A 401k rollover requires that 20 percent of the amount being rolled over be withheld for taxes, even though the account owner still has to deposit 100 percent of the amount within 60 days to avoid taxes and penalties.

A 401k transfer requires no withholding and moves the funds tax-free.

An IRA rollover gives the account owner 60 days to deposit any rolled over funds into a new IRA account. IRS rules limit each taxpayer to only one rollover per year.

An IRA transfer moves the money directly to a new qualified retirement plan account with no delays and with no one per year limits.

FBO – For Benefit Of

A trustee-to-trustee transfer occurs when you move funds from one qualified retirement plan custodian to another without ever having control of the money. The easiest way for the IRA owner to do this is electronically with the the financial institutions moving the money from one account to the other by computer. However, it isn’t the only way it is done.

Some IRA banks and brokerages send the account owner a check. This is easier on them because they don’t have to interface their account systems with another bank’s account systems. If they make the check payable to you, however, you have taken control of the funds and started a rollover, not a transfer.

It all comes down to three little letters on the check: FBO.

FBO stands for "for benefit of" and it is a method of writing a check to you, without actually writing a check to you.

An FBO check is a third-party check. In this case, the check will be made out to the new IRA custodian, usually a bank or brokerage firm, for your benefit. That makes all the difference in the world.

As the FBO on the check, you do not endorse the check. You cannot deposit the check in your bank account. You cannot cash the check. The check is not made out to you. It is made out to Vanguard or Fidelity or whoever is your new IRA company.

The FBO means that you will eventually be the final recipient of the funds. Merrill Lynch can’t just cash your check either. That would violate the FBO portion of the payee. However, you do not get control of the funds until … they are already in your IRA. Viola! Trustee-to-trustee transfer, and not a rollover!

If you are trying to do a transfer and not a rollover and you get a check from your old 401k company or IRA company that is made out directly to you (without the FBO) return the check immediately. Cashing the check or depositing it is the worst thing you can do because that gives you control over the funds and turns your transaction into a rollover.

Your new retirement plan bank or brokerage should help guide you through the process, but it is always smart to know what is going on before you get started.

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Difference Between a Rollover and a Transfer originally published at Finance Gourmet

401k Withdrawal for Mortgages

Most 401k plans do not allow current employees to withdraw funds from their current 401k. There are two major exceptions.

Remember that all 401k plans are governed by their own specific rules as specified in their plan document. The features described below are allowed, but not required, by IRS rules. As such, they may not apply to your employer’s 401k plan.

A 401k hardship withdrawal allows a current employee to withdraw money from their 401k account for expenses that are “immediate and heavy.”  Immediate and heavy expenses can include payments necessary to avoid foreclosure or eviction, or even expenses associated with purchasing a home. There is no need for an expense to be “unforeseen” when it comes to hardship withdrawals from a 401k plan.

An in-service withdrawal from a 401k is a provision that allows a current employee to withdraw a portion of their current 401k balance. Typically, an in-service withdrawal is used to rollover funds from a current 401k to an IRA or other qualified retirement plan. However, an in-service withdrawal can be used to finance a mortgage if necessary.

Unfortunately, in neither case are the taxes or early withdrawal penalty on 401k plans waived. That means that you will still owe taxes on all withdrawn amounts. For those under 59 1/2 years old, there will also be a 10 percent tax penalty on withdrawals.

401k Loans

Some 401k plans offer loans from their 401k. Essentially, an employee takes a loan from his 401k and then pays it back to the plan over time. 401k loans typically have to be repaid within 5 years, however, 401k loans used to purchase a primary residence are exempt from this requirement.

Be careful with 401k loans however, There are many downsides to a 401k loan.

Exception for First-Time Home Buyers

One of the trickiest thing about financial planning is that there are often rules that apply to only certain types of investments and accounts. This is doubly true in retirement planning where the rules for 401k accounts, IRA accounts, 457 plans and 403b plans all are very similar, but not the same.

Many people have heard of an exception that allows an early distribution from a retirement account to buy their first home. Unfortunately, this first-time home buyer exception for 401k withdrawals doesn’t exist.

