If we learn anything from the Haiti disaster, it’s that they can happen anywhere, anytime. According to NPR, most Haitians didn’t realize they lived in an earthquake zone. Given the poverty of the country, there probably isn’t anything the people could have done to prevent the destruction even if they had known. We can’t always prevent destruction in our own country, but we can do something to prepare for emergencies and disasters.

Update Your Emergency Kit
When I moved, I discovered that I hadn’t updated my emergency kit in eighteen months. Most of the food inside it had expired and the water was starting to evaporate. Since the food was canned, it’s unlikely it would have poisoned us, but we replaced it anyway.

Get Your Documents in Order
Last year, I wrote two week’s worth of posts listing every document and item you need for an emergency. Since we’re starting a new year, this is a perfect time to review your preparations or pull things together.

Write an Advance Directive
Making your wishes known isn’t enough. You need to write an Advance Directive. This isn’t just for emergencies. Before my husband scheduled his surgery, he was asked if he had an Advance Directive. We’ve been instructed to bring it to the hospital with us. If you don’t have one, download the form and complete it now before something comes up.

Have a Plan in Place
I’ve mentioned before that my husband and I carry emergency phone numbers in our wallets, behind our driver’s licenses. In addition to attempting to call each other in an emergency, we will also call my parents, who live 400 miles away, to let them know we’re okay. They can then communicate to the rest of the family. My husband’s card includes his brother’s info so emergency workers can call him if they can’t reach me.

Obviously, a disaster doesn’t have to as severe or unexpected as the Haitian earthquake, but you should always be prepared. Even if you don’t live in a “disaster zone,” fires or personal emergencies can happen anytime.

Yesterday I wrote about the benefits of the Roth 401K, and mentioned that you can roll the money into a Roth IRA to avoid required minimum distributions. So now I should probably explain what a Roth IRA is and why you should have one.

What Is a Roth IRA
A Roth IRA as an individual retirement account that you can set-up without going through your employer. You can invest the money you deposit in mutual funds and stocks. It’s very similar to a traditional IRA, but with a few key exceptions:

Post-Tax Contributions: When you fund a traditional IRA, you receive a tax deduction for your contribution. With a Roth IRA, you don’t receive a tax-deduction. However, the contributions and growth are both tax-free when you withdraw them during retirement because you paid the tax on the money you contributed already.

Income Limitations: Roth IRA contributions are subject to income limits. If you’re single, the limit is $105,000-$120,000. If you’re married filing jointly, it’s $167,000-$177,000. If your income exceeda the cap, you can still own a Roth IRA, but you can’t contribute to it that year.

No Required Minimum Distributions: 401Ks and traditional IRAs require you to withdraw a minimum distribution every year (except 2009) once you reach age 70 ½. Not with the Roth. You can leave the money there forever. If you pass it on to heirs, they can also leave the money there forever.

Looser Early Withdrawal Rules: I covered this in a previous post about withdrawing from a Roth IRA. Suffice it to say, you can withdraw your funds for a wider variety of things and with fewer penalties with a Roth IRA. Obviously, it’s still not recommended because you’re depleting your retirement, but it’s easier.

How to Open a Roth IRA
Opening a Roth IRA is simple. Choose a brokerage or mutual fund and tell them you want to open a Roth IRA. You can usually apply online, but will need to submit some signed paperwork. A brokerage will give you more options because you won’t be limited to a single fund family, but it’s a personal decision. You can open a Roth IRA for 2009 until April 15, 2010, so you could actually make double contributions in the year you open it by designating some contributions for 2009 and some for 2010, even though they all took place in 2010.

If you don’t work, but have a spouse who does, you can open a “spousal IRA”. Basically, you can contribute money from any source, as long as your spouse has qualifying income.

Roth IRA Contribution Limits
The contribution limits for a Roth IRA are the same as the limits for traditional IRA: $5,000 for most people, $6,000 for those over the age of 60. This is a total for both traditional and Roth IRAs per person, not per account. So, you and your spouse can contribute $5,000 each to any type of IRA account.

