Money To Live

September 17, 2008

Roth vs Trad 401(k)

Filed under: investments,retirement,savings,taxes — by moneytolive @ 5:00 am
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There are two kinds of employer sponsored defined contribution retirement accounts: the Roth and traditional 401(k). These two options are analogous to the Roth and Traditional IRA accounts:

  • With a Roth 401(k), taxes are paid on the contribution, and withdrawals in retirement are tax free.
  • With a traditional 401(k), contributions are not taxed, but withdrawals in retirement are.

In Money Magazine, Walter Updegrave compares the two types of accounts:

Investing $11,625 in after-tax dollars in the Roth 401(k) is the equivalent of making the maximum $15,500 contribution of pre-tax dollars into a regular IRA. But you’re not limited to contributing $11,625 in after-tax dollars to the Roth.

Which means that as long as the dollar amount you can contribute to a regular 401(k) and a Roth 401(k) are the same, the Roth 401(k) effectively gives you the chance to sock away more money on a tax-advantaged basis for retirement, assuming you’re willing to part with the extra bucks. [emphasis added]

At my new job, I have the option of opening a retirement account of either type. Last summer I worked out my budget assuming that I would open a traditional IRA (because I did not know the Roth was an option). The immediate benefit of the traditional 401(k) is the tax savings, leaving more money in my pocket each month.

But since a Roth 401(k) is available and it allows me to ultimately save more money for retirement, I am going with a Roth. That makes my take home pay a bit smaller, but in the long run I will appreciate having more money in retirement.

September 1, 2008

Follow the news?

Filed under: retirement,savings,taxes — by moneytolive @ 5:00 am
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I recently had a conversation with a friend about reading financial news. She said it was not worth reading the news; she has an investment plan and sticks to her target asset allocation.

Generally, I agree that it is a waste of most people’s time to follow financial news on a daily basis. There are several things going on right now, though, that I follow in the news.

This is what I am paying attention to now.

  • Home heating costs
    Last year I spent twice as much money on oil for my home (around $1,000) as gasoline for my car (around $500). At my old apartment in New Jersey, a giant oil tank in the basement was used to generate hot water and heat in the winter. Each time the tank was re-filled, I got a bill for at least $600. With higher oil prices, these re-fills will cost even more. For example, in New Hampshire, “retail heating oil costs about $4.50 a gallon, up from $3.30 last winter.”
  • Nearing retirement in a downturn
    I care about this topic because my parents are in/near retirement (my father is retired, my mother is still working). There is compelling advice to near-retirees that it makes sense to work longer, giving retirement accounts time to bounce back before withdrawals begin. (NYT)
  • Changes in the tax law
    Specifically, changes in capital gains tax, the Alternative Minimum Tax, and limits on retirement account contributions.
  • The housing market
    I may (or may not) buy a condo in the next few years. If prices decrease significantly in the DC area, I probably will buy. (Washington Post)
  • Which Wall Street firms are closing
    Since I have friends on Wall Street, I am curious about how the major companies are faring and who is planning lay-offs. (TheStreet.com)

There are some things I am intentionally not paying attention to.

  • 529s/ ESA
    I will most likely not have children within the next few years, and when/if I do have kids, I may live in a different state. Also, these accounts have only existed for a short amount of time. If the laws change, it may not make sense to use these anymore (or it may make more sense)
  • News about “hot” funds/sectors/stocks …
    Here I completely agree with my friend — follow your asset allocation and ignore the market fluctuations.

July 26, 2008

Review: www.irs.gov

Filed under: review,taxes — by moneytolive @ 5:00 am
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Perhaps one of the most anxiety-inducing websites is www.irs.gov. But it doesn’t have to be.

These are some of my favorite features of http://www.irs.gov.

The search tool. Use the search feature to find easy-to-read information about anything related to federal taxes. When I search “deduct taxi,” the top hit is a page explaining that the cost of taking a taxi to the doctor is deductible (helpful for parents in NYC who do not want to take a sick baby on the subway).

Links to free tax prep software. A number of web sites help you prepare and file your federal tax return at no cost. Be aware that these sites will often charge you to file your state return, though. Check out your state’s taxation webpage because many states offer free web-based programs for filing.

Information about EFTPS. EFTPS is an electronic system for paying taxes. I recommend that anyone who pays quarterly taxes check this out. It keeps a complete record of the tax payments for the year.

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