Money Blue Book

So you’re thinking of opening a Roth IRA account? Congratulations! Although it’s only one small step forward in sound financial planning, it’s one giant leap towards building your financial future and saving for retirement. By now you’ve likely settled on which investment retirement account (IRA) vehicle is best for you. There are three major types – Roth IRA, deductible IRA, and the non deductible IRA. All offer tax deferral benefits but the retirement account that is most appropriate for the majority of ordinary individuals and married couples is the Roth IRA. Unlike traditional IRA’s (both tax-deductible and non-deductible), Roth IRA’s enjoy several great advantages and benefits which make them very attractive for those who want to invest and plan for their future retirement. Here is what every prospective Roth IRA investor and account holder should know:

1. Withdraws from Roth IRA’s after age 59.5 are generally not taxed, because you pay your taxes on the front end by contributing after tax dollars.
2. Because most people steadily increase their total income over time as they get older, they usually either stay in the same marginal tax bracket or end up at a higher bracket level at retirement. Thus, Roth IRAs enable savvy savers at retirement to accumulate more money than even tax-deductible IRA’s.
3. Unlike a traditional IRA, not everyone is eligible to open and contribute to a Roth IRA. For both 2009 and 2010, the Roth contribution limit is $5,000 as long as your income falls below $105,000 if you’re single, and $166,000 if you’re married filing a joint tax return. There are income phaseouts after that.
4. Unlike a traditional IRA, with a Roth you can withdraw your original contribution money at any time for any emergency reason, tax free, and without penalty and you don’t have to replace the funds, unlike a 401K or a traditional IRA. Of course, it’s always best not to withdraw because that stops the compound interest process.

Choosing The Best Broker To Open Your ROTH IRA Account With, And What To Look For:

The majority of investors choose to start their retirement savings with a Roth IRA. The best course of action is to open the account with a reputable broker rather than a bank. Some banks and credit unions offer retirement accounts but their choice of investment vehicles like certificate of deposits are often limited with low rates of return. Here are some basic criteria you should take into consideration when deciding which broker to open your Roth IRA account with:

1. Choice Of Investment Options Including Mutual Funds and Exchange Traded Funds (ETF’s) – A Roth account is merely the account type. With the funds your contribute to it, you can use it to trade any type of investment vehicle you wish from stocks, bonds, to mutual funds.
2. Low Commission Costs and Account Fees – My recommendation for new investors is to stick with mutual funds and low cost index funds. Always make sure the maintenance fees for funds are reasonable.
3. Automatic Contribution – For those who wish to invest regularly, try to look for a retirement broker that offers the ability to make automated fund transfers into your Roth from your linked bank account.
4. Minimum Balance Requirement – Most brokers have minimum initial investment and balance requirements. For new investors, the minimum requirement may be an initial hurdle if the limit is to high. However, even for those who only want to start up with a few hundred dollars, there are options available.

Investing In Mutual Funds – The Best Approach For New Roth IRA Account Holders

New Roth investors should put their money primarily into mutual or index funds. Here are two of the top brokerage firms that specialize in their own family of mutual funds and have built a reputable track record of solid returns. For new retirement account holders and those who are unsure about their investment approach, low cost, no load mutual funds are the less volatile and smarter way to invest for your future.

1) Fidelity – (Sign Up) – Fidelity Investments is where I chose to open my Roth IRA account and it’s also the place where I manage my 401k. I like their clean and easy to use website interface and the fact that they have a very established track record. They offer a basic approach to opening a Traditional or Roth IRA. The minimum investment requirement is $2,500, but that amount is waived if you can commit to future automatic monthly contributions of $200 per month. For new and young investors who don’t have $2,500 to invest right away, they can start out with just $200 and agree to put in $200 per month in the future.

Fidelity offers a huge variety of attractive mutual fund and index fund options, many of which have no transaction fees (although minimum balance requirements for Fidelity’s index funds are rather high at $10,000). With a Fidelity account, you can trade Fidelity family funds for free, although there may be early redemption fees.

2) Vanguard – (Sign Up) – Vanguard is most well known for offering one of those lowest expense ratios for access to their family of Vanguard index funds. Opening a Roth with Vanguard will enable you to trade Vanguard mutual funds for free as well. While they ordinarily charge an annual $20 fee for each Vanguard fund account with a balance under $10,000, the maintenance fee is completely waived and eliminated if you simply register for account access on Vanguard.com and agree to accept electronic delivery of statements, reports, and other shareholder materials through Vanguard’s e-service package.

