Poor couple looking for retirement IRA advice

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Poor couple looking for retirement IRA advice

Postby jeniox8 » Sun Feb 10, 2013 6:15 pm

Hello all. I have been a lurker for a while here and am looking for some advice as pertaining to my husbands and mine retirement savings.

Long story short, were both in our mid-30's and we've had a rough financial past due to run-ins with the law, drinking, smoking, and debts that had mounted in our past. We've seeked counseling and rehab and financial assistance get our lives back on track and we've been clean in the past 5-6 years, and have paid down our debts aggressively to the point that we are now completely debt free!!!!

My husband works as a service counter rep at walmart and I waitress 4 days a week at Buffalo wild Wings. We made combined $36,000 dollars last year and out of that, we managed to save $2,000 for emergency monies and for the first time ever it seems, we will get a tax refund of about $2,000 (our previous refunds went to pay tax liens, penalties, etc from past)

We live together and rent a small upstairs studio apartment abouve our landlord and have learned to live frugally while paying off our debts. We drive 2 old cars but we maintain them well and hopefully they will last a couple more years.

Needless to say, we have very little to no retirement savings (husband has been saving about 4% of income from walmart and has about $4,000 in it but expense ratios as I have learned here are high. We were thinking of taking our $2,000 and opening up a Roth and could use some guidance as to how to do that. Thank you very much!
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Re: Poor couple looking for retirement IRA advice

Postby nwffdiver » Sun Feb 10, 2013 8:18 pm

Congrats to you and you husband for turning your lives around. Investing your tax refund is a great idea ( It's money you weren't counting on so, it's not missed). A Roth IRA is simple to open, it can be done online in about 10 minutes. The instructions are simple just fill in the information and link a bank account.

Because of your low income level, you may qualify for a savers credit as well.

Check it out here
http://www.irs.gov/Retirement-Plans/Pla ... dit-(Saver’s-Credit)
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Re: Poor couple looking for retirement IRA advice

Postby bottomfisher » Sun Feb 10, 2013 8:25 pm

A Roth IRA is a good choice for the additional monies. Many on this forum prefer Vanguard fund family due to low expenses. Opening a Roth IRA very simple, straight forward. Here's a link: https://personal.vanguard.com/us/whatweoffer/ira
Then pick which fund. Many Vanguard funds require $3000 minimum balance; but Target Retirement funds start lower.
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Re: Poor couple looking for retirement IRA advice

Postby EHoops » Sun Feb 10, 2013 8:27 pm

Impressive story and great discipline! I hope things continue to head in the same direction for you. Where is your husband's money going right now (the $4000 you mention)? That was not clear to me. Hopefully you'll get advice from the many experts on this site. In terms of the Roth IRA, many people (including us) use Vanguard. Their Target Retirement Funds only require $1000 to open...seems like a good place to start.

Best wishes.
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Re: Poor couple looking for retirement IRA advice

Postby StillTired » Sun Feb 10, 2013 8:34 pm

Congrats on coming so far financially.

Vanguard is an excellent place to open an IRA, from what I have heard. We, personally, use Fidelity for convenience (location of DP's primary 401(k) account).

If you haven't already filled out your 2012 taxes, you might want to consider making the contribution into a 2012 IRA. That way you would be eligible for the saver's credit and get the $500-1000 back with this years taxes (which could then be put aside to invest in a 2013 account). You *would* have to use your emergency fund to fund the IRA for the few weeks you were waiting for your tax return. Either way, make sure your husband is getting the savers credit based on his contributions to the account he has through Wal-Mart:

http://finance.yahoo.com/news/savers-cr ... 54754.html

Additionally, if Wal-Mart is not providing good options in that program *and* not providing a match (you didn't mention) you might want to consider forgoing that option and simply putting the 4% into an IRA instead.
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Re: Poor couple looking for retirement IRA advice

Postby grabiner » Sun Feb 10, 2013 8:34 pm

Congratulations on turning your lives around so that you can start thinking about savings.

If you can put $2000 into a Roth IRA before April 15, 2013, you can make it a 2012 contribution, and then can qualify for the Saver's Credit for 2012, which may increase your refund even more. Your husband's contributions to the Wal-Mart 401(k) also qualify for the Saver's Credit. Therefore, you (not he) should make the Roth IRA contribution, as the contribution is based on up to $2000 contributed per person, even for a married couple.

If you are getting a $2000 tax refund, you might consider filling out new Forms W-4 and claiming more withholding allowances. This way, you will pay less tax out of every paycheck, rather than paying more tax than you owe and then waiting until the next April to get it back from the IRS. Since you aren't living off the money, you can contribute the tax savings to your Roth IRA as you earn them, so you'll have the money for a Saver's Credit in 2013 as well, and it will start growing immediately.
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Re: Poor couple looking for retirement IRA advice

Postby grabiner » Sun Feb 10, 2013 8:48 pm

One more point: check your tax forms, and in particular, look at the limits on IRS Form 8880:

http://www.irs.gov/pub/irs-pdf/f8880.pdf

If you can get your income for 2012 to $34,500 or less, then you qualify for the maximum 50% Saver's Credit, which could wipe out your entire tax bill.

