To commemorate the occasion, I have composed a brilliant sonnet. Bathe in its glory.

Roth IRA, how do I love thee? Let me count the ways.
Thy tax-free distributions a path to retire,
financially secure, never to be mired
in dreadful labor til the end of my days.
Forever the tax man will you keep at bay,
thanks to you old age to me will not be as a blight
upon the noble tuber, nor will I have to fight
til the end, laboring ever to earn my pay.
Something something something something use
something something – something something shelf,
and to the IRS I have already paid my dues,
they shall have no further access to my wealth,
and if leaving my Roth IRA to my heirs is what I choose,
no taxes shall be paid on its earnings, not even after my death.

I am sure the epic romanticism of my awesome sonnet has convinced you to run out an open a Roth IRA immediately, but just in case you have no soul, I will out-line the most awesome of Roth IRA benefits below in a form more befitting you poor inartistic souls.

Why Roth IRA’s Are Awesome

Tax-free income - No taxes when you withdraw your money. Ever. So long as you avoid triggering any Roth IRA penalties, of course, which means you need to keep your grubby mitts of it until you’re 59 1/2 years old. And yes, I know using 59 /12 is a ridiculously stupid number, but that’s the government for you.

You can open one for practically nothing - While Vanguard imposes a $1,000 minimum to open a Roth IRA, plenty of companies will let you open one for practically nothing.  T Rowe Price will let you start a Roth IRA for $50, for example.

The government limits how much you can contribute, which automatically makes it cool - Under article 3, section 14 of the Constitution of the United States of America, the federal government is required to limit the use of totally awesome things such Roth IRAs, the reason being that too much awesome has been shown to cause people’s friggin’ heads to explode. Since too many exploding heads would impede the progress of certain Important Government Projects,  citizens are currently limited to only $5,000 in Roth IRA fun per year. Think of it this way: if you don’t max out your awesome potential this year, you’ll never get that back. Carpe diem! This also explains why such awesome things as the percentage of alcohol in beer and amount of cheese that can be legally applied to a burrito are limited.

Guys: Girls LOVE Roth IRA’s! – Guys, I can’t stress this enough. Girls love money. Roth IRAs are incredible tools at getting lots and lots of money. If you want to get your swerve on in the retirement home, you’d better be maxing out a Roth IRA in your 20′s. Otherwise, you’ll only need a one-seat motor scooter because you won’t be driving any honeys around on your discount 6 volt; not when the guy down the hall with the fat Roth IRA balance is sporting a pimped-out, gold-plated 12 volt. Remember those Bing.com commercials from a few years ago? You’ll be the guy screaming “looooos liiiiiiiiiinks!” (i.e. the one without the girl).

Girls: Guys LOVE Roth IRA’s! – Seriously ladies, no guy likes a gold digger. Having a big, fat portfolio makes you hot, hot, hot.

Roth IRA is into yoga – One of the best things about a Roth IRA is that it is so FLEXIBLE! We’re talking a real yoga master, here. Decide you don’t need the money in your IRA after all? Want to pass it on to your heirs? Roth IRA got your back! No required minimum distributions! Now what about if you have some sort of emergency? Need to pay some medical bills? Roth IRA got your back! You can withdraw your contributions completely tax-free forever and for always! Go ahead and give Uncle Sam the finger. He can’t touch you!

Roth IRA can beat up Traditional IRA – Seriously, it’s not even close. Tax-free income! No required minimum distributions! Traditional IRA is old and busted. Roth IRA is the new hotness. It’s like watching a baby take on the Incredible Hulk. Traditional IRA doesn’t stand a chance.

So go ahead, open a Roth IRA today. All the cool kids are doing it.

Why Do Small Businesses Usually Have Such Crappy Plans?

401ks wouldn’t be so bad if they weren’t so horrible. Sure, some larger employers have great 401k plans full of low-cost active funds and even some choice index funds, but most don’t. Most 401ks are full of expensive, crappy actively-managed funds and numerous fees meant to pass on the cost of operating the plan to participants. This works because while most companies need to at least offer a 401k plan to attract qualified candidates, most candidates don’t know nearly enough about investing to know the 401k is crap. Thus, merely having a 401k is usually enough. The sad reality is that it just doesn’t pay for companies to spend money to offer a good 401k in most cases.