For most Vanguard funds, the minimum investment requirement requirement is $3,000 per fund. However, with the broadly indexed Vanguard STAR Fund (VGSTX), the initial minimum balance requirement is only $1,000. The STAR Fund is a stable fund well suited for the beginner retirement account investor with limited funds to start. Once your investment has grown, you can always upgrade to one of the more targeted Vanguard Life Cycle Funds designed to suit investors depending according to their target retirement date. For me, I would choose the Target Retirement 2045 fund (VTIVX).

Vanguard expense ratios are quite low – a predictable trademark of most Vanguard funds. Vanguard is probably best suited for fund investors who want to concentrate their investing efforts primarily in index and mutual funds rather than individual stocks, the best course for the vast majority of investors.

Investing In Exchange Traded Funds and Individual Stocks – Another Approach For Roth IRA Investors

Currently there is an investment movement away from loaded investments and expensive adviser managed funds, and towards exchange traded funds (ETF). ETF’s are attractive because not only do they track the diversified performance of broad indexes, they also offer very low expense ratios and may be easily traded like ordinary stocks. If ETF’s are your intended approach, then you will need to find a Roth IRA discount broker that offers low per trade commissions and low fees. Here are a few low cost discount brokers that I either have accounts with or have had a history of positive trading experiences with:

Top Discount Broker Picks For Roth IRA Investors Who Want To Trade ETF’s And Individual Stocks

1) Zecco – (Sign Up) – Zecco was one of the pioneers for the movement towards free stock trades. Although it has since scaled back the terms of its original free trade promotion, this discount broker still offers a great commission deal for free equity trades. Currently, account holders receive 10 free trades per month so long as they can maintain at least $2,500 in total account equity, which includes the total value of cash and stock positions. Otherwise, individual equity transactions for market and limit orders cost $4.50 per trade. Although there is technically no minimum balance investment requirement, if you want to take advantage of the free trade offer, you should maintain at least $2,500 in your account.

2) TradeKing – (Sign Up) – Notice: For a limited time only, TradeKing is offering new account applicants a free instant $50 bonus in their brokerage account when they fund and trade via the provided link). TradeKing is a popular deep discount broker that offers very low commission fees. Currently, each market and limit trade costs $4.95 per trade. There are no annual fees for IRA accounts and no minimum balance investment requirements to open a Roth account. For more background info about this deep discounter, check out my online review of TradeKing.

3)  E-Trade – (Sign Up) – Right now, Etrade is offering 100 free stock and option trades (no commissions) for new IRA account registrations. This is a pretty amazing deal, especially coming from such an established brand name broker. Those who prefer no hassle financial accounts will also appreciate E-trade’s no fee, no minimum balance approach to IRA’s and Roth IRA’s. This may be the best time to hop on board, while this particular limited time ETrade promotion is still active.

4) ShareBuilder – (Sign Up) – Exclusive $25 bonus offer for new accounts – ShareBuilder has established itself as a popular discount broker, offering comparatively low commission fees for equity transactions at $4 per trade through automatic investment plans, and $9.95 for regular real time market orders. There is no minimum investment balance requirement to open a new Roth or an ordinary brokerage account. The $25 annual fee is waived if you sign up for a trading plan other than their basic plan.

New ShareBuilder Promotion Codes: (Updated)

• 25WOLS – Free $25 offer after sign up

Update: Read About The Possibility Of A 2009 Second Stimulus Check

With both the U.S. House of Representatives and the Senate having nodded their respective approvals of the nearly $160 billion economic stimulus package (that’s “B’ as in Billion), the bill has finally been signed, sealed, and delivered to President Bush for final approval. The President has already indicated that he will quickly sign the economic aid into law – so I believe the rebate checks will soon be on their way to a mailbox or direct deposit account near you.

I shall try to explain how the 2008 economic stimulus package will work and how much you can expect to receive in the way of a rebate check.

1) Why Are We Getting A Tax Rebate Check?

