Ahh, tax time!  The time in America where everyone gets a little edgy, a little nervous and a little anxious as we patiently await our peril (owing more to Uncle Sam) or our “profit” (a big refund).

Accountants are settled in to their cubby holes, people are scrambling to gather all their documents and Uncle Sam waits with a grin.  Tax time is great isn’t it!?

Every year, there are millions of people who make some big mistakes when filing their taxes and it just shouldn’t be.  These are easy ones to avoid when filing your 1040!

Let’s take a look at a few of them:

Missing the April 15 Dealine

For all you procrastinators out there, this one’s for you.  Of course no one likes to pay or file for that matter, but the longer you wait, the more anxiety builds up and the more likely that you’ll not have all you need in terms of documents, which means you’ll need to file an extension.

Get an early start, gather everything and double check your documents – then file as soon as you can so you don’t flirt with that deadline.

For those of you who say, “I’d rather not file because I know I’ll owe money” – that is just plain silly.  The IRS will tack on some monster penalties for what you owe them.  They are not an entity you want to mess around with.

Not Reporting All Income

This sounds easy enough – if you have a W2, you put that number down.  But, many people forget to include things like interest and dividends from savings, CDs or other investments.

What about income from a side hustle, hobby or that multi-level marketing business you joined last year?

Servers, don’t forget to include your tips – parents, do you need to include your teenager’s income?  You don’t want to get a note in a few months from Uncle that says you owe more money – take care of it now.

Missed Deductions or Not Itemizing Deductions

This one is so easy, yet can be a big mistake – and a costly one at that.

Take a look at this list from the IRS, review the rules and see if you can deduct any of these on your 1040:

Wrong, Duplicate or Missing Social Security Numbers

Seriously?  This one sounds simple enough, yet millions every year either put down the wrong numbers, duplicate their social number for their spouses or just completely forget to put down their social security number when filing their taxes.

The easiest way to correct this is just to double and triple check – make sure you have everything filled out properly.

Not E-Filing

Even if you use an accountant or a tax-prep service you should probably e-file.  It’s simple, it’s easy and it speeds up the refund.  You can get your refund direct deposited into your bank and not have to worry about lost or stolen checks!

If you’re doing your taxes yourself and using software like H&R Block’s At Home Online FREE Edition, then e-filing is even easier.  Take advantage of technology!

If you’re looking for other tax software, check out Amazon’s deals.

 Other Deductions?

What else would you add to the list of biggest tax-filing mistakes?

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There’s no question that 401k’s have become the norm for retirement savings.  More and more companies are putting the responsibility of saving for retirement on the employee and have gotten rid of traditional pension plans.

401k Popularity

According to a 2007 Hewitt & Associates survey, 64 percent of plan sponsors said they use a 401k for their organization’s primary retirement-savings program. That’s up from about 35 percent just 10 years ago.

Not only do employers like the 401k, but many employees love them as well.

Why people love their 401ks

Ease of Use

Most 401k plans are pretty easy to sign up for and begin saving into.  A couple forms, a couple signatures and you’re on your way to putting a percentage of your income away for retirement!

Bigger contribution limits

Unlike Traditional or Roth IRAs, which cap your contributions at $5,000 (with a $1,000 catch-up contribution if over age 50) the 401k allows up to $16,500 with a $5,500 catch-up contribution over 50!

If you’re making a good income, this is a great way to get additional money saved up for retirement.

Tax treatment

Contributions are tax-deferred, which means you don’t have to pay taxes on gains each year.  They are deferred until you withdraw your money in retirement.

Not only can you defer your taxes, you can also take a deduction on your contributions.  In other words, you get to deduct (or subtract) the amount of your contributions against your ordinary income.

That’s a pretty sweet deal.  Say you make $80,000 and put away $16,000 – your ordinary income is reported to be $64,000!

Why you shouldn’t love your 401k!

Limited Control

Here’s what I mean:

1. The employer chooses which company you will use (i.e. Fidelity, Vanguard etc)
2. In general, the employer chooses which funds you can pick from (you may only have 15-20 options)
3. You only have 11 years to control your withdrawals (59 1/2 – 70 1/2 – there are penalties for withdrawing before that and penalties if you don’t withdraw after that).

Government Forced Withdrawals

Many people don’t realize this – but at age 70 1/2 the government forces you to take money out of your 401k (unless you’re still working).

