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2011 Traditional And Roth IRA Contribution Limits And Account Phaseout Rules

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At the end of last month the IRS put out their 2011 Traditional and Roth IRA contribution limits tables. It’s always good to plan ahead for the coming year and make sure that you're putting enough in your Roth IRA, especially in years that the limits go up.  Keep up on your stock investing strategy!

Unfortunately, as most people expected for this year, the 2011 Traditional and Roth IRA contribution limits will stay the same for the upcoming tax year. Phaseout limits did change a little bit, however.

2011 Roth IRA And Traditional IRA Contribution Limits

The Traditional and Roth IRA 2010 tax year contribution limits are $5,000 for those under the age of 50.

If you’re over 50 you have the opportunity to make catch up contributions, up until the  limit of $6,000.

Note: Remember, you can contribute to both a Roth IRA and a Traditional IRA in the same tax year, but you can’t go over your limit of $5,000-$6000 when the total contributions to the two accounts are added together. Example: If you were under 50 and contributed $2500 to a Roth IRA, you then be able to contribute only up to $2500 to your Traditional IRA.

Here’s are the Traditional and Roth IRA contribution limits for 2011, and for years past.

YearAge 49 and BelowAge 50 and Above
2002-2004$3,000 $3,500
2005$4,000$4,500
2006-2007$4,000$5,000
2008$5,000$6,000
2009$5,000$6,000
2010$5,000$6,000
2011$5,000$6,000

Traditional And Roth IRA Phase Outs For 2011 Based On AGI

Traditional and Roth IRAs have phase out limits where if you  make to much money, you can't contribute to these account types.  Those limits have risen between $1,000 and $2,000 this year.

For Roth IRAs single taxpayers with an annual Modified Adjusted Gross Income (MAGI) over $107,000 begin to see their contribution limit drop until at $122,000 it goes away completely. The limits for Married Filing Jointly investors are $169,000-$179,000.

For Traditional IRAs single taxpayers with an annual Modified Adjusted Gross Income (MAGI) over $56,000 begin to see their contribution limit drop until at $66,000 it goes away completely. The limits for Married Filing Jointly investors are $90,000-$110,000.

IRA TypeSingleMarried Filing Jointly
Roth IRA$107,000 – $122,000$169,000 – $179,000
Traditional IRA $56,000 – $66,000$90,000 – $110,000

Contribute To Your Traditional Or Roth IRA Until April 15th

One of the great things about IRA accounts is that you can open a new Roth or Traditional IRA right up until tax day on April 15th. If you do make a contribution in 2012 before tax day, be sure to specify which tax year the contribution is being made for, 2011 or 2012.

Differences Between Roth IRA And Traditional IRA Accounts

The main difference between Traditional IRA and Roth IRA accounts is when you end up paying your taxes on the money. Traditional IRA account contributions are made with income before it has been taxed. Because the money is pre-tax your distributions will be taxed at withdrawal. Roth IRA contributions are made with income that has already been taxed. Because of that the money will grow and not be taxed at withdrawal.

For a complete look at how to open a Roth IRA, and where to open it,  check out this article: How And Where To Open A Roth IRA.

Do you currently have a Traditional IRA or Roth IRA? Do you have both so that you can tax diversify? Are you contributing right up to the limit?

The Most Expensive Bottle Of Wine Ever Sold. Would You Drink It?

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I was reading a post on the Wall Street Journal today about a recent Sotheby's wine auction in Hong Kong. The story discussed some of the amazing prices vintage wines direct from the wine maker are getting.  To me it's amazing that even in this economy vintage wines can command such amazing prices.

What does a $29,000 glass of wine taste like?

An Asian buyer is about to find out–at least, if they decide to pop the cork.
Three bottles of Châteaux Lafite-Rothschild 1869 were just sold at a Hong Kong auction by Sotheby’s. The hammer price of $232,692 a bottle set a record for the most expensive bottle of wine ever sold at auction. It may well be the most expensive bottle ever sold, though there are no records of private sales.

“Wine history was made today,” said Serena Sutcliffe, head of Sotheby’s International Wine Department.

So some lucky buyer bought a bottle of wine for over $230,000 dollars – the most ever paid on record for a bottle of wine.  Personally I'm not a big wine drinker so I can't really understand the attraction of a wine this old.  Is it purely historical value of the bottle, or does the wine actually taste good after all that time? Would you even want to open a bottle that expensive? Or would you hold onto it for investment purposes – to resell down the road?