Unfortunately for small businesses, that logic no longer works. In the past, it’s true there were relatively few low-cost ways for small businesses to offer quality low-cost 401k plans to their employees, but not anymore.

Employee Fiduciary

A company that has been getting a lot of attention lately (at least in the circles I run in) is Employee Fiduciary. Employee Fiduciary seems to be a one-stop shop, handling everything from set-up to record keeping to on-going administration for a low fee. The numbers I’ve heard from people who’ve supervised a switch say it only costs a few thousand dollars to set up and they actually advertise the fact that they offer access to every single Vanguard fund (as well as DFA funds if your plan works with a registered DFA investment advisor). Best of all, there are no wrap fees and all charges are 100% transparent to plan participants. What you see is truly what you get, which is so rare in the 401k world these days.

Vanguard Is Re-entering The Small Business 401k Market

When Vanguard got out of the small business 401k market a few years ago, people were understandably disappointed. It seems they are back, however, as Vanguard recently announced the reintroduction of retirement plan services for small businesses. Again, this appears to be an all-inclusive service with record-keeping, access to a wide range of mutual funds (not just Vanguard funds, although those are all offered as well), investment research through Morningstar (of dubious value since you can get the same info with a simple free Morningstar account), and even quarterly statements. The costs of this plan is not completely clear from just reading the website, however, knowing Vanguard you can bet that the fees and charges will all be completely transparent to the plan sponsor and plan participants. After all, an account maintenance fee isn’t nearly as egregious if you’re aware you’re paying it.

Do you have a crappy 401k plan? Why not point your plan’s administrator towards one of the two lower-cost options above? Who knows, maybe you’ll end up saving both yourself and your company a lot of money in the long run.

And if you are a plan fiduciary, are you really giving your employees the best deal possible or are you just cruising out of inertia? It always pays to shop around, especially when doing so could mean tens of thousands of dollars to your employees in retirement.

401k Tax Treatment

Traditional 401k plans are highly advantageous for high-income investors because they allow an immediate tax deduction for the full amount of your contributions. For example, if your income is currently taxed at the maximum marginal federal income tax bracket, it’s unlikely you will be taxed at an even higher rate in the future, even if overall tax rates go up. This is because you probably won’t have (or need) as high an income in retirement as during your working years. Thus, high-income investors are often better off taking the current tax benefit rather than deferring it. For low- or middle-income investors, however, this probably isn’t the case.

The main disadvantage of 401k plans is the way withdrawals are taxed. Specifically, 401k withdrawals are taxed as regular income at your full marginal income tax rate and now the lower long-term capital gains rate enjoyed by taxable investors. Because of this, low-income investors likely to have a higher income in retirement (due to their diligent saving and disciplined investing in portfolio of low-cost index funds) are probably better off paying taxes today in exchange for tax-free withdrawals tomorrow, which is where the Roth IRA comes in.

Roth IRA Tax Treatment

Roth IRA’s (and their new cousin, the Roth 4o1k) trade an immediate upfront tax deduction for tax-free withdrawals at retirement. That’s right, folks. Even though you get no tax benefit for contributing to a Roth IRA today, your earnings grow without the drag of taxes and you will be able to withdrawal from your account 100% tax free. Thus, the Roth IRA is generally a better bet for low- to medium-income investors who expect their incomes to rise over time.

So Which to Choose?

While there are of course a plethora of exceptions to every rule, in general the Roth IRA vs 401k question comes down to two factors: your current income and your expected future income. Thus, it is possible to make a few limited generalizations. It’s probably safe to say that if you’re in the two lowest income tax brackets (10% and 15%), you are almost certainly better off investing in a Roth IRA, particularly if you expect your income to rise in the coming years. If you are in the 28% tax bracket, you are likely slightly better off investing in a 401k versus a Roth IRA, however, the advantage is not a very large one.  For those in the 25% tax bracket, it’s more or less a toss-up.