How can the IRS force you to take money out?  By whacking you over the head with a 50 percent penalty for not taking the withdrawal!  50 percent!!

So all that money you’ve managed to save up for retirement – and perhaps you don’t need – you MUST withdraw.  Why would the government do this?  To get tax revenue silly!

401ks are Tax Infested

This is the biggest reason not to fall in love with your 401k.  All those taxes you deferred for all those years have to be paid some time.

People often assume their income will be lower in retirement and therefore their tax bracket will be lower – which means that they’ll pay less taxes.

That’s not necessarily true.

You’ll probably want to maintain your standard of living, which means you’ll need the same amount of income.  Factor in inflation and depending where tax rates are - you could actually be paying more in taxes than you ever imagined!

That pretty balance you had on your 401k statement isn’t really yours.  You may be giving 25 percent or more back to good ol’ Uncle Sam.

These things are loaded with taxes.

If you pass away, your beneficiaries are forced to take money out (again think penalties here) and will have to pay ordinary income tax on every single dollar that’s pulled out at whatever tax rates apply to them!

What should you do?

Use it wisely

The last thing you want to do is throw the baby out with the bathwater as the ol’ saying goes.  The bottom line is you need to use the 401k wisely.  If your employer is matching contributions – you want to definitely take advantage of that!

Make informed decisions.

Take a look at your situation to determine if you’re creating a tax-infested monster.  Crunch some numbers to determine if using a Roth IRA or Roth 401k is better for you.  There’s some handy calculators out there that will help you figure this out.

Diversify

Diversify yourself from a tax perspective.  In other words, make 401ks and IRAs, taxable accounts, municipal bonds and Roth 401ks and IRAs a part of your overall tax strategy.

Bottom Line

Don’t get caught up in the hype of 401ks.  That doesn’t mean you don’t use them, but just don’t fall in love with them!  Make informed decisions and understand what you’re saving into.

What about you?  Are you in love with your 401k?  What have you done to diversify yourself?

Remember as a kid how excited you were for your birthday to come?  It couldn’t arrive fast enough!  Presents, cake and everyone making a big deal of you was great! 

You probably couldn’t wait to turn 13 and finally become a teenager.  Then maybe you looked forward to 16 so you could get your license.  18 to vote.  At 21 you could legally drink and 25 got you a discount on your auto insurance. 

After that, you may have spent the rest of your time wishing you were 25 again.

It’s in our nature to look forward to milestones.  After all, they are a rite of passage and a big achievement.

Did you know you’ve got some retirement milestones to look forward to?

Being unaware of these milestones will cost you money!

Milestone #1 – Age 50

In 2002, the government changed the rules on contributions to retirement plans and IRA’s.  They allowed a “catch-up” provision for older individuals.  If you are age 50 or older, you may now contribute an extra $1,000 to your IRA’s and an additional $5,500 to your 401k’s in 2009. 

This is a great deal for those looking to sock some extra cash away for retirement!

Milestone #2 – Age 55

Age 55 is a big deal for those looking to retire early for the simple fact that if you retire or separate from service the year you turn 55 or after, you are allowed to take 401k distributions without getting whacked with a 10% penalty! 

Let me say that again…NO PENALTY for early retirement distributions.  This is known as the “Age 55 Exception”. 

Get this – if you roll your money to an IRA, the deal is off the table.  That’s right, you must leave it in the 401k, but you are allowed to take out as much as you want, whenever you want.

Milestone #3 – Age 59 1/2

I doubt most of you celebrate Half Birthdays, but this is one you’ll want to throw a party for!

This is the traditional age in which you can withdraw your retirement money without fear of Uncle Sam hitting you over the head with a 10% penalty for pre-mature distributions.

Milestone #4 – Age 62

62 is a big age as well for the simply because you can now qualify for Social Security benefits.  It doesn’t mean you have to take them or even that you should take them, but you at least have the option available to you.  Don’t forget it will be a reduced benefit, but a benefit nonetheless.

Milestone #5 – Age 65

At this age you are now qualified to take Medicare, which is social insurance including two main parts.  Part A covers hopsitalization and Part B acts as your medical insurance. 

If at this point you are not receiving Social Security benefits then you need to apply for Medicare and will want to do that three months before you turn 65.