Top first-growth wines, of course, have had a huge run lately because of demand from Asia–primarily newly wealthy Chinese buyers. The Sotheby’s auction raked in a total of $8.4 million–more than triple the initial estimate. All 284 lots were sold. The wine came directly from Domaines Baron de Rothschild, giving them “perfect provenance,” in wine speak.

A total of seven bottles hit more than HK$1 million, or $128,205 each.

By way of comparison, billionaire William Koch paid $500,000 for the four bottles of Bordeaux (vintages 1784 and 1787) that many now believe to have been counterfeit.

At $232,692 a bottle, the Lafite 1869 works out to about $29,000 a glass, or more than $2,000 a sip.

Worth it? We may never know. The buyer is unlikely to ever drink them. More likely they were purchased as investments or well-lit and highly protected centerpieces to a wine cellar.

But if they do decide to take a sip, let us hope they post a review.

My, my, my. $2,000 a sip. No thank you.  I guess the article does make clear that the buyers of such vintage wines usually don't open them, but hold onto them for investment purposes, and to have as a highly coveted centerpiece of a wine collection.

Do Most Millionaires Own Expensive Wines?

Reading this story reminds me of Thomas J. Stanley's recent book called “Stop Acting Rich:  And Start Living Like a Real Millionaire“.  In the book he devotes an entire chapter to those who aspire to be wealthy – and how for many of them – talking about wine, owning wine, having a wine collection and a wine cellar are cues to themselves, and they believe others, that they are successful.  They think if  they can talk about and understand wine, and display their importance through social cues like owning and talking about fine wines, that others will think that they're successful and refined as well.

Because having a big wine collection is thought of as an indicator of wealth by many, it is often included in marketing to wealthy individuals.  For example, many custom homes include a wine cellar as part of the home.

Funny thing though – only a small percentage of millionaires actually own expensive bottles of wine.  Thomas Stanley's survey of millionaires found that only 7.3% of the millionaires surveyed own a bottle of wine that retails for more than $100. But nearly 4 in 10 have wine of the $10 or less variety.  In other words, while some of them may drink wine or have some wine on hand, only a minority own anything that might be considered “fine wine” or “vintage wine”.

So if you really want to be wealthy, my suggestion is to steer clear of silly status symbols like this expensive bottle of wine, and work on doing other things that millionaires do that lead to success.

What do you think about this expensive bottle of wine?  If you had the money would you ever consider buying an expensive bottle of wine like this? Would you drink it?  Tell us your thoughts in the comments.

Retiring Wealthy On An Average Salary: The Story Of The Saving Secretary

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This post is another installment in our recurring series, “Retiring Wealthy On An Average Salary“.   To see the other installments, please click on the link in the navigation bar above.    The idea behind the series is to highlight the stories of average folks who made good decisions in order to be able to retire wealthy – even though they made an average salary during their working years.  The hope is that it will help to inspire the rest of us as we continue on our own journeys of building wealth.

Today I want to highlight the story of one woman, who flew under the radar much of her life, only to give away millions of dollars when she passed away. I'm going to call this one “The Story Of The Saving Secretary”.

The Story Of The Saving Secretary

Grace Groner was  a simple woman who lived a frugal lifestyle.   She never owned a car, and shopped at rummage sales.  She worked for many years as a secretary, and only after she passed away did people realize that she was a multi-millionaire.

She lived in a tiny one-bedroom cottage in Lake Forest, Ill.She bought her clothes at rummage sales, didn’t own a car and worked most of her life as a secretary for a pharmaceutical company.

Yet after her death at age 100, Grace Groner left Lake Forest College a gift of $7 million to be used for scholarships. The money came from three shares of stock she bought–and held on to–in 1935.

“She did not have the (material) needs that other people have,” William Marlatt, her attorney and longtime friend told the Chicago Tribune. “She could have lived in any house in Lake Forest but she chose not to.…She enjoyed other people, and every friend she had was a friend for who she was. They weren’t friends for what she had.”

Ms. Groner seemed to have plenty of friends, but they were close friends because of who she was and not because of what she had. Many of them didn't even know how much she had. Her lifestyle didn't really give any clues to the fact that she was wealthy.

