401k

‘Never invest in a business you cannot understand.’
-Warren Buffett

If your company offers a 401k, use it. This is a great tax deferred investment tool made even better if your company matches your investment. Still there are things to watch out for says money.msn.com.

1. How much is the employer really matching?
Some companies require a vesting period of 3-5 years and won't match a penny until you've worked for them that long. They may show matching dollars in the quarterly statements but they reserve the right to take it back if you leave the company too soon. Also find out if there is a maximum your company will match or if the matching ratio is not 1-1.

2. You may borrow against your 401k BUT...
If you quit, are laid off or fired, you may be required to pay back the 401k immediately. Not what you want to hear when unemployed.
And if you can not pay it back? Then the IRS counts the loan as an early withdrawal with taxes and 10% penalty.

3. If you 401k is less then $5000 when you leave the company...
the company has the option to cash out the plan instead of holding on to it or rolling it over to a new 401k for you. If cashed out you have 60 days to find a new 401k or IRA or the IRS will impose tax penalties for early withdrawal.

4. Your 401k funds might charge a load
If your company is small, the investment house managing the 401 might charge a front-end load, often 4%, for every investment.  This is not acceptable - especially since the same company will also be charging administrative fees to your account. I try never to buy a load fund. Lobby your employer to move to Fidelity or Vanguard or similar 401k provider which do not charge loads.

5. Avoid tax-advantaged investments in a 401k
A 401k is already tax deferred. There's no reason to use it to buy a fund whose goal is to minimize taxes. The goal should be to make the most money you can in the 401k and pay the taxes on it at a lower tax bracket when you've retired.

Bottom Line

Watch out for the hidden fees and gotchas when investing. Read and understand what you're buying.

Roth IRA's in 2010

"If stock market experts were so expert, they would be buying stock, not selling advice."-Norman R. Augustine

In 2010 the law for Roth IRA's changed (for the better). But you ask, what the heck is a Roth IRA?

With a normal IRA you put in "tax-free" money now and pay taxes when you cash it in during retirement. You get a credit on current taxes for the money deposited and will pay taxes on the money invested and all the interest earned at time of withdrawl. Hopefully you'll pay from a lower tax bracket in retirement.

With a Roth IRA you invest money and get no up-front tax credit. You're investing after-tax dollars. But once invested, there are no further taxes (provided you follow the rules and wait until age 59 1/2, have a disability, or are a 1st time home buyer). You can withdraw the money and interest tax free!

This may sound like 6 one day, half-a-dozen the other, but Roth has some clear advantages.

1. You can withdraw the principal (but not the interest) early if you're strapped for cash.

2. You can invest in Roth and have a company 401k at the same time

3. With a normal IRA you must withdrawl by age 70 1/2 or face a 50% penalty. With Roth there is no age limit for required withdrawls.

Bottom Line

So what is the good news for 2010? In prior years there were restrictions on Roth IRA's for anyone earning more than $100,000. Now those restrictions are lifted and anyone can convert a normal IRA to a Roth (by paying the taxes now).

Why convert now? If you're unemployed part of the year, you'll be in a lower tax bracket and will pay less tax during conversion. If the stock market collaspe took a big bite out of your IRA, there will be less money to convert and tax.