What To Invest In, 401ks Or IRAs

Roth IRAs and 401ks are both great ways to save up your money safely for retirement. But which one of these plans offers the best deal for you? Which one should you focus on?

There are advantages and disadvantages to both plans. The best option for you may depend on your specific situation. So, how do these retirement plans actually work?

401ks are set up by your employer to allow you to invest your money before it is taxed. This money can then grow tax free until you retire. When you are eligible you can take the money out to help you on your pay for your retirement. You never have to pay taxes on this money until it is taken out which makes it a very nice way to grow your money.

Roth IRAs work differently. You pay your taxes up front, but as long as you follow the Roth IRA rules all of the money that you make from your initial investment is tax free. This means you are able to get a tax free income when you do retire, which is a very good thing.

So, which plan works better? It all depends on your tax brackets. If you believe that you will be in a lower tax bracket and therefore pay lower taxes in the future then a 401k is probably the better option. This way you can avoid taxes when they are high and pay them when they are lower.

On the other side if you believe that your taxes will be higher in the future, Roth IRAs are going to be a fantastic way to take advantage of it. This way you can pay taxes now at a lower rate and avoid them when you are in a higher tax bracket.

Looking at your specific situation can really help you to decide which one is the better option for you. However the best option is to invest into both. If you can afford it and you are eligible there are some great benefits of investing into both 401ks and Roth IRAs. This way you can save more money while at the same time benefiting from both plans, which can be a good thing.

For more information about 401ks vs Roth IRAs or other information about saving for retirement visit 401k information

2009 RMD Waiver Relieves Retirees in a Down Market.

George Bush enacted the RMD waiver into law in December 2008 under the Retiree and Employer Recovery Act when the financial crisis was at its peak and stock portfolios held in IRAs and other tax deferred retirement accounts were at its lowest values. An RMD or required minimum distribution is the amount an account holder must withdraw in order to pay taxes.  Of course one may withdraw more in order to meet living expenses and medical bills and other such necessities or luxuries.

This requirement begins in April of the year one turns 70 ½.  The money must be withdrawn by December 31.  If the RMD is not withdrawn, then a 50% penalty is imposed on the amount that was not withdrawn.    The RMD is basically how the government ensures that it receives taxes on your retirements accounts that were allowed to accumulate and gain value tax free.  It’s a revenue stream that helps pay for all the wonderful services we receive as U.S. citizens.  The RMD only applies to IRAs and employer sponsored retirement plans such as 401k and 403b plans.  If you own a Roth IRA, you do not have to worry as the money used to fund this type of account has already been taxed and therefore exempted from this requirement and obviously waiver.

The IRS determines your required minimum distribution based on your life expectancy and the balance in your retirement account.  Your accountant can tell you what your RMD should be.  You can also find your RMD at IRS.gov.  Many financial and retirement related websites also have retirement calculators for RMD.  Just Google RMD calculator.  Retirees have benefitted from the 2009 RMD waiver because it allows them to recover some or hopefully all of the losses endured in 2008.  Absent a waiver, a retiree would have had to make a withdrawal on a lower account balance and force to take losses.  Instead with the waiver, one will likely have a lower taxable income while enjoying the potential of having account values (including the RMD not withdrawn) grow once again with the thriving stock market.  As a result, some may benefit by not having to pay taxes on social security income as well.

Don’t expect the waiver to be extended to 2010.  The growing sentiment that the U.S. economy is out of danger and the 50%+ advance in the stock market has the administration and the IRS preferring to get its portion of taxes from retirement accounts.  That said the resumption of 2010 RMD will be based on account balances as of December 31, 2009.  If you turned 70 ½ this year you would have had the privilege and responsibility of taking your first distribution if there was not a waiver.  Make certain for 2010 you do it (your RMD) by December 31, 2010.  If you already took a distribution this year, you have the option of putting that money back into your IRA as long as you do it by November 30, 2009.  Please discuss this matter with a tax or financial planner to ensure compliance with IRS requirements.

2008 IRA Contribution and Deduction Limits – IRS

April 15th is around the corner.  In case you are still wondering what the 2008 contribution limits are for ROTH and Traditional IRA’s, here it is verbatim from irs.gov.  Keep in mind that if you have both a ROTH and Traditional IRA, the limits apply when combined.  You cannot exceed the limit. 

2008 Combined Traditional and Roth IRA Contribution Limits:

If you are under 50 years of age at the end of 2008: The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2008. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000. This maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (AGI).

If you are 50 years of age or older before 2009: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2008. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000. This maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.

See Publication 590, Individual Retirement Arrangements (IRAs), for additional information.

One Year’s IRA Contribution Can Really Make a Difference in Savings

(NewsUSA) – New data from Fidelity Investments found that more  than eight out of 10 Americans have cut back on discretionary purchases because of the recent economic crisis, and nearly half of respondents are now saving money. But many are unsure where to place the savings for the greatest benefit.

“After maximizing workplace savings plans and paying off credit card debt, investors should consider saving more for retirement using an Individual Retirement Account or IRA,” said John Ragnoni, senior vice president, Fidelity Investments. “Even though Americans are facing a challenging economic environment, it’s important to prepare for the future by making annual contributions.”

For example, an investor who makes a single contribution of $5,000 to a Roth IRA now could see that amount potentially grow to more than $53,000 in 35 years, assuming an annual rate of return of 7 percent.

Additionally, consolidating old workplace savings accounts at former employers into an IRA may offer the most compelling benefits for managing one’s retirement savings, including a broader range of investment choices.

This hypothetical example assumes the following: (1) one annual $5,000 Roth IRA contribution made on January 1 of the first year, and (2) an annual rate of return of 7 percent, and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pretax (deductible) contributions from a Traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax-free, provided certain requirements are met. IRA distributions before age 59 1/2 may also be subject to a 10 percent penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market.