Back when I was 16, my father helped me open a Roth IRA. “She’s so young!” our adviser exclaimed. “Think of how much tax money she will save!”

Retirement plans come in both traditional and Roth forms. Roth 401(k)s and IRAs do not offer a tax deduction, but money can be withdrawn tax-free during retirement.

A traditional account lets you take a tax deduction for retirement contributions. If you contribute $1,000 to an IRA or 401(k) in 2008, you can deduct $1,000 from your income for tax purposes. Any money earned through the investment is then taxed when you withdraw the money during retirement.

 My trusty Roth worked well the first few years.  I didn’t earn much income, and my taxes were always low. My employer took out the government’s 10% and that was that.

Move forward a few years. I am now self-employed, and with my husband earn substantially more than we did in high school and college.  Suddenly, we’re being hit with self-employment taxes, a higher tax bracket, etc.

My trusty Roth is continuing to plug along, but is it still the best retirement plan for our situation? We’re in the position right now where we could really use the tax breaks a traditional retirement plan can offer.

I must admit that I don’t trust the government, either. Will they be able to resist taxing Roths in the next 40 years?  Will they be encouraged or forced to tax these otherwise “tax free upon withdrawal” accounts, to make up for the financial mess our country is headed towards?

In my opinion, it can’t hurt to diversify your retirement funds. If we have both a traditional and Roth IRA, we should be able to choose “when” we are taxed in retirement. I’m aiming for an equal mix of Roth, traditional and non-retirement funds to pull from at our discretion.

Note that I mentioned non-retirement funds, such as long-term stock market investments. While there are no tax benefits to saving money outside of IRAs and 401(k)s, etc., you pay taxes on capital gains, not the entire invested amount. Of course, who knows what capital gains will be taxed at in 20 or 40 years?

What I’m really attracted to, in the case of non-retirement funds, is the ability to pull my money before age 59 1/2. We’re hoping to retire young, perhaps between 45 and 50. While the government does allow us to take “substantially equal periodic payments” before age 59 1/2, a 72(t) withdrawal, I’d rather have complete control over how much (or how little) we withdraw in early retirement.

How are you planning for retirement?  Do you have a mix of tax-advantaged accounts?


Our financial vice

FiveCentNickel recently discussed his biggest financial vice (eating out), and encouraged other bloggers to examine their own spending habits.

By far, our biggest vice is beverages. While we prepare meals in our own kitchen most nights, we’re both rather hooked on flavored beverages – soda, juice, iced tea, milk, coffee, you name it.  We probably spend nearly $10 per week, or $500 per year, on beverages alone.  The ocassional bottle of wine doesn’t help much, either.

But that’s not too horrible, you might add.  It’s only $10 per week – that’s less than the cost of a night out. Consider this: Our food budget is only $45 per week. We spend 22% of our budget on drinks. Yikes!   

I really wish we could drink tap water, but we have a sulfur problem and filters don’t completely remove the smell. We can cover the smell with drink mixes, yes, but I just can’t take any icy glass of water and chug it.  Shudder…  it’s like drinking raw eggs.

I have been making some progress.  We’re focusing on sales, and try to drink what’s on sale for the week. The Husband loves Mountain Dew, but will drink the generic brand of soda on occasion. We also stock up on drink mixes, and try to focus on “healthier” mixes that don’t have sugar as their main ingredient.

Finally, I’m experimenting with new water filters. We haven’t hit one yet that works completely, but I’m highly motivated. Aside from financial concerns, I’d love to brush my teeth in sulfur-free water.

Rite Aid rebates

Have I ever mentioned that Sunday is my favorite day of the week?  My husband stays home from work, we usually sleep in, and we get coupons and ads in the paper!  What’s not to love?

Rite Aid is offering several steals this week on bathroom products:

Herbal Essence shampoo and conditioner, 2/$5 (normally $3.99 each)
There was also a coupon for $3 off 2, and a rebate for $2 off two.
Total cost: Free

Infusium leave in treatment, $4.99 (normally $7.69)
I had a coupon for $3 off, and a rebate for $2
Total cost: Free

Crest toothpaste, $2.49 (normally 2.99)
I had a coupon for $1 off, and a rebate for $1.74
Total cost: -$.25

The final verdict: Rite Aid paid me $.25 for $18.66 worth of stuff.
That $.25 pays for the sales tax, which means I break even after taxes and get a summer’s worth of hair products for free!