If you exceed the cap and want to open the account, you still can. Simply contribute to a traditional IRA, and then roll it over to a Roth IRA. Starting in 2010, there are no income limits for rollovers, only initial contributions.

The Roth 401K was introduced in 2006 as a counterpart to the Roth IRA. It was originally set to sunset in 2010, so most employers chose not to offer it. The sunset provision has been removed, so many employers are offering them this year. If your employer offers it, you should seriously consider switching into it. If your employer doesn’t offer it, campaign for it! It really is that good.

What a Roth 401K Is
A Roth 401K is a retirement account similar to a traditional 401K in that your employer sets up the plan and takes contributions from your paycheck. If your employer provides a 401K match, they can continue to do so, but must put matching contributions in a pre-tax account. You can typically invest in the same selection of mutual funds as your traditional 401K. Contributions remain the same: $16,500 for 2010, plus an extra $5,000 contribution for employees over age 55. Unlike the Roth IRA, there are no income limitations on Roth 401K eligibility.

If you open a Roth 401K and then switch jobs, you can either roll the funds into a new Roth 401K with your new employer or open a Roth IRA. There are no income limitations if you open the account for a Roth 401K rollover.

How a Roth 401K Differs from a Traditional 401K
There are a few key differences between the two plans:

The Roth 401K uses post-tax dollars. That means that your contributions don’t reduce your taxable income. If you contribute $50 per paycheck, your paycheck will be reduced by $50 and your taxes will be slightly higher than they were before.

Roth 401K retirement withdrawals are tax-free. All withdrawals – even the gains. If you withdraw $50,000 a year to live on, that’s exactly how much you have to live on. You don’t have to worry about setting some aside for taxes. Of course, there are two stipulations: you must be 59 ½ and the account must have been open for five years in order to receive the money tax-free. Since this is a retirement plan, that shouldn’t be a problem for you.

You can avoid required minimum distributions. Both traditional and Roth 401Ks require you to start withdrawing your savings at age 70 ½, but there’s a loophole for the Roth 401K. You can rollover your funds into a Roth IRA before the initial required minimum distribution and avoid it! Roth IRAs don’t have RMDs.

The Advantages of a Roth 401K
Even if you currently have a high tax rate, there are still advantages to choosing a Roth 401K and paying the taxes on your contributions now. First, tax rates will be going up. (Argue all you want, but most advisers agree on this point.) If you pay the taxes now, at least you know what you’re getting into.

Second, the growth is also tax-free with the Roth. Here’s a scenario: you put $1,000 in now and pay $250ish in taxes on that income. That money grows to $10,000 by the time you retire (totally making up numbers here.) If you have a traditional 401K, you’ll save the $250 on your taxes now, but owe $1,000 in taxes in retirement (assuming the 10% tax bracket at retirement.) If you have a Roth 401K, you’ll only ever pay $250 in taxes. Unless you lose a greater portion of your investment than you contributed, the Roth 401K will save you money in the long-run.

Third, not owing taxes makes it easier to plan your retirement budget. You don’t have to set aside money for taxes. Just withdraw the money and spend it as needed.

Converting to a Roth 401K
The easiest way to switch to a Roth 401K is to redirect your current contributions to the new plan. Ask your benefits administrator for the form. You can also convert your current 401K funds until the Roth 401K, but you’ll have to pay the taxes on that money. You should avoid using retirement funds to pay those taxes, so you should only convert if you have money for the taxes in savings. If you decide to convert your current account, that tax will be paid over two years. You don’t have to pay it all this year.

If this plan is available to you, you should seriously consider it. It will save you a LOT of money in the long-run, even if it costs you a little more right now.

At the start of each year, my husband and I calculate our taxes for the year and adjust our withholding to get the lowest refund possible. That way we get to use more of our money during the year, rather than give the government an interest-free loan.

Withholding Errors Do Happen
My employer’s payroll company usually gets it right, but as we’ve seen before, my husband’s employer’s payroll company isn’t quite as good at that. Which is odd, because they use the same payroll company. I guess my employer, being larger, gets better service.

