The 401k limits and IRA limits will remain the same in 2010. I highlight the Roth IRA and the Roth 401k because they are my favorite retirement plans; limits for traditional 401ks and IRAs will also remain unchanged in 2010.

2010 Contributions

Here are the contribution limits for each:

You can make your 2010 contributions as early as January 2 for the whole year. If you contribute 2010 Roth IRA money between January 2 and April 15, be sure to designate calendar year 2010 if you have already contributed the maximum for 2009.

2009 Contributions

You can still make 2009 contributions before the end of the year for your 401k. 2009 IRA contributions can be made until April 15, 2010.

See the 2009 Roth 401k and Roth IRA Limits for eligible contributions.

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When I told you about my struggles with my Solo 401k contribution at Fidelity, Lee suggested I look at the SEP-IRA, which made us take a step back and relook at all the available plans; the Solo 401k, the SEP-IRA, and the SIMPLE IRA.

All three plans are available to sole proprietors, partnerships, and C or S corporations.

I promised to share my perspective after we highlighted each plan. Here’s my take:

When You Want a SEP-IRA

There are a few instances that a SEP-IRA is your obvious choice:

Do you have employees? If the answer is yes, you’re going to want to open a SEP-IRA. You cannot open a Solo 401k if you have employees; it’s only for the business owner and spouse.

Is the calendar year over? If the answer is yes, and you still want to make a contribution for the prior tax year, the SEP-IRA is the way to go. You can open and fund a SEP-IRA until the tax filing deadline, plus extensions. In contrast, a Solo 401k has to be established by December 31, but can be funded until the tax filing deadline, plus extensions. If you are planning for next year, act now, and you can establish either plan.

When You Want a Solo 401k

Are you planning Roth conversions? A benefit of the solo 401k is that you won’t have to include the contributions in the pro rata calculation. However, a SEP-IRA will be included in the Roth IRA Conversion calculation.

If you have any plans to make Roth conversions on non-deductible IRA contributions, steer clear of the SEP-IRA, or you’ll be increasing your tax bill on the conversions.

Do you want to maximize your deferral? The Solo 401k is the big winner. Here are the contribution limits:

• 2009 Solo 401k Limits: $16,500 employee deferrals ($22,00 age 50 or older) plus 25% of compensation; maximum of $49,000($54,500 age 50 or older).
• 2009 SEP-IRA Limits: 25% of compensation; maximum of $49,000.

While the limits appear similar, each having a $49,000 maximum, they actually aren’t. Let’s take a closer look at the calculations.

Calculating Maximum Contributions

To calculate the 25% profit sharing contribution, you need to account for the deduction of the plan contribution in the formula in addition to half the self employment tax. So a 25% contribution rate, looks like this:

(Net income – 1/2 self employment tax – profit sharing) * .25 = profit sharing.

It’s actually the same as a 20% self employed rate, which some people prefer to use:

(Net income – 1/2 self employment tax) *.20 = profit sharing.

Here’s an example:

Let’s say your net income is $20,000. Half of your self employment tax is $1412.96. So your profit sharing contribution is $3717.41.
($20,000 – $1412.96 – $3717.41) * .25 = $3717.41
or ($20,000 – $1412.96) * .20 = $3717.41

For the solo 401k, you can defer 100% of your compensation. To calculate your compensation use the prior formula: (Net income – 1/2 self employment tax – profit sharing). ($20,000 – $1412.96 – $3717.41) = $14869.64. Add the profit sharing contribution to the employee deferral ($14869.64 + $3717.41) = $18587.05.

Total solo 401k contribution: $18587.05
Total SEP-IRA contribution: $3717.41

As you can see, this is where the solo 401k is the big winner. If you want to skip the hand calculations, you can use a calculator to determine your maximum contribution.

Simple IRA?

What about the SIMPLE IRA? I didn’t include it, since the contribution limits don’t even come close to the Solo 401k or the SEP-IRA. If you have employees, and want to let them make contributions, it might be a good choice, however, at that time, you’ll want to compare the SIMPLE IRA to a 401k.

Action Plan

I decided to stick with the Solo 401k since the plan contributions are so much higher and our goals are to defer the maximum amount of money. In addition, we’re planning Roth conversions in 2010, so I want to minimize our taxes for the conversions.

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Solo 401k Overview

A Solo 401k combines the characteristics of a regular 401k plan with a profit-sharing plan. A Solo 401k can only be established by self employed individuals or small business owners with no other employees or just one employee – the owner’s spouse. For most people with no employees the Solo 401k will maximize the allowable contributions you can make to a retirement plan in a given year.

