What is it?
A Traditional IRA (as opposed to a Roth IRA) is a type of retirement investment. You do not pay taxes on your annual contributions (see limits) to a Traditional IRA. This means that you will pay taxes when you withdraw this money later in life, taxed at whatever tax bracket you are in during retirement.
Note from about.com:
*The money in the account can generally be invested in stocks, bonds, mutual funds, or CDs.
*Any interest or capital gains from the investments are not taxed when the gains are realized. Instead, they are deferred until money is withdrawn from the IRA, at which point the money is taxed as ordinary income.
Pros and cons
*The nice thing about a Traditional IRA is that you can deduct your annual contributions when you do your taxes.
*The bad thing about the Traditional IRA is that you will have to pay taxes later (at a possibly higher tax rate).
*Another bad thing is that you are required to start taking money out of this account when you reach age 70 1/2.
Eligibility Requirements
Source: about.com
Anyone with earned income is eligible to open a traditional IRA, but there are some restrictions as to who can deduct the contributions. There are income limits that are used to determine how much of the contributions are deductible, if any at all.
If you are currently covered by a retirement plan at work in 2007, deductibility for traditional IRA contributions are phased out if your modified adjusted gross income is:
* More than $83,000 but less than $103,000 if married and filing a joint return
* More than $52,000 but less than $62,000 for a single individual or head of household
* Less than $10,000 for a married individual filing a separate return
If you live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work but you are not, the deduction is phased out if your modified adjusted gross income is more than $156,000 but less than $166,000.
Which to choose: Traditional or Roth?
Read this article: about.com
Monday, January 7, 2008
Converting from a Traditional IRA to Roth IRA
Source: Vanguard
Converting to a Roth from Traditional
*Any money you want to convert from a traditional or rollover IRA into a Roth IRA does, in fact, count as income.
*If you want to transfer money currently in a Roth at one company and move it to a different company (but still as a Roth), that does not count as income. It’s just a transfer.
*You are able to convert from traditional to Roth a little at a time in order to avoid jumping into a higher tax bracket.
*Finally, starting in 2010, the income limits (currently, you cannot earn more than $110,000 for single; $160,000 married filing jointly) for the Roth will be waived.
Converting to a Roth from Traditional
*Any money you want to convert from a traditional or rollover IRA into a Roth IRA does, in fact, count as income.
*If you want to transfer money currently in a Roth at one company and move it to a different company (but still as a Roth), that does not count as income. It’s just a transfer.
*You are able to convert from traditional to Roth a little at a time in order to avoid jumping into a higher tax bracket.
*Finally, starting in 2010, the income limits (currently, you cannot earn more than $110,000 for single; $160,000 married filing jointly) for the Roth will be waived.
IRA contribution limits
For both Traditional and Roth IRAs
Source: about.com
The annual dollar limit is:
* 2007..... $4000
* 2008..... $5000
For those 50 and over before the close of the taxable year, the following annual limit applies:
* 2007..... $5000
* 2008..... $6000
According to wikipedia: Starting in 2009, contribution limits will increase in $500 increments based on inflation.
Source: about.com
The annual dollar limit is:
* 2007..... $4000
* 2008..... $5000
For those 50 and over before the close of the taxable year, the following annual limit applies:
* 2007..... $5000
* 2008..... $6000
According to wikipedia: Starting in 2009, contribution limits will increase in $500 increments based on inflation.
Roth IRA
What is it?
A Roth IRA is a type of investment that allows you to pay taxes now and get tax-free withdrawals in the future. This is nice, because taxes will probably just keep rising and rising.
What are the Advantages of a Roth IRA?
Source: about.com
* Contributions can be made after age 70 ½ (unlike the age limitation of a traditional IRA)
* Eligible individuals may contribute up to a specified limit annually
* Contribution eligibility is not restricted by active participation in an employer’s retirement plan
* Withdrawals of earnings upon death or disability, for first time home-buying or after age 59 ½ are tax-free provided a 5 year wait has occurred
What are the Disadvantages of a Roth IRA?