At any rate, my husband’s first paystub of the year has arrived, so I entered the new withholding into my tax spreadsheet and discovered that we would overwithhold by a whopping $5600 if the current levels were maintained.

That didn’t seem right to me, so I used the Paycheck Calculator to verify that their calculations were correct.

Yeah, not so much. I can’t figure out how they arrived at this particular figure, but they’re adding $235 to his federal withholding. Interestingly, that’s the same amount they used when they withheld taxes from his paycheck, but forgot to pay him his whole salary. I don’t know what their obsession with $235 is. At one point we had them withholding an additional sum every paycheck because of the marriage penalty. It’s possible that was $235, but that was 6 months and two W-4 forms ago.

To double-check the double-checking, I also used the IRS withholding chart in their tax publication. I looked at several possible calculations and not one of them matched the number the payroll company came up with. I don’t know what they’re doing over there.

How to Handle Errors
If you find an error, take your stub to your HR rep (or whoever does payroll at your company) and tell them it’s wrong. They’ll communicate that to the payroll company or verify that they have the correct information entered into the system if they process payroll themselves. Then check it again when the next paycheck arrives. Unless they seriously messed up, you probably won’t get a refund of the overwithholding.

Obviously, one paycheck error isn’t going to break us, but over a year, it adds up. Sure, we’ll get it back, but I’d much rather have it now. If you agree, take a few minutes to check your paycheck when your first stub comes. You might be glad you did.

‘Tis the season to start gathering your tax documents. Yeah, it doesn’t quite have the same ring as ‘tis the season to be merry, but it must be done nevertheless. Last week I tried to make a list of all the tax documents I need to gather or expect to receive, but I always worry that I’m forgetting something and will only discover it when I sit down to do my taxes. That’s what I was happy to discover this new tax checklist from H&R Block that helped me figure out what I should expect in the mail and what I need to gather. It was a lot longer than my list.

Filling Out the Checklist
It’s pretty simple. Just check the boxes yes or no. It’s a short list, but it includes items specific to 2009 like the homebuyer tax credit and new car tax deduction as well as the standard income and expense questions.

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Once you complete the questionnaire, it provides a complete list of everything you need broken down by category.

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Gathering Your Documents
If your taxes are pretty simple, then you might be done after your W-2 arrives. All tax documents must be mailed by January 31, so it may take until February 10 to receive everything. If you haven’t received a document by then, call the company that was supposed to issue it to request a new one. You may also be able to go online and print it out from there, which will save time.

Double-Check the Documents
Don’t wait until you’re doing your taxes to double-check the documents, especially if you’re the type of person who completes your taxes on April 15. Instead, check them as they come in. Compare your W-2 to your last paystub. Compare your mortgage interest statement to your amortization schedule/personal records.

Compile Personal Records
If you’re self-employed, paid tuition, or did charity work, you may not receive an official tax record to rely on, so pull together your receipts and other personal records related to it. If you take the home office deduction, read my previous post to find out which documents you need for that.

Keep Everything Together
Before you compile those taxes, keep everything together. A small folder is easy to keep track of. I use a shoebox, but my shoebox is organized, not just a jumble of random receipts. My business receipts are in an envelope labeled for business receipts. I also photocopy receipts that are printed on thermal paper, because they will fade over time. Once I file my return, I put the shoebox labeled with the year in the closet, and put a hard copy of the return in my metal file box for safekeeping.

Shred Items You Don’t Need
There’s no reason to keep all your old paystubs once you have the W-2. The same goes for credit card statements if you have the actual receipts. Shred whatever you no longer need, preferably in a cross-cut shredder. I keep each shoebox for three years, and then shred the contents. This may take a while – give your shredder a few breaks so you don’t overheat it!

I’ve set aside this weekend and next to gather my personal records and documents, and I’ll slowly be building my stash of other documents until the end of the month. But I’m one of those obnoxious people who files their taxes as soon as possible.

Hopefully you rebalanced your investment portfolio at the end of 2009 to capture tax losses, but you can do it now if you haven’t already and have those losses for 2010. However, you should look at more than just your portfolio. It’s time to look at all the places you keep money to make you’re not being hit with new fees.

