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Hey everybody,  this is Jeff Rose from Goodfinancialcents.com. Today I am going to talk a little bit about a common question that I get quite frequently. This question is:

Is just having a 401k enough to have a successful retirement?

It is a very good question because a lot of people wonder about, am I saving enough? Am I putting enough away to make sure I get enough to retire when I want to retire and is the 401k only thing that we need to get us by? And I would say that generally speaking that answer is no. As far as my reasoning and logic behind that is this.

401k By Itself Is Not Enough

For one reason, most people that do have a 401 k, most of you are not maxing it out. This is what I’m gathered from my several client meetings of those that have the ability to put money in a 401k.

So are you putting in $16,500 per year in that 401k? If you are, you definitely have a fighting chance and if not then most likely the 401k is not going to be enough.

Note: See 2011 401k Contribution Limits

And if you have a good company that has a good match at top of that, obviously it will make it better. For those who are not putting the maximum amount in and not having good and favorable 401k match from your employer then you definitely have to consider other means and sources of savings.

You can obviously choose between traditional or Roth IRA. Both of those are excellent tools to complement the 401k and specially if you are doing the Roth IRA and you are doing the regular 401k that gives you pre tax money and after tax money. Both those together are a good compliment.

I know for me personally as a business owner  I have a SEP IRA which is kind of like my 401k.  Over and above that I have been able to do Roth IRA and a Roth IRA conversion.  That gives me some pre tax money and after tax money as well. Nothing like having options!

It’s Nice Having Options

Between the two, having a good 401k, having a Roth IRA traditional IRA, gives you another bucket to choose from. Me personally, I am not really counting on Social Security being there for me. And if it is there, it will most likely come at a later date, say 70 when I can get it, it will probably be a reduced amount. Do not plan on it being there, and utilizing 401k and Roth IRA as an alternate or replacement for that income. Between those two, another thing I would add is saving account and investment account, utilizing other investment savings tools to have that for you at retirement.

So to answer the question, if you have a 401k and is that enough? I will say no. Make sure that you are utilizing all the other tools. For me, I like having three buckets approach. If you got a 401k, Roth IRA it is another source of retirement income that could be a saving accounts or investment account. At least have three buckets, so you can always have choices when it comes to the retirement. One bucket dump’s over is depleted; you have got other buckets to choose from. So that was my advice to you. If you have any questions, feel free to email me, contact me on the blog.

You can also see my Soldier of Finance Video below that addresses having a “Multi-Bucket Approach For a Successful Retirement”.

2010 will mark as one of the most exciting years of the Roth IRA account since its creation in 1997.  Many of the basic rules and contribution limits have sustained, but what  is creating most of the hype is the 2010 Roth IRA conversion event.  One thing that hasn’t changed is the tax free money waiting for you at retirement by contributing to a Roth IRA. Once again: TAX FREE MONEY. I repeated that for the benefit of those that haven’t opened a Roth IRA account yet.  Without further ado, let’s look at some of key rules of the Roth IRA for 2010.

1. Contribution Limits For 2010-2011

Contribution limits have stayed at $5,000 for 2010 and 2011.  Are you 50 and over?  Catch up contribution remain at $1,000 for a total of $6,000.  It’s still up in the air whether Roth IRA limits will increase next year, so stay tuned.

2. 2010 is the Year of the Mighty Conversion

If you haven’t heard of the 2010 Roth IRA Conversion event, then you obviously haven’t visited my blog before. That’s okay, I forgive you.  While 2010 is the actual year that you will be able to convert, the income to be claimed can be deferred until 2011 and 2012.  Expecting a vast majority to take advantage of this, the IRS has set up special provision on how the tax will be paid.  The IRS has granted you the option to claim 50% of the conversion amount as income in 2011 and the remaining 50% in 2012.  Keep in mind that this is only in 2010.  After 2010 the taxes will all be paid in full the following year going forward.

3. The “Take Back” Rules

If you plan on converting your Traditional IRA’s and 401k’s into Roth IRA’s, I suggest you do it sooner than later for a few reasons: 1. The market is still in a recovery phase and you could benefit from converting when your account balances are lower and pay less income tax. 2.  If that strategy backfires, you can always do a Roth IRA Recharacterization, better know as the conversion “take back”.  A recharacterization allows you to reverse the conversion completely. This could be the case if the market were to tank again or if you had an unexpected increase in income which would make your tax liability more than care to share with the IRS. You have until October 15th of the calendar year after the year you converted to recharacterize. For 2010, that would be October 15, 2011.