* Premature withdrawals in excess of contributions are fully taxable and are also subject to a 10% penalty
* Contributions are limited each year for each individual
Maximum contributions limits are the lesser of the annual dollar limit of the table below or 100% of earned income less contributions to traditional IRAs.
You cannot contribute if...
Source: about.com
Single:
If your income tax filing status is single, your Roth IRA contribution limit is reduced when your adjusted gross income is more than $95,000. Your contribution limit is zero when your adjusted gross income reaches $110,000.
Married Filing Jointly:
Married person's filing jointly will have a reduced contribution limit for each persons Roth IRA if their adjusted gross income exceeds $150,000. If their adjusted gross income reaches $160,000, each persons contribution limit is zero.
Married filing separately and living apart:
If you are married but file separately and have lived apart from your spouse for the entire tax year, your Roth IRA contribution amount will be reduced if your adjusted gross income is more than $95,000. You Roth IRA contribution limit will be eliminated if your adjusted gross income reaches $110,000.
Married filing separately and lived with your spouse:
If you are married filing separately and lived with your spouse at any time during the tax year, your roth IRA contribution amount will be reduced when your adjusted gross income exceeds $0.00 and will be completely eliminated when your adjusted gross income reaches $10,000.
Related topics
Roth limits
A Roth IRA is a type of investment that allows you to pay taxes now and get tax-free withdrawals in the future. This is nice, because taxes will probably just keep rising and rising.
What are the Advantages of a Roth IRA?
Source: about.com
* Contributions can be made after age 70 ½ (unlike the age limitation of a traditional IRA)
* Eligible individuals may contribute up to a specified limit annually
* Contribution eligibility is not restricted by active participation in an employer’s retirement plan
* Withdrawals of earnings upon death or disability, for first time home-buying or after age 59 ½ are tax-free provided a 5 year wait has occurred
What are the Disadvantages of a Roth IRA?
* Premature withdrawals in excess of contributions are fully taxable and are also subject to a 10% penalty
* Contributions are limited each year for each individual
Maximum contributions limits are the lesser of the annual dollar limit of the table below or 100% of earned income less contributions to traditional IRAs.
You cannot contribute if...
Source: about.com
Single:
If your income tax filing status is single, your Roth IRA contribution limit is reduced when your adjusted gross income is more than $95,000. Your contribution limit is zero when your adjusted gross income reaches $110,000.
Married Filing Jointly:
Married person's filing jointly will have a reduced contribution limit for each persons Roth IRA if their adjusted gross income exceeds $150,000. If their adjusted gross income reaches $160,000, each persons contribution limit is zero.
Married filing separately and living apart:
If you are married but file separately and have lived apart from your spouse for the entire tax year, your Roth IRA contribution amount will be reduced if your adjusted gross income is more than $95,000. You Roth IRA contribution limit will be eliminated if your adjusted gross income reaches $110,000.
Married filing separately and lived with your spouse:
If you are married filing separately and lived with your spouse at any time during the tax year, your roth IRA contribution amount will be reduced when your adjusted gross income exceeds $0.00 and will be completely eliminated when your adjusted gross income reaches $10,000.
Related topics
Roth limits
Saturday, January 5, 2008
Selecting a tax form: 1040EZ, 1040A or 1040?
Source: IRS
The three forms used for filing individual federal income tax returns are Form 1040EZ (PDF), Form 1040A (PDF), and Form 1040 (PDF).
Form 1040EZ is the simplest form to fill out. You may use Form 1040EZ if you meet all the following conditions:
Your filing status is single or married filing jointly,
You claim no dependents,
You, and your spouse if filing a joint return, were under 65 on January 1, and not blind at the end of the year,
You have only wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, qualified state tuition program earnings, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500,
Your taxable income is less than $100,000,
You did not receive any advance earned income credit payments,
You do not owe any household employment taxes on wages you paid to a household employee,
You do not claim a student loan interest deduction, an educator expense deduction, or a tuition and fees deduction, and
You do not claim an education credit, retirement savings contributions credit, or a health coverage tax credit.