Review Your Checking Account
If you have direct deposit, then you may not worry whether your checking account carries fees. However, some employers don’t offer direct deposit. If your employer is one of them, it’s time to check your account for fees. You should be able to find a fee list online. If not, call customer service and ask. If they charge fees for calls, teller services, monthly account maintenance, low balance, etc., it’s time to move your money. Your first try should be a local credit union, which is probably fee-free. If you can’t find one of those, some major banks offer fee-free accounts. You could even ask your bank if they have one and inform that you’re prepared to find a new bank if they can’t switch you into it.

Review Your Savings Account
I’m not saying you should move your savings account each time a different bank shows a slightly improved rate. You should, however, check this account for fees, too. For example, last year I had to remove my money from Everbank after they more than tripled the minimum balance and doubled the associated low-balance fee. We weren’t in danger of triggering the fee, but we wanted the flexibility and they didn’t offer it.

Review Your Brokerage Account
This is a tricky one, because your investments may be tied up for a short while if you have to move them to a new brokerage. However, you should still check your brokerage account for new “account maintenance fees.” Those fees were one of the reasons I left E-Trade several years ago. They didn’t tell me they’d introduced the fee until they sent me a statement four months after they levied it and then said they couldn’t reverse it because it had been more than 90 days. Even when I said I wanted to close the account if they didn’t reverse the fee, they didn’t budge. So I closed the account and I’m never going back.

Review Your Credit Cards
Credit card companies are cutting limits and hiking fees and interest rates all over the place. If you don’t carry a balance, interest rate hikes are moot, but you need to know if they’ve cut your limit. They should send you a letter when they change your account, but check your account online monthly just to make sure.

Review Your CD Due Dates
If you have any CDs expiring this year, mark the due date on a calendar so you can notify the bank immediately about your intentions. If you wait more than 10 days, the CD will automatically renew and lock your money in for another term unless you pay a high surrender fee.

Check Your Credit Report
While you’re doing all this, why not check your credit report, too? I use annualcreditreport.com to check one free report every four months: January, May, and September.

A once-a-year checkup is a good way to start the year, but always be vigilant about changes to your account because they can happen at any time. The sooner you take action, the less risk of getting hit by a fee.

It’s the beginning of the year, which means it’s the perfect time to sit down and redo your budget. Plan out your basic expenses, budget for savings and big purchases, and start yourself on the path to a financially sound year.

Reassess Your Taxes and Income
If you adjusted your retirement or flexible spending account contributions, received a raise, bought a house, had a child, or did anything else to change your finances, then you probably need to readjust your tax withholding and budget for the difference in income. Start by using the IRS withholding calculator, which has been updated for 2010. Enter your income, expected contributions, deductions, and credits. It will tell you exactly how many allowances to claim to arrive at as low a refund or payment due as possible. It’s the best way to maximize your income without getting walloped by a big tax bill. If you need to make a change, file a new W-4 with your employer. You can complete the form and print it right from the IRS site.

Reassess Your Expenses
Now update (or list for the first time) all of your monthly, semi-monthly, and annual expenses. For the irregular or annual expenses, divide the amount due by 12 to figure out how much you need to save for the next year to cover the payment. List the due dates and payment amounts in your budget. Calculate the difference between your income and your expenses. If you don’t have a positive balance, you’re spending too much. If you do have a positive balance, put the extra into savings or invest it.

Plan for Major Expenses
Is this the year you buy a new couch, a new car, or take a vacation? Check your savings to make sure you’ve got what you need to cover it. If you don’t, calculate what you need to save each month and add it to your budget as an expense so you won’t be caught short when the day comes.

Budget for Savings
If you’re not already serious about saving, it’s time to make it a line item on your budget. We usually transfer our money into savings after the second pay period of the month. We like to keep the money in our checking account during the first period as a buffer in case we have a paycheck error (as happened twice last year.) With the money in the account, we know our mortgage payment and bills will clear without us having to transfer money back from savings.