Solo 401k Basics

• Coverage: A Solo 401k is only established for the business owner and the business owner’s spouse if he is an employee.
• Contributors: Solo 401ks are funded by both the employee and the business. The employee contribution is deferred compensation while the business contribution is a portion of profits.
• Contribution limits: In 2009, an employee can defer up to $16,500 to a Solo 401k. Employees who are 50 or older at the end of the year may make a “catch-up” contribution of an additional $5,500. The total amount allowed is reduced by any contributions to a 401k, 403(b), or 457 at another employer. In addition to the employee deferral limit, the business can make a contribution of up to 20% of your total income (25% of earned income, which is total income reduced by self-employment taxes). The total employee and employer contributions must not exceed $49,000 in 2009, or 100% of your income.
• Deadlines: You must establish the plan by December 31 of the calendar year for which you first want to contribute. Contributions, however, can be delayed until the tax-filing deadline for that year, including extensions. For most people this is October 15 of the following calendar year.
• Taxation: Both individual and business contributions to a Solo 401k are deductible from the employer’s income, and are not included as employee income at the time of the contribution. Taxes on withdrawals are explained below.
• Vesting: There is no vesting period for Solo 401k contributions. Note that this is different from most tradtional 401k plans.
• Withdrawals: Solo 401k withdrawals are subject to the same withdrawal rules as regular 401ks. All withdrawals will be subject to income tax. Penalties may apply if taking withdrawals before the age of 59 1/2. A unique feature of Solo 401ks as opposed to other self-employed retirement options is that loans may be available depending on how the plan is set up.

Special Characteristics

• Once the plan reaches $250,000 in assets, you must complete a Form 5500.
• A Solo 401k can accept rollovers from many other retirement plans, making it easy for you to consolidate accounts in one place before beginning withdrawals in retirment.
• Contributions are discretionary, so you can choose not to contribute in years where your business has low revenue and increase contribution if you want to minimize taxes.

Establishing a Solo 401k

There are no regulations governing the establishment of a Solo 401k. You can open one with most major financial institutions, including Vanguard and Fidelity.

Solo 401k Pros

The biggest advantage of a Solo 401k is that it typically allows for the largest contribution when compared to other self-employed plans.

Solo 401k Cons

You cannot use a Solo 401k if you have any employees other than a spouse.

Stay tuned Madison’s wrap-up of this series: an analysis of which self-employed retirement plan is best, in Solo 401k Versus SEP-IRA.

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SIMPLE IRA Overview

SIMPLE stands for Savings Incentive Match Plan for Employees. SIMPLEs were established to encourage small businesses to open retirement plans without the expense of maintaining a qualified plan.

Only businesses with less than 100 employees are eligible to establish a SIMPLE. A SIMPLE can actually use an IRA or a 401(k) to “hold” the contributions, but we are focusing only on the SIMPLE IRA since the 401(k) is rarely used. SIMPLE IRAs are easy to establish, have no annual filing requirements, and relatively few administrative expenses.

SIMPLE IRA Basics

• Coverage: SIMPLE IRAs must cover all employees who either made $5,000 in two preceding calendar years or are expected to make $5,000 in the current calendar year.
• Contributors: SIMPLE IRAs are funded by both employees and employers. Employees contribute by deferring a certain percentage of their income. Employers can choose to either match employee contributions or contribute to all eligible employees, regardless of participation. Employers who match contributions must generally match 100% of contributions up to 3% of employee compensation, with some exceptions. Alternatively, employers can contribute 2% of compensation to all eligible employees.
• Contribution limits: In 2009, the maximum SIMPLE IRA contribution per employee is $11,500, including the employer match. Employees who are 50 or older at the end of the year may make a “catch-up” contribution of an additional $2,500. The catch-up amount is reduced by catch-up contributions to a 401(k), SEP-IRA, or 403(b).
• Deadlines: Employers must establish SIMPLE IRA plans by October 1 of the calendar year that employees can first contribute. Employer contributions, however, can be delayed until the tax-filing deadline for that year, including extensions. Note that this only applies to the employer match portion. The employer must forward compensation deferred by employees no later than 30 days after the end of the month in which it was deferred (e.g., April 30 for March contributions).
• Taxation: Both employer and employee contributions to a SIMPLE IRA are deductible from the employer’s income, and are not included as employee income at the time of the contribution. Taxes on withdrawals are explained below.
• Vesting: There is no vesting period for SIMPLE IRA contributions. An employee has access to 100% of the contributions as soon as they are made.
• Withdrawals: SIMPLE IRA withdrawal rules are the same as those for traditional IRAs. Employees can withdraw at all times, including while they are employed. Withdrawals will be subject to ordinary income tax regardless of age or reason for withdrawal. In addition, SIMPLE IRA withdrawals will be subject to a 10% penalty if the account owner is younger than 59½. Some exceptions to the 10% penalty apply. If it is applicable, the 10% penalty increases to 25% if withdrawals are made within the first two years of participating in the SIMPLE IRA.