If you file Form 1040EZ, you cannot itemize deductions or claim any adjustments to income or tax credits (other than the earned income credit.)
If you cannot use Form 1040EZ, you may be able to use Form 1040A if:
Your income is only from wages, salaries, tips, taxable scholarships and fellowships, interest, jury duty pay, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, and taxable social security or railroad retirement benefits and Alaska Permanent Fund dividends,
Your taxable income is less than $100,000,
You do not itemize deductions, and
Your only adjustments to income are the IRA deduction, the student loan interest deduction, and the tuition and fees deduction.
If you file Form 1040A, the only credits you can claim are the credit for child and dependent care expenses, the earned income credit, the adoption credit, the credit for the elderly or the disabled, education credits, the child tax credit, the additional child tax credit, and retirement savings contribution credit.
Finally, you must use Form 1040 under certain circumstances, such as:
Your taxable income is $100,000 or more,
You have certain types of income such as unreported tips, certain nontaxable distributions, self–employment earnings, or income received as a partner, a shareholder in an "S" Corp., or a beneficiary of an estate or trust.
You itemize deductions or claim certain tax credits or adjustments to income, or
You owe household employment taxes.
A complete list of conditions outlining when Form 1040 must be used is in the instructions for Form 1040A.
If you were a nonresident alien during the tax year and you were married to a U.S. citizen or resident alien, you may use any one of these three forms, based on your circumstances, only if you elect to file a joint return with your spouse. Other non–resident aliens may have to file Form 1040NR (PDF) or Form 1040NR-EZ (PDF). For more information on resident and nonresident aliens, refer to Topic 851.
You may be mailed the type of tax form you filed last year, but review your situation to determine if another form would be more advantageous for you. For Alternative Ways to File, please click on the e-file logo on irs.gov.
The three forms used for filing individual federal income tax returns are Form 1040EZ (PDF), Form 1040A (PDF), and Form 1040 (PDF).
Form 1040EZ is the simplest form to fill out. You may use Form 1040EZ if you meet all the following conditions:
Your filing status is single or married filing jointly,
You claim no dependents,
You, and your spouse if filing a joint return, were under 65 on January 1, and not blind at the end of the year,
You have only wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, qualified state tuition program earnings, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500,
Your taxable income is less than $100,000,
You did not receive any advance earned income credit payments,
You do not owe any household employment taxes on wages you paid to a household employee,
You do not claim a student loan interest deduction, an educator expense deduction, or a tuition and fees deduction, and
You do not claim an education credit, retirement savings contributions credit, or a health coverage tax credit.
If you file Form 1040EZ, you cannot itemize deductions or claim any adjustments to income or tax credits (other than the earned income credit.)
If you cannot use Form 1040EZ, you may be able to use Form 1040A if:
Your income is only from wages, salaries, tips, taxable scholarships and fellowships, interest, jury duty pay, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, and taxable social security or railroad retirement benefits and Alaska Permanent Fund dividends,
Your taxable income is less than $100,000,
You do not itemize deductions, and
Your only adjustments to income are the IRA deduction, the student loan interest deduction, and the tuition and fees deduction.
If you file Form 1040A, the only credits you can claim are the credit for child and dependent care expenses, the earned income credit, the adoption credit, the credit for the elderly or the disabled, education credits, the child tax credit, the additional child tax credit, and retirement savings contribution credit.
Finally, you must use Form 1040 under certain circumstances, such as:
Your taxable income is $100,000 or more,
You have certain types of income such as unreported tips, certain nontaxable distributions, self–employment earnings, or income received as a partner, a shareholder in an "S" Corp., or a beneficiary of an estate or trust.
You itemize deductions or claim certain tax credits or adjustments to income, or
You owe household employment taxes.
A complete list of conditions outlining when Form 1040 must be used is in the instructions for Form 1040A.
If you were a nonresident alien during the tax year and you were married to a U.S. citizen or resident alien, you may use any one of these three forms, based on your circumstances, only if you elect to file a joint return with your spouse. Other non–resident aliens may have to file Form 1040NR (PDF) or Form 1040NR-EZ (PDF). For more information on resident and nonresident aliens, refer to Topic 851.