Set Your Goals
If you haven’t already set your financial goals for the year, set a couple of reasonable goals (increase your emergency fund by 20%, for example), and a couple of stretch goals (double your emergency fund). Now figure out the dollar amount necessary for each goal, divide by 12, and add it to your budget as a monthly expense.

Put It In Motion
If you know you won’t remember to transfer the money to savings every month, make it an automatic withdrawal. If you like to move money around, set up the accounts now so you can transfer funds in a flash. Each month, update your budget with that month’s irregular or annual bills and make sure you’re still on track. If you had to spend a little extra on an emergency, deduct it from your goals before you decide to carry it as debt.

Once you get into the habit of using a budget and saving money, it gets much easier every month. Try it for just this month to get 2010 off to a good start.

Maybe it’s something about the decade (sort of) ending, but top 10 lists of posts seem to be all the rage this week, so I’ll throw my hat into the ring. Here are my personal 10 favorite posts from this year, one for each month:

January
8 Frugal Valentine’s Day Ideas

I couldn’t believe it when I went into Target on December 28 to buy some holiday storage bins and walked past a display of Valentine’s Day stuff. Seriously? It wasn’t even January yet! This is quite ridiculous. Since I’ve always been a bah humbug about V-Day (and I do have a Valentine, so I’m not just a lonely sad sack), here are my 8 tips for a frugal V-Day, most of which involve skipping it.

February
50 Ways to Cut Your Spending by 10%

If you want to find a way to increase your retirement savings by 10%, you probably need to cut your spending. If you just want to save money, then you probably also need to cut spending. 10% sounds like a lot, but it can be done if you adopt several of these 50 options.

March
How the 2009 New Car Tax Credit Works

If you bought a new car in 2009, this is the lowdown on how the deduction works (it’s not a true credit). Quick tip: You claim it on this year’s tax return, not at the dealer. If you didn’t buy a new car, sorry, you’re out of luck.

April
How We Save 25% of Our Income

In April of last year, I discovered we were saving 25% of our income without feeling it. Even though we now own a house, we’re still spending less than we earn. Right now, we’re barely spending anything, but that will increase. We do still plan to save a substantial portion of our income, though.

May
That Makes Me Stabby: The Handbag as Investment

You’ve probably read my “stabby” posts, which are basically rants about various topics related to finance. This is one of my favorites: the claim in fashion magazines that handbags, shoes, and other items of clothing are “investment pieces.” Hogwash!

June
Nine Signs It’s the Right House for You, and One It Isn’t

Quick statistic: my husband and I saw 50 homes before we finally went into escrow. We only made offers on three of those. So, after viewing 50 houses, I learned to recognize the signs that it was the right house for you, and how to know when you’re iffy on it.

July
My Long and Winding Road to Home Ownership, Part 1

We did it! We bought a house in July. If you want to know how we did it and what we went through in the crazy real estate market, read our story.

August
Save Money on Wedding Photography and Wedding Albums

I did a whole series on saving money on your wedding and this is one of my favorites from the bunch. It’s so easy to spend thousands on photography and then drop another couple grand on the completed album, but you don’t have to!

September
Will the New Frugality Last?

Not to be a contrarian, but I don’t think the “new frugality” will be as permanent as some pundits like to think. Sure, some things will stick and it will be a while before we’re all mortgaging our houses to buy furs again, but I don’t think everyone will stay as frugal as they are now.

October
How to Prepare for the Unexpected

The unexpected is the basis of most movies, but it’s also something that happens with startling frequency in real life. Even if you don’t know what’s coming, you need to be prepared for the “what ifs.”

November
Six Questions You Must Ask Before Getting Engaged

You’ve heard the statistic: money is the reason for 50% of divorces. If you don’t want to be among those, you and your beloved need to ask each other these six questions before you get engaged. If you don’t feel comfortable talking about this, you shouldn’t be getting married. Period.

December
Simple Home Improvement Project: No-Sew Window Swag

I’m all about home improvement now. Even though I’m also the proud owner of a sewing machine, I made these window swags without a sewing machine, and so can you. Freshen up your home for cheap with these new window treatments.

