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Three Smart Money Moves for the New Year
What can I do now to get 2009 off to a good start?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
January 2009
Now that 2008 is finally behind us, it's a great opportunity to start 2009 with a clean slate. Here are three things you can do in January to help improve your financial situation for the year.
Make it easy to save for retirement. It's a great time to set up an automatic investing plan for your 2009 IRA, which spreads your contributions over the year and helps you take advantage of dollar-cost averaging -- by investing a fixed amount at regular intervals, you'll buy more shares when prices are low and worry less about the timing of your investments. Contributing $416.67 per month gets you to the $5,000 maximum by year-end (and you can contribute an extra $1,000 if you’re 50 or older in 2009).
You can qualify for a Roth IRA -- which gives you tax-free income in retirement -- if your adjusted gross income in 2009 is $120,000 or less if single, or $176,000 or less if married filing jointly. If you earn too much to contribute to a Roth, you can make after-tax contributions to a traditional IRA this year and then convert it to a Roth in 2010, when the $100,000 income limit for Roth conversions disappears. And you have until April 15, 2009, to contribute up to $5,000 to your 2008 IRA if you haven't already.
You need earned income to contribute to an IRA, but if you don't work and your spouse does, he or she can contribute to a spousal IRA on your behalf -- which can be a great idea even for retirees who earn a little income through the year. (You can contribute to a Roth IRA at any age). For details about the IRA rules for retirees, see Stretch Your Retirement Savings. For general information about IRAs, see Why You Need a Roth IRA.
Convert a traditional IRA to a Roth. If stock-market losses hammered your traditional IRA last year, it could be a great time to convert some of the assets in the account to a Roth, where the money can grow tax-free for the future.
Because you have to pay taxes on the money you convert (except for any nondeductible contributions), the lower your account value, the less tax you'll owe. And now that i'’s 2009, you won't have to pay the tax bill on the conversion until April 15, 2010 (but you may need to boost your withholding from other income or make quarterly tax payments to avoid an underpayment penalty).
It may be a particularly good time for people who are age 70˝ or older to convert some of their IRA money to a Roth. Congress suspended required minimum distributions from retirement plans for 2009 (see No IRA Payouts Required in '09) so retirees wouldn't be forced to tap accounts that have been decimated by the market crash. That means you could take some of the money you had been planning to withdraw and convert it to a Roth instead. You'll still have to pay taxes when you make the switch. But moving the money to a Roth means that you can take tax-free withdrawals after five years, you never have to take required minimum distributions, and you can create a tax-free inheritance for your heirs.
You don't need earned income to be able to convert to a Roth IRA; your adjusted gross income just needs to be below $100,000. See Convert Now to a Roth IRA? for more information.
If your account value continues to shrink after you make the change, you get a second chance to convert again so you don't end up paying taxes on a phantom account balance. You have until October 15, 2010, to "recharacterize" a Roth IRA -- that is, switch the Roth conversion back to a traditional IRA -- then reconvert at a lower account value in the future. See Undoing a Roth Conversion for more information.
Clean out your files and start organizing your tax records. Soon you'll start receiving year-end statements from your brokerage firm and mutual fund companies. You can toss some of the monthly statements you've received throughout the year after making sure that everything matches up (but make sure you keep the statements with the date and price of stock purchases, which you'll need when you sell the stock). See Which Tax Records to Keep for more information. And start gathering your records for filing your 2008 taxes.
If you took on freelance work or started your own business in 2008, determine what you can deduct as business expenses and start digging up receipts. See Tax Toolkit for the Self-Employed for more details. And keep an eye on our Kiplinger Tax Center for more information about filing your taxes, answers to your tax questions, lists of frequently overlooked deductions, and other information that can save you money on your tax bill.
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