However, an IRA allows an early withdrawal for purposes of a first-time home purchase. This rule offers an exemption from the usual early withdrawal penalty for people under 59 1/2 who are taking money out of a retirement account.

The first-time home buyer exemption for early withdrawals applies to IRA accounts, but NOT to 401k accounts.

Withdrawing Money from 401k for Mortgage

Many people wonder when they can take money out of a 401k to help with a mortgage or to buy a home.

The answer is that you can take money out of a 401k at any time so long as you have separated from service (no longer work at that company).

That does not mean that you can take money out of a 401k tax-free.

All withdrawals from a 401k (except for Roth 401k contributions or other non-deducted deposits) are considered income and are subject to ordinary income taxes. In addition, anyone under 59 1/2 years old taking money out of a 401k will be hit with a 10 percent tax penalty.

Be sure to run the numbers before taking money out of your 401k plan for your mortgage. The taxes may be so high that is isn’t worth it.

You may also want to consider using a Roth IRA as an emergency fund.

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How To Use 401k For Mortgage Purposes originally published at Finance Gourmet

Contributions must come from taxable income. In other words, a parent cannot contribute to an IRA on behalf of a child with no earned income.

For couples who file jointly, there is an exception called a spousal IRA.  A spousal IRA allows one spouse to contribute to the other spouse’s IRA up to the yearly IRA contribution limits for 2010 or 2011.

If Bob makes $100,000 and Betty makes $2,000, typically, Bob could contribute $5,000 to an IRA and Betty could contribute just $2,000.  However, if the couple is married filing jointly, a full $5,000 contribution can be made to Betty’s IRA by the couple.

If Betty is over age 50, a catch-up contribution is allowed to spousal IRA as well, so $6,000 can be contributed to the spousal IRA for 2010 and also contributed for 2011.

If One Spouse Is Over 50 Can There Be a Catch-Up Contribution to a Spousal IRA?

A question that often comes up is, what happens if one of the couple is over age 50.  Who can make a catch-up contribution when one spouse is over age 50?

More 2011 Tax Tricks and Tips

The answer is that the age of the IRA account holder is what matters, not who has the regular IRA and who has the spousal IRA.  If Betty is over 50 and Bob is under 50, a catch-up contribution can be made to Betty’s IRA but not to Bob’s IRA, no matter who has the higher income.

Can A Spousal IRA Be a Roth IRA?

A spousal IRA can be a Roth IRA or a spousal IRA can be a traditional IRA.  However, the same rule that applies to all IRA contribution limits is that the annual contribution limit for 2010 and beyond applies cumulatively to both types of IRA account.

For example, if Bob has both a Roth IRA and a traditional IRA, then he can contribute a total of $5,000 across both accounts ($6,000 if he is over age 50.)  Therefore, he can contribute $3,000 to the Roth IRA and $2,000 to the traditional IRA, or any other combination so long at the two IRA accounts together have contributions of $5,000 or less.

However, Bob’s contributions have no affect on the spousal IRA of Betty. Regardless of how Bob contributes to one or both of his IRA accounts, Betty can contribute any combination of the maximum IRA contribution limit to her accounts.

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Spousal IRA Contribution Limit 2011 originally published at Finance Gourmet

Should I convert my IRA to a Roth in 2010?

There is a special 2010 tax trick that allows you to convert your traditional IRA to a Roth IRA and spread the taxes from the IRA conversion out over the next two tax years. That little tax secret expires at the end of 2010, which means that unless you convert your IRA to a Roth before year-end, you can’t lower your taxes with that tax loophole.

Roth IRA conversions are open to everyone regardless of income from now on. However, there are still Roth IRA income limits for contributions.

Is It A Good Idea To Convert IRAs in 2010?

Normally, making a big tax move like a Roth conversion late in the year is not a good tax strategy for most people because it doesn’t give you any time to compensate for it.