Milestone #6 – Age 66-67

If you were born between 1943 and 1954 then your full retirement age (FRA), or the age in which you can collect 100% of your entitled Social Security benefits is age 66. 

For those born in 1955 you have to wait an additional two months.  The government adds two more months to the waiting period for each year until 1960 (i.e. if you were born in 1958, your FRA is age 66 and 6 months). 

If you were born in 1960 or beyond your FRA is age 67. 

I hear a lot of people tell me “I can’t retire until 67″.  What they usually mean is they can’t collect full Social Security benefits until age 67.  You can retire whenever you want, you just won’t get your full benefits until then.

Milestone #7 – Age 70 1/2

Here is another one of those Half Birthdays, however, this one doesn’t justify much celebration.

In the year you turn 70 1/2 good ol’ Uncle Sam says you MUST start pulling money out of your IRA’s or 401k’s. 

What? Surely that’s a typo right?  Sorry to bear bad news, but you MUST start pulling money out of your retirement plans. 

In effect, Uncle Sam says to you, “Great job saving that big chunk of money in your 401k and deferring the taxes for all these years, we love you, now it’s time to pay the Piper, which is why we love you even more at this age!”

What do I mean by MUST?  Well, if you want to try to get around pulling money out and paying taxes on it, just realize that you will be subject to a 50% penalty on your distribution!!  Ouch!

This is known as RMD or Required Minimum Distributions.  There is a special formula based on life expectancy that the IRS uses to determine your RMD.  See these worksheets at the IRS website for more info.

One last note on the 70 1/2 rule.  This only applies to your pre-tax retirement accounts.  In other words, money that you have not previously paid taxes on.  So, your Roth IRAs (which consist of after-tax money) do not apply when discussing RMDs. 

So What.

Now that you know about these important milestones what should you do about it? 

If you are unsure how much you need for retirement and are trying to decide where to save more money you may want to keep the 70 1/2 rule in the back of your mind.

Regardless of age, it makes sense for you to look into whether a Roth IRA is right for you.  You might be able to contribute to them OR you might be able to convert existing pre-tax money to a Roth IRA.

If you are 50 or older that’s easy – you should be socking away as much as you can for your retirement.

If you want to retire early you might be able to take advantage of the age 55 exception and early Social Security Benefits.

Knowledge is key to making the right decisions when it comes to retirement.  Don’t let your birthdays come and go without taking advantage of opportunities that exist for your retirement.

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Most people prefer not to discuss the issue of estate planning.  Let’s face it, there are certainly less morbid topics to talk about, however, this is perhaps one the most neglected and often misunderstood personal finance areas out there.  Knowing the basics of what some of the estate documents can do for you and having a good plan in place could potentially save hundreds of thousands of dollars in taxes and reduce stress for your loved ones. 

Estate laws are constantly changing, so it is important to contact an experienced estate planning attorney before you do anything.  Having an idea of what these documents do before you meet will be valuable.  Here are seven documents you should consider including in your estate plan:

Will

At the very least everyone should have a will.  It describes whom your assets should be given (i.e. – my stamp collection goes to cousin Tommy).  If you have minor children, your will can name a guardian for them as well.  The downside to the will is that your assets will still go through probate, which is a lengthy and expensive process where the courts determine the validity of and interpret your will.  Having beneficiaries listed on your accounts will help to avoid probate for those items, but for others like your furnishing in your house etc. those will head to probate.

Revocable Living Trust

This document serves to avoid probate.  You still retain control over your assets and can provide various instructions to distribute your assets. (i.e. Little Johnny can’t receive money til he’s 25 because you think he’ll blow it on big screen TVs and video games)

Living Will

Remember the controversial Terry Schiavo case?  Terry’s parents wanted to keep her alive and the husband didn’t want to see her suffer any longer.  What a living will does is make the choice for your family before you get to a point where you can no longer make decisions on your own.  Many people think “I never want to be hooked up to machines to prolong my life.”  This document provides instruction on how you would like to handle the issue of  life support.  This is also known as a “physicians directive”. 

Pour-Over Will

This document basically ensures all of your assets pass through your trust if you have one so they can be handled the way you want and can still avoid probate.  This is basically a clause in your will that ensures your assets “pour over” into your trust. 