But You Should Invest In Both Anyway

Now here’s where many people get lost. The fact is, you should probably invest in both a 401k and a Roth IRA (and a taxable account, too!) regardless of what the math says. Why? Because we have no idea what tax rates will be in the future. If taxes go up dramatically, a 401k because relatively less attractive. And if they go down, a Roth IRA becomes relatively less attractive in turn. Having a significant sum saved in several different types of accounts with different tax characteristics will give you the flexibility you need to make the best tax decisions in the future. If you hold all your retirement assets in, say, a 401k plan, you may find you’ve invested yourself into a corner.

* Age-old in the last-few-decades-they-have-existed sense.

In effect, self employed retirement plans allow a small business owner to shelter a higher percentage of his or her income from taxation. The law raised contribution limits and allows a person to roll over money from existing IRA or other retirement accounts. Money put away in these 401ks can be pre or post tax. Money that a self-employed person feeds into one of these accounts will be less-taxed, thereby increasing the amount of money they will be able to access upon retirement.

A self employed 401k plan is intended for businesses with a single employee or co-owners and perhaps their spouses. Even taking on a single employee may cause a person to become ineligible. Freelancers, independent contractors, sole proprietors, or co-owners in a partnership, Limited Liability Company (LLC) or corporation (FREE QuickBooks Simple Start with your LLC or Incorporation filing), if they have no employees, are best served by these plans.

Self employed 401k contribution limits change each tax year based on inflation. In 2009, the maximum contribution amount for a sole proprietor was $49,000, $54,500 if they are age 50 or above. Participants can choose to donate pre-tax, post tax, or a combination of the two. The advantage to making after-tax contributions, otherwise known as tax once and done, is that neither the principal not the growth will be taxed when withdrawn. It can also be beneficial to make a before-tax, or tax-deferred contribution. These will be tax deductible in the year in which you put the money aside and will grow without your having to pay taxes, though you will have to pay taxes upon withdrawal when you retire. The advantage of one over the other depends on the amount you are putting away and your overall financial picture. Specific contribution amounts, limits, and regulations are based on net earned income.

Another interesting change made to some individual 401k plans is that often, a business can take out a tax-free loan from a solo 401k. This can be helpful in many situations, but must be approached carefully, as a misstep in repayment can mean costly penalties.

Self-employed 401k plans are a great option for many people. As always, it is best to consult with a professional in order to determine which plan is right for you and your situation. These plans are intended to help a small business owner plan for retirement and can be very effective if appropriately used.

Advantages And Disadvantages Of Self Directed IRA Accounts

What’s the advantage of holding non-traditional assets in an IRA, you may ask?  For starters, the potential for greater diversification and the resulting superior risk-adjusted returns.  However, there’s a catch:  complexity. You have to use a self directed IRA custodian to oversee the account, and this usually doesn’t come cheap.  Additionally, the IRS has tight rules on what investments are allowed even in these self-directed IRA accounts.  Granted, the non-allowed investment list can put a damper on things, but the ability to invest IRA funds directly in real estate or another alternative asset class is appealing to many investors.

After the IRS, self directed IRA custodians have the final say on whether an investment is allowable or not.  If a non-allowable investment is made, the owner of the IRA stands to be penalized and taxed by the IRS. In addition, it is important to know who is allowed to sell what to the IRA so as to maintain an arms-length relationship at all times. For example, the owner of the IRA cannot sell to the IRA property they already own.  The law is very clear about this and it would pay to research it on the IRS web site and not just take the word of the custodian.

One of the things to be aware of is the high self directed IRA fees charged by most custodians.  Since most self-directed IRA custodians don’t earn transaction fees like normal brokerages do with mutual funds, they tend to charge significant fees for starting and closing the account as will as on-going account maintenance fees.  Other things to look out for in hiring custodians are to make sure they are approved by the IRS. Length of time in the business will give some idea if they understand the IRS codes.  Know what they are licensed for, especially if real estate is being bought in other states beyond your local area.