While Ms. Groner did end up retiring wealthy, how she did so may not be something we would necessarily want to emulate. In some respects she ended up being very lucky.

Ms. Groner’s story might seem like a classic Millionaire Next Door fairy tale–the thrifty, conservative, hard-working saver who hoards pennies over a lifetime to accumulate vast wealth. And that is certainly part of the story. Aside from occasional trips, Ms. Groner was rigorously frugal due to her Depression-era upbringing. (Not having a husband or children may have also helped her savings rate.)

Yet the way Ms. Groner garnered her wealth was, in fact, more like one big, lucky gamble than a lifetime of scrimping and saving.Ms. Groner worked for 43 years as a secretary for Abbott Laboratories. In 1935, she bought three specially issued shares of Abbott for $180. She never sold a share, even after repeated stock splits. She also kept reinvesting the dividends. By the time of her death, she owned more than 100,000 shares valued at about $7 million.

As David Roeder of the Chicago Sun-Times points out: “It is a grave error to put your nest egg behind a single company, and it is worse when the company is your employer. Groner had a winner, but others have done this with Enron, General Motors or Bear Stearns.”The all-in-one basket strategy was, of course, a grave error for employees of Enron and others. And financial advisers love to herald diversification, which didn’t turn out so well for many investors during the financial crisis.

But Ms. Groner’s story shows that savings alone probably doesn’t get you to $7 million. It seems that loading up on a one single investment and getting tremendously lucky over a long period of time can get you there. But don’t count on it.

So basically she became so wealthy because she saved religiously, but especially because she bought 3 specially issued shares at $60 a piece back in 1935.  She never sold the shares, and it doesn't sound like she diversified at all.  In the end she was very fortunate that the company she worked for didn't have problems, because if it had she may have ended up losing her entire fortune.

While I wouldn't suggest others try to get wealthy in the way that Ms. Groner did, I still think her story bears out the importance of valuing relationships over money, of not buying things you don't need, saving and investing (although her specific strategy I wouldn't recommend).

What do you think about her story? What keys do you pull out of this story?  Tell us your thoughts in the comments.

Take A Personal Day To Fix Your Finances

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So often our lives get busy, and it can be hard to stay on top of all the detailed minutia of our financial lives.   Things tend to slide, and we end up not having the optimal setup for anything in our finances because we just don't want to jump into the details.  Since performing certain financial tasks can be a bit boring or mundane, it can be easy to just push off fixing things indefinitely.

This is why I suggest having something MSN calls a “personal money day”.  A day dedicated solely to reviewing your financial life, and fixing the things that aren't optimized.  Getting better rates on your insurance, finding higher interest rates for your savings, rebalancing your portfolio, switching TV providers, setting up a budget and a variety of other things.

So let's get started.

Getting Started: Focus On Fixing The Big Things

So where do you start when  you've decided to take a personal day to fix your finances?  At our house I decided to take a personal day when I was stuck at home one day because my car was in the shop being repaired.  I had to take the day off from work anyway, so I decided to make it worth my while.

If you're considering taking a day off as well, I'd suggest trying to take  a day off from work because a lot of the things you'll be doing – you may need to call a place of business to get details or a quote, so doing it during business hours will probably work better.  It also puts a bit more pressure on you to get things done because you're paying a price – a vacation day – to do this.

I like to focus on the bigger things first to help maximize the return.  Some of the things I might focus on include:

  • Insurance:  Make sure that your homeowners, auto, life, disability and other types of insurance are all set to go, and that you've got good rates. If you don't have one of the types of insurance, consider getting quotes to transfer your risk.  If you've got decent rates already, consider changing your coverage to save money.  Reduce deductibles, or drop un-needed coverage.
  • Bank accounts: Consider closing accounts with fees attached and opening accounts with higher rates of interest,  investigate the advantage of laddering.  Find better rewards and less fees.
  • Credit cards:  Get accounts with lower interest rates, especially if you are carrying a balance.  Cash in any rewards you've already got on current cards.  Set up a plan to pay off your cards.
  • Set up a budget:  If you've never set up a family budget, consider doing that now. It's a lot easier nowadays with the advent of all the budget software out there.
  • Retirement planning:  Over time your retirement account allocations can become skewed.  Consider re-balancing your portfolio.  If you don't have a Roth IRA, IRA or other retirement account, consider opening one at a discount brokerage or mutual fund company on your day off!
  • Find better deals for utilities and services: Cancel cable or satellite TV and sign up for a cheaper alternative, or watch TV for free via your computer.  Look into cheaper home phone and cell phone alternatives.
  • Cancel services you don't need:  Signed up for cable TV but you don't watch?  Have a gym membership, but don't go?  Cancel the un-necessary expenses!

