Was my Traditional to Roth IRA conversion a mistake? May 17, 2013

Remember last year when I went through all the reasons I was going to convert my rollover IRA (from an old 401(k)) into my Roth IRA?  I had plenty of good reasons.  It wasn’t going to be that much money either way.  I wanted to have all my money in one place so I could buy funds with higher initial investments.  And of course…THE FISCAL CLIFF.  No one knew exactly what was going to happen on January 1, 2013.  I definitely didn’t.  But in retrospect, I should have known that congress would just kick the can down the road.

So on December 31, 2012 (seriously, I’m a bit of a procrastinator), I went ahead and converted my IRA to my Roth IRA.

Then, a few months ago, I sat down to fill out my taxes online, and I entered in all my numbers.  Now, don’t get me wrong, I knew I was going to have to pay taxes on the conversion amount.  But I hadn’t predicted how this added “income” due to conversion was going to impact eligibility for certain tax deductions.  Not that I should complain!  But apparently there’s a strict cut off for eligibility of the Student Loan Interest Deduction.  And with my conversion, I’m over the threshold.   There is a range where your increased income decreases the deduction.  But over the threshold, you’re out of luck.

I did check to make sure my conversion wasn’t going to put me into a new tax bracket.  I knew there was no danger in that happening.  But I hadn’t considered the Student Loan threshold (or any other tax deduction/credit cutoffs).

It’s not the biggest issue.  But in looking back, I probably could have planned out a little better how much of my IRA to convert so that I wasn’t over the limit.  In the end, it wasn’t a lot of money that I could have gotten back with the student loan deduction, but it would have been nice.  I’ve never really been the type of person to base financial decisions on tax liabilities…I figured that’s a problem the super wealthy have to deal with!

What tax and money decisions did you make leading up to the end of 2012?  Did you make any mistakes with your money decisions?  Are you already over it?

Converting my IRA to a Roth IRA December 16, 2012

Back when I was laid off from my old job in 2008, I took the money that was in my 401(k) and rolled it over into an IRA.  And since 2008, I’ve had my Rollover IRA just sort of sitting there.

I started the rollover IRA with $5,026.80

I bought a bit of a target date fund (2045, so it would be different from the 2050 fund in my Roth…because I thought that would be diversifying…whoops!) and kept the rest in the Cash/Money Market fund.  When it started, the return on the money market was around 2.4%.  Now it’s 0.01%.  Bleh.  And then I never touched the account again.

So, with the ups and downs of the market, after 4 years, as of this posting, I now have $5,308.69 in that account.  So my money has grown ~5.6% total in the past 4 years.  It’s not terrible.  Especially considering the financial crash.  But it’s not fantastic.

But here’s the thing.  I want to do more with this money.  Not crazy “invest in the next bubble” more.  Just put it into something normal like an index fund.  And apparently most low-cost index funds available to me in my IRA have minimum investments of $10k.  Which is hard to do if you only have $5k.  So I’d like to roll over my IRA into my Roth IRA.

Another reason I want to roll my IRA over is because I assume my 401(k) will remain larger than my Roth IRA, since 401(k) plans have higher contribution limits, AND my company puts money in through a match and a defined contribution plan.  So I’d like to be able to diversify my tax liability when I retire (you know, have more options on what distributions to take and when), and so the more I have in my Roth, the better!

Lastly, there’s the taxes themselves.  Everyone’s freaking out about the Fiscal Cliff. I’m honestly not sure what tax rates might change to in 2013.  They could stay the same.  Or they could increase due to phasing out of tax cuts we’ve enjoyed for years.  I honestly don’t know.  What I do know is that if any of the tax rates go up, I might as well convert now, just in case.  Plus, I’m still in a pretty low tax bracket at this point in my life, so I might as well take advantage of these rates as well.  (yeah it’s only taxes on a tiny bit of money.  So I might as well do it now!  And I guess it wouldn’t matter much either way).

As a reminder, I’m not a financial advisor.  I’m just sorting out my personal finance thoughts on this blog.  So please don’t take this as financial advice.  I mean, you can still convert an IRA to a Roth IRA if you want.  But talk to your own tax/money people!

Saying that, here is something I learned from my tax/money people (i.e. customer service at Fidelity):

“At the time of your conversion, you will have the option to have taxes withheld. Many investors choose to pay the taxes due on the conversion from another source, as any taxes withheld from the conversion will be considered an IRA distribution and will be subject to any applicable taxes and an early withdrawal penalty if you are under the age of 59 1/2.”

