Leveraging Long-Term Unemployment to Get a Tax Break on Roth IRA Conversions

Being out of work can be a daunting experience that's mostly filled with anxious questions about how you're going to pay the mortgage and your many day-to-day expenses.

While the good things one can say about the impact of unemployment on your finances are few and far between, there is at least one positive scenario you should take advantage of if you've been out of work for more than a few months: a Roth IRA conversion.

For most investors, Roth IRAs are recognized as a preferable alternative to traditional IRAs, due to their tax treatment.

With a Roth IRA, you don't get a tax break when you make contributions, but after age 59 1/2, all your withdrawals, including accumulated earnings, can be taken tax-free.

In contrast, all or a part of your contributions to a traditional IRA may be tax deductible, which could lower your taxes. You will be taxed, however, on withdrawals, and your tax rate will depend on what tax bracket you fall into at the time of withdrawal.

While you must take minimum distributions from a traditional IRA by age 70 1/2, there is no such requirement associated with Roth IRA withdrawals, making them an ideal tool not only for retirement, but for passing assets on to heirs.

Many workers believe their tax bracket upon retirement will be higher than in their earlier working years, making Roth IRAs an attractive option.

Yet the stumbling block for some is the prospect of a large tax bill that comes due following a conversion, since the amount converted is added to your income and is subject to tax.

That's why a job loss and long-term unemployment can make a Roth IRA conversion a much more doable event with a less painful tax bite.

In my case, I was laid off in the third quarter of 2009, so I will still have significant 2009 income to report when I do my taxes. But given the extraordinarily poor job market, it's conceivable I'll remain unemployed for much of 2010; what income I do earn, aside from unemployment benefits, may come from freelance writing or other temporary work assignments.

If that's the case, or for others who have already been out of work for much of 2009, this could be an ideal time to take advantage of your lower tax bracket during this time and convert your IRA to a Roth IRA. The conversion could cost you very little.

In my own case, I've been wanting to convert at least a portion of my traditional IRAs into Roth IRAs for some time, but the subsequent tax bill made me reluctant to do more than think about it. If my unemployment continues well into next year, however, my income will be abnormally low and I could be bumped into a lower tax bracket.

A Roth IRA conversion now might still make sense for you, even if you've only been out of work for a few months. If, for example, your salary when you were employed placed you close to the minimum income within any of the federal tax brackets. In a case like this, even a small reduction of income could cause you to fall into a lower bracket.

Remember, you can only convert to a Roth IRA if your modified adjusted gross income is under $100,000 in 2009. This limit on income disappears next year.

Consider such a tax-advantageous move only if you have adequate savings and won't hurt yourself by paying the IRA conversion tax bill.

Money Problems Still Loom Over Baby Boomers

A new AARP survey asking baby boomers how they’re faring as the economic downturn continues reveals what some of us already have a gut feeling about − it’s still a struggle for many, despite the rebounding stock market and glimmers of a turnaround in the real estate market.

The survey polled 939 Americans ages 45+ in July/August 2009. The results, released today, suggest a rebound in baby boomers’ personal finances has yet to materialize.

Here are some of the highlights of the survey:

• 51% had problems paying for gas or used their vehicle less to save on gas
• 41% lost sleep due to stress or worry
• 30% stopped contributing to 401(k)s, IRAs or other retirement savings
• 29% postponed needed health care or dental work for financial reasons
• 23% had problems paying for necessities like food or utility costs
• 22% had their work hours cut or had to take a pay cut

• 22% had problems paying medical bills
• 21% saw their health insurance premiums increase in between annual enrollment periods
• 19% didn’t fill a prescription, cut the dosage of prescribed medication or skipped doses
• 14% had adult children move back home

These are tough economic times, and the age 45 to 64 population is perhaps feeling the squeeze more keenly than other groups as they care for adult children and their aging parents while still struggling to put aside for their own retirements.

Do the results of the AARP poll reflect your own “high anxieties” about your future?

