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A Handy-Dandy IRA Glossary

An IRA is a fan-darn-tastic retirement tool. However, it can be a little overwhelming. Below you will find a helpful glossary for all big, fancy IRA words.

1. Adjusted gross income, or AGI
Used to calculate federal income tax, your AGI includes all the income you received over the course of the year, such as wages, interest, dividends and capital gains, minus things such as business expenses, contributions to a qualified IRA, moving expenses, alimony and capital losses, interest penalty on early withdrawal of bank CD certificates and payments made to retirement plans such as SEPs and SIMPLE IRAs.

2. Individual retirement account, or IRA
IRAs are retirement accounts with tax advantages. You may contribute up to $5,000 in 2008. Or, if you’re 50 or older, you can put aside up to $6,000 for that tax year. But your contributions can’t exceed your earned income. The investment grows tax-free until you begin making withdrawals, usually after age 59½. Take money out before then and you will usually get hit with a 10 percent penalty unless you meet certain specified requirements.

3. Contribution
IRA contributions are limited to $5,000 for the 2009 tax year if you’re younger than 50. If you’re 50 or older, you can contribute as much as $6,000 for the 2009 tax year. The limits are the same for 2010. Contributions are classified as either tax deductible or nondeductible.

4. Deductible or nondeductible
Contributions to a traditional IRA are tax deductible if you are not covered by your employer’s retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending on your income and filing status. Contributions to a Roth IRA are not deductible.

5. Modified adjusted gross income, or MAGI
For the purpose of determining your contribution limit, some people use their MAGI. For most people, this will be the line on your taxes that says “adjusted gross income,” or AGI, but some taxpayers will have to modify their AGI by adding back some income or tax breaks. These add-backs range from foreign income you didn’t have to count in your adjusted gross income to interest income for Series EE bonds that you used to pay for qualified educational expenses to a deduction for student loan interest or a traditional IRA contribution.

6. Required minimum distribution
Generally, if you have a traditional IRA, you must begin taking money out of the account by April 1 of the year after you turn 70½. The amount is a minimum distribution determined by your age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to determine the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren’t subject to minimum distribution requirements until after the Roth owner dies.

7. Rollover
This is the term used when reinvesting assets from one tax-deferred retirement plan to another within 60 days. Generally 20 percent of the funds is withheld for tax purposes if you take possession of the funds. You can avoid this by doing a direct rollover, which is a trustee-to-trustee transfer from one retirement account to another.

8. Roth IRA
The most notable thing about a Roth is withdrawals are tax-free if the account has been open for at least five years and you’re at least 59½ when you start to withdraw money. Contributions to a Roth are not tax deductible. “You can withdraw your contributions anytime you want, no penalty or taxes,” says Picker. You can also withdraw earnings for a qualifying event if the account is at least five years old. Qualifying events include: death or disability of the account holder and a first-home purchase.

9. Tax and penalty-free withdrawals
You can take money out of your IRA tax-free and penalty-free as long as you repay the full amount within 60 days, but may only do it once in a 12-month period. The withdrawal proviso was intended to make IRAs portable, says Barry Picker, CPA with Picker, Weinberg & Auerbach. “It’s not for short-term loans.” But some account holders use the rule to make loans to themselves. And many financial planners caution against it. The situation is “fraught with the potential for missing the deadline, not having the money and having a taxable event,” says Peggy Cabaniss, CFP. A short-term IRA loan “would be my last resort,” she says.

10. Education IRA
This account was years ago renamed Coverdell Education Savings Account, or ESA, in honor of the late Sen. Paul Coverdell, but you still hear the term education IRA pop up. This is not strictly an IRA, since it doesn’t finance retirement, but when it was created, the general rules reminded folks of an IRA, hence the nickname. Instead, you make annual contributions, of up to $2,000 per child, to a Coverdell ESA to help pay education costs. You can’t deduct the Coverdell contributions from your income taxes, but earnings are tax-deferred and qualified withdrawals, for certain school costs from elementary school to college, are tax-free.

