Is it time to convert old IRAs, 401ks, etc to a Roth IRA?  2010 is the only year where there is no income limit on converting your old accounts into a Roth IRA.

Let’s start with what’s a Roth IRA?  It’s a retirement account which any individual with earned income can open.  For couples, even if one partner doesn’t work, contributions can still be made for both people.  Currently there are limits on the contributions, such as an annual limit of $5k for people under 50 and $6k for people over 50 to “catch up”.  When contributing to a Roth IRA, after tax dollars are used.  Thus when the money is withdrawn in retirement, the Government has allowed the money to be withdrawn tax free.  Obviously this is a huge benefit, since the retirement savings has been allowed to grow and compound for years tax free.

The other limit on the Roth IRA, has been the people who can contribute to it.  Individuals who make below $105k are eligible to contribute to a Roth IRA, as well as married couples who earn below $166k.  A phase out occurs for those earning between $105-120k for individuals and $166-176k for married couples.  This of course is your modified adjusted gross income, which is your gross income after pre-tax deductions.  A final income limit, is that anyone making over $100k cannot “rollover/convert” their retirement contributions from a traditional IRA or 401k into a Roth IRA, after paying taxes on the amount.

However, in 2010, a loophole has arisen to erase the income limits on who can “rollover or convert” their old retirement accounts into their Roth IRA.  The question is, is it worth it?

It’s hard to judge.  There are a few factors involved in making a decision, such as age, amount rolled over, and current savings.  One benefit also available in 2010, is that the tax burden for converting your IRA or 401k to a Roth can be spread out over 3 years.  The Government is allowing people to pay taxes over 3 years instead of the traditional tax burden of the year you convert.

This benefit could be useful if you know or think your income may drop in 2011 or 2012.  Also it allows people to have the opportunity to pay a small lump sum in taxes from the conversion instead of all at once.

So is it worth converting your old accounts into a Roth IRA?  I would say yes for most people.  It is definitely worth considering if you are younger than 40 and have another 20 years until retirement.  This is a great opportunity to grow your retirement money tax free!

Are you doing it?  Personally we’re considering it and will be running the numbers as we do our taxes this year.

Don’t forget to email me with the secret word from the RSS feed for an extra chance to win a free copy of TurboTax.  Also leave a comment on the post here.

You are able to contribute up to $5k/year to a flexible spending account.  This is different from a health savings account, which you own and are able to accrue money in tax free for medical premiums and expenses for your life.  What you put in grows tax free, but usually is with taxed money.  Then when you withdraw it for qualifying health expenses, it’s tax free.  Typically these types of accounts are used in conjunction with high deductionble, high premium insurance policies.

But a flexible spending account is an account, typically through an employer, where you can contribute up to $5k/year for medical expenses.  Unfortunately it’s a use it or lose it scenario.  Thus the money contributed is tax free, but if you don’t use it by the end of the year, you lose it.  Therefore it’s better to undercontibute than overestimate and lose the money.

For us, we typically are able to predict our medical expenses.  But this year I have no idea what we’ll be spending. I have no idea what extra expenses a baby adds, except obviously a lot of co-pays from going to the pediatrician.  But how much more?  This would be a great year to take advantage of the tax break, but what if we don’t use the contributed money?

How do you estimate your family’s medical bills and expenses?  Do you have a rule of thumb?

Recently Meg from World of Wealth wrote a post about her Section 8 Tenant driving a Mercedes.  We’re not talking about an old mercedes but a newer one.  She was surprised because the woman is on public assistance and if she had seen her and her two kids elsewhere, she would have assumed them to be finanically well off.  Thus she wondered how did the woman afford such a great car?  And manage to look so well put together and groomed?

A lot of commentators suggested under the table earnings or a rich boyfriend whose income didn’t count.  Others suggested that perhaps illegal activities or “gaming” the system.  Meaning that she got tons of cash on hand but pretended to be poor to get government assistance.