For example, if you were to convert an IRA to a Roth IRA in 2011, you will owe income taxes on the amount of money converted, minus any non-deductible IRA contributions you made to the traditional IRA or 401k you are converting to a Roth. Without the special tax rules for 2010, all of those taxes are due when you pay your 2011 taxes (filed by April, 2012). If you converted your IRA early in 2011, you could adjust your tax withholdings on your W-2 at work, or increase your estimated quarterly tax payments if you are a small business owner. Over several months, those small changes would blunt the tax hit of the conversion.

On the other hand, if you converted your IRA near the end of 2011 and generated a $10,000 tax spike, there isn’t much you can do about it. You can adjust your withholdings, but unless it is a big change, it won’t add up to much. Adjusting your W2 to withhold an extra $300 a month starting in February adds up to $3,000 by December. Doing the same thing in November adds up to just $600.

Best Tax Move For 2010 End of Year

For 2010, however, there are special tax rules for IRA conversions that make this year the right time to convert your traditional IRA to a Roth IRA. In fact, few 2010 year-end tax moves can save you more on your taxes.

For 2010 only, you can report the conversion income from your Roth IRA on your 2011 and 2012 tax returns. Spreading the Roth conversion taxes out over two years means you only have to pay half in 2011, and the other half in 2012.

Even if you have the money laying around to pay for your conversion, this is still a smart financial move.

If your Roth conversion generated income taxes of $10,000, you could put $5,000 in a 1-year CD or a high-interest money market account to pay the taxes in 2011, and put the other $5,000 in a 2-year CD or MMA to pay the taxes in 2012. Not only do you not have to worry about the Roth IRA conversion taxes, you can make money on your tax liabilities by deferring them for a year.

If you are planning to convert your IRA in the near future, convert it now before the 2010 tax-year ends. You’ll have plenty of time to plan for the taxes thanks to the special tax treatment you get in 2010.

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Should I Convert My IRA to a Roth IRA In 2010? originally published at Finance Gourmet

That question about retirement planning is very common. I’ve written up short answers, detailed answers, courseware, seminars, flyers, tear sheets, white papers, and who knows what else about what a Roth IRA account is versus a traditional IRA account.

Lately, the questions, while similar have gotten more varied:

• What is the difference between a SEP-IRA and a SIMPLE IRA?
• What is the difference between a Rollover IRA and Traditional IRA?
• What is the difference between a regular IRA and special IRA?

That last one says to me that somewhere out there, there is a popular financial planning book, personal finance speaker, or television show using terminology that is either inaccurate, or poorly understood. Either way, here is a crash course in all the types of IRAs, what they are, how they work, and who they are for.

Regular IRA Accounts – Individual IRAs – Personal IRA Accounts – Normal IRA Accounts

Let’s start at the beginning.

All IRA accounts are, by definition, personal IRA accounts, or individual IRA accounts. There is no such thing as a joint IRA. There is no such thing as an IRA account with more than one owner.

An IRA, according to the IRS, is an Individual Retirement Arrangement. The ‘i’ in IRA stands for Individual. All IRAs are Individual IRAs.

There is no such thing as a regular IRA account or a normal IRA account. However, when most people say such a thing, they mean traditional IRA, which was the first widely known IRA account to exist, and is thus, often considered “normal” or “regular.”

Traditional IRA Versus Roth IRA

If you want an in-depth explanation of how IRAs work then click the link. Otherwise, here is the short, short, version.

A traditional IRA offers (some) people a tax deduction up front when you contribute the money. In exchange, you owe taxes on all money in an IRA when you withdraw it, no matter how old you are.

The same thing applies to 401(k) plans, 457 plans, and 403(b) retirement plans.

A Roth IRA works in reverse. You get no tax deduction for Roth IRA contributions today. However, when you retire, you can take all of the money out of a Roth IRA tax-free, including all interest and capital gains.

If you are licking your lips, then you understand the power of the Roth IRA. Years of tax-free compound interest will generate more money than you could ever possibly save by deducting a few thousand dollars per year on your taxes.

Since no taxes are due on money inside a Roth IRA, the IRS doesn’t care if you ever take it out, so there are no required minimum withdrawals, or RMDs necessary on a Roth IRA.

For traditional IRA accounts, you must begin taking an RMD after age 70 1/2, until you die.