The Tax Rebate Check is part of the U.S. government’s emergency pro-growth economic stimulus plan to prevent the U.S. economy from stalling out and entering a period of prolonged recession. Due to the recent slowdown in the economy caused by housing bubble problems and subprime mortgage related issues, the federal government wants to keep the economy on the up and up by putting money into the hands of U.S. consumers to encourage increased consumer spending. Like jump starting a car, the government wants to hand consumers extra wads of cash to encourage increased business investment and consumer activity. Surveys have indicated that at least half of consumers intend to use the money to pay down existing debt, while the other half intends to either save or spent it on extra things. Personally, I plan to save my economic stimulus check if I qualify for one. While the stimulus plan also provides some business incentives, I will only focus on the consumer side tax rebate checks at this time.

2) How Does Qualifying For And Receiving A 2008 Tax Rebate Check Affect And Relate To My 2007 and 2008 Tax Returns?

The economic stimulus tax rebate is counted as a tax credit against your future 2008 tax bill. However, you are entitled to the full qualified rebate amount when you file your 2007 tax return by the April 15, 2008 deadline. Qualification to receiving it now will be based on your 2007 income information. Taxpayers should not be concerned that the tax rebate is only a mere future credit that has been accelerated into the present in terms of timetable. The economic stimulus tax rebate is a true credit for qualified taxpayers (free money essentially). The rebate amount that you receive now will not be used to offset any of your future income tax bill or any anticipated refund checks from filing your future 2008 tax return on April 15, 2009.

The economic stimulus plan is flexible and permits taxpayers to either file their tax return on April 15, 2008 and get their rebate checks now (the preferred route), or wait till April 15, 2009 to file their 2008 tax return and get their rebate checks then. Note that even if you file now and qualify for a rebate check, and your status changes and you become eligible for a larger rebate when you file your 2008 tax return next year, you can still claim the positive difference at that time. In addition, you will not have to give back any rebate money already received even if your status change causes you to later qualify for a lesser amount for tax year 2008 when you file in 2009.

3) Who Will Get A Tax Rebate Check and How Much Will I Receive?

The economic stimulus tax rebate checks are intended to go into the hands of low to middle income Americans (those who are supposedly more inclined to spend them immediately). Thus while most ordinary taxpayers will qualify for a stimulus check, those who make a lot of money are likely to be partially or fully phased out of receiving a rebate.

The amount of your tax rebate will be based on your 2007 federal income tax return’s adjusted gross income (AGI), which is not just your annual salary. Your AGI includes all income sources including wages, salaries, tips, interest, alimony paid to you, and dividends, offset by any specific business, or capital gains or losses – but it does not include the personal exemption, or any standard or itemized deductions. You are entitled to receive the full rebate amount unless your adjusted gross income exceeds a certain threshold, in which case you will either receive a reduced rebate or be entirely excluded from receiving one at all if your income is simply too high. However, the economic stimulus package is intended to cover many people and nearly 130 million Americans are expected to qualify for at least part or all of their entitled tax rebate check.

The proposed plan that is expected to be approved will provide one time check rebates of up to $600 for individuals or $1,200 for couples, along with an additional $300 for each child (classified as dependents under the age of 17). Low income people, including retirees on Social Security or Veterans disability benefits who earned at least $3,000 will receive checks of $300. Low to middle income people including retirees who made enough to pay taxes will receive higher tax rebates up to their net tax liability, limited only by their AGI. But so long as you paid taxes and made ($3,000 or more a year but less than $75,000 as a single individual), or ($3,000 or more, but less than $150,000 a year as a married couple), you will be entitled to the full tax rebate check.

If you exceed the adjusted income threshold, you may still get a rebate, but it will be reduced by 5 percent of the amount you earned above the adjusted gross income limits of $75,000 for single filers and $150,000 for couples. Thus for example: A single filer with no children and an adjusted gross income of $80,000 ($5,000 over the limit), will see his or her rebate check reduced by $250 (5% of $5,000), and will receive a check for $350, instead of the full $600. Rebate checks will phase out completely for single filers who earn over $87,000 and for couples who earn over $174,000.

4) Who Is Excluded From Receiving An Economic Stimulus Rebate Check?

If you are a single individual who earned more than $87,000, or if you are a married couple that earned over $174,000 for the year, you are likely excluded from receiving a rebate check, unless you can otherwise claim any extra child rebates. Keep in mind that the child rebates can also be phased depending on how much your adjusted gross income exceeds the income threshold.

If you’re a young college student who had earned income for 2007 but are claimed as a dependent under your parent’s tax return, you are ineligible for the tax rebate as well.

Under the Senate approved proposal, illegal immigrants will also not be eligible to receive tax rebate checks for obvious reasons.

5) What Do I Have To Do To Get My Tax Rebate Check?