Should you check into self directed IRA investing?  Probably not.  While there are always exceptions, most investors would be better off in professionally-managed index stock and bond mutual funds. But for those who want a little more control over their money, a self-directed IRA may be worth a look.

Alternative options include almost any type of investment other than traditional publicly-traded stocks, bonds and mutual funds like derivatives, hedge funds and venture capital.  You can look into areas you may not have considered such as gold commodities and real estate.  Also on the rise are self directed Roth IRA plans for those looking to put away funds for retirement.  These include a vast number of investment opportunities like bank CDs, government securities, oil and gas investments, precious metals, private corporate debt offerings, promissory notes, tax liens and trust and mortgage deeds.

However, these may be among investments that have regulations against prohibited transactions, so you need to be careful when you decide upon an IRA option.  Still, these IRA investments open up a wide array of new options for investors.  The rules regarding Roth IRA investment options may vary.  For instance, a self directed IRA can be used in private equities such as joint ventures, leases and lease options, limited liability corporations and private stock offerings.  This way you can invest in tax-deferred holdings not tied to the stock market.  Sometimes the returns on these investments can be great, but as with any investment opportunity, they present some risk.

You have to make the decision about how far you want to diversify your investments.  Just as it is not wise to put all your money in one investment, you may not want to put all your investments in these alternatives.  You can work with a broker or third-party company that can help you decide the best investments for your needs.  In essence, this company becomes a custodian of your IRA, so it must follow the directions you give.

Furthermore, you need to thoroughly research and get to know the alternative IRA investment options available to you.  You want to know all the potential risks involved as well as all the potential returns on your investment.  You also want to find a custodian you can trust to help you with any uncertainties you may have about your investments.  Finding the right investments for your retirement may not be the easiest task, but it is well worth the time.

First, many 401k plans are set up by your employer.  Often times they match the amount of money you invest into your retirement.  Free money from your employer should not be overlooked.  However, there are a few downsides to a 401k with your employer.  Generally, your investment options are very limited.  There many be only a very small amount of funds you can put your money into.  Additionally, some of these funds may contain fees that are detrimental to optimal growth.

Another option is opening an IRA.  The benefit of an IRA is you have complete control on where and who to invest in.  You can balance your funds in many different forms such as stocks, index funds, mutual funds, etfs, bonds, and more.

Taxation is another important factor when choosing your investment option.  In particular a Roth IRA is a form of investing for the middle class.  Your gross income has to be less than $120,000 if you are head of the household or on a single account earnings.  But the main benefit of the Roth is that your money is taxed on earnings and when you qualify for retirement after the age of 59 ½ the money you withdrawal is tax free.

In order to decide between a 401k or IRA is based solely upon a few main points.  Does your employer match your funds contributed to your 401k?  What are your investment options for your 401k?  Do you like having complete control over your investment opportunities?  These are some of the questions you need to ask yourself in order to choose the best way to save money for retirement.

As long as they meet certain income limits and earned income requirements, each taxpayer can contribute $5000 a year in this account (for 2010, adjusted for inflation going forward); married taxpayers with only one income earner can contribute $5000 apiece (again, in 2010). Taxpayers 50 years or older can increase the contribution to $6000, allowing them to save more towards their retirement. This investment can be in collectibles as if real estate, art, antiques, jewelry and coins as long as all the rules and regulations are followed. Most investors choose normal investment strategies of stocks, bonds and currencies.

There is no mandatory age at which this account needs to be used under the Roth IRA withdrawal rules. This account can continue to grow tax-free until the death of the investor and can be transferred to the heirs. Many people are using Roth IRA’s as part of their estate planning and a way to transfer wealth without generating estate taxes. These funds can be withdrawn without penalty when the investor reaches 59 1/2; under special circumstances, these funds are available at earlier ages without penalties.

