Sachin’s Posterous

When most people leave a job, they rollover their 401k into a traditional IRA. They are basically the same thing: tax deferred investment accounts. You continue to invest your IRA as you wish, then pay taxes when you withdraw the money at age 60. The benefits of an IRA are:

• You might be in a lower income bracket at the time you retire 
• Since you haven't paid any taxes yet, your principal investment is higher. You are making money on the taxes you would have normally paid up front 

Roth IRAs are different. You pay the tax up front for money deposited into this type of account, just as you would for normal income you put into a savings account. But the difference is when you withdraw the money (again, at age 60) you don't pay any taxes at all.
 
Now here's the tip:
 
You can convert a traditional IRA *into* a Roth IRA. You do pay taxes on that money at the time of conversion, but that money can then grow until your retirement and you get it all tax free at that time. If you are young, this could add up to a ton of savings.
 
There are limitations to IRA to Roth conversions, and here's where it gets interesting.
 
You can convert your IRA to a Roth if you make less than $100k per year. So lets say you worked for a company for a few years, had a 401k building, then you started your own company. Presumably you took a big salary cut and will be making less than $100k. So you quality to convert!
 
And, thanks to a tax cut provision signed by our good friend Mr. Bush, there's no limit to IRA to Roth conversions in 2010. So even if you do make more than $100k, you can do this conversion next year only. This is basically a way for the government to front load some tax income. They will get a big influx of tax money in 2010, at the expense of taxes coming in later.
 
So what should you do?

• If you have an IRA and make less than $100k, consider converting it to a Roth. 
• If you make more than $100k, plan to convert your IRA next year
• Either way, fund your traditional IRA! The more money you put into your IRA now, the bigger your Roth will be after conversion. Especially if you're young, being able to pump more money into a Roth IRA can add up to some sweet retirement money. 

Couple more points:

• By paying the taxes up front now, you are hedging against a higher tax rate in the future. Given the economy is slumping and we have a democratic president, the top marginal tax rate is likely to go up. Remember, it was as high as 70% not too long ago! 
• Most of us have lost a lot of value in our 401k/IRAs in the past year. So that makes it an even better time to convert! Do the conversion now when your IRA value is low, then let it recover tax free in the Roth.

There are many, many other factors that come into play when deciding what type of accounts to use when saving for retirement, so please consult with a tax advisor before taking any serious action :).

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One of the least understood areas of taxation seems to be stock options. You can do all the research online you want, but chances are you will find conflicting info and be more confused than when you started. In particular, when multiple states come into play. Here's a summary of what i know:
 
1. Stock option gains are taxed as ordinary income, not capital gains. In fact, for NQSOs, the money is withheld by your employer just like your salary taxes.
 
2. People think you only pay taxes in the state where you exercise your options. This is wrong. If you lived in multiple states, each state will tax you based on how long you lived there. So people thinking they can move to Washington and then exercise are out of luck.
 
3. Say you held some options for 6 years, lived in California for 3 of those, then New York for 3 of those, and exercised the options in New York for a gain of $10,000. You might think California will tax you on $5000 and New York on $5000. Not true. New York taxes you on the whole amount. Then California will tax you on $5000 and New York will give you a credit for that amount. So if you held options in Washington for years and years, moved to New York and then exercised, you're screwed. NY will tax the whole amount.
 
4. New York City screws you even more. New York state tax is 7%, city tax is another 3%. California tax is 9%. Whatever tax you pay to California gets credited off of your New York State taxes. However, you don't get a credit on the city taxes. So you might pay California 9% state tax AND New York City another 3%. Brutal. I'm still trying to confirm this.
 
Anyone have any info on this? Or other tricks to save money (legally)?

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http://bits.blogs.nytimes.com/2008/06/03/will-amazon-lose-sales-because-it-collects-new-york-taxes/

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