What I Did On My Personal Money Day

On my day off (a while back now) I focused on a couple of areas that I knew were long overdue for a look-see.  I began by looking at my car related expenses, mainly auto insurance.  I submitted online quotes for a bunch of different companies and to my horror realized I was overpaying on my insurance to the tune of almost $1100.   I quickly switched, started paying less for the same coverage.

Next, I looked at homeowner's insurance. I found that by switching I could save another $200, and still have the same coverage.

I also looked at our savings account which was holding our emergency fund and realized that our bank was paying us next to nothing in interest.  I researched some online savings accounts and signed up for one of the ones with the highest interest.  This ended up meaning a few extra hundred dollars in interest every year.

So on my day off, even just looking at a few things, I ended up saving almost $1300/year.  Not too bad of a return!

Conclusion

These are just a few of the things you can look at on your personal money day. It may not be the most enjoyable day you've ever had, but in the end you’ll be glad you did.   It can end up saving you hundreds or even thousands of dollars.  And who doesn't like having extra money to help pad their bottom line?

Have you taken a personal day to fix your finances?  What types of things did you look at?  What things did we miss that people should consider looking at?   Tell us your thoughts in the comments.

Retiring Wealthy On An Average Salary: The Story Of The Sensible Social Worker

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This post is part of a continuing series called “Retiring Wealthy On An Average Salary” that looks at the inspiring stories of men and women who earned average salaries during their working years, but in the end retired wealthy, with plenty of money to spend and give. In fact, I've found that as I read more of these stories, these frugal investors also tend to be very generous people, giving away a huge chunk of their fortunes after they pass.

Today we have another story of someone who lived a frugal lifestyle, and was able to retire quite well off. Her name was Jane M. Buri, a St. Louis social worker.

The Story Of The Sensible Social Worker

When I read the story of Miss Buri –  the social worker, one thing that struck me is that it sounds like she lead a pretty full life, despite the fact that she was so frugal.  She frequently socialized with friends, and was very involved with her church. It also talks about how she allowed herself to have small indulgences like a trip to Europe, and a visit to the Rose Parade.  She didn't live without, but she was frugal.

Jane M Buri, a school social worker, spent nearly four decades fighting to keep kids in class.

She tracked students to their homes, found them shoes, meals, jackets, and returned the truants to their teachers. She never married, never had children, never missed a day of work.

All the while, she was quietly building a small fortune. Buri died at 84 with $1.4m to her name.

Then in death, as befit her life, she gave it all away.

The last checks from her savings – willed to more than 50 friends, cousins and charities – should be arriving soon in mailboxes.

She gave to African missionaries, Legionaries of Christ and Catholic schools for the Sioux and Cheyenne. She donated to her high school, college and graduate school, to the south St Louis parish she visited thrice weekly, the Alexian Brothers nursing home where she volunteered, and the disabled friend she took to the discount grocery store every Friday.

How did she amass such an estate?

“It beats me,” said old friend and co-worker Genevieve O'Hara Brueggemann. “And it beats everybody who knew her.”

In retrospect, friends say Buri's savings made sense. They say she drove a 30-year-old car, watched an ancient TV, lived four decades in a house bought with cash in 1969 and just kept stacking charity donation envelopes in her sun room, until, once a year, she sent them all in.

They say she gave of herself and asked little in return.

Nobody's disputing that generosity. But it's not the whole story.

Because this isn't about someone who selflessly saved so others could have.

It's about someone who saved because spending more just didn't occur to her.

It seems as if so many of these closet millionaires are able to amass a fortune because living a frugal lifestyle comes as second nature. They're able to live with less, even still while enjoying some of the finer things, while allowing a lot of other things they don't need, that others might have bought,  to pass them by.

Buri was a child of the depression, which may help to explain her frugal lifestyle.  She did it out of necessity first, but then by habit.