A married couple with $34,500 in income, reduced by the $12,200 standard deviation and $7800 for two exemptions, owes $1448 in tax on $14,500 taxable income. Therefore, if you contribute $2000 and your husband contributes at least $896 (to an IRA or 401(k)), you will get a credit of 50% of $2896, which is $1448, and owe no income tax. (In contrast, if your income is over $34,500, the credit is 20%, and the largest possible credit is $800 if you each contribute $2000.)

If you contribute to a Traditional IRA, that will decrease your income, and you can make a 2012 IRA contribution through April 15, 2013. Thus, if your current tax form says that your Adjusted Gross Income is $35,800, then you can contribute $1300 to a Traditional IRA (between the two of you) to get down to $34,500, and all the rest to a Roth IRA (which is better since you aren't paying any taxes to deduct.)
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Re: Poor couple looking for retirement IRA advice

Postby crowd79 » Sun Feb 10, 2013 10:23 pm

Wow, congrats on putting your lives back together and getting the right mindset moving forward. You will no doubt benefit from having to live on a tight budget for years and watching every penny while paying down your debts and now you will reap the rewards with that extra money, and get it working for you!

Still, we need a little more information from you:

1. Does Wal-Mart match your husbands contributions? If so, he needs to contribute at to the max whatever Wal-Mart matches. Best return on his money he can get.
2. Have you filed taxes already for 2012? If not, I would take (as someone else suggested above) the $2,000 EF and open up a Traditional (not Roth) IRA before April 15th and claim that $2,000 as a deductible against your $36,000 (is this your combined AGI?) income, since Traditional IRA's are fully tax deductible, and it will push you into the maximum Saver's credit for 2012 of 50%. Roth's are not deductible against AGI. Replenish the $2,000+ EF when you get your tax refund.
3. If you want to do the above #2 and have already sent out your 2012 taxes, you will have to Amend your tax return for for 2012 with form 1040X here: http://www.irs.gov/uac/Form-1040X,-Amended-U.S.-Individual-Income-Tax-Return

Welcome abroard!
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Re: Poor couple looking for retirement IRA advice

Postby WHL » Sun Feb 10, 2013 10:50 pm

If I'm reading your post right, and I'd like to think I am, you guys will have around 4k in the bank after receiving your tax refund.

I don't think I would invest any of that money. I would like to see your bank account (ER) built up a few thousand more before starting any additional investments. I realize people are going to say that the contribution into an IRA can be taken out in a time of need, blah blah blah - I still wouldn't do it.

Good work on wiping out the debt and past troubles. Build the ER a bit more to ensure you stay out of debt forever!
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Re: Poor couple looking for retirement IRA advice

Postby Dibbels81 » Sun Feb 10, 2013 10:56 pm

WHL wrote:If I'm reading your post right, and I'd like to think I am, you guys will have around 4k in the bank after receiving your tax refund.

I don't think I would invest any of that money. I would like to see your bank account (ER) built up a few thousand more before starting any additional investments. I realize people are going to say that the contribution into an IRA can be taken out in a time of need, blah blah blah - I still wouldn't do it.

Good work on wiping out the debt and past troubles. Build the ER a bit more to ensure you stay out of debt forever!


+1

Congrats on getting out of debt. You're actually ahead of the majority of people living in the US.
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Re: Poor couple looking for retirement IRA advice

Postby bdpb » Sun Feb 10, 2013 11:08 pm

Congrats, great story!

Instead of investing in stocks and bonds you might consider investing in yourself. You might consider spending on education. If you can handle waiting on people as a waitress you might be successful in the health care industry. More likely a better long term return on your money. There may also be financial assistance.
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Re: Poor couple looking for retirement IRA advice

Postby grabiner » Sun Feb 10, 2013 11:12 pm

WHL wrote:If I'm reading your post right, and I'd like to think I am, you guys will have around 4k in the bank after receiving your tax refund.

I don't think I would invest any of that money. I would like to see your bank account (ER) built up a few thousand more before starting any additional investments. I realize people are going to say that the contribution into an IRA can be taken out in a time of need, blah blah blah - I still wouldn't do it.