4. Phaseout Limits Did Increase….Barely

Wage earners that are on the outside looking in when it comes to a Roth IRA didn’t get much help in the phaseout limits.  Single filers received no improvement, while joint filers increased a whopping $1,000 to the bottom and top ranges.   Don’t worry though, you may still be in luck (See #5).

Roth IRA Limits 2010

Roth IRA Phase Outs For 2011

Once again phaseout limits did increase for 2011, but barely. The limits have increased between $1,000 and $2,000 this year.

For Roth IRAs single taxpayers with an annual Modified Adjusted Gross Income (MAGI) over $107,000 begin to see their contribution limit decrease until at $122,000 it goes away entirely. The contribution limits for Married Filing Jointly investors are $169,000-$179,000. (You can see last year’s limits above).

5. Roth IRA- Phased Out But Not Out

Many people have wanted to take advantage of the Roth IRA for the past several years, but couldn’t because they surpassed the Roth IRA phaseout limits.  Many then settled for the pretax substitute of the traditional IRA.   The only problem with the traditional IRA (other than paying taxes at retirement) is that after certain income limits you no longer get a tax deduction for contributing to one.   You still get the tax deferred growth, but that’s it.

If you are an active participant (making annual additions or accruing a benefit) in a company plan and make more than $65,000 as a single taxpayer in 2009 (or $109,000 as a married joint taxpayer) then you are disqualified from taking the full deduction.  What you are then left with is the nondeductible IRA.

Introducing the Nondeductible IRA

In the past, there was nothing all that attractive about the nondeductible IRA.   With 2010 just around the corner, the nondeductible IRA has become a very popular tool to allow high wage earners a way into the Roth IRA- a “backdoor” way.  A high wage earner can contribute to a nondeductible IRA with the sole intentions of converting it in 2010.

By contributing to the nondeductible IRA, you will only be responsible to pay what gains you’ll have from now until you convert in 2010.   If 2009 will be the first year to contribute, then unless you happen to pick a one in a million shot, your tax liability should be minimized.

6. College Savings As a Backup

Roth IRA for College Savings

Traditionally a Roth IRA is used for saving for retirement…..duh, right?  Many don’t know that there is a provision that allows you to withdraw from your Roth IRA to pay for “qualified higher education” expenses while avoiding the 10% early withdraw penalty. (This pertains to the earnings, you can withdraw your contributions at any time).  Who is this appropriate for?  529 college savings plans are a superior way to save, but if you’re behind in saving for retirement then this strategy might suit you.  It’s better to have extra savings tied up in the Roth versus a college savings plan that might never get used.

7. Direct Rollovers From 401k’s to Roth IRA’s Just Got Easier

Prior to 2010, it was a pain trying to convert a 401k into a Roth IRA.  First, you had to set up a traditional IRA and then  roll the 401k into a traditional IRA.  Then you would have to open a Roth IRA account and then complete the conversion paperwork.  Once the conversion was complete, you would then close the Traditional IRA since it was no longer needed.  (All that paperwork for nothing.)  But that was then and this is now.  In 2010, you will be able to direct rollover your 401k into a Roth IRA and bypassing the unnecessary middle step.  Less paperwork makes me a happy camper.

What you need to know about the Roth IRA for 2010.

That’s the rules of the Roth IRA for 2010.  If you haven’t done so yet, go out an open a Roth IRA and get your tax free nest egg going.  Trust me.  You’ll thank me later that you did

*Restrictions, penalties and taxes may apply.  Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.

Photos by Jason York Photography (shameless best friend plug).

Securities offered through LPL Financial, Member FINRA/SIPC

The 2010 Roth IRA Conversion event can’t get here soon enough.  As you may know, this is the time that anybody will be able to convert their traditional IRA’s to Roth IRA’s no matter your income level.  But currently as it stands now, if you make over $100,000 AGI Married Filing Jointly, your left counting the days until you are allowed to do so.

Common Misconception on Converting

A few people I’ve talked with thought that everybody had to wait to convert until 2010.  This is not the case. In fact, for many of you that have been contemplating whether to convert your former traditional IRA to a Roth IRA, now might be the year to do it.  With the recent decline in the market for 2008, chances are you’ve seen your investment accounts drop in significant value.  If you have a traditional IRA or a 401(k) at a previous employer, this might be the opportunity to convert that into a Roth IRA.