I am planning on paying the taxes using another source.  The taxes I have to pay on this conversion I will pay for out of my regular bank accounts.  The other (not preferred) option is to pay the taxes out of the money you’re converting…which just seems like a horrible idea, because you have to pay a withdrawal penalty for that amount, and you’re lowering the amount of money you’re putting into your retirement account.  I guess some people do it if they have no other option.  Though I’ve also heard of people only partially converting to a Roth so that they can pay taxes on it bit by bit.

As a reminder:  Converting or contributing to a Roth IRA isn’t for everyone.  Depending on your income, your age, your tax liabilities, and plenty of other issues, you might stick with a traditional IRA or try something different.

What tax-related steps are you taking before the end of the year?  Is the drama over the Fiscal Cliff impacting your decisions?  Have you ever converted one retirement account type to another?  Do you agree with my decision to convert my IRA to go into my Roth IRA?

Still haven’t filed your taxes? How to do your taxes on the cheap! April 9, 2012

I have a confession.  I only JUST filed my taxes.  I swear I have an excuse.  I was waiting for months to get an obscure form from my old employer.  So even though I was almost ready to file before then, once I finally got the paperwork, I lost all my motivation.

But I just hopped onto TurboTax and finished everything up, e-filed, and called it a night.  (Of course I called it a night.  What else would I call it? :P)

And good news!  I’m getting a refund (yes, I think it’s good news).

I’m getting $10 back from the federal government, and a nice $443 from Massachusetts.

As an added bonus, I was able to file for free this year, because I won a TurboTax giveaway on Twitter through Vanguard.

But if you’re a slacker like me (i.e you waited until the last minute), and you want to file your taxes on the cheap, I’ve compiled a bunch of options from around the internets.

I’ve actually posted a list of discounts/options for a few years.  You can find my posts from 2009 and 2011.

So, there’s going to be a bit of copy/paste action below, with updates and new discounts I’ve found thrown in.

TurboTax Online Discounts:

First off, if you have a really easy return, you can use their free version for your Federal returns, and it looks to be ~$40/state filing, though you could probably get it cheaper using the next discount.

Fidelity:  Save 25% off Federal and State products.  In addition, you can access the “Basic” version, a cheaper blend between the free and Deluxe versions.  I initially filled out the “Basic” version, then “upgraded”, and saw that it made no impact on my returns.  So I’d recommend going with the Basic if you can.  (yes, I did that a few years ago, but this time I did it on purpose since I knew I was going to get TurboTax for free)

Bank of America:  Save 35% off Federal products.

Chase:  Save 35% off Federal products.  Not sure if you have to pay your taxes with your Chase card to be eligible.

Vanguard:  If you’re a Vanguard Customer, you can get 25% off Federal and State products.  It looks like they also have the “Basic” option available.  Unfortunately, unlike the Fidelity discount, it looks like you have to be a Vanguard customer.

Those are the best discounts I’ve found.  You can also get a bunch of different discounts (depending on what version you pick) through RetailMeNot.com.

I’ve used TurboTax every year since graduation, but there are plenty of other online options.

TaxAct:

They have a good free federal option, as well as a relatively cheap fancier version (deluxe) at $9.95 or deluxe federal + state return for $17.95.  I’m not as familiar with their product, so anyone with experience with TaxAct, let me know what you think of it.

IRS’s FreeFile:

If your Adjusted Gross Income (AGI) is less than $57,000 you can use one of these tax preparation sites for free.  If you want some help figuring out which site to use, you can answer a few questions to narrow down the list.  Some companies just offer free Federal filing, but some also offer free State filing as well.

If your AGI is more than $57,000, you can still e-file for free.  You can access the forms you need and fill them out through FreeFile by following the link here.

Also, for my fellow Massachusetts people, I came across this part of the Massachusetts Department of Revenue website where you can fill out and file your taxes for free.

One of the options for: people with low AGI (below $31k) OR Active Military with AGI below $57k OR if you qualify for the Earned Income Tax Credit, TurboTax offers a the “Freedom Edition” which is free for federal and free or discounted for state (depending on your state of residence).

So, yes, this post is similar to previous year’s posts.  But I just wanted to share what I’ve found over the years.

How do you file your taxes?  The old pen and paper routine?  Online software?  Or hand over a shoebox of receipts to a trusted accountant?

I’m getting a tax refund, and I’m happy about it March 27, 2011

That’s right.  I finally filed my taxes.  I used the Fidelity discount for Turbo Tax that I mentioned in a previous post.  My refunds are going to be:

Federal:  $89.  (Effective Tax Rate:  15.88%)

State:  $465.

So hooray!  $554 back in my account.  But, if you’ve read personal finance books and blogs in the past, you know that I SHOULD be sad.  I gave Uncle Sam an interest-free loan.  But guess what?  I’m okay with that.  The government had $89 of mine that I would have had.  And I gave Massachusetts an interest free loan of almost $500.  WHATEVER.