With a head full of this glorious knowledge, you are well-equipped to retire a wealthy person. Way to go!

Article | 10 must-know IRA terms.
Photo | pedrosimoes7

Social Security: The Recession & Your Government Cheese?

ssAlthough it might not have been apparent to recipients, the worst recession since World War II has trimmed Social Security’s finances. And as millions more Americans become eligible, future and current beneficiaries are left wondering: Just how safe are my Social Security checks?

…the system’s break-even date — when Social Security will begin paying out more in benefits than it takes in through payroll taxes — has been moved forward by one year, to 2016, in the most recent Social Security trustees report.

What’s more, the still-sputtering economy might bump that date forward again in next year’s report. The system will make up the shortfall by dipping into its $2.4 trillion trust fund. (The fund, however, is held in government bonds, not cash. Redeeming the securities might require federal tax increases or spending cuts.)

Well, we all know it won’t be spending cuts.

So we are 6 or 7 years from the system’s break-even date, but what does that mean? Well, it isn’t the end, but it certainly could be classified as the beginning of the end. At that point, the system will be on life support. Either payouts will need to be decreased or the supporting taxes will need to be increased. Probably both things will need to happen. It seems that Obama won’t be able to take care of us forever. W.W.FDR.D.?

“If you hear something wrong in your transmission and you fix it immediately, it may be expensive, but it is a heck of a lot cheaper than when gears start to fly out the back of the car,” says David John of the Heritage Foundation, a conservative think tank. “We are at the point right now where the gears aren’t flying off, but they are getting close.”

via Social Security reform, bankrupt, benefits, plan for retirement – MSN Money.

10 Money Saving Apps for the iPhone

So you you spent all of your cash purchasing an iPhone and now it is time to use your trendy talker to save some dough. Here is a collection of 10 apps that will help you recover your cost:

  • Mint.com – We’ve already raved about Mint and now we will continue. If you are a Mint user, the iPhone app is a must have. Budgeting is a fundamental discipline in your personal finances and now you can budget on the run. Last week the folks at Mint upgraded the app and now it is well worth recommending.
  • KidsEatFree – Toting the kids around town can be exhausting, but taking them to eat doesn’t need to exhaust your checking account. With KidsEatFree, you can find nearby restaurants offering food specials for your young ones.
  • Compareme – We’ve all been there. Standing in front of a huge display of [insert product], trying to decide if the bigger buy is the better value. Now you can save yourself the anguish of mental math and let Compareme do the work.
  • Grocery IQ – We all know you save significant money by having a list when visit the grocery store. Grocery IQ takes pantry management to new heights by providing a digital shopping list. The app provides multi-store support, as well as barcode lookup.
  • Coupon Sherpa – This app provides digital coupon support, displaying the coupon barcode directly on your iPhone screen. Reviews criticized the limited stores, but the database is growing.
  • Snaptell – There is a lot of competition in the ‘price comparison’ app market. Snaptell floated to the top with the best reviews. Other notables include Pricecheckah & Save Benjis. Snaptell provided a clear interface and price comparisons from multiple online retailers.
  • Amazon App – All though there are many price comparison apps out there, none touch the quality of the Amazon app. If you are like me, you save plenty of money each year by purchasing products from Amazon. The Amazon App takes Amazon‘s money-saving power mobile. It is a iPhone must have.
  • GasBuddy – While running the roads, GasBuddy provides nearby gas price comparisons. GasBuddy isn’t free, but it could easily pay for itself in one tank. Cheap Gas provides a free alternative.
  • Zillow – Most of us are probably familiar to zillow.com. Well now the real estate powerhouse has a very useful iPhone app. With GPS detection, it is a great tool for your home search. Rough pricing, comps, etc are available curb-side and in the palm of your hand. It might be the perfect tool for taking advantage of the home-buyer tax credit.
  • Fast Figures – All things being held equal, Fast Figures may be the most important Financial app on your iPhone. It provides an array of financial calculators including (but not limited to) time value of money, breakeven, mortgage, sales tax, and tip calculators. It is easy to see why this is an important tool to counterbalance your wallet.