Save the Post Office By Writing a Letter

When's the last time you wrote a letter to someone?

If you can't remember, let it be known that you (and nearly all of us) are contributing to the growing financial cloud hanging over the U.S. Postal Service (USPS), which is facing a $7 billion deficit, even after the latest postage rate hike in May.

It's another sign of the times. Americans who are dealing with cutbacks in services of all types may soon face some big changes from one trusty institution that used to deliver: no matter what. ("And neither snow, nor rain, nor heat, nor gloom of night, nor the winds of change, nor a nation challenged, will stay us from the swift completion of our appointed rounds.")

To narrow its deficit, the USPS has proposed cutting mail deliver to five days a week, consolidating its mail routes, closing branches and, yes, even removing thousands of blue "under-performing" mailboxes.

Earlier this year, a letter was sent to the White House on behalf of the American Postal Workers Union, the National Rural Letter Carriers Association, the National Association of Letter Carriers and the National Postal Mail Handlers Union, asking for a "bailout" reminiscent of car-makers' and financial services companies' bailouts. Legislation was introduced in January that would provide the USPS relief in funding future retiree healthcare benefits.

The venerable USPS is said to be hemorrhaging $20 million a day, due not only to Americans' increasing propensity to use email, but also because many of us are more apt to text or call someone than use snail mail. With unlimited texting and cell phone minutes a commonplace feature of many plans, texting and email are not only quicker than the mail, but cheaper. In fact, the volume of mail crisscrossing the country dropped more during the past year than at any other time in the Postal Service's 234-existence, according to the Washington Post.

The recession hasn't helped. If people can save 44 cents by paying a bill only, they often will. Party invitations and RSVPs can be handled the same way.

Perhaps the most obvious sign of postal troubles is the disappearance of thousands of blue mailboxes from city streets and suburban neighborhoods across the country. The USPS has sold for scrap roughly 200,000 "under-performing" mailboxes; that is, those that collect less than 25 pieces of mail a day. Roughly 175,000 mailboxes remain on the streets. As for post office branches, fewer people are trekking to them when they can buy stamps elsewhere or order them online, postage paid.

Said one Postal Service employee, "People just take it for granted that we're always going to be there. Well, if you want to keep your collection box, would you mail a letter, please!"

Would you be sorry to see the USPS go? Is it an institution worthy of a bailout?

A Substantial Safety Net for the Unemployed & a Payroll Tax Credit of Questionable Impact

There's a fresh breeze blowing across the country these days, and it's called President Obama.

For the first time that I can remember, campaign rhetoric about "I'm going to do this" and "I'm going to do that" was more than just words. The Obama administration actually seems to be putting the wheels in motion on many of Obama's campagin promises and fulfilling his pledges, methodically and deliberately.

Although I'm still employed, and will continue to be so (God willing), I think the help he's extending to those out of work is quite valuable. Extended benefits, we've gotten that before, but also a $100 monthly increase AND, best of all in my opinion, is the 65% subsidized COBRA healthcare premiums for nine months.

Now that's meaningful. It feels like a real safety net.

A friend of mine who's been out of work since last July shells out $750 a month to keep his COBRA. Scary, isn't it? That kind of money could put a dent in anyone's budget. This same person, a single guy who worked in the oil shipping business at a Stamford, Connecticut firm, is willing, at this point, to relocate anywhere in the world for his next job. It's become a matter of survival, he said.

Another friend spent several years after an earlier layoff from the IT field driving an airport limousine. The pay never matched what he once made professionally, but it paid the bills, or at least some of them. Then, after a point at which i might have suggested leaving IT for good, he landed a job at Macy's, only to be laid off again after less than a year. He's back to driving the limo, except that there's not much work there either, since the recession has curtailed travel for many.

I'm also in touch with two 50ish women, both writers, laid off by my own employer more recently, back in mid-December. They seem in good spirits, but neither has had any interviews.

