.

Are you over age 70 1/2 – if so, there’s this not-so-little rule about Required Minimum Distributions (RMDs) that must be satisfied first!

What tax bracket are you in? – Will the money you convert push you into a higher tax bracket?  Yikes – better think twice!!

Are you trying to get financial aid? – Whether it’s for you or for your kids, the Roth IRA conversion will count as income on the application!

More Insights into Roth IRA Conversions

For some good insights and varying opinions check out these articles from some fellow bloggers:

• Roth IRA Conversion: Good Idea? – From Consumerism Commentary
• Be a Sloth and Don’t Roth – From Financial Samurai
• Unforseen Consequences of the Roth IRA Conversion – Good Financial Cents
• Should You Convert to a Roth IRA in 2010? – Christian PF

Roth IRAs can be great tools to use for retirement – but, be sure to review the rules and regulations to determine whether you should open a Roth IRA and to see if a Roth IRA conversion is right for you.

For some reason I get this question a lot, so I thought I’d provide a little clarification on IRA withdrawal rules.

Individual Retirement Arrangements or IRAs were designed to provide an opportunity for folks to save for retirement on a pre-tax, tax-deferred basis.  In other words, the money grows without having to pay any taxes on the gains.

Of course, with an IRA you have to pay the Piper at some point in time.  That means when you get into retirement and start your IRA withdrawals, you’ll have to pay taxes.  This can create a “tax-time bomb” in retirement, but I won’t get into that here.

The short answer to when you can take your IRA withdrawals is – any time! 

People are often shocked by that answer, but it’s true. 

You can access your money through an IRA withdrawal any time you’d like, but you just better be aware of the tax and penalty ramifications.

If you take your IRA withdrawal after age 59 1/2 you won’t have to worry about any penalties, just the taxes. 

There are some exceptions to taking money out before age 59 1/2, so let’s take a look at an early IRA withdrawal:

Your IRA Withdrawal Prior to Age 59 1/2

The general rule is that if you take an IRA withdrawal before 59 1/2 the IRS whacks you with a 10% penalty.  So, ideally you need to wait on your IRA withdrawal until you reach that age.

As with most IRS rules, there are some exceptions:

IRS publication 590 lists these exceptions to the 10% penalty for early IRA withdrawals:

• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• The distributions are not more than the cost of your medical insurance
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You are receiving distributions in the form of an annuity.
• The distributions are not more than your qualified higher education expenses.
• You use the distributions to buy, build, or rebuild a frist home.
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution

These exceptions to the early IRA withdrawal rules have some qualifiers on them so it’s important to look at the IRS publication to make sure you fit into one of these categories before you take the money out.

For example, the exception that says you can take the money in the form of annuity – basically what the IRS means here is that you must take “substantially equal period payments”  – in other words a set amount per year for either a) five years or b) til 59 1/2, whichever is longer.

Also, be aware that these exceptions are for the 10% premature distribution penalty NOT taxes!  You still have to pay taxes on any IRA withdrawal.

Your IRA Withdrawal After Age 59 1/2

Reaching the magic age of 59 1/2 is one retirement milestone you should look forward to.

Once you reach this age, you can begin to take your IRA withdrawal penalty free!  At this point you can take out as much as you want, whenever you want.

Again, there is no escaping the taxes (unless of course you open a Roth IRA) so just be aware that every dollar you pull out will be as if you earned that money for the year – it counts as ordinary income.

By the way, you literally must reach age 59 1/2 – not 59, 5 months and 15 days. You can take the money any time on the day you turn 59 1/2 or after.

Just because you turned 59 1/2 doesn’t mean you have to take the money out though.  You may not want to.  If you’ve done a good job establishing other sources of income, you may decide to wait.

Your IRA Withdrawal at Age 70 1/2

If you do decide to wait however, you won’t be able to leave that money in your IRA forever.

At age 70 1/2 you will be required to take a minimum distribution ( also known as RMD, which uses a formula set up by the IRS to determine the amount) and pay taxes on those withdrawals.

But, what if you don’t need the money and you’d rather wait?  That’s fine, but just know that good ol’ Uncle Sam will uppercut you with a 50% penalty on the amount that should’ve been distributed along with the normal taxes due.

They want to make sure they get their tax revenue some how. So be aware that sooner or later you HAVE to take money out of your IRA.

So remember, you can always take an IRA withdrawal, but you need to know the right rules and regulations to determine when a distribution will be right for you.

This was a post I originally did for ChristianPF.com and thought I’d share it here as well.

According to Wikipedia, Baby Boomers are those who are born between 1946-1964 – meaning they range in age from 46-64 years of age.

Retirement is certainly on their minds and they are concerned about how much they need for retirement savings.

As baby boomers approach the magical age, there are some pretty important things to keep in mind about saving for retirement.

Let’s take a look at five things to keep in mind about retirement savings:

Retirement Savings Is Up to You!

Ok, so this is no breakthrough – I’m not pretending to discover a cure for cancer by any means, but this point needs to be stressed over and over again.

Years ago, you could work for an employer for 30 or 40 years, retire with a nice pension provided by the company and collect your social security and be pretty comfortable in retirement.

Not anymore!  Companies are dumping their pensions left and right, Social Security will need a massive overhaul to avoid going defunct – so what does that mean for you?

You are on your own for retirement savings – and that’s OK.

When Can You Access Your Retirement Savings?

This is something that all baby boomers should get really familiar with.  Accessing your retirement savings is generally what’s going to provide you an income in retirement, unless you have other business income etc.

Most people recognize 59 1/2 as the magical age to access your retirement savings, but get familiar with the rules surrounding your withdrawals.  Here’s a couple of them to remember:

• You can access your IRA at any time, but be aware of the penalties.
• You can withdraw from your 401k savings prior to 59 1/2 without penalty if you are at least age 55 when you retire.
• You can take out Roth IRA contributions at any point in time, but the earnings must left alone until age 59 1/2.