You may be mailed the type of tax form you filed last year, but review your situation to determine if another form would be more advantageous for you. For Alternative Ways to File, please click on the e-file logo on irs.gov.
Mutual Funds
Source: yahoo.com
There are three types of mutual funds:
Growth funds are those that "grow" your money. "As their name implies, these funds tend to look for the fastest-growing companies on the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation." Expenses tend to run high, as does risk.
Value funds "These funds like to invest in companies that the market has overlooked." Fund managers "search for stocks that have become 'undervalued' -- or priced low relative to their earnings potential." Expenses tend to be low. Good for the conservative investor.
Blend funds are a combo of both growth and value. "They might ... invest in both high-growth Internet stocks and cheaply priced automotive companies. As such, they are difficult to classify in terms of risk." Remember, hundreds of different companies can make up one mutual fund.
Size groupings
Source: yahoo
Beyond the classifications of growth, value, and blend, mutual funds can be further separated into large-cap, mid-cap, and small-cap, based on the size of the companies they are invested in:
Large-cap funds invest in large companies -- brand names that are internationally recognized. These are usually solid performers. "Large-capitalization funds generally invest in companies with market values of greater than $8 billion. Some, like the Vanguard 500 Index fund, merely mimic the index and invest in all 500 companies." Lower risk.
Mid-cap funds: "As the name implies, these funds fall in the middle. They aim to invest in companies with market values in the $1 billion to $8 billion range -- not large caps, but not quite small caps, either. The stocks in the lower end of their range are likely to exhibit the growth characteristics of smaller companies and therefore add some volatility to these funds. They make the most sense as a way to diversify your holdings." Moderate risk.
Small-cap: "A small-cap fund ... will focus on companies with a market value below $1 billion. The volatility of the fund often depends on the aggressiveness of the manager. Aggressive small-cap managers will buy hot growth and technology companies, taking high risks in hopes of high rewards. More conservative "value" managers will look for companies that have been beaten down temporarily by the stock market. Value funds aren't as risky as the hot growth funds, but they can still be volatile." Higher risk.
A well-diversified portfolio will have a percentage of each of these types. Look for a 9-square chart like this one:
Vanguard has more info on the stock square chart:
Try to spread your mutual funds across this 9-square chart. Have some small-cap blends, large-cap value, mid-cap growth, etc. Diversity, diversify, diversify!
When buying:
Look for no-load funds.
Look for low expenses.
Look for low tax-ratios.
Look up ticker symbols at morningstar or yahoo to find out about expenses and tax ratios. Companies that sell mutual funds (Vanguard or American Century) will have information about whether a fund is no-load or not.
There are three types of mutual funds:
Growth funds are those that "grow" your money. "As their name implies, these funds tend to look for the fastest-growing companies on the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation." Expenses tend to run high, as does risk.
Value funds "These funds like to invest in companies that the market has overlooked." Fund managers "search for stocks that have become 'undervalued' -- or priced low relative to their earnings potential." Expenses tend to be low. Good for the conservative investor.
Blend funds are a combo of both growth and value. "They might ... invest in both high-growth Internet stocks and cheaply priced automotive companies. As such, they are difficult to classify in terms of risk." Remember, hundreds of different companies can make up one mutual fund.
Size groupings
Source: yahoo
Beyond the classifications of growth, value, and blend, mutual funds can be further separated into large-cap, mid-cap, and small-cap, based on the size of the companies they are invested in:
Large-cap funds invest in large companies -- brand names that are internationally recognized. These are usually solid performers. "Large-capitalization funds generally invest in companies with market values of greater than $8 billion. Some, like the Vanguard 500 Index fund, merely mimic the index and invest in all 500 companies." Lower risk.
Mid-cap funds: "As the name implies, these funds fall in the middle. They aim to invest in companies with market values in the $1 billion to $8 billion range -- not large caps, but not quite small caps, either. The stocks in the lower end of their range are likely to exhibit the growth characteristics of smaller companies and therefore add some volatility to these funds. They make the most sense as a way to diversify your holdings." Moderate risk.