Special Characteristics

• Employers who maintain SIMPLE IRAs cannot maintain any other type of retirement/deferred compensation plan.
• SIMPLE IRAs can be rolled over to other SIMPLE IRA accounts for the first two years of plan participation without tax or penalty. After two years, you can do a tax- and penalty-free rollover into an IRA, qualified plan, 403(b), or 457.
• Airline pilots, nonresident aliens, and union employees who have separate retirement agreements can be excluded from the coverage requirements noted in the “Coverage” section above.

Establishing a SIMPLE IRA

To establish a SIMPLE IRA, an employer must only file a Form 5304 SIMPLE or a Form 5305 SIMPLE. The first is for employers who allow participants to select an institution to hold their SIMPLE IRAs, while the second allows the employer to select the institution for all employees. Any financial institution that offers traditional IRAs should be able to set up SIMPLE IRAs.

SIMPLE IRA Pros

The biggest advantage of a SIMPLE is that it allows both employers and employees to save in a manner similar to a qualified plan without extensive set-up or administrative fees.

SIMPLE IRA Cons

Because a SIMPLE IRA requires contributions to all employees, it is not a good plan for someone with employees who only wants to beef up his or her own retirement savings. The SIMPLE IRA has a lower contribution limit than any other retirement plan. If your small business is the sole source of your income and you make more than a few thousand dollars, a SIMPLE IRA will severely limit your ability for tax advantaged retirement savings.

Stay tuned for more in the series, including an explanation of Solo 401ks, and Madison’s analysis of which is best, in Solo 401k Versus SEP-IRA.

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SEP-IRA Overview

SEP stands for Simplified Employee Pension. A SEP uses an IRA to “hold” the contributions, is easy to establish, and is often more flexible than a qualified plan. It is ideal for sole proprietors and small businesses.

SEP-IRA Basics

• Coverage: If you are a business owner and contribute to an SEP-IRA plan in a given year, you must make contributions on behalf of all employees who are 21 or older, have worked for three years or more, and have earned more than $500 during the year.
• Contributors: A SEP-IRA is funded by employers only – employees cannot contribute.
• Contribution limits: In 2009, the maximum SEP-IRA contribution is the lesser of 25% of an employee’s compensation or $49,000. The maximum contribution is reduced by any employer contributions to a profit-sharing plan, and vice versa – together, employer contributions to a SEP-IRA and a profit-sharing plan are capped at the lesser of 25% of compensation or $49,000. For self-employed business owners, “compensation” refers to earned income, which excludes self-employment taxes and contributions to other employees.
• Deadlines: A SEP-IRA can be established and funded for a given calendar year up to the tax-filing deadline for that year, including extensions. For sole-proprietorships and partnerships, the final extension date is October 15 of the next calendar year, so you can establish and fund a SEP-IRA for 2008 as late as October 15, 2009.
• Taxation: Employer contributions to a SEP-IRA are deductible from the employer’s income, and are not included as employee income at the time of the contribution. Taxes on withdrawals are explained below.
• Vesting: There is no vesting period for SEP-IRA contributions. An employee has access to 100% of the contributions as soon as they are made.
• Withdrawals: Because SEP contributions are made to IRAs, the withdrawal rules are the same as those for traditional IRAs. Employees can withdraw at all times, including while they are employed. Withdrawals will be subject to ordinary income tax regardless of age or reason for withdrawal. In addition, SEP-IRA withdrawals will be subject to a 10% penalty if the account owner is younger than 59½. Some exceptions to the 10% penalty apply.

Special Characteristics

• SEP contributions are made to traditional IRA accounts and cannot be made to Roth IRA accounts. Once contributions are made, the account can be rolled into a Roth IRA – the rolled over balance will be subject to income tax.
• Employer contributions to SEP-IRAs can be made at the employer’s discretion, meaning that an employer can establish the plan without being obligated to fund it each year.

Establishing a SEP-IRA

To establish a SEP-IRA, an employer must execute a formal, written agreement to provide benefits to all eligible employees, and inform employees of that agreement and the account establishment. An individual SEP-IRA must then be established for each eligible employee. Any financial institution that offers traditional IRAs should be able to set up SEP-IRAs.