Sharing the wealth

We don’t have a lot of money right now.  We’re not struggling, but we certainly can’t afford to throw cash around like crazy people.

But the point is: We’re not struggling, while some people in our area really are struggling just to feed their families.

I made a conscious decision yesterday to start sharing our “wealth.”  I added a few boxes of pasta to our grocery cart with the intention of donating them to the local pantry.  When I drop off the pasta, I might ask what else they need. I know it isn’t much, but if we all share just a little bit of our time and money, the world would be a much better place.

We can all make a big difference in the world, with small gestures of kindness. Will you join me?

Learning from mistakes

Tricia at Blogging Away Debt made a great point today about letting kids learn from their own financial mistakes, while the stakes are still fairly low. I have my parents to thank for that, as well – they let me earn and spend my own money, and as a result I have a stronger feel for the “worth” of a dollar.

My strongest financial memory is of our local Wal-Mart’s grand opening. I was about five years old, and I was so excited – I finally had somewhere to spend my money! Up until then, I mainly put my birthday and holiday funds into a savings account, or saved up for our semi-annual trip to the “city.” Yes, we were that rural back then.

I can still picture myself running through Wal-Mart with cash in my pocket. I gathered an impressive amount of “stuff” and headed to the register. While standing in line, I had a realization – I didn’t have enough money for everything that day. I had to set priorities, and put a few neat but costly things back on the shelf.  My heart was broken, and I’m pretty sure I cried as a put back my most expensive item, a flexible snow sled.

The funny thing is, I only remember the sled. I don’t remember any of the things I actually bought. Did I treasure those items for a short while, and then toss them?  Would I have missed those items if I hadn’t bought them, as I did the sled?  Having recently cleaned out my childhood room, I’m almost positive that I traded that sled for an armful of junk.

The lesson learned: Don’t judge purchases by their dollar value – judge them by the inherent value and pleasure they can add to your life. Because money is a valuable and limited commodity, we must learn to balance our wants and needs with the amount of money available.  Sure, I got lots of cool stuff that day. But I was also broke, and I didn’t get to buy my favorite thing at the store. 

Thanks, Mom and Dad, for letting me buy that armful of junk. It really made me realize the value of the dollar, and the importance of wise spending decisions.

Happy 4th of July!

In honor of Independence Day, the Husband and I will be visiting family members.  I hope all of my American readers have a happy and safe 4th of July!

Frugal gardening

It’s been about two months since we planted our garden now, and things are coming along nicely. We’ve had fresh peas for awhile now.  The cherry tomatoes are full size and turning pink. 

As I was weeding today, I thought about the role gardening is playing in many people’s budgets this year. With the price of food skyrocketing, many families are growing their own food to save a bit of money.  We have enjoyed gardening for several years, but this is the first summer we are growing food to replace groceries.  (Up until this year, we grew veggies in his parents’ backyard. We didn’t buy groceries back then!)

To make your own frugal garden pay off, consider the following:

– How much does this food cost?  I would estimate that we harvest about $2.50 (five storebought cans) worth of peas from a $.99 package of seeds. It takes a lot of shelled peas to make one serving! On the other hand, store-bought peppers cost about $1 each. We can harvest 4-6 nice peppers from a $1 plant. The same goes for tomatoes – nothing beats the taste or price of a fresh, homegrown tomato.

– Does your family enjoy this food? Our neighbors gave us eggplant seedlings. Generous, but I doubt the husband and I will eat all that eggplant.  We took the plants to be neighborly, and I’m looking forward to trying a few recipes. But we wouldn’t waste space or money on plants we don’t already enjoy.

– Do you have time for gardening? Plants need water, weeding and prompt harvesting. If you can’t dedicate a few hours each week, don’t disappoint yourself by starting a garden. It’s a great way to get exercise and save money, but the effort is pointless if your plants don’t survive to harvest time. 

Best of luck with your garden, and happy weeding!