Health Care Power of Attorney

This empowers a loved one whom you trust to make health care decisions for you should you be unable to do so.  No matter where you stand on the Terry Schiavo case, this document could have saved the family a lot of fighting had there been something like this in place.

Durable Special Powers of Attorney

This basically allows someone to complete specific actions for you should you be unavailable or unable to do so because of medical reasons or other situations.  Durable just means that it will continue in or take effect upon the event that you become mentally incapacitated.

HIPAA Waiver

Under the HIPAA law, your health and medical information is considered private and sensitive.  Medical staff are required to keep your information confidential, which means that in the event that something happens to you, your doctors will not be able to tell your loved ones too much information.  The HIPAA waiver allows the hospital or medical staff to release medical and health-related information to someone you love.

This list should provide you with a basic grasp of what you might need for a proper estate plan.  Again, it’s important to seek out a qualified estate planning attorney when looking to create your end-of-life plans.  What are your thoughts, is there anything you would include or not include in your own plans?

No doubt most people have heard of a Roth IRA, after all, they’ve been around since 1998.  Although they’ve been available for over 11 years, I’m constantly amazed by how many people are just simply unsure of exactly what they are or what they do. 

The Basics: What is an IRA?

An IRA is simply an Individual Retirement Account (IRA) that provides investors an opportunity to save for retirement in a tax-advantaged way.  Generally, you must wait until 59 1/2 to withdraw the money without IRS penalty. 

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. 

Features

The main difference between the Traditional and the Roth IRA is how it is taxed.  With a Traditional  IRA, you typically contribute before-tax (with some exceptions) money to the account.  Depending on your eligibility, you can deduct your contributions from your income on your current year taxes.  You receive the tax break now.  The money grows tax-deferred so when you pull your savings out in retirement you have to pay taxes on every single dollar you withdraw at whatever your current tax rate is at the time.

The Roth IRA is just the opposite.  You contribute after-tax dollars to the account 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.

Advantages

1. Obviously the biggest advantage to the Roth IRA is the tax-free withdrawals in retirement.  This can be a huge potential tax savings for you especially if you think tax rates will be going up.

2. The Roth offers more flexibility on withdrawals prior to retirement.  You can withdraw your principal (your contributions)  tax and penalty free at any time during the life of the Roth IRA.  To an undisciplined person might have trouble with this, but someone who runs into a bind an is cash strapped can have a little comfort knowing they have some additional money available.  This is a huge plus compared to the Traditional IRA, where you would pay a 10% penalty on any pre-59 1/2 withdrawals as well as taxes.  

3. Another advantage is that you can contribute to the Roth even if you are covered by an employer-sponsored retirement plan (401k etc).  With the Traditional IRA you are subject to income testing to determine if you could contribute when covered already by a plan  at work. Even if you could contribute, you don’t get to take advantage of the deduction on your taxes.  So the Roth becomes the perfect additional savings plan when you already have a 401k or other employer plan.

 4. For older folks, the fact that you do not have to take withdrawals is a major advantage as well.  With a Traditional IRA, the government forces you to take money out at age 70 1/2 or face a 50% penalty for not withdrawing your savings.  The main reason is of course to generate tax revenue.  Since Roth IRA distributions are tax free, you don’t have to worry about this rule. 

Key Tradeoffs

1. Your contributions are limited.  Currently in 2009, you may only contribute $5,000 and if you are over 50 you can contribute an additional $1,000 for a “catch-up” provision.  Depending on your income, you might be phased out of your contributions.  For example, a couple making between $166,000 and $176,000 will have their contributions limited.  Income over $176,000 disqualifies you for Roth contributions altogether.  Try this online calculator to determine how much you can contribute to a Roth.

2. You still might have to pay taxes on non-qualified distributions.  In order to meet the specifications for a qualified distribution, you must have had the Roth opened for at least five years and meet one of the following:

• Reached age 59 1/2 by the time of the withdrawal
• Withdrawal is due to qualifying disability
• Withdrawal is made for first-time homebuyer expenses (up to $10,000) 

Again, you are still able to withdraw your contributions at any time without penalty or taxes.

3. Tax treatment differs depending on the state.  The tax laws mentioned above correspond to federal law.  Your state may have differing laws for Roth IRAs You should check with your tax advisor to ensure you won’t have to pay state taxes. 

How Do I Get One?

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 in essence 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.