SEP-IRA Pros

Sole proprietors or employers with just a few employees love SEP-IRAs because they are easy to establish and require little effort from year to year. The ability to choose whether or not to make contributions is also ideal for business owners with highly variable income from year to year. Finally, the late contribution deadline makes it easy to use a SEP-IRA to lower your tax bill after you calculate it.

SEP-IRA Cons

Because a SEP-IRA requires contributions to all employees, it is not a good plan for someone with employees who only wants to beef up his or her own retirement savings. It is also not good for businesses with employees that want to be able to contribute to their own accounts. Finally, the SEP-IRA may not maximize savings opportunities for business owners because of the way self-employment income is treated.

Stay tuned for more in the series, including an explanation of SIMPLE IRAs, Solo 401ks, and Madison’s analysis of which is best, in Solo 401k Versus SEP-IRA.

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It seems that keeping his house and saving a large amount for retirement are in direct conflict with each other. Marke would like some help trying to figure out what to do.

Background

• Age 59
• No retirement savings.
• Home has lost $250k in equity.
• Mortgage payment $1,700 per month.
• Owns a small vacation cabin with no mortgage.

Options

Marke is trying to decide which option will work best. Of course there are many more details than those provided here. However, many of those are emotional aspects, like quality of living, that only Marke will be able to answer himself.

1. Stay in Home

If Marke stays in his house, he’ll pay it off in 10 years. He’ll spend $204,000 in payments ($1700 x 120 months) over those next 10 years. He’ll have to work diligently to save for retirement in other areas of his budget, which may or may not have a big impact on the amount he’ll be able to save.

2. Sell Home and Save for Retirement

Since Marke has lost considerable equity in his home, if he sells it, he will break even after paying off the mortgage. However, if he sells the home, he’ll plan on saving the $204,000 that he would have spent on mortgage payments for the house and save it for retirement. I’m guessing he’ll live in the cabin if he chooses this route. Otherwise, he’ll have to subtract the cost to rent another place out of the money now earmarked for retirement.

3. Rent the House

The last option he is considering is to rent out the home with a negative cash flow, live in the cabin and hope to sell it someday. Unfortunately, this option probably won’t help him generate any additional funds for retirement, but it might allow him to live in the house after it’s paid off.

What Do You Suggest?

Let’s help Mark out! I’ll highlight your suggestions and add mine in a future article.

Should Marke keep his house? What’s more important saving for retirement or owning a house?

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My wife and I both opened a Roth IRA account with $4,000 each. Can we add more to our IRA before the end of the year? – Mac

The 2008 Roth IRA Limit is $5,000 (or $6,000 for age 50 and over). Assuming you meet the eligibility requirements, you can each put additional money in your IRAs for 2008. If you want to plan ahead for next year, the 2009 Roth IRA Limits and 2010 Roth IRA Limits remained the same.

Can I contribute to the maximum limit, for both the 401K and the IRA? Or are there some limits if you have each kind of account? – Rebecca

Yes, you can contribute to both a 401k and an IRA. The limits will be based on your income, but you can have both. I usually contribute to both each year.

I am a current college student and I want to open up a Roth IRA, but don’t think I will have Adjusted Gross Income of more than $2500 for 2008. What happens if I fund it to the ‘maximum’ amount of $5000 with money I have just sitting (and not growing) in my checking account. – Scott

Unfortunately, you can only contribute as much to a Roth IRA as your earned income (or a spouse who has earned income). Here is a helpful list to determine what Qualifies as Income for IRA Contributions. Money sitting in a checking account will not count.

Can you withdraw from your Roth IRA before age 59 1/2 without a 10% penalty? -Mo

You can. I covered some of the ways to do so in How to Make Early Roth IRA Withdrawals. Although please note the disclaimer that the withdrawal methods are only explained as part of a plan to access funds for early retirement. I don’t recommend tapping your retirement funds for other purposes!

What if I earn too much to contribute to a Roth? – Mike

You can contribute to a nondeductible IRA and convert it to a Roth IRA in 2010 when the conversion limits disappear. Although the conversion will be taxable, since you must convert a pro-rata amount of your traditional and nondeductible IRA. (For those who want to convert just their traditional IRA to avoid the tax, there is a Roth IRA Conversion Strategy to Avoid Taxes.)

My daughter is 14 now. If I open a Roth IRA account for her in her name now, how will it affect her when she is going to apply for college financial aid or scholarships? – David

As long as she has earned income, there is no age restriction for a Roth IRA. In fact, I plan to do the same once my children are earning some income. For more information see Roth IRAs for Minors.

