Traditional IRA vs. Roth IRA

There is alot to consider when deciding whether to fund a Traditional IRA or a Roth IRA. One of the simplest things to ask yourself is whether your tax bracket in retirement will be higher or lower than it is right now. That may be a difficult question to answer, especially if you are a long way from retirement. The reason that this is pertinent is that with a Roth IRA you will not be taxed on your withdrawals (as long as the Roth has been opened for over 5 years and you are older than 59 1/2-there are other qualified reasons that we will discuss later). With a traditional IRA you are taxed on your withdrawals. So if you anticipate your tax rate to be lower than it is currently, it would be beneficial to go with a traditional. However, if you believe that you will be in a higher tax bracket upon retirement, then the Roth would be the way to go since you will not be paying taxes on your withdrawals (as long as you meet specific requirements).
The following will give you an idea of the differences/similarities between the Traditional and Roth.

Traditional IRA
-Individual contribution limit per year $4000 (2006-2007), $5000 (2008-2010).
-Available to all individuals with earned income
-Fully deductible contribution if:
1. you and your spouse are not participants in an employee sponsored retirement plan for any part of the year.
2. you are not a participant, your spouse is, and your combined AGI (Adjusted Gross Income) is under $150k(married, filing jointly)
3. you are a participant and have a combined AGI that does not exceed $50-60k(single) or $80-90k (joint).
-Even if you and your spouse have an employee sponsored plan, you can still contribute, but it's not deductible.
-Earnings are tax deferred until withdrawn
-In general, withdrawals before age 59 1/2 are subject to ordinary income tax, plus a 10% penalty
-If early withdrawals are paying for new home expenses or qualified higher education costs, no penalty, you just need to pay ordinary income tax.
-Can convert your traditional IRA to a Roth IRA if your AGI is under $100k, you will however have to pay the taxes on the amount you convert.
-Mandatory distributions begin at age 70 1/2
-At your death, heirs pay income tax on distributions at their tax bracket.

Roth IRA
-Individual contribution limits per year $4000(2006-2007), $5000(2008-2110)
-Available to all individuals with earned income with the following income limitations:
for single filers, up to $95k (for full contribution) , $95-110k (partial contribution)
for joint filers up to $150k(for full contribution) , $150-160k(partial contribution)
-Contributions are not tax deductible
-Earnings grow tax free
-Contributions can be withdrawn at any time without tax or penalty (your first withdrawals will come from regular contributions)
-Withdrawals are taken in this order, regular contributions, any conversion contributions (tax consequences apply), and then earnings.
-Earnings are tax free after 5 years and after age 59 1/2 or other qualified requirements such as death, disability or first time home expenses.( the 5 year limit is based on January 1st of the 5th year after you open the account, therefore it could actually be less than 5 years) ex. open Roth in October '06, earnings will be tax free after January 1, 2011 as long as you are age 59 1/2.
-No mandatory distributions required at any age.
-Upon your death, if account is at least 5 years old, heirs will inherit income tax free
-Even if you participate in a plan at work, you can open a Roth subject to the income limits mentioned above.

There may also be the question as to whether it would benefit you to convert your traditional IRA to a Roth. Remember that you will have to pay the taxes on the amount that is converted to the Roth. A conversion to a Roth is probably appropriate if:
1 you have 10+ years to save until retirement
2. you have enough outside of the IRA to pay the taxes
3. your AGI is less than 100k
4. you expect to be in the same or higher tax bracket when you retire

On the flip side, it would probably be most beneficial to leave it in the traditional IRA if:
1. you have fewer than 10 years to save until retirement
2. you need to tap the retirement account to pay the taxes on a conversion
3. your AGI is more than 100k
4. you expect to be in a lower tax bracket when you retire

One more note, don't confuse the Roth IRA with the new Roth 401k. They are not the same thing. The Roth 401k is another interesting savings vehicle, but I will have to examine that at another time.

Market Movers for Next Week

Is this the beginning of a significant pullback or just a small retracement for the next move up? There seem to be a lot of mixed signals in the market right now. But putting technicals aside, one thing I've noticed in the past week or so is that the market is no longer ignoring bad news. Aside from a few big down days, the market has continued to march forward from it's July low, stair stepping it's way to new highs along the way. And there has been good news and bad news during that time, but it chose to ignore the bad and really embrace the good. Maybe it's that no one is sure what exactly is good news/bad news now. Do we want a strong economy... I would think so, but then interest rates may go higher. Or do we prefer a weak economy so that the fed may start to consider cutting rates. There is even a hint of selling into good news...as some of the earnings this week have been pretty decent, stocks took off after hours and pre-market, only to have the market sell off during the day. To me it looks like a negative divergence. With a significant amount of news (economic and earnings) on the horizon for next week, I am betting on the downside.