January is the time when my husband and I sit down and plan our financial goals for the year. These are goals, so we may not meet all of them, but it gives us something to work towards. I’m also throwing in a few personal goals, just for good measure.

Financial Goals:
Boost Our Emergency Fund: We’ve got a decent cash cushion aside from the funds we need for property taxes, insurance, etc. However, a good portion of that will be spent on new furniture and my husband’s surgery. Once those bills are paid, I want to get us up to $15,000 in emergency savings. I’m not sure we’ll reach that goal entirely this year, but we should get pretty close.

Increase Our Retirement Savings to 10%: This will have to wait until my husband returns to work, but after that I’m finally getting serious. We have a couple advantages this year. First, my employer now offers a Roth 401K, so I can save more there. I’ll also open a Roth IRA for my husband. He gets a defined contribution from his employer, but we won’t contribute to that account.

Buy a New Car: This year, I will get a new car. My car has served me well, but it’s time. I’ve been waiting for three years. I know what I said just a few days ago, but I want a new car!

Personal Goals:
Furnish Our House: We still have three rooms to furnish, our china, and a new fridge to buy. It will all have to wait until after the surgery, but those are high on our list of things to do. It may not be a true “financial goal,” but we’ll have to save up some money for those purchases. Fortunately we’re also getting a sizable tax refund, most of which will go toward furniture and rugs. It’s pretty pathetic watching our cats lie on the doormat because it’s the only rug in the house. We expect to spend around $12,000 on furniture this year, but we’ll do it over time, not all in one big chunk.

Finish Painting My House: I’ve got one bathroom ceiling, one ceiling patch, a hallway, a full bath, and a half bath left to paint. I want to have it all done by the end of the spring. If I do just one room a weekend, I can get it done in five weeks. I think that’s manageable.

Fix Up the Backyard: Our backyard is overgrown and missing steps. Come spring, I’ll be planting my vegetable garden and we’ll spend a little money on repairs. We may apply for a home improvement show to do some of this work, which would help reduce our effort and budget.

Lose Five Pounds: It wouldn’t be New Year’s if I didn’t resolve to lose weight, now would it?
I’ll be generous and say I accomplished one and a half financial goals this year. Not great, but since one of those was buying a house, I’ll pat myself on the back anyway. Hopefully I can do better in 2010.

Last January, I made a list of six financial goals for 2009. Some were major, some were small. Sadly, I only succeeded in couple. Let’s take a look at the areas where I succeeded, and the ares where I didn’t quite make it.

Buy a House: We did it! It took longer than we anticipated, but we closed on our house in late July. We did it with 20% down and some money leftover, which is quite an accomplishment.

Pay Off that Little Debt: We have a $4000 student loan still hanging around that we never did pay off. We opted to keep that money in our house-savings and now in our emergency fund. It’s a small monthly payment and we’ll pay it off when it seems like a better use of our cash, but for right now it’s not going anywhere.

Boost Our Emergency Fund: Despite buying the house, we will have about $8000 in emergency funds. This money was earmarked for furniture, but now my husband needs surgery. We’re saving it to cover any lost wages and get us through the month we’ll have to wait for his disability payments to show up (he gets paid for the time, but California is slow to send the money.) It’s nice to have that cushion, let me tell you.

Increase Our Retirement Savings to 10%: Since it took so long to buy the house and we didn’t want to reduce our taxable income before we closed, we didn’t do this yet. Soon, though!

Buy a New Car: Sigh. No new car for Aryn. My husband decided he needs a new spine instead. I know, the selfishness of some people! But seriously, my car is a Toyota and it’s doing fine, even if it doesn’t have the little luxuries I’d like.

Save for Our Next Big Vacation: We haven’t saved any actual cash for the vacation, but we’re very close in travel miles, so that’s something at least.

I’ll be generous and say I accomplished one and a half financial goals this year. Not great, but since one of those was buying a house, I’ll pat myself on the back anyway. Hopefully I can do better in 2010.

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