Next: Small Business IRA Plans

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Types of IRAs Guide originally published at Finance Gourmet

The IRS publishes various numbers, tax brackets, and the like for the next tax year during the fall of the previous year, depending upon what the number is, and how it is to be calculated. Maximum salary limits for Roth IRA contributions in 2010, for example, were known well in advance because the number was set in statute to be the same as the high income limitations for 2009 Roth IRA contributions.

However, starting in 2011, the income limitations for Roth IRA contributions are indexed for inflation. In other words, the IRS must wait until it has the proper inflation index calculation according to its rules and regulations. Then, it must apply that inflation amount to the Roth IRA contribution limits for income and compute new Roth IRA income phase-out limits and the maximum salary allowed to make Roth contributions at all.

These numbers will not be available until later in the year. When we get the new 2011 Roth IRA limits, we will pass them on to you.

Don’t forget, the law removing the salary cap for converting a traditional IRA to a Roth IRA has been made permanent, so you can covert your IRA in 2011 regardless of how high your MAGI is.

New Roth IRA Income Maximum Salary Limits for 2011

With all of that being said, we can actually make some educated assumptions.

Inflation has been low to non-existent for 2011. That means that Roth IRA income limits will likely not be going up for the 2011 tax year, or that any increase will be very small.

For your advanced tax planning strategies, you can continue using the same Roth IRA numbers from 2010 taxes for your 2011 taxes. There may be some small adjustments necessary when the final IRS numbers come out, but you can safely assume that any calculations based on the 2010 tax-year will be fairly close.

Note: The same information applies to traditional IRA limits for 2011 as well.

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2011 Roth IRA Income Limits originally published at Finance Gourmet

If you qualify for a deductible contribution to a traditional IRA either by meeting the income limits, or because you don’t have a retirement plan provided for you at work, then it can give you a much lower tax bill and you get to keep all of the money.  How many other deductions can claim that?

If you contribute $5,000 to your 2008 IRA, you would get a $5,000 tax deduction on your 2008 taxes.  Now, that is a deduction, not a credit, but in the 30% tax bracket, that works out to a $1,500 savings on your taxes.  For many tax payers, that is the difference between oweing money and getting a refund. You get an even bigger savings if you are a high income earner because your deductions are more valuable due to your high tax bracket.

It gets even better.  If you are married filing joint, and you can make a similar deductible contribution for your spouse, that’s $10 grand that you can sock away, and now you will save $3,000 on your taxes!

If you have an emergency fund, or some cash sitting in a brokerage account after selling some investments or real estate this year thanks to the stock market downturn, this is a huge opportunity to both earn some money on your cash ($3,000 savings on your taxes is like earning $3,000 on your $10,000 investment) and to get future growth and earnings tax defered.

You have until April 15 to mail your contribution to your broker, so there isn’t necessarily any rush, but you don’t want to be caught up opening a new IRA account if you don’t already have one.  So, open an IRA account NOW, and then worry about getting the $5,000 or $10,000 into it later.

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1. Quick 2008 Tax Tip to Make Things Easier
2. 2008 Last Minute Tax Filing Tips

Last Minute Tax Tip – Make Your 2008 IRA Contribution Now originally published at Finance Gourmet

Your tax-rebate is part of the [tag]economic stimulus[/tag] package recently passed by Congress and signed by the President. You will get up to $600 per person or up to $1200 per joint couple. You also will get up to $300 per child. That money will be a tax free payment from the government. So how do you collect your bonus?

If you qualify for a deductible traditional [tag]IRA[/tag] contribution in 2008 and you put your rebate into a traditional IRA then you will get to deduct the amount of the contribution. So, if you are in the 30% tax bracket, it’s like getting a 30% bonus in the form of a deduction on your 2008 taxes (which you will file in 2009). If you are self-employed you can accomplish the same thing using your SEP or SIMPLE IRAs.