And even though I often agree with the principle, I strongly disagree here because there is a lot of free money involved. If your income is $35,800 and you have already contributed $900 to a 401(k), you are currently getting a $180 Saver's Credit against a tax of $1583 and have a $1403 tax bill. If you then contribute $1300 to a Traditional IRA (reducing your income to $34,500) and $700 to a Roth IRA, you have a zero tax bill, so you contributed only $597 to get $2000 into your investments.
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Re: Poor couple looking for retirement IRA advice

Postby zebrafish » Sun Feb 10, 2013 11:17 pm

What you describe sounds like a very difficult, but rewarding, life change. Well done.
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Re: Poor couple looking for retirement IRA advice

Postby pkcrafter » Mon Feb 11, 2013 1:56 am

I do think you need more in an emergency fund, but grabiner makes some very good points. I'm not clear on the 401k, but your husband should do automatic contributions to it. Read this about 401k plans for another view.

http://online.wsj.com/article/SB124181801239401917.html


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When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Poor couple looking for retirement IRA advice

Postby zucckerbugger » Mon Feb 11, 2013 7:58 am

Congrats. Keep on keepin' on.....
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Re: Poor couple looking for retirement IRA advice

Postby NYBoglehead » Mon Feb 11, 2013 8:52 am

Congratulations on all you've done. As others have already posted, I would recommend opening a Roth IRA at Vanguard. You can get a Target Retirement Fund started for $1,000. My advice would be after you get it established, set up an automatic transfer once per month for $100. I'd also gradually build up your emergency fund to 3-6 months worth of expenses. You don't want to fall into any debt whatsoever if one of the cars need repairs/replacing.

Good luck to you.
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Re: Poor couple looking for retirement IRA advice

Postby Wricha » Mon Feb 11, 2013 9:17 am

Very impressive,well done. As mentioned by others you are ahead of most Americans. I was in a similar position (financially) in my 30's . Twenty five years later finanically indepentent bah bah. My point to you is I think you need to invest in yourself to obtain additional skills to earn more money or other sources of revenue (business/real estate). I know, I will get push back but I believe it is nearly impossible to gain financial independence just living low, buying Vanguard funds while earning less than $50k. Just a thought.
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Re: Poor couple looking for retirement IRA advice

Postby Dandy » Mon Feb 11, 2013 9:34 am

Congrats to both of you for making such a dramatic and difficult turnaround. You are living on thin financial ice as you know. Having an emergency fund is a great idea and you should be gradually adding to it. One of the things that can hit hard is medical expenses so try to make sure you have coverage. Don 't skimp on preventive care - short term savings aren't worth it. Not only expensive care but possible loss of job etc.

I would open the Roth with maybe $1500 and keep an extra $500 in your emergency fund. If all goes as planned this year you can add the $500 to your Roth near the end of 2013.

Best of luck
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Re: Poor couple looking for retirement IRA advice

Postby rickmerrill » Mon Feb 11, 2013 11:28 am

You have some very good advice here! The fact that you found the Bogleheads is a great advantage. Like everyone else said:
-Take advantage of the savers credits
-Try to build up your Emergency funds - your roth contributions can be considered an emergency backup plan
-Look into health care - there are seriously some jobs out there and not just in nursing
-Live Below Your Means (LBYM)

The greatest financial milestone for me was when I had saved enough that unexpected expenses couldn't mess up the plan. The best discovery was to start thinking about the cost of purchases vs investing 20 years down the road. The true cost of a $20,000 car is over $93,000 (at 8% compounded interest) and that's not counting the loan! I think about that every time I pull out the wallet and it makes it a lot easier to not spend. Saving can be addictive too (in a good way).
If I am stupid I will pay.
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Re: Poor couple looking for retirement IRA advice

Postby red5 » Mon Feb 11, 2013 11:53 am

jeniox8 wrote:Hello all. I have been a lurker for a while here and am looking for some advice as pertaining to my husbands and mine retirement savings.

Long story short, were both in our mid-30's and we've had a rough financial past due to run-ins with the law, drinking, smoking, and debts that had mounted in our past. We've seeked counseling and rehab and financial assistance get our lives back on track and we've been clean in the past 5-6 years, and have paid down our debts aggressively to the point that we are now completely debt free!!!!

My husband works as a service counter rep at walmart and I waitress 4 days a week at Buffalo wild Wings. We made combined $36,000 dollars last year and out of that, we managed to save $2,000 for emergency monies and for the first time ever it seems, we will get a tax refund of about $2,000 (our previous refunds went to pay tax liens, penalties, etc from past)

We live together and rent a small upstairs studio apartment abouve our landlord and have learned to live frugally while paying off our debts. We drive 2 old cars but we maintain them well and hopefully they will last a couple more years.

Needless to say, we have very little to no retirement savings (husband has been saving about 4% of income from walmart and has about $4,000 in it but expense ratios as I have learned here are high. We were thinking of taking our $2,000 and opening up a Roth and could use some guidance as to how to do that. Thank you very much!