Buri grew up in the packed city neighbourhoods of the Great Depression.

Her father ran a cigar shop in downtown St Louis. Her mother was a prim, fancy-dressing woman.

Buri was their lone child. They protected her, family members said.

“Nobody had too much money,” said Jack Goettelmann, Buri's cousin and her last relative in the area. “And all they did was try to improve.”  Buri clipped coupons, her cousin said, because that was how she was raised.

As mentioned, she didn't deny herself when she wanted something.

Nor did she deny herself small indulgences. Some weeks, she ate out three meals a day, friends said. She traveled to Europe, and to the Rose Parade in California. She bought a baby grand piano.

There was nothing she wanted and didn't buy, said Brueggemann, the co-worker.

“She was frugal because she didn't need anything else,” she said. “She wanted that old car. She dressed the way she wanted to dress.”

When she passed away Miss Buri left an inheritance to many around her including missionaries, school associations, friends and family.  In life she had realized that happiness doesn't come from money, and in her death she was able to continue giving to those around her and leave a legacy of caring.  I can only hope I do as well to follow her example.

Renting Vs. Buying A Home: Which Is The Best Choice?

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When my wife and I bought our new home in 2006 we were moving from a neighborhood that was undergoing significant changes.  Not only was the neighborhood starting to have more crime and lack of homeowner pride, we also discovered that there was  a new 4 lane highway going in within throwing distance of where our townhouse sat.  It was a scary prospect, and we didn't want to have to put up with the sounds of loud cars rushing by our house every day.  So we decided to pack up and sell our house fast.  The only question now was whether we would buy something right away, or whether we would rent.

In our culture home ownership has almost been deified, to the point where if you don't own your own home, something is wrong.   You might say that some of that cult of home ownership also helped to bring about the recent real estate and economic meltdowns (remember how they were pushing home ownership on a whole lot of people who couldn't really afford it?).  From CNN:

Modern America has long paired the “American Dream” with home ownership. The idea of staying put, paying property taxes and periodically mowing the lawn belonged to citizens who were somehow more American than the poor saps who could only afford to rent the place they called home.The notion isn't accidental. Ownership and the American Dream are deeply linked in government policies that favor mortgages over rent payments, dating back before Herbert Hoover was elected president in 1929.

While I still think that home ownership is in many cases a good thing and can be a blessing, if you're not careful it can also become a curse.  You need to make a careful examination of the facts in your own situation before you jump headlong into purchasing a home.

Questions To Ask Before You Rent Or Buy A House

Some things you might want to consider before making a decision on whether to buy or rent:

  • Do you have a nice emergency cushion saved up?  At our house this meant having at least 3-6 months of expenses saved up – that would not be used for a down payment. That would need to be saved separately.
  • Do you plan on being in the house for more than a few years?  In most cases you would probably need to be in the house for at least 5 years to break even with costs associated with the loan and closing.
  • Are you able to put down a sizable down payment? 20% is a good goal to have because it can help you to avoid paying private mortgage insurance.
  • Do you have any outstanding debts – especially high interest credit card debt? Pay that debt off first!
  • If you were to rent, how much would it cost in your area?  Is it enough less than buying after added ownership costs that it will be worth your while?
  • Do you expect to be downsized or let go any time soon? Is your job stable?
  • Have you put together a zero based budget, and determined what your cash flow plan is?
  • Do you know how much of a home you can afford?  Dave Ramsey suggests not buying a home more than 25% of your income.
  • Do you feel you understand the complete costs of home ownership?  Don't forget all the fees, property taxes, association dues, etc.

Another good resource for helping you to make a decision on whether to rent or buy are rent vs. buy calculators like the one found at dinkytown.net or the New York Times:  Rent Vs. Buy Calculator vs. Rent Vs. Buy Calculator

Conclusion

Buying a new home is a huge decision, it will be one of the biggest purchases you probably ever make.  It will pay to carefully weigh your options and ask yourself all of the important questions before you just jump into something.    If you don't, the homebuying blessing can quickly turn into a curse.  Remember, there is absolutely nothing wrong with renting, and for many people renting is actually the better choice.

What do you think about renting a home instead of buying? Have you ever made the choice to rent instead because it seemed to be the more logical choice?   Have you ever bought a home and regretted it later?  Tell us your thoughts in the comments.