As far as financial aid, if she doesn’t make any withdrawals during her college years, it shouldn’t affect her financial aid. The money in a Roth IRA is not counted as an asset, although any withdrawals during the year would be. Although, from what I’ve read it looks like this is the federal financial aid standard. If she were to apply to a private school, they may have their own formula for determining aid which may or may not include retirement accounts.

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The 401k limits go up in 2009, but the IRA limits remain the same. The Roth IRA and the Roth 401k are two of my favorite retirement plans! (I know it’s corny to be in love with a retirement plan… but it’s the truth!)

2009 Contributions

Here’s the contribution limits for each:

2009 contributions can be made as early as January 2 for the whole year. If you contribute 2009 Roth IRA money between January 2 and April 15, be sure to designate calendar year 2009 if you have already contributed the maximum for 2008.

Get an E*TRADE IRA. No-fee, no minimums. Get 100 Commission-free Trades.

2010 Contributions

Planning for next year? See the 2010 Roth 401k and Roth IRA Limits.

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1. Uncover Hidden Administrative Fees. It’s becoming more common that employees are paying the administrative costs for 401k plans, but the fees are sometimes hard to find. Check your transaction history for removal of partial shares. If you didn’t sell anything, it’s probably an administrative fee. In addition, you can also check out the expenses of your plan in the annual Form 5500 filing, which is available to the public.

2. Look for In-Service Withdrawal Options. Check your summary plan document. If you are allowed to make in service withdrawals, you can roll your 401k money to an IRA while you are still working. I’ve done this in the past to contribute extra money to my Roth IRA. In addition, it’s great for anyone who is getting the shaft in their 401k.

3. Check for a Self-Directed Brokerage Account. If your 401k account options are terrible, look for the option to manage your own retirement account. In exchange for agreeing to indemnify and hold harmless your employer, you get access to invest in a huge set of choices. My husband has this option at the University and it opens up the plan to over 3,000 funds.

4. Sign up for Automatic Increases. This option is becoming more popular on plans of all sizes. If you can’t max out your plan now, but want to keep increasing your contribution, select this option and let your administrator automatically increase your deferrals on a scale that you choose. Coordinate it with your annual raises and you won’t even notice the difference.

5. Claim your Saver’s Credit for Retirement Savings Contributions. Tax credits up to $1,000 ($2,000 for married couples) are available for contributing to your retirement plan. Eligibility guidelines and income limitations are in IRA Publication 590. The credit is in addition to the ability to contribute pre-tax to a 401k or deduct your contribution to a traditional IRA. If you missed this credit in the past, you can amend your old tax returns to get your credit back.

6. Check Access to Institutional Funds. If you work for a large employer, chances are you might have access to some funds that you couldn’t use as an individual. For example, we have access to the Vanguard Institutional Index Fund with an expense ratio of 0.025%. However, the minimum investment is $200,000,000. With fees like that, it’s sometimes worth it to roll IRA money INTO your 401k.

7. Coordinate with Your Spouse. If you aren’t going to max out both your plans, contribute to the plan that gives you a better deal (after getting the match on both plans). Look at investment options, expense ratios and fees. My husband has access to a 457 plan; it’s a better plan than a 401k and 403b due to the liberal withdrawal guidelines, so we direct all our contributions there first. Some may not feel comfortable commingling your retirement planning with your spouse, but we share all our money. (In addition, we live in a community property state, so even if we don’t want to, we share our money.)

Do you have other tips and tricks for maximizing your retirement plan? Share your thoughts in the comments.

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At age 29 I left the corporate world behind and I’m embarking on a new chapter in my life: spending more time with my kids (ages 1 and 2), following my passion (teaching others about personal finance), and an overall life of freedom not tied to a JOB! Here’s how I did it (and how you can too!)