Small-cap: "A small-cap fund ... will focus on companies with a market value below $1 billion. The volatility of the fund often depends on the aggressiveness of the manager. Aggressive small-cap managers will buy hot growth and technology companies, taking high risks in hopes of high rewards. More conservative "value" managers will look for companies that have been beaten down temporarily by the stock market. Value funds aren't as risky as the hot growth funds, but they can still be volatile." Higher risk.
A well-diversified portfolio will have a percentage of each of these types. Look for a 9-square chart like this one:
Vanguard has more info on the stock square chart:
Try to spread your mutual funds across this 9-square chart. Have some small-cap blends, large-cap value, mid-cap growth, etc. Diversity, diversify, diversify!
When buying:
Look for no-load funds.
Look for low expenses.
Look for low tax-ratios.
Look up ticker symbols at morningstar or yahoo to find out about expenses and tax ratios. Companies that sell mutual funds (Vanguard or American Century) will have information about whether a fund is no-load or not.
Friday, January 4, 2008
Types of Investments
There are many types of Investments. There are safe ones, risky ones, in-between ones. The most common types of investments are these.
Source: investopedia
From highest to lowest risk (and consequently highest return to lowest return):
Stocks are individual shares in company (such as 50 shares of Google). You buy a a part of the company. You make money if the stock increases in value (if the company does well). These can earn you lots of money if you choose the right company. You can also lose your shirt. Key word: Diversify!
Invest in stocks for the long-term: retirement, or for at least 10 years. This is not a place to store your down-payment cash.
Mutual funds: A collection of stocks and bonds. A mutual fund can have hundreds of different companies' stocks in a variety of industries (health care, technology, manufacturing). Can be high- or low-risk, depending on its balance of stocks vs bonds. Good for diversification. A 10% average annual return is respectable. More on mutual funds here .
Money Markets: A type of mutual fund that is low-risk. You can often write checks using money from these accounts. Good for short-term investments (2-3 years), since you can be pretty sure your money will be safe and get a decent return (5% or so -- shop around).
Bonds: An investment based on debt. "When you purchase a bond, you are lending out your money to a company or government." Low-risk. Good if you need steady income and cannot tolerate risk. Folks in retirement tend to have these types of investments.
CDs (Certificates of Deposit): An investment that is set for a fixed time period at a fixed rate, say $500 for 6 months at 4.6%. Local banks sell CDs. Low-risk, because you know how much money you will make from the start. There is usually a penalty for early withdrawal.
Savings accounts: Your garden-variety savings account you have at the bank. Barely beats inflation, if at all.
Source: investopedia
From highest to lowest risk (and consequently highest return to lowest return):
Stocks are individual shares in company (such as 50 shares of Google). You buy a a part of the company. You make money if the stock increases in value (if the company does well). These can earn you lots of money if you choose the right company. You can also lose your shirt. Key word: Diversify!
Invest in stocks for the long-term: retirement, or for at least 10 years. This is not a place to store your down-payment cash.
Mutual funds: A collection of stocks and bonds. A mutual fund can have hundreds of different companies' stocks in a variety of industries (health care, technology, manufacturing). Can be high- or low-risk, depending on its balance of stocks vs bonds. Good for diversification. A 10% average annual return is respectable. More on mutual funds here .
Money Markets: A type of mutual fund that is low-risk. You can often write checks using money from these accounts. Good for short-term investments (2-3 years), since you can be pretty sure your money will be safe and get a decent return (5% or so -- shop around).
Bonds: An investment based on debt. "When you purchase a bond, you are lending out your money to a company or government." Low-risk. Good if you need steady income and cannot tolerate risk. Folks in retirement tend to have these types of investments.
CDs (Certificates of Deposit): An investment that is set for a fixed time period at a fixed rate, say $500 for 6 months at 4.6%. Local banks sell CDs. Low-risk, because you know how much money you will make from the start. There is usually a penalty for early withdrawal.
Savings accounts: Your garden-variety savings account you have at the bank. Barely beats inflation, if at all.
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