Step3 Prophet

2010 Contributions to Roth IRA

Earlier this year I contemplated spacing out my Roth IRA contributions over the course of the year, looking for the lows and avoiding the highs. Sadly, the execution of that strategy did not go so well because this year has been a pretty steady climb for my preferred IRA investment, Vanguard's REIT index (VGSIX). I like it for my IRA because REIT's throw off a lot of dividends, and the IRA keeps those dividends tax free for now. Looking back now I would have been better off to just invest all my IRA money in January and collect the extra dividends and appreciation, but it's too late for that, so it's time to come up with another strategy. I've still got the bulk of my 2010 IRA contribution remaining, and since VGSIX has gone up so much this year, I'm going to diversify into something else (1 yr growth for VGSIX is 31%, whereas the S&P 500 index VFINX is only up 9%).

I've had my eye on some of Vanguard's Dividend funds. This wouldn't really be diversification actually, since I hold so much S&P 500 stock any way, but it would be a concentration of potentially higher quality stocks. Solid companies + Reinvestment of Dividends = high returns. Two fund that fit the bill are Vanguard Dividend Appreciation Index Fund (VDAIX) and Vanguard High Dividend Yield Index Fund (VHDYX). They both have high dividend yields, and expense ratios are the same as well. They are also both at a 52 week high right now, which make me reluctant to buy. Since everything is on a high right now, I'm going to hold off on my contribution a while longer. Thanks to IRA rules, I have almost 4 more months to decide.

Maybe it's just the engineer in me, but I love the way the IRS spells everything out on their website. IRS publication 590 covers IRA's, and it says:

You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions).

 

You can make contributions for 2009 by the due date (not including extensions) for filing your 2009 tax return. This means that most people can make contributions for 2009 by April 15, 2010.

So I have until April 15, 2011 to make contribution for my 2010 IRA. I'll give the matter a little watching.

 

Question about a bonus and F-connect test

I'm testing out the F-connect feature of Typepad, which should link my blog w/ my FB account.

Here is a question I pulled from yahoo answers. It caught my eye because its related to military matters and finance: I am reenlisting the the Air Force and receiving a $50,000 bonus. I do not pay any state taxes so I only want to know around how much I get to keep after taxes. I just returned from a combat zone and will not be going back for a long time. I couldn't reenlist overseas because I was just short of my window. Any help would do, but someone who has received the same or near the amount I am getting and could give me a rough estimate would help

Since he can't reenlist in a combat zone, the bonus is taxed at his normal rate, which means it depends on base pay, TSP savings, and how he gets the bonus. I'll make some assumptions here to show how it works.

Let's say you are single, E-4, have over 4 years of service, and no TSP contributions, which makes for a base pay of $2094/month or $25,129 a year. BAS and BAH are not counted since they are allowances. Special pays and bonuses are taxed, so you just have to figure it out what your expected income is for the year.

This year the 15% tax bracket is between $8,350 to $33,950, and the 25% bracket is between $33,950 to $82,250. (you can find these on page 101 of the i1040 pdf.)

You get roughly $10,000 in exemptions and deductions if you are single with no dependents, which makes your starting taxable income about $15,000, which means you start in the 15% bracket and each additional dollar is taxed at that amount until you exceed that bracket.

If you get your full bonus this year, the first $19,000 will be taxed at 15% so your tax will be $2850
($15,000 regular income + $19,000 bonus = $34,000 limit on 15% bracket)

Your remaining $31,000 bonus will be taxed at 25%, so you will owe $7750 on that part.

Including Social Security & Medicare @ 7.65%:  $3825

Your total tax liability is $7750 + $2850 + $3825 = $14,400 in taxes.

In this scenario, taking your bonus over 2 or more years would save about $2000