*Scared to open your 401K statement?

Financial Stress

*Don’t think you will ever recover from the losses?

*Too many investment choices and don’t know how to evaluate?

This ebook will help you open your statement, figure out your 401k contribution limits and gain confidence-knowing that your money is working for you- in your time frame, with your risk tolerance, and with the return you need to meet your goals.

You deserve to have confidence in choosing and maintaining the most valuable investment you own-your 401K plan.

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The Roth IRA is for wussies. Whoa! Every article under the sun is saying that the Roth IRA is the best thing since sliced bread to build wealth and I say no . Here’s why- in your do it yourself financial plan, you have to decrease taxes and keep up with inflation and you have to do that before you even try to make a profit~ Here’s why- in your do it yourself financial plan, you have to keep up with inflation and decrease taxes and you have to do that before you even try to make a profit. That is the secret to fast wealth. The best way to cover those two bases is to use tax deferred plans plans that have both features of reducing our income when we contribute and also deferring any tax on our gains.  Deductible IRAs, 403b plans, 401K plans, and 457 plans, etc. are prime examples of that . Notice I didn’t say Roth IRA. That is because you lose the tax saving benefit with the Roth IRA because youi are contributing with after tax money. So for most of us who aren’t in the Bill Gates or Warren Buffett league we need to contribute first to all of those plans that I mentioned before contributing to the Roth IRA.

Okay now I know you are freaking out because all that money you put away you can’t touch till you are age 59.5. That’s right -so go ahead and be a wussie and contribute to your Roth IRA first so you have the ability to get your greedy hands into your nest egg when you need it. You also get these other benefits of the Roth IRA:

• You can use contributions to help pay for college
• In retirement, all of your withdrawals will be tax free and you won’t have to withdraw annually as you would with a traditional IRA or 401K.
• It is a great account to preserve assets you intend to pass on to your heirs

So go ahead and be a wussie if you can’t stand the idea of locking up as much money as you can in a tax deferred plan, and contribute to your Roth IRA as the next best thing. -Fern Alix LaRocca CFP® Wealth Coach

If you have an IRA you probably know about the concept of a Roth IRA conversion – where you  take distribution of a portion of your IRA and directly transfer that money into your a Roth IRA,  paying tax as you go.  Then the Roth IRA can continue to grow tax-free (as Roth IRAs do) and  you’ll never owe tax on your qualified distributions from the Roth IRA.

In addition, if the investments you’ve made in the Roth IRA have lost money, before October  15 of the following year you have the opportunity to recharacterize your Roth conversion.  If  you didn’t recharacterize, you’d be paying tax on a conversion amount that is much lower now if  there was a downturn in the investments, so your average tax rate is much higher than you’d  hoped.  By recharacterizing, you can undo the conversion or a part of it.

I had a question raised to me recently about using the recharacterization option to your  advantage.  Here’s the gist of the strategy:  If you have an IRA worth, say $100,000, you could  convert it into two Roth IRAs, one half invested in a 2x leveraged bull-oriented investment, and  the other half invested in a 2x leveraged bear-oriented investment.

If the two investments go flat for the year, your conversion could be recharacterized with no tax consequence.  However, if the market went up by 10%, your bear holding would be down 20% (being leveraged 2x) and the bull holding would be up 20% (vice versa had the market dropped).  This would give you the opportunity to recharacterize only the bear holding, leaving you with a traditional IRA worth $40,000.  Your Roth IRA would be worth $60,000, although you would only have to pay tax on the original $50,000 converted.  At a 25% tax rate that works out to $12,500 in tax, which would only be 20.83% on the Roth IRA.

Perhaps that rate isn’t low enough for you though – maybe you need to ensure that the tax rate is even lower, say 15% or less.  Following the example, you’d need to see an increase of 66% or more in your holdings, which would equate to a 33% move in the market (for your leveraged holdings, one way or the other).  If the market doesn’t move in the amount you hoped, you can just recharacterize the entire conversion, nothing lost.

You probably want to pull your “winnings” off the table and put the remaining Roth IRA into a safe(r) investment than the leveraged investments chosen before, such as a balanced fund or even straight bonds.

Now you now can pull the same maneuver in the following year with whatever is left in the traditional IRA, splitting it just as before.  Over time you should wind up with a significant Roth IRA with a lower tax cost.

This is not a huge payoff strategy – you’ll be losing money in your traditional IRA holdings each year, guaranteed.  Your net position would be the same (minus the tax).