President Obama's stimulus for working people, the payroll tax credit, doesn't seem as meaningful as the benefits for those out of work. True, a payroll credit is better than a lump-sump check, since it's been said that many people simply saved those one-time payments, but at $400 for a single person, the payroll tax credit will only mean an extra $15 in each of my paychecks. It's barely a blip on the screen. Whether it gets spent or saved is anyone's guess.

The Best and Worst Things About the Federal Stimulus Package

There are an awful lot of goodies in the $900 billion government stimulus package now facing the Senate. I'm still not clear on everything that's in there. I'm guessing at least a few legislators feel that way too. I read somewhere the bill is running in excess of 400 pages long. That's a lot of speed reading.

One thing I have heard about, though, which seems to make very good sense, is a plan to put money back into taxpayers' pockets, not through another one-time payment, but by decreasing payroll taxes. The idea is that people will be more inclined to spend the money - perhaps not even realizing they're doing so - when it's realized gradually, and over time. Compare that to those big checks we got last year. I'll admit, I simply put mine into savings.

The worst thing about the stimulus package, from my perspective, is the degree to which it'll bury us in debt even deeper than ever. Our national debt (the total amount of money the U.S. government owes) now stands at $10.6 trillion. While I'm finding it hard to wrap my head around that number, it does equate to $34,807 for every adult U.S. citizen. Imagine the chaos that would ensue if you allowed your personal household budget to grow to similar proportions.

What do you say we give every American citizen a good strong cup of hot coffee instead? That's a stimulus that works every time.

Do you support the government stimulus package as a necessary spending bill to get our economy rolling again?

Pedaling Uphill Toward Financial Independence

No industry, it seems, is immune to recessionary pressures.

For the past year, I've worked as a personal finance writer for a website hosted by an Internet marketing company. I brought with me a degree of experience in the financial services field that includes about 10 years writing about such things as 401(k)s, mutual funds, annuities and retirement planning. A news junkie and voracious reader, my current job allows me to delve into an even broader range of subject matter including breaking economic news, identity theft and personal privacy topics, credit and debt matters and personal finance strategies.

I love my job. Still, we've been through two rounds of layoffs, first in December and then again in January. There have been other signs of a squeeze at our company, including an across-the-board salary freeze for all employees and a renewed focus on the most profitable priority projects.

I decided to create this blog to showcase my writing abilities and to use it as another tool in my arsenal in case I should find myself out of work and on the prowl for a new position. I hope you'll find some worthwhile reading here and perhaps even find yourself compelled to comment.

The current recession has made it very clear that we can't depend on either private industry or the government to take care of our needs. In today's challenging economic environment, savvy money management and a keen focus on long-term goals is more important than ever before. Consider the kind of world we live in. In a "throw the baby out with the bath water" retrenchment following years of excess and an abandonment of lending standards, banks are now afraid to extend credit to even the most creditworthy borrowers.

In the past, most homeowners considered insurance to be a kind of guarantee, one where, in exchange for regular premium payments, we would be compensated for losses. Now we're learning that those "guarantees" are conditional and variable.

In fact, a growing number of property insurers now deem certain locations (such as the entire state of Florida) too risky and too prone to hurricane damage, to qualify for homeowner's insurance.

Federal entitlement programs like Social Security and Medicare, left untouched, will look more and more like the Leaning Towers of Pisa as payouts to retiring baby boomers exceed incoming contributions by a younger generation. I think most agree we can count on higher retirement ages, reduced benefits or a combination of both in coming years.

Amidst all the uncertainty, one thing is clear: ultimate responsiblity for our personal financial well-being lies with us. If we're lucky, we'll still get modified Social Security and Medicare benefits but it would be foolish to expect these programs to do more than supplement our personal savings. Got a pension? Hold onto it tight, because it's a vanishing breed. If you're like the majority of working Americans, your 401(k)s are going to have to do all the heavy lifting and yes, it's going to be tough to make up for steep losses in the current contraction.

Hold onto your wallets, friends, it's time to take stock of our personal finances and put things in order.