Leaving the Rat Race at Age 29

1. Save Early. I started my first IRA at age 16 based on advice from my mom. Proof that teaching your kids about money is very powerful.
2. Save aggressively. I saved like crazy after I graduated from college, often more than 50% of our salary. Once our money was compounding really well we began decreasing our contribution percentage without much effect on the portfolio.
3. Use low cost, indexed investments. We used a total market asset allocation with low-cost index funds instead of hot tips, speculation, or ultra risky investments. Our current portfolio holdings have an overall 0.148% expense ratio.
4. Work the tax system. Volunteering to do other’s taxes helped me learn the ins and outs of the tax code. Knowing the rules helps to be able to work them in your favor and streamline your tax preparation time.
5. Organize yourself. Staying on top of our accounts, whether it’s calling on a mistake, organizing 181 accounts or monitoring a credit report helped to maximize rewards and minimize penalties.
6. Align your financing with your goals. When we were busy working with stable careers, we financed with an adjustable rate mortgage to get the best rates. Now that we’re ready to settle down, we refinanced with a somewhat more stable product.
7. Prepare for retirement withdrawals. In addition to refinancing, I prepared for my lifestyle by creating CD ladders for short term money needs, developing a plan to handle irregular paychecks, and planning for my new retirement lifestyle cash flow.
8. Maximize tax deferred and tax free options. We maximized the use of tax advantaged accounts including the public employee’s option to double-dip on retirement. Whenever a new plan was a available (like the Roth 401k) we took advantage of it.
9. Learn from the best. I’ve spent a lot of time reading about others who retired early. The Early Retirement Forums, Retire Early Home Page, and the Motley Fool Retire Early forum were my main hangouts. I’ve probably read almost every thread in each one!
10. Read the best. In addition to the online resources, my favorite early retirement books are Your Money or Your Life by Joe Dominguez and Vicki Robin and Cashing in on the American Dream by the Paul Terhorst. The latter is currently out of print, but you can find it at the library or get a used copy.
11. Get paid what you are worth. Research and negotiation is a big factor in how much you are paid. In addition, you need to take advantage of the money saving opportunities on the job.
12. Enjoy life. We traveled, had fun, and didn’t live like penny pinchers. In addition, I always tried to maintain a healthy life mix pie chart.
13. Don’t underestimate a college education. Getting a marketable well paying degree was a key part of my success. In addition, going to grad school almost doubled my salary. I can’t put enough emphasis on a solid education. If you are a new grad here are 10 financial tips and 29 more financial tips to get you headed in the right direction.
14. Set goals. The 4% withdrawal rate gave me an idea early on about how much I would need to save. I set yearly goals to meet this number.
15. Measure your goals. Each year we compared our portfolio to our goals and made sure we were on track for our dollar plan. We also did some end of year tax planning and made a finance checklist.
16. Be frugal, but not too frugal. We try to save money when it comes to some things, like eating out for less. But I also know where to draw the line as there are some frugal tips I can’t (or won’t) do.
17. Shop around. Comparing prices on insurance premiums and cell phone service saved us each month.
18. Talk about it. People around me knew that I wanted to retire early. It wasn’t a secret. If it wasn’t for my support system of family and friends, I probably wouldn’t have done it so soon.
19. Save for kids before they are born. We took advantage of financial strategies for infants and young children for our kids. One of those, was opening and funding 529 plans before they were born, freeing up money in our budget now.
20. Miss your target. I was $7,000 short of my goal in October, but decided to jump anyways. The key is to know when you are close enough. With diversified income, it makes it a little easier to slide with the number.
21. Stick it out. Two times this year alone, I almost didn’t make it to my goal. After my maternity leave I questioned whether or not I should stay home or go back to work. I went back. Then just two months later I was given the opportunity for an early exit when our pension plan was reduced. I stayed.
22. Follow your passion. Early semi-retirement is ok. That’s what I’m doing. But now, my side income will come from what I love: personal finance. Semi-retirement can open the opportunity to leave the corporate world much sooner.
23. Make a plan with your spouse. My husband and I decided to leave the workforce at different times to allow us to maintain health care for the time being. Because we want more children in the future, it makes sense for us to stay on a group policy.
24. Frame it. I always believed that I could retire early. Nothing anybody said changed that. Not even all the nay-sayers…. I’d love to say that I proved them wrong, but actually I wish they would have embraced the idea for themselves. Instead they are still at work.
25. Explore outside-the-box financial ideas. Bank IPOs, credit card arbitrage (using 0% balance transfer credit cards), and free money were my hobbies. While they didn’t contribute huge amounts to our savings, every little bit adds up, and over time it was probably an additional $50,000 at least.
26. Learn from your mistakes. We built a big house that sucks money, including our our dumbest purchase ever: our sauna.
27. Adjust for the unexpected. Just like everyone else, we had our share of unexpected expenses. However, it’s all about how you handle them that defines success.
28. Plan your exit. Once you make your decision, get everything in place. Here are 43 tasks to get you ready!
29. Don’t look back. Once you make your decision, enjoy your new life. There will be a transition period, but give it some time. I’ll be reminding myself of this in the next few weeks as I settle into my new routine.

What’s Next?

I’m working on creating some new goals, learning how to cook, and beginning early Roth IRA withdrawals.