But an anonymous commented perhaps the Mercedes was from a former lifestyle.  Perhaps she had once been working a great job or had a husband with a great job.  Then with the recession they lost everything but the car.  Then they had to go on government dole to make ends meet.

Honestly I have to say I don’t buy that theory.  Why?  Because if you were losinour home, your savings, etc wouldn’t you sell your luxury vehicle?  Wouldn’t that be one of the first things to be sold? It’s a luxury, a need, not a want.  A vehicle to get to and from work, the doctor, grocery store, etc is a need in areas without public transit.  However a Mercedes isn’t exactly a basic beater.  Thus I wonder why or how this woman would consider a Mercedes a need versus a want?  And prioritize owning a Mercedes over rent or a mortgage payment?

I think it’s likely she gets cash under the table.  It probably is cash from an ex-boyfriend or husband for child support.  Not reported and not taxed.  And that pays for a great car.  Nothing wrong for her, but if the cash payments stop, it’s possible she’ll be screwed and unable to collect more child support.

Is this gaming the system?  Maybe.  But the truth also is no one really knows the situation except the woman.  Even Meg, she can only assume that the government will keep on paying the rent.  Hopefully this tenant works out better than the one moving out.

FWIW, I am a firm believer in government assistance to help people get better. Not a permanent solution to living.

I’m giving away 2 copies of TurboTax Deluxe and 1 Premier.  So what do you have to do?

Leave a comment for one entry, and then send me an email with the secret word at the end of my RSS feed for another comment. 

I’ll draw the winner next Wednesday 2-16-10 and mail out the copies to the winners. 

Enjoy!

At savingsadvice, a forum I read, I read an interesting article explaining the difference between living below your means and living within your means.  The difference is that people who live within their means are able to meet all their monthly obligations.  But they are not necessarily saving for the future or for any unexpected expenses.  When you lose a job or get sick, they are unable to survive on a reduced income.

People who live below their means are saving for the future and still have fun.  Rather they are able to survive on less because their monthly obligations are minimal and savings is part of the budget.

Is it wrong to live within your means?

My take is it’s better to live within your means than beyond.  Also sometimes, it takes time to stabilize your budget, income, etc, especially when you are first getting started as an adult.  Thus by just living within your means you are ahead of the curve.  You aren’t getting into more debt trying to be like everyone else.  Rather you are waiting to “afford” things with cash, than using debt to finance a lifestyle you can’t afford.

Personally, my DH and I lived within our means for many years.  We weren’t really able to save on our incomes.  Our biggest goal during those early years, was to not acquire debt and just pay all our bills on time and in full.  We were definitely living paycheck to paycheck, sometimes worrying about paying our bills on time and in full.  We didn’t really have any extra for savings and definitely retiring.

I considered it a huge accomplishment that we made it through 5 years without acquiring debt.  That we were able to manage our finances without CC debt or car debt.  We didn’t have much extra, and our lifestyle was very minimalistic and student like, but it was debt free.  We lived in as small an area as possible, I rented a bachelor’s apartment.  That’s an apartment without a full kitchen and less than 300 sq ft studio!  But the location was wonderful and the rent was still expensive at $800/month!  And I was grossing $2k/month in income!  Ouch!

I think that depending on the circumstances, sometimes just living within your means and not accruing debt is an achievement in itself!  While it’s honestly better to be living below your means, and I feel much more relaxed now than before, I think that living within our means gave us the tools to live simply when we made more income.   And thus accomplish our goal of living below our means now.

I would say that right now in today’s economy customer service is more important than ever.  That treating customers with an extra special touch gives them the incentive to come back and eat or shop or spend money in general.  Being rude and impolite makes it easy to justify not spending the money and saving it instead.

I know I’m more sensitive than usual and definitely in more of a rush.  But I have to admit that I’ve gotten used to getting great customer service for the past year unlike previously.  It seems that people, stores, merchants have taken the recession to mean that they need to go the extra mile.  That giving people a coupon to come back again, being extra nice about orders or special services have become the norm and not the exception.

