Roth IRA and Flexible Spending Account deadlines

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End of Year Action Items

If you have not already done so, NOW is the time for opening a Roth IRA account.  If you do have existing Roth IRAs, be sure to contribute as much as possible this year so you can enjoy the tax sheltered benefits come tax time.

Also, if you participate in an employer sponsored Flexible Spending Account… NOW is the time to discover your remaining balance and spend it before you lose it!

Roth IRAs

As I mentioned above, now is the time for starting a Roth IRA.  If you are out of debt and/or ready to invest, fund your Roth IRA(s) early and often.

Before Opening Roth IRA:

  • Make sure you have some liquid savings set aside for emergencies – in this market I recommend at least 3 months but prefer to have 6 or more.
  • Make sure all your high interest debt is paid off.

Roth IRA Info:

Check this link for the latest Roth IRA information.

  • Roth IRAs are tax exempt accounts, not tax deferred accounts.  Although your contributions are after tax, as long as you follow the rules and keep your grubby hands off the money until you are 59 1/2, all your principal and gains can be drawn tax free!
  • Annual contribution limit is $5,000 for those 59 and younger and $6,000 for those 60+.
  • Single filers with an adjusted gross income of $107,000/year or less can contribute the full amount and the AGI phaseout limit for contributing is $122,000.  *In the video I gave last years phaseout numbers, but those listed here are correct.
  • Joint filers AGI phaseout range is $169,000 – $179,000.
  • Deadline for 2010 contributions is Monday, April 18th, 2011.

Flexible Spending Accounts

Do you take advantage of an employee sponsored FSA?  If so, remember to check your current balance and make sure you spend any remaining amounts before the end of the year.  Why?  Because if you don’t use it… you lose it.  Similar to a Health Savings Account, an FSA is a tax exempt savings for health spending, but unlike HSAs, with FSAs you cannot carry balances over into the next calendar year.

This lack of full consumer control is my fundamental qualm with the FSA structure – people have to guess how much they will spend on health care in yearly intervals and are punished if they guess too high or too low.  With all that said, if you can give a fairly accurate projection of your yearly health spending you stand to realize valuable tax relief… which is the value of the product.

Although I am currently participating in my employer sponsored FSA plan, if I had my druthers I would choose and HSA every time.



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1 Mike Piper

Two quick additions:

You can contribute to a Roth for 2009 all the way until April 15, 2010. (That said, I’m all for doing it earlier rather than later!)

Also, contributions that you make to a Roth can come out free from tax and free from penalties at any time. That means that if you think you can afford to make a Roth contribution, but aren’t quite sure, go ahead and do it anyway. Then just keep it in something very safe (like a money market account), where it won’t lose value.

Then, once you find out that you didn’t (and aren’t likely to) need the money in the near future, you can move it into some riskier mutual funds. Or, if you do end up needing the money, you can just take it right out of the account, no problems.

2 Matt Jabs

I appreciate this info Mike, I did update the post w/a note reflecting the actual IRS deadline.

3 Peter

I’m thinking about signing up for the FSA plan at work this year -we’ll be having a few expenses this year with the baby on the way, and I thought this might be a way to save a little money. I’d be interested in a full post on FSAs. Get on that would you? 😉

4 Kyle

@Peter I wrote a guest post over at Mrs. Micah discussing Spending accounts, both the Dependent care and Health Care types. If Matt doesn’t mind here is the Link: http://www.mrsmicah.com/2009/11/12/what-are-flexible-spending-accounts/

5 Matt Jabs

Go for it Kyle. Thanks for the link.

6 Paul @ FiscalGeek

Well done Matt, video makes me feel like I know you a little better. Some day we’ll meet if not on the banks of the Columbia while you are in your canoe. The FSA is very handy, my employer actually auto reimburses any FSA expense so when I had a painful trip to the dentist earlier in the year, I received my FSA money back in my checking account the following week. That’s efficiency I like. I do wish it would roll over and something I’m thinking about if I moved to an HSA model.

7 Craig

I am trying my best to max out my IRA for this year.

8 Jonathan

The max contribution is $6,000 if you are 50 by December 31, 2009.

9 Jonathan

IRS Publication 17 is a book every household should take a look at. It gives information on virtually every subject. Don’t let its length scare you, just look at the sections that pertain to your situation. Remember, for many of us, taxes will be our biggest liability during our lives. You can get Pub 17 at the IRS website.

http://www.irs.gov/app/picklist/list/publicationsNoticesPdf.html

10 Matt Jabs

Solid info Jonathan, I just downloaded it & will read parts of it over the coming weeks. Fun stuff! 🙂

11 Financial Samurai

Matt – Is that a real Christmas tree in the background? If so, how much did it cost? Thinking about getting me a fake one so it’ll last forever.

Anybody ever do this calculation on paying tax up front or paying tax later (trad/roth)? Doesn’t the calculation on return come out the same for the most part since it’s just a re-arrangement of the equation?

12 Matt Jabs

Ha!… fake tree… I don’t think so!

I only do real Christmas trees. Beyond that, we always cut down a fresh tree as opposed to buying a pre-cut. They last longer, but the entire experience is what we enjoy. Every year, the day after Thanksgiving day we cook up some homemade hot cocoa, stick it in a Thermos, and head out to our favorite Christmas tree farm. We love it.

Some things are worth paying for. 🙂

13 Mike Piper

Yeah, commutative property of multiplication tells us that if tax rates don’t change, it’s irrelevant (in terms of ending value) whether you pay, say, a 25% tax now or a 25% tax later.

The primary decision is simply whether you expect to be in a higher or lower tax bracket when you withdraw the money than you’re in now.

Or, if you admit that you don’t have a clue, then you may want to “tax diversify”…which means do a little of both. 🙂

14 Undebt

Samurai-

It works out roughly the same if you’re in the same tax bracket while contributing vs your tax bracket after retirement. If you’re in a high tax bracket now, and will be in a low one later, the Traditional IRA usually makes more sense.

However, with all the deficit spending going on now, there are those (like me) who think that taxes are going to be going up dramatically over the next decade, and being semi-retired without a huge amount of earned income, I expect my tax bite to be much higher down the road. The Roth makes better sense to me in that scenario.

Ultimately, you pays your money and you takes your chances…

15 Matt Jabs

Good info. I suspect the answer to Sam’s question is that… it depends on your situation.

16 Robert Espe

The sweetness of a ROTH is not about tax savings on the principal, it’s that the earnings are completely tax free. Earnings in a traditional IRA will be taxed, even if you are in the lowest bracket (and seriously, how many of you think you will be living off of less than $8500/year in retirement). If you have no IRA, its a no brainer, get a ROTH, you probably have a tax deferred 401k already anyways. If you are close to retirement and have a traditional IRA, it pays to run the numbers before converting.

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