Why Is This A Good Time To Convert to a Roth IRA?

Reason being, when you convert to a Roth IRA, you have to pay the ordinary income tax on the converted amount.   By converting this year, your IRA’s have most likely dropped significantly and you will then have less to pay ordinary income tax with.  Sure it’s not exciting to see your account drop 30-40%, but if you could sock that away in a Roth IRA, think of all the tax free money down the road……woo-hoo!

Roth IRA Conversion Example

If your traditional IRA or previous 401(k) is worth $15,000, that would mean that you would have to claim $15,000 of income that year and then pay the according tax.  But let’s say that same 15,000 is currently worth $10,000 due to the recent market downturn, you then would pay less ordinary income tax on the converted amount; thus making it a timely opportunity to convert to a Roth IRA in a down market.

Before You Get Too Excited

Please keep in mind that currently if you individually or jointly make over $100,000 or modified adjusted gross income, you cannot take advantage of this opportunity.  Your first window of opportunity will not be until the year 2010, which then depending on the value of the accounts  might be another time of considering converting to a Roth IRA.

Update: Check out my latest post that shares some real life scenarios and tax consequences of converting a Traditional IRA to a Roth IRA.

Other good reads:

• Moment On Money: Every Cloud Has a Silver Lining
• Five Cent Nickle: Roth IRA Conversion In a Down Market
• My Dollar Plan: Roth IRA Conversions

*Restrictions, penalties and taxes may apply.  Unless certain criteria is met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.

Securities offered through LPL Financial member FINRA / SIPC.

If you’re one of the millions of American households who owns either a Traditional individual retirement account (IRA) or a Roth IRA, then the onset of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It’s also a good time to start an IRA if you don’t already have one. The IRS allows you to contribute to an IRA up to April 15, 2009, for the 2008 tax year.

In either case, this checklist will provide you with information to help you make informed decisions and implement a long-term retirement income strategy.

Which Account: Roth IRA or Traditional IRA?

There are two types of IRAs available: the Traditional IRA and the Roth IRA. The primary difference between them is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your income level. Any account earnings compound on a tax-deferred basis, and distributions are taxable at the time of withdrawal at then-current income tax rates. Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax free.¹

In choosing between a Traditional and a Roth IRA, you should weigh the immediate tax benefits of a tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement.

If you need the immediate deduction this year — and if you qualify for it — then you may wish to opt for a Traditional IRA. If you don’t qualify for the deduction, then it’s almost certainly a better idea to fund a Roth IRA.

Case in point: Your ability to deduct Traditional IRA contributions may be limited not only by income, but by your participation in an employer-sponsored retirement plan. (See callout box below.) If that’s the case, a Roth IRA is likely to be the best solution.

On the other hand, if you expect your tax bracket to drop significantly after retirement, you may be better off with a Traditional IRA if you qualify for the deduction. You could claim an immediate deduction now and pay taxes at the lower rate later. Nonetheless, if your anticipated holding period is long, a Roth IRA might still make more sense. That’s because a prolonged period of tax-free compounded earnings could more than make up for the lack of a deduction.

Should You Convert to Roth?

The IRS allows you to “convert” — or change the designation of — a Traditional IRA to a Roth IRA if you have an adjusted gross income of $100,000 or less. As part of the conversion, you must pay taxes on any investment growth in — and on the amount of any deductible contributions previously made to — the Traditional IRA. The withdrawal from your Traditional IRA will not affect your eligibility for a Roth IRA or trigger the 10% penalty normally imposed on early withdrawals.

The decision to convert or not ultimately depends on your timing and tax status. If you are near retirement and find yourself in the top income tax bracket this year, now may not be the time to convert. On the other hand, if your income is unusually low and you still have many years to retirement, you may want to convert.

Maximize Contributions

If possible, try to contribute the maximum amount allowed by the IRS: $5,000 per individual, plus an additional $1,000 annually for those aged 50 and older for 2008. Those limits are per individual, not per IRA.

Of course, not everyone can afford to contribute the maximum to an IRA, especially if they’re also contributing to an employer-sponsored retirement plan. If your workplace retirement plan offers an employer’s matching contribution, then that “free” money may be more valuable than the amount of your deduction. As a result, it might make sense to maximize plan contributions first, and then try to maximize IRA contributions.

Securities offered through LPL Financial, Member FINRA/SIPC