What is Your Retirement Savings Number?

A few years back, Lee Eisenberg wrote a book called The Number, where he talks about what you’ll need for the rest of your life and what it will cost.  It’s an entertaining and informative look at what the rest of your life will look like.

You should be asking questions like, “Is a million dollars the magical number?”  Many people think they need much, much more than that, but is that right?

In light of this, you’ll need a good retirement calculator and you’ll want to sit down with your loved one and figure out your income versus expenses and determine how much retirement savings you need?

How Will You Diversify Your Retirement Income?

This is one that boomers probably have in the back of their minds, but some careful consideration should be done.

Will you have a pension, social security, 401k savings, IRA money, or annuities to help supplement your retirement income?

What about starting a business or turning a hobby into an opportunity to make some side money?  Have you considered other ways to make money and diversify your income in retirement?  You probably should.

Once again, retirement savings is up to you, therefore you need to be prepared and should have multiple lines in the water so that you’re not relying on the fish always biting from one particular source.

How Will You Diversify Your Retirement Savings From a Tax Standpoint?

Tax diversification is extremely important and is something that everyone should get familiar with and take a look at for their own situation.

In essence, tax diversification takes a look at the tax status of investing into three different vehicles.  You have tax-deferred, taxed-as-you-go (or non-qualified) and tax-free.

No one investment vehicle is right in every circumstance, but I think it’s very important to spread savings out among these three types of accounts because the greater the flexibility you have for accessing retirement savings, the greater the options you have for lowering your tax burden in retirement.  Plus, after reading why tax-deferral may not be all that it’s cracked up to be you might agree with me.

If taxes are high in some years, you have other money to withdraw from besides your 401k.  If tax rates are low, then why not pull money out of your IRA and consider a Roth conversion etc.

How About You?

Readers, what are some other things to consider for retirement?

Tax Season is upon us and this time of year usually gets people thinking about funding IRA contributions for last year, which usually leads to a question of – which type of IRA is right for me?

Today we’re going to briefly talk about Roth IRAs.  There’s been a lot of talk about Roth IRAs this year because of the new IRS rules regarding Roth Conversions.

As always, no investment is right for every single person, but in the right scenario, Roth IRAs are a great retirement savings tool.

Let’s start with the basics:

Roth IRA vs Traditional IRA

A Roth IRA is an Individual Retirement Account named after its legislative sponsor, late senator Bill Roth, that was established in 1998 to provide an alternative method of saving for retirement that offers different tax advantages than the Traditional IRA.

Under this section of the tax code, a Roth IRA is funded with after-tax contributions, which simply means you do NOT get a tax break up front.

With a Traditional IRA, provided you meet certain qualifications, which we’ll cover in a future post, you can deduct your contributions up front and get a tax break NOW.

So remember – at its very basic level, a Roth IRA gives you a tax break later

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Roth IRA Withdrawals Are Tax Free

You are funding a Roth IRA with after-tax dollars, and the money still grows tax-deferred.  You cannot deduct your contributions; however, in retirement you can withdraw your money (provided you meet certain qualifications) completely tax free.

Not only that, but as long as your Roth IRA has been in existence for five years, your beneficiaries on the account can pull out money income-tax free, so the Roth IRA becomes a nifty estate planning tool as well.

What are the qualifications to make sure your Roth withdrawals are tax free?  Here’s a great little chart from the IRS website, publication 590.

Income Limits

Limits, there’s always limits!

Here’s the deal with the income limits and phase outs for your contributions:

• If you are married filing jointly your contributions are reduced if your modified adjusted gross income (AGI) is between $167,000 and $177,000. Beyond that – sorry! No can do.
• If you’re a single filer, your contributions are reduced if your modified adjusted gross income (AGI) is between $105,000 and $120,000.  You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.

Some Things to Consider When Opening a Roth IRA

1. When will you need the money? Remember, this is a retirement account – so ideally you want to put in the back of your mind that this is “post 59 1/2″ money.  But, the nice thing about the Roth is that your contributions are available without tax or penalty, so if you do run into a bind you’ve got some money available.
2. What is your tax status now? If you are in a low bracket now and are figuring that your income and therefore your tax bracket will be increasing in the future, then a Roth IRA makes a lot of sense because you’ll be pulling money out tax-free in a higher bracket giving you more advantage.  If you’re in a high bracket, remember that contributions to a Roth IRA do not reduce a taxpayer’s adjusted gross income (AGI).
3. What will be your tax status in the future? Again, if you think that your tax bracket will be increasing, the benefit to the Roth looks even better;  if you think your bracket will be decreasing and your income will go down in retirement then you want to consider whether the Roth IRA makes the most sense for you.  It doesn’t mean you shouldn’t do it, after all – it’s smart to diversify yourself from a tax standpoint - just make sure you know what you’re getting into.

How Do I Open a Roth IRA?

You can open a Roth IRA through any financial institution, bank, life insurance or mutual fund company or even right online through a brokerage website.  Where you establish one primarily depends on your own needs and preferences.  There are many investment options available as well, so consider the types of investments that will suit your needs (i.e. stocks, funds, CDs, ETFs etc).

Contributions must be made by the time you file your tax return. So, you have until April 15 of the following year to get your Roth contributions in for the previous tax year.

The Roth IRA can be a great investment and retirement savings vehicle for many people.  Be sure to do your homework, develop a plan, assess your needs and be comfortable with your decision.

What are your thoughts?

Readers, do you think the Roth IRA is a good idea or is it a trick by Uncle Sam to get more tax revenue up front?