Some of the earnings of note for next week are Google, 3M, Merck, Altria, and Eli Lily. And among some of the energy stocks announcing are Exxon and Valero Energy. The economic calendar is heavy next week with the most important probably being the 2 day fed meeting. They will announce their decision on rates on Wednesday and as usual it's not the rate decision (most are guessing they will stand pat for now) but the "language in the statement" ( Can't you just feel the drama). All eyes will also surely be on the Jobs Data that comes out on Friday. Among other reports of note are Consumer Confidence (Tues.), GDP and Chicago PMI (Wed.), Personal Income/Spending and Initial Claims(Thurs.) and Factory Orders (Friday).

Being in the middle of earnings season and with all this economic news out next week, I would have to say I am "cautiously pessimistic".

Happy Trading!

How to get a Double Tax Deduction

Next time you contribute to your IRA, consider selling a losing stock that has declined in value and use the money from that sale to fund your IRA. You can also write off a capital loss on the sale of that losing stock.

If you really want to hold onto that stock, just buy it back in the IRA. The "wash rule" ( IRS rule that says if you sell and buy back the same stock within 30 days before or after the sale, you cannot take a capital loss) will not apply to this transaction.

10 Rules for Building Wealth

Saving money may seem like one of the most difficult things to do, especially if you have a specific goal (children's education, wedding, retirement) and a specific time frame. It can be overwhelming thinking about how and where to invest to maximize your gains. If you haven't even considered saving, if you've been putting it off for a while, or even if you have been saving for years, it's never to late to take a look at some well thought out advice. I recently read an article in Fortune magazine "Ten Rules for Building Wealth" and thought that there was some very good advice that I would pass along. So the ten rules in summary are as follows:

1) START EARLY- Probably the most important thing is to start saving as early as possible.
2) USE YOUR 401K- You should definitely be signed up for your company's 401k plan. These are pre-taxed dollars that are being put away and most companies match your contribution. Don't pass up an opportunity to save not only your money, but your company's match also!
3) KEEP IT SIMPLE- Stock picking is not an easy task. Make it easy by picking several index funds, ETF's or funds that are based on your changing goals.
4) DON'T TRY TO BEAT THE MARKET- Diversify your assets and rebalance at least once a year by selling some winners and picking up some assets in areas that have been lagging.
5) DON'T CHASE TRENDS- Don't blindly invest in the hottest sector because everyone else is doing it, be sure to understand why this certain asset class is taking off. If there seem to be legitimate reasons for it then good for you, but be careful with those that are "hot" for no apparent reason.
6) MAKE SAVING AUTOMATIC- Once the money is in your hands, it makes it more difficult for you to put it into a savings vehicle. If you are already maxing out your 401k, but need to save more see if your company can transfer money directly from your paycheck to a Roth or other savings account or perhaps your bank can transfer a specified amount every month from your checking to a savings account. It's worth it to find out.
7) GO HEAVY ON STOCKS- The more time you have before you need the money the more heavily you should be invested in stocks. Stocks are the most risky investments, but they offer the most return, so if you don't need the money in the next few years, consider being more aggressive.
8) HOLD DOWN FEES- Try to avoid any mutual fund that charges a management fee of more that 1%. If trading stocks, watch for commissions, they can really add up. If you are not trading aggressively you should be OK, but if you plan to trade often see if your broker offers a quarterly transaction fee.
9) DITCH CREDIT CARD DEBT- Try to pay off your high interest debt first (usually credit cards) and work your way down.
10) DEFER TAXES- Know the tax implications before you sell your stock. In taxable accounts you will have to pay capital gains on your profits. At tax time you may want to consider selling some losers to take advantage of the $3000 capital loss deduction that you are allowed per year.

Well, there you have it, so what are you waiting for? The longer you wait to start saving the less you will have saved- simple enough. An interesting chart shows the difference in savings for someone who started saving a $1000 a year at an 8% growth rate. At age 65, the person who starts saving at age 25 would have @ $280,000, start at age 35 you would have $122k and wait until age 45, your savings at age 65 would only be $49k.

You can read the Fortune magazine article at http://money.cnn.com/popups/2006/fortune/buildwealth/index.html

Good luck and happy savings!