I’m also going on a field trip with preschool, getting to watch my favorite t.v. shows again, and spending more time with my spouse … all things I wouldn’t have gotten to do with my job.

Update: Reflections on Leaving My Job… Six Months Later.

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Why You Need to Track Your Roth IRA Contributions

Early Retirement. The typical age for a tax free withdrawal is after age 59.5. However, what if you retire earlier than that? I previously described How to Make Early Roth IRA Withdrawals which details exactly how that works.

Tax Treatment of Contributions and Conversions. In order to make the tax free withdrawals, one of the key components is knowing how much you’ve contributed, how much you’ve converted, and in which years. After 10 years of contributions… can you remember how much you put in each year?

It’s Not Captured on Your Tax Return. You might think that the information is on your tax return. After spending hours digging through the last ten years of tax returns, I found that the conversions are, but the contributions probably are not (unless you used it to claim the retirement savings credit).

Roth IRA Tracking Worksheet

Do your future self a favor and start tracking it. It’s really easy, I made a quick excel spreadsheet to get the job done:

Roth IRA Tracking – Get more Free Tax Forms

(The negative value for the 2008 conversion is because I had to recharacterize a prior conversion.)

Action Plan

You can download a copy of the spreadsheet and change the numbers to your own. Each year you complete your taxes, print off an updated copy and throw it in your tax folder.

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I have less than a month until the big day and I’m panicking. I can’t quite describe the exact emotion, it’s a mix of anxiety, sadness, fear, and doubt all rolled up. It’s almost a feeling of emptiness.

This isn’t about missing work, it’s about changing the entire way that I align our personal finances to meet our goals. You see, ever since I was 16 personal finance has been one of my favorite hobbies. I’ve had lots of mini-goals, but all of them centered around the main goal, quitting the work force.

What happens after you meet your goal?

The problem is that I actually met my goal, the big one. And now that the excitement has worn off, I feel really disappointed.

I hit the “personal finance peak” and now I’m getting ready to head down the other side. Over time, I’ve found comfort in the climb up the hill. I know how to save money, live frugally, navigate retirement plans and taxes… but what I don’t know how to do is live the financial life on the other side. I’m sure it will come with time, but right now the feeling is a bit scary.

I’m happy and excited about my new life. Of course, I’m going to enjoy what I get to do with all my time – my kids, family, and other interests I haven’t had any time for. That part doesn’t concern me. It’s the relationship with money that is changing.

Where Do I Go From Here?

Obviously, I’m going to stick around here and continue to write about the stuff that made the climb up the hill successful, but I’m a planner, so I’m trying to come up with a new “goal” to replace my old one. Feel free to give me ideas…. I’m all ears.

Lots of times in our life we deal with transition. Maybe my way of handling transition is to make excel spreadsheets with lots of columns and dollar signs. I just don’t know what the column headings should be…

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Obsessing Over the Decision

It was funny, even though I kept looking at the numbers, they didn’t change! As Mike from Quest for Four Pillars would probably tell me, stop looking at those spreadsheets and just do it already! And Penelope from Brazen Careerist had an article recently that reminds us to stop obsessing over the decision.

Ironically, I feel like I already evaluated this decision when I looked at staying home with my kids. The numbers haven’t changed significantly; I’m about a third of the way done with my plan. I still need to refinance the house though.

Administration Mix up

Last week I mentioned that I had two strikes ($20 in expired Kohl’s cash and $55 for a replacement phone). I was just waiting for the third and last Wednesday it happened.

I called our benefits vendor and HR to confirm the date for a decision. Unfortunately, it looks like they dropped the ball and forgot that some of us might be taking the retirement option who aren’t retirement age. We have a different date. I think they actually felt bad for me because it probably never occurred to them a 28 year old would jump on this offer.

It turned out that I would have had to give notice, and start the paperwork that day and leave by the end of the month…. earlier than the people who are retirement age who could stay midway through June. There is absolutely no way I could get my house refinanced by the end of the month.

Second Chance

Luckily, there is another opportunity in December to consider. And financially, it could actually be a better offer for me than the one this month was. (Part of the reason I didn’t fight the date change.) To be ready for it, I’ll be hard at work to finalize the outstanding items in my action plan:

• Rearranging our Finances to Refinance the House.
• Sell the car.
• Any other items that can be done in advance from Retirement Planning Checklist: 43 Tasks to Get You Ready!

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Unfortunately, that’s a situation that we’re currently facing. Our company announced a change to our pension program at the beginning of the year. We were told that the lump sums of our pension plan would go down… but we wouldn’t know by how much until a calculator was available. However, if you retire in the next two weeks, you can still get the higher amount.