I don’t care about that.  Because the alternative would have been that I had saved all that money the whole time.  First of all, that’s not quite accurate, because it would be more like $39 per month.  But seriously, at interest rates being where they are, even on so-called “high interest savings accounts”, earning 1% interest on that money wouldn’t have been helping so much.

I figure that, since my tax situation isn’t very complicated, I only have a few deductions/credits that affect me, so I don’t expect to owe too much or get a refund of much each year.  I don’t ever aim to get a HUGE refund, just whatever the tax credits give me.

Some people advocate OWING as much as possible come tax time.  Then wait until the last day possible to pay it.  I know I could have modified my withholding to make it so I would owe the government money.  But that honestly makes me uncomfortable.  I’m not familiar enough with the tax codes to know how to underpay my taxes without getting in trouble.  If you underpay your taxes too much, you will get hit with penalties.  I know THAT much.  If someone has an easy way to figure out how to owe the most without getting penalized, I’d love to hear it.

Wisebread posted a similar discussion with 5 Reasons It’s Okay to Get a Tax Refund.  I’m pretty much agree with points 1, 2, and 5.  I don’t use my tax refund as an alternative for an emergency fund.  I assume it’ll be something small and not a big deal.

So, what’s your tax plan?  Do you try to owe as much as possible?  Do you try to get a huge refund?  Or do you try to stick close enough to $0 difference as possible?

Filed my taxes March 28, 2009

I finally filed my taxes.  Well, I e-filed my Massachusetts return, and will have to mail out my Federal returns soon (I have a form that has to get sent in with my Federal return).

I used TurboTax, which was pretty easy to use.  There are also lots of discounts available online for TurboTax (though I think some of them expired yesterday, which is partially why I finally filed yesterday!)

But here’s the newest discounts as I’ve seen this morning:

Going through Bank of America, you can get a 35% discount on Federal.

Going through Fidelity, you can get a 25% discount on Federal and State.

Going through Chase, you can get a 30% discount on Federal.

It looks like the discount for filing before March 27th has been removed (because, well, today’s the 28th!), though that discount was the same as the Fidelity discount, so that’s not too big of a deal.  And I’m pretty sure you can get all those discounts even if you don’t have an account with them.

I’m sure there are other discount codes out there, I’m just not aware of them.  Also, it looks like, only using Fidelity, you can get “Basic” which is a nice compromise between the “Free” and “Deluxe” versions.  So that’s slightly cheaper than the Deluxe.  I actually was using Basic for a bit, but wondered what it would be like to use the Deluxe version, so I clicked the button that said to upgrade.  BIG MISTAKE.  Once you upgrade, you can’t downgrade using the account you have.  So I lost ~$11 in the process.  Not a big deal, but I’m guessing if you did that and upgraded to the big fancy versions, you might be kicking yourself.

Also, if you have an AGI less than $56k, the IRS can help you file for free.  Hmmm, it looks like, including deductions, I might have been able to use that…but oh well…too late now!

Anyway, as for my taxes, I’ll be getting a total of ~$660 (combining Federal and State).  I don’t think that’s too bad.  With so many changes in 2008 (lose one job, collect unemployment, get a new job), it would have been hard to get a good prediction on my taxes.  Had I adjusted my withholding or something like that, I might have owed a bit too much (I don’t want to pay a penalty!)  So, I think that once my financial situation stabilizes, I might be more willing to change things so I don’t “give Uncle Sam an interest free loan” as many say.

Oh, and don’t forget.  There’s still time to open and fund an IRA for 2008.  You have until tax day to do it!  And since you’re limited to $5000 (or $6000 if you’re 50 years old or older) per year, you could miss out on hitting that limit for 2008.  Check out this post from Get Rich Slowly, I think it’s pretty helpful.  Yes, it’s for Roth IRAs in particular, but the advice applies to traditional IRAs.  He also has a good comparison of the two types here and here.

Have you filed your taxes yet?  Do it! Do it now! 🙂

The good thing about e-filing is… April 16, 2008

You get your refund a lot faster!

I used TurboTax to prepare and file my taxes. Well, actually, I e-filed my state taxes, but had to mail my federal taxes (I had to include a document from work). But the awesome part is that because I e-filed, and opted for direct deposit, I already got my state refund!

Other awesome things related to taxes (if you can say there are awesome things about taxes…) is that there are some good tax breaks/deductions (I can’t remember which…) that I was able to take advantage of. They allow deductions for rent you pay, cost of commuting (subway passes and/or EZ-Pass), and for interest on your student loans. Those were the big three that kicked in for me, and granted there are limits for your deductions, but it made me happy to see at least some effect.

That’s all I got for today. Hopefully you’ve all filed your taxes by now…and if you haven’t, you’ve filed an extension.