Roth IRA contribution rules require the taxpayer have earned income to make contributions to this account.  Earned income is income earned from working for someone else or self-employment income. Roth IRA rules exclude income from interest or dividends. This special retirement account was designed to help average taxpayers; the Roth IRA income limitations are generous and allow average taxpayers access to this retirement vessel. These income limits increase every year adjusting for inflation, income tax prepares and accountants have up-to-date information on the current income amounts.

This wonderful investment account for retirement has simple, easy-to-follow guidelines for average US taxpayers. Allowing these funds to grow without taxation and without increasing income limits when withdrawn encourages many people to invest in their own future. Every investor has complete control over when the funds are used.

One consideration is when you plan on retiring versus your current age. With a Roth IRA, taxes are paid before contribution so the money will grow tax-free. This has tremendous benefits in the future when it becomes time to withdraw. However, you won’t have the benefit of using your tax money to grow interest as you do with a traditional IRA. You may also be in a lower tax bracket during retirement but remember tax rates could also increase in the future. There are several online calculators that use a combination of factors (i.e. how many years you have until retirement, future and current tax brackets, whether you can pay the conversion penalty without using current IRA funds) to evaluate whether conversion is your best option. Generally speaking, the older you are, the less sense it makes to convert since you may not have time to make up the money lost during conversion.

Another important factor to this decision is your current tax implications. You are responsible for the taxes on the current money in your IRA. You will pay taxes now on the amount you convert. You can use current IRA funds, but that is not advisable for several reasons. First, if you are younger than retirement age, you will have to pay a 10% penalty. Second, this leaves less money for your savings. Also remember the amount moved in Roth IRA conversions will count towards your current income taxes and could affect your tax bracket. This may or may not affect any other tax benefits you are receiving this year.

Finally, if you are planning on leaving your retirement money to your estate, a Roth IRA may be a better choice than a traditional IRA. One benefit is that you are not required by law to make minimum withdrawals when you reach retirement age, as you are with a traditional IRA, leaving more money to grow tax-free for your heirs. Another benefit is that during conversion you will pay income tax and reduce your taxable estate. This could reduce the estate tax for your inheritors.

There are two main dangers of a self-directed 401k plan. The rules governing these are complex and complicated; if they are not followed completely, the IRS will disallow the 401k or certain portions of it. Individuals managing their own retirement accounts may lose the funds. People with a self-directed 401k are targeted by crooks who want the money; one of the most popular schemes is Ponzi schemes.

A 401k self directed plan allows people to direct their investments personally without being limited to the few pre-selected mutual funds most employers choose to offer.  Many people, dissatisfied with the returns they’ve been getting the past few years, are turning to non-traditional methods of investment. For example, real estate can be held in a self directed 401k plan though either Real Estate Investment Trusts or private partnerships and many investors are pursuing this in pursuit of higher returns.

If the rules are not followed, the IRS can disqualify the 401k or a portion of it with the associated penalties and interest. Life insurance and collectibles are not allowed under this program. Everything else can be used to generate retirement money;  tax liens, deeds of trust, equipment leasing, precious metals, business franchise, stocks, bonds and currencies.  Basically, if you can buy it on an exchange somewhere, you can own it in a self-directed 401k.  However, if the self directed 401k rules are not followed and the IRS determines a nonqualified transaction has taken place, they can disallow the 401k and assess penalties and interest on part or all of the 401k’s assets.

The other major danger is the con artists looking for ways to separate people and their money. Ponzi schemes work well; the people starting in the new investment plan get a great return on their money and brag to their friends and relatives. After a few months or year or two, the amount of new money flowing into the Ponzi scheme slows and the payments are reduced or stopped; the 401k holder has nothing left but a few pieces of worthless paper. Investors directing where the money goes need to be extremely cautious in the investments made. As Will Rogers said, “I am more concerned about the return of investment than I am about the return on investment.”

Many people choose a self-directed 401k as a way to increase retirement income and are successful in the endeavor. There are two major dangers of this plan every investor should be aware of and take steps to avoid. The rules for a self-directed 401k are complicated and need to be followed carefully. Any investment contemplated should be researched carefully to protect this valuable retirement account.