The calculator was made available yesterday and here’s what it looks like for me:

Unfortunately, the change just decreased my compensation package as I am now effectively earning less than I was before. In addition, it will take me over six years just to get back to the value that I currently have.

Since I was considering becoming a stay-at-home mom before, this is really making me reevaluate my plans to change around our finances by the end of next year.

What it means for you?

Anytime you could be faced with a split-second decision. Would you be prepared to make a quick decision? What if you received the numbers and had to make a decision in two weeks?

The reality is that things can change. Companies get bought, benefit plans change, you could be offered a buy-out. Are you ready?

What you can do to prepare yourself

Many of the topics in Retirement Planning Checklist: 43 Tasks to Get You Ready can be done long before retirement. Having them handy will give you a head start to making a quick decision. In addition:

• Know your living expenses.
• Know how much income your outside investments will generate.
• Have your finances in place to make a quick change.

Action Plan

I had some things on my to-do list from the planning I did back in February. We’re almost ready to refinance (just waiting for the right rate to lock and apply), the business is going well and I put the car up for sale.

However, two weeks is going to be a really tight time line….

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I expanded the list here to include planning for those of you nearing retirement (or wishing you were!). Many items can and should be done a year or two before you leave, some are in the months leading up to the big day and a few are the week of or just after retirement.

1. Create a cash cushion to cover short-term expenses, any emergencies and any gaps before retirement payouts begin.
2. Adjust your asset allocation.
3. Research and plan your 72(t) distributions if you are retiring early.
4. Plan for health care coverage.
5. Sign up for pre-retirement programs. Many HR departments offer seminars or retirement planning programs to help you navigate the paperwork.
6. Obtain any financing that will require a salary. (Refinance your mortgage, apply for a HELOC for emergencies, apply for a cash rewards credit card, etc.)
7. Research what day you need to be employed to receive your last bonus, 401k match, and other accrued benefits.
8. Use any time off that you will lose.
9. Plan for any time off that you can use to extend your retirement date or receive a payout for.
10. Find out if your pension will pay higher for a certain day of the month. For example don’t retire on the 14 of the month if you will get a higher payment just by staying until the 15.
11. Keep track of your spending and simplify your finances.
12. Identify and plan for any expenses that will no longer be paid for by your job. (Ex. a company car.)
13. Calculate additional expenses: travel, leisure, sports, etc.
14. Pick a date. Consider many of the other tasks listed here to determine your date.
15. Pay off any small outstanding loans.
16. Make a list of EVERYTHING you want to do when you are retired. This will help those of you who are worried about not having enough to do or getting bored.
17. Cancel your life insurance if you no longer need it.
18. Find out how much notice your company likes.
19. Give your notice.
20. Request any pension estimates from your plan provider.
21. Spend the money in your flexible spending account.
22. Learn about the payment plan options you will be given. (Lump sump, annuity, etc.)
23. Use the FIREcalc or other retirement calculators to make sure your money will last.
24. Change your insurance coverage for your car. A pleasure rate may be cheaper than a working rate.
25. Plan your party if you want one.
26. Record email addresses and contact information in your address book.
27. Record bookmarks, anniversaries, birthdays and events stored in your calendar.
28. Change your contact information. (For example your email address for banks and subscriptions.)
29. Print information that is only accessible online: copies of paychecks or other information for taxes.
30. Set goals for yourself. Retirement opens up new possibilities to give you time to achieve!
31. Consider a trial period. Take a multi-week vacation and pretend you are retired to get yourself adjusted.
32. Evaluate your needs. Are you someone that likes structure? Do you like to be organized or go day by day? Create some routines that are enjoyable and reflect your personal needs.
33. Consider the emotional aspects. If your identity has always involved work, you may need to plan for the emotional impact of retirement.
34. Talk openly with your spouse. Discuss impacts and expectations of your new routine and whether or not you will both retire at the same time.
35. Utilize help offered by your employee assistance program for preparation.
36. Plan for your 401k. Is a rollover to an IRA in the picture?
37. Use benefits that will expire. For example, make a final vision appointment and buy new glasses or get major dental work done.
38. Stop investment contributions. I assume you will be making withdrawals shortly.
39. Reevaluate your new tax situation.
40. Practice living on your new budgeted amount now.
41. Make your moving plans. If you will be relocating, think about the planning for selling your house and moving and when you want it to happen.
42. Convert group insurance. If your company offers conversion programs for life insurance and disability insurance, convert what you need to an individual policy.
43. Determine when you are eligible for Social Security benefits and apply.

Photography: Lonely Hammock by *Micky

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