But the other day I went into CVS and for the first time in a long time I was treated super rudely.  The cashier didn’t want to use my coupon, then said she was too busy to give me a receipt when it jammed and didn’t print properly.  She just tossed the half printed receipt in my bag and when I asked about it, she ignored me.

Um, okay.  I shop at CVS because of convenience.  I get prescriptions there and any last minute needs.  But now, I feel like what’s the point? I  might as well go to the Walgreens or Target or even supermarket. I liked the deals at CVS, but after my experience I’m really turned off on returning.

I actually was irked because my Extra Care Bucks should have printed but didn’t so I had to call and ask for them to be reprinted.  Thus I also complained to corporate because I was so miffed.  They apologized and gave me a $5 coupon but I’m not really sure if I feel like going back.

Honestly I wonder if this economy has made me more picky or just feeling pressed for time?  I wonder, do you think that customer service can make or break a company?  I mean look at what Toyota is going through right now.  Will they really be able to retain market share?

Would you go back to a company that treated you poorly?

Prior to this week I would have to say I’m a pretty frugal person naturally. I look for deals, watch my pennies, and try to make wise financial decisions.  But then you have a kid and suddenly a few things  change.  Suddenly it feels like time is of an essence.  That you need to have convenience instead of saving every buck.  That you are pressed for time, so you take a short cut instead of the cheapest route.

Not to mention once you have a kid, you also go crazy afterwards, thinking about all the stuff you want to have for your child.  When your pregnant it’s easy to deny yourself things and say they are too expensive. But then after you have the baby, it’s either the hormones or the sleep deprivation that causes you to decide there isn’t anything too expensive or crazy to have. Although I have to wonder what is it that affects men?  Is it just the fact that it’s your baby?

I am going to admit to succumbing to spending.  My DH and I were borrowing an infant car seat.  One day of carrying it and we gave in and bought a travel system.  We went to costco and bought the infant system for $149.99, which came with a stroller, car seat, and two bases.  Yep, we could have struggled with the infant seat and no stroller and one base as a freebie, but due to circumstances we gave up.  At this point she’s using it daily and it’s saving me a lot of hassle and stress.  I caved to pressure and spent money instead of saving it.  The truth is it’s actually a time and energy saver suddenly became more important than money.

Have you ever felt this way?  When did time become more important than money? Or has it never happened?

I haven’t even been really watching the news for the past week, in fact I have barely registered what is going on outside of my own little sphere.  But I know that Toyota is having a major recall for a sticking accelerator.  They are in stopping production and fixing the problem. 

So why do I care?  I wonder is this the right time to consider buying a new/used toyota?  Typically everyone knows used Toyotas are ridiculous about keeping their values.  Thus it often is hard to justify buying a used 1 year old toyota that is priced $1k less than a new Toyota.  Even 3 year old cars are expensive relative to deals you can get on other makes and models.

But with this recall, I wonder if Toyota’s reputation and value will decrease?  Will it make it affordable for people to buy either a new or used Toyota?

What am I thinking about?  Well I’d really love to buy a new Toyota and keep it at least 10 years.  But which model I’m not sure.  Right now I am starting to have a better feel for what we might require when buying our next car.

It must be 4 doors and automatic.  It must comfortably fit  car seat and 4 people.  It would be nice if it could fit 3 people and 2 car seats.  It must not be more than $25k.  I am thinking our car buying journey will be taking us the rest of the year and possibly the summer.  I have no idea when and how we’re going to squeeze it into our schedule. It really is better to do it before you have kids, but then after kids, you have a better appreciation for what might work and what won’t.

Suggestions and tips on what else to consider and look for would be appreciated.  Do you think it’s a good time to look at Toyotas?

Super busy end of the month.  I honestly have no idea what I’ve been spending, but I’m sure I spent more in the last 5 days than the rest of the month.  Most of it unexpectedly, but still some planned, just not this early.  Perhaps it’s better not to know the damage.