After the first year of the example, assuming a 20% gain you’d have with $60,000 in the Roth and $40,000 in the traditional IRA, having paid $12,500 in tax.  Second year, same result and you’d have $84,000 in Roth, and $16,000 in traditional IRA, paying $5,000 more in tax.  Third year, again the same 20% gain  resulting in a total of $93,600 in Roth, $6,400 in trad, paying $2,000 in tax.  And so on, until the amount gets too small to work with any more.

The end result

The end result is that all of this tallies up to the same $100,000 that you started with, having paid tax of just less than $21,000, versus the original $25,000 you would have paid.  Holding out for a higher return from the strategy would yield a lower tax rate overall.

Jim Blankenship CFP

Listen to this interview I had with Curtis Smith CFP®, a fee-only Financial Advisor with Interactive  Capital Management
to find out how a Roth IRA works and if it is right for you.

RothIRA033010

What you will learn:

• What is a Roth IRA and how it differs from a traditional IRA
• The basic strategy of a  conversion
• Who benefits from a Roth IRA and how

I am pleased to highlight fee-only financial planners who really know their stuff. Curtis is from Sugarland, Texas and a real charmer who is very sharp on retirement planning.  Remember, it is only a half hour long and has valuable information that you need to know now.

Many people were not allowed to convert their IRAs to a Roth IRA due to the income limitations. That has changed due to the Pension Protections Act of 2006. Now everyone is eligible to convert their 401ks to IRAs and then to a Roth IRA or from an IRA to a Roth IRA. But should you?

According to a Fidelity survey of 800 retirement plan holders with household income of $100,000 or more 83% who work with an advisor said they were unaware of the changes to the law and 54% said they didn’t know whether they would be eligible to convert. Many brokers and advisors are looking at this as an opportunity to talk to clients and get them to convert their money to a Roth that is managed by them, but is this a good deal for you?

What’s so attractive about the Roth IRA is that it allows tax free accumulation of earnings and you don’t have to pay tax when you withdraw the money.

For a thorough report on how to do a rollover from a 401k to an IRA and conversion to a Roth IRA, sign up in the box and you will get the free pdf download.

For more info listen to this teleseminar on Roth IRA Rules with Curtis Smith CFP®, a fee-only Financial Advisor with Interactive  Capital Management to find out how a Roth IRA works and if it is right for you.

RothIRA033010

I am pleased to highlight fee-only financial planners who really know their stuff. Curtis is from Sugarland, Texas and a real charmer who is very sharp on retirement planning.  Remember, it is only a half hour long and has valuable information that you need to know now.

Don’t know if you should contribute to your 401K or not? You are not alone. Many people find the information overwhelming. Stop wondering if you can do better somewhere else. The 401K account is there to help you grow money that will supplement your social security. Take full advantage of it by following these five tips to make your 401K contributions grow fast:

1. Know your 401K limits. The first thing you need to know is when you “vest” or when you can start to have money taken out of your check. Your Human Resource or Benefits department can usually answer that for you.

2. Your 401K contributions will be limited to a percentage of your salary or maximum fixed amount. Use that information to decide how much you want to contribute. Jump in and put in the maximum. You can always change it later.

3. Know the 401K Rules. What does your plan document allow you to do in the account? Do you have hardship provisions or loan features? Even though this money is for the long term, you should understand any 401K early withdrawal features your plan may offer.

4. Your 401K account will have investment options that you need to become familiar with. When you take out all of the ones that are actively managed with high fees, you will be left with some great low cost index funds to choose from. Diversify into asset categories and asset classes.

5. 401K early withdrawal penalties are severe so don’t do it. Have money for emergencies set aside so you don’t have to withdraw your 401K money.

The 401K plan is a retirement plan account. It is designed for long term savings. Everyone knows how difficult it is to live on Social Security income alone. The 401K account can provide an addition income for you. It has tax savings and tax deferral features that make any outside investment hard to compete with. Take advantage of this opportunity and contribute to your 401K plan.

2009© Fern Alix-LaRocca CFP® All Rights Reserved

Get more tips on how to plan your 401K contributions by grabbing the 401K First Aid Kit:Stop Your Portfolio Bleeding and Get Back to Financial Health E-book at (coming soon -so sign up now)

You will also receive the free Whole-Hearted-Way e-newsletter written by Fern Alix LaRocca, a Certified Financial PlannerTM and Wealth Coach with over 24 years experience as a fee-only Financial Advisor.