To get your tax rebate check now, you must file your 2007 federal tax return (either a form 1040 or 1040 EZ) by the April 15, 2008 filing deadline. Or you can wait until April 15, 2009 to file your 2008 tax return and obtain it then (although, why would you want to wait until then?). I recommend using a low cost online tax preparation program such as Turbo Tax or Tax Cut to assist you (both are reasonably priced and provide accurate results). Even if you don’t usually file a tax return because you don’t earn enough to owe taxes like some retirees or veterans on disability, you will still need to file a 2007 tax return in order to receive the economic stimulus check.

6) When Can I Expect To Receive My Tax Rebate Check?

The Internal Revenue Service (IRS) intends to start issuing the rebate checks starting May 2008 to qualified recipients who properly and timely submit their tax returns by the April 15, 2008 filing deadline. If you miss the annual tax filing deadline or request a filing extension, it is possible you won’t receive your rebate check until the end of the year (thus I suggest you file by April 15, 2008 – mark it on your calendar and circle it!)

7) Where Can I Get More Information About The Tax Rebate?

To get official answers to your tax rebate concerns and queries, you should check the official IRS website link on the subject. Please take a look at my post on obtaining official Answers To 2008 Economic Stimulus Questions. For an unofficial response however, you can try posting your comments or questions here.

Updated Note: The IRS has released the official Economic Stimulus Payment Schedule.

I have this policy for myself where I refuse to pay someone for a service I can easily perform myself with reasonable effort. For example, if I lived in a house with a front and backyard lawn, rather than pay someone to handle the landscaping, I’d rather mow the grass and trim the hedges on my own, so long as the time and effort spent aren’t too prohibitive.

Online and Software Tax Preparation Programs Make It Easy To Do Your Own Taxes

When it comes to taxes, I’ve traditionally done my own tax preparation work. Ever since I started working and generating income, I’ve always filed my own tax return. Initially before I gained a better understanding of tax matters, performing my own tax accounting work was difficult. But then along came extremely useful online and software tax preparation programs like Intuit’s TurboTax and H&R Block’s TaxCut. With the assistance of software based tax preparation programs, I was able to easily complete my own taxes with comparative ease. The advantages of using tax preparation programs are obvious – you simply compile all of your tax papers and respond to the series of tax related questions proposed to you by the program of your choice. The software asks you a whole slew of questions to determine what category you fall under and what type of tax deductions you qualify for. For those that have easy tax returns, I recommend using TurboTax or TaxCut to not only help you save money but to help you get educated and empowered.

Learn More About Your Own Finances And Become Better Educated On Important Money Matters

I think the vast majority of people are intimidated by the IRS and the voluminous tax laws that surround its presence. Most people have a general and basic understanding of the tax code and understand that income is taxed and that there are such things as deductions that help to reduce your tax liability. But beyond that, most layman don’t know the specifics – and tend to avoid anything to do with taxes like the plague – even lawyers. When I attended law school, the massive majority of students avoided tax law courses. Bucking the trend, a small group of students including myself embraced tax and went on to take most of the complicated tax law courses available – everything from individual, to corporate, to partnership tax. Of course, after taking all of those courses, I later realized why even studious individuals avoided the subject – there are a lot of numbers involved and sometimes for more complex transactions, calculations can get somewhat daunting.

However, with the wealth of information available on the internet and the ability to utilize tax preparation software today, regular individuals don’t need to remain in the dark on such an important matter. Rather than diligently gathering all of your assorted tax receipts together and driving them down to your certified public accountant with a big check, why not consider filing your own taxes? Of course, this is only advisable to tax novices who have relatively simple tax issues. If your income sources are straight forward and you don’t run your own home business or otherwise own complex financial investments, you’re likely a good candidate to file your own tax return.

There Is No Magic Involved – Just Self Financial-Empowerment

The biggest problem with outsourcing your tax preparation work out to someone else is that you are kept in the dark and remain clueless about a very important document in your financial life. If you spent just a few moments doing it yourself with the assistance of tax preparation software, you’ll gain a needed appreciation of your financial status as well as learn how to better improve your tax situation in the future. Most people seem to think professional tax preparers are some sort of magicians who possess the ability to make financial sense out of chaos. If you put a bit of extra effort into trying to understand your own tax numbers better, you’ll see that there is no magic involved. You might also come to realize that you’ve been wasting your money on expensive professional accountants all this time. Remember, it’s in your tax preparer’s own financial interest to leave you in the dark about specific tax issues to keep you dependent on them continuously for the service they provide.