Let’s say a joint couple with two children put their rebates into traditional IRAs. That’s $1200 for the couple + $600 for the children for a total of $1800. By putting the $1800 into their IRAs they will be able to deduct $1800 from their 2008 taxes (which they will file in 2009, don’t try and get too clever and do it this year). At the 30% tax bracket that works out to a savings of approximately $540! Instead of a $1800 gift from the government, they get $2,340! Wait, it gets better. If that $1,800 grows at 8% for the next 25 years, they’ll have an extra $12,327. I don’t do my math this way, but one could say that it is like getting $12,000 from the government.

If you don’t qualify to make a deductible contribution to a traditional IRA (usually because you have a retirement plan at work and make more than $62,000 for single filers or $103,000 joint) you might still be able to get a bonus. Many states (but not all) offer a state income tax deduction on contributions to the state sponsored [tag]529 plan[/tag]. In Colorado, for example, every dollar contributed to one of the Colorado 529 plans can be deducted from your state income tax. At a tax rate of just over 4.6% that same $1,800 in our example gets a much smaller, but still nice $83 bonus. Not to mention the extra money their children will have for college. Make it a double bonus situation by having their grandparents contribute their rebates. The grandparents can either setup their own 529 plans for your children (you can have as many as you want) if they want the tax break, or the can give the money to you and you can increase your tax break (an especially good idea if Grandma and Grandpa live in a state where there is no tax break for 529 contributions.)

If you don’t have children and you don’t qualify for a deductible contribution then the easy bonus option isn’t for you, but you can still come out ahead. If the couple above put their $1,800 into a Roth IRA, they would get that same $12,000. The difference? They’re money will come out tax-free. So, they will get tax-free money from dollars they NEVER paid taxes on! An opportunity like that doesn’t come along very often.

In the coming days, look for detailed articles on www.financegourmet.com on how to open Traditional IRA, Roth IRA and 529 Plan accounts.

By the way, there is some mis-information out there about the rebates. These rebates are NOT taxable, and they do NOT reduce your refund next year. Read this http://www.irs.gov/newsroom/article/0,,id=179181,00.html on the IRS official web site and you’ll see both of these issues directly addressed right from the horse’s mouth. Or, you can read this copy and paste of the exact words:

Q. Is my stimulus payment taxable?

A. No. You will not owe tax on your payment when you file your 2008 federal [tag]income tax[/tag] return. But you should keep a copy of the IRS letter you receive later this year listing the amount of your payment. You will need to know this amount next year when you fill out your 2008 return.

Q. Will the payment I receive in 2008 reduce my 2008 refund or increase the amount I owe for 2008?

A. No, the stimulus payment will not reduce or increase your refund when you file your 2008 return.

Just FYI:

My current list of states that offer at least some kind of deduction for 529 plan contributions is: Arkansas, Colorado, Connecticut, District of Columbia, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, Wisconsin.

More states are adding it each year, so check with your state if they aren’t on the list.

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How to Get a Bonus On Your Tax Rebate! originally published at Finance Gourmet

Here in Colorado you get a state [tag]income tax[/tag] deduction for every dollar you put in a Colorado 529 plan. Although this varies from state to state, many states have some sort of [tag]tax deduction[/tag] available if you are using the in-state plan (which is why your advisor should have gone over in detail with you about your state plan before he put you in another state’s plan. If he/she didn’t, you might have a bad advisor.)

How awesome is this? You get money from the federal government as part of this stimulus package. That money is not only free money, but it is also tax-free money. So, if you put that money somewhere that will give you a tax break, you are making even more money! Here in Colorado it is like getting a 4.5% bonus on your rebate. You get the rebate plus 4.5% more back in the form of dollars off of your 2008 [tag]taxes[/tag]. Plus, your kids have more money for college.

If you qualify for a deductible IRA contribution, put the money in there and you can get a federal tax deduction! If you are in the 30% tax bracket, that’s like getting an extra 30% on your rebate which you will get as money off of your 2008 taxes.

No kids and don’t qualify for a deductible IRA? You can still contribute to a [tag]Roth IRA[/tag]. No, you won’t get a bonus like above, but you get tax-free growth on money you never paid taxes on in the first place. Not a bad deal there either.

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1. How to Get a Bonus On Your Tax Rebate!
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Put Your Tax Rebate In an IRA or 529 Plan – GENIUS! originally published at Finance Gourmet