Along the same lines, I always find it remarkable when people say that they don’t mind paying their accountants the hefty tax preparations fees to do their personal tax returns because the fees are tax deductible, and using this self proclaimed fact to support their decision to outsource the work. Now where did they get this information – their self serving accountant? Yes there is a place for tax preparation fees under Miscellaneous Expenses on Schedule A, however only the amount that exceeds 2% of the tax filer’s adjusted gross income is deductible. Unless their tax preparation was exceedingly complex and very expensive, most ordinary people would not be able to qualify for this itemized deduction to reduce their taxes.

When you don’t try to understand your own personal tax return and instead depend on someone else’s knowledge, you grow dependent on them and give them more credit than they deserve. For example, when someone hands their accountant a stack of medical bills thinking that the accountant will process the bills and deduct everything to reduce the overall tax liability, would it surprise you if the accountant chose not to do anything with these bills? That’s because you would have needed to have suffered a major illness or medical condition to have accumulated sufficient medical expenses to make it tax deductible. Only medical expenses in excess of over 7.5% of the adjusted gross is deductible. Of course your accountant likely may not tell you all that – preferring to keep you mesmerized and dependent on his or her magical tax preparations skills.

If some strange auto mechanic told you to come back with your car and get an oil change every 3,000 miles, should you trust him right off the bat? Of course not. You would either get a second opinion or go perform some online research to verify that you’re not being taken for a ride. Doing your own personal tax return works in the same way. Remember, knowledge is power, so please empower yourself.

The end of the year is here, but don’t just take it easy and forget about important end of the year financial moves you may need to make. For those who have one through their employer, make sure you’ve fully maxed out your Flexible Spending Account (FSA). For the remaining unused funds, my usual end of the year routine is to get creative and spend the rest on qualified health care items like Tylenol, Advil, and over the counter cough medication like Delsym and Robitussin. Covered FSA medical expenses also include items like contact lens solution and eye care drops. If you have no immediate health needs, it’s always a good idea to stock up on emergency, medical kit type supplies like Band-Aids, gauze, and Betadine for common scratches and scrapes, particularly if you have kids.

What Is A Flexible Spending Account And How Does It Work?

Flexible Spending Accounts are tax advantaged arrangements set up by some employers to allow employees to set aside a pretax portion of their regular paycheck to pay for qualified expenses, usually for medical care, but frequently also for child care costs. The smart use of pre-tax savings through FSA’s can help you save up to 30% of the cost of out-of-pocket medical related expenditures. Most people contribute about $1,000 towards their FSA, but it varies depending on individual need.

Benefits of the Flexible Spending Account Include:

1. Contributions towards your FSA are pre-tax.
2. When you provide receipts to get reimbursed, the FSA reimbursements are tax free.
3. Convenient FSA debit cards are now frequently being used to make it easier for employees to use the funds in their FSA.
4. Medical FSA’s are pre-funded by the employer – when you set aside an amount for the year, the entire amount is available for use immediately at the beginning of the year, even though your periodic contributions will actually be made later.
5. FSA’s are well, flexible – they can be used to pay for a wide array of health care related expenses including dental, vision, over the counter drugs like painkillers and allergy medicine, and even elective medical procedures like Lasik laser vision correction surgery. FSA’s also cover health care related costs like insurance co-pays, deductibles, and other related out-of-pocket expenses.

The FSA “Use It Or Lose It” Rule – Two Way Street Between Employer and Employee

It’s important to properly and accurately estimate how much you are likely to need in your FSA for the plan’s coverage year. The biggest drawback of the FSA is that it is a use it or lose it account. If by the start of the new year there is still money left on your previous year’s FSA not spent, the amount is forfeited back to the employer, where it is used to cover administrative costs. Don’t let this happen because you’re just giving away your own money back to the employer!

However, this use it or lose it policy also works in reverse as well. As I mentioned earlier, one benefit of the FSA is that the entire allotted amount is available immediately at the start of the year. If you leave your job before the end of the FSA coverage plan year and have already used up the entire year’s amount, you do not need to refund or return the amount back to the employer. Some employers may attempt to recoup the loss by informally asking you reimburse them for the amount since you’re leaving the employment, however officially, employers are not permitted to see seek repayment of FSA monies so long as the original distribution was properly substantiated.