Jeniox, your post is inspiring. I too have been in a low income family for the last 4 or 5 years and am of similar age. From your post I am assuming you do not have any kids, which will definitely free up some funds each month.

I'm sure you've heard this a million times, but pay yourself first. If your husband is saving 4% of *his* income, then I'm going to assume that is roughly 2% of your *total* income. I'd really really try to up that percentage gradually until you are saving at least 10% to 15% of your total combined income (the more the better). This way you could save upwards of $5,500 per year (15% of 36,000). Saving $5,500 per year and investing it "properly" will make for a nice nest egg when it is time to retire. Between your $2,000 tax refund and your savings of $2,000 last year you are almost up to saving 15% already!

Also, try to work it so that you are not getting such a large refund every tax year. That $2,000 refund could have been an extra $166.66 per month throughout 2012, which would make saving 15% easier.

Lastly, we keep some of our Emergency Fund in our Roth IRA, some of which is invested in bonds and stocks. We mentally account this money as separate from our regular retirement savings. This method is of course a lot riskier than keeping it in a vanilla savings account. However, perhaps keeping ER money in a short term bond fund or a money market fund could work. At least this way you are taking advantage of tax advantaged space. Many I am sure will disagree that some ER money be kept in a Roth IRA. This way you'd have your husbands $4,000 in his work plan, and then upwards of $4,000 in a Roth IRA. If you are able to save 10% to 15% of your salaries this year then you could conceivably have roughly $12,000 in retirement plans by the end of this year.

Good luck!
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Re: Poor couple looking for retirement IRA advice

Postby 4nursebee » Mon Feb 11, 2013 11:54 am

Good advice thus far.

As you are both still young, I'd say investing in yourselves is a better investment. What can you do at the community college nearby to advance your career paths? I'd vote for nursing. One or two classes could get you a job as an aid making similar money. Then work your way thru school. My local hospital pays for schooling in return for future employment. My guess is both of you working as aides would pay more than you make now...and open the door for other jobs.
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Re: Poor couple looking for retirement IRA advice

Postby jeniox8 » Mon Feb 11, 2013 5:10 pm

Wow, thanks to everyone here for all the compliments and advice here. This is a lot of advice and information to digest and I (we) appreciate it very much! Much more advice than I could have imagined in just one day!

I suppose that I should say that we are technically not completely debt free, my husband does have a 12 yr old son for which he has 6 years left in child support payment to make on or until he graduates school, but that is rolled into our monthly budget. His work matches 6% of contributions so I suppose we should get that max first and foremost.

We have done our taxes but have not sent them yet. our AGI for 2012 after 401k deductions and health was $35,696. I never knew about this savers credit thing that you are all talking about. I guess I don't understand how we can claim a savers credit on his 401k contributions and our IRA contributions when, for example, his 401k contributions are already written off and deducted from taxes on his W-2 (not included in his wages, inc box). Isn't this a like getting a 'double credit' for the same thing? We will have to sit down, talk about, and refer to this bogleheads board and re-examine our taxes before sending them out. So, it's possible we can get an even bigger refund? Our tax bill is $1,434. (refund of $2,038).

If we are able to get more money back, we will add it to our emergency savings for which we now keep at our local Wells Fargo Bank in a CD. We cannot put our $2,000 into an IRA right now because of possible withdraw penalty to claim for 2012 IRA deduction.

As far as later on job prospects, we have talked about it, hubby does want to go to nursing school, but right now we just remain committed to building up some savings and something for retirement since we are so far behind on retirement and overall savings compared to other people, especially in this bogleheads board! Hubby does not want any more debt piling up (school loans, etc) until the child is taken care of, and then we'll go from there.
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Re: Poor couple looking for retirement IRA advice

Postby jeniox8 » Mon Feb 11, 2013 5:15 pm

Wow, thanks to everyone here for all the compliments and advice here. This is a lot of advice and information to digest and I (we) appreciate it very much! Much more advice than I could have imagined in just one day!

I suppose that I should say that we are technically not completely debt free, my husband does have a 12 yr old son for which he has 6 years left in child support payment to make on or until he graduates school, but that is rolled into our monthly budget. His work matches 6% of contributions so I suppose we should get that max first and foremost. He put away a total of $1,006 last year into 401k.

We have done our taxes but have not sent them yet. our AGI for 2012 after 401k deductions and health was $35,696. I never knew about this savers credit thing that you are all talking about. I guess I don't understand how we can claim a savers credit on his 401k contributions and our IRA contributions when, for example, his 401k contributions are already written off and deducted from taxes on his W-2 (not included in his wages, inc box). Isn't this a like getting a 'double credit' for the same thing? We will have to sit down, talk about, and refer to this bogleheads board and re-examine our taxes before sending them out. So, it's possible we can get an even bigger refund? Our tax bill is $1,434. (refund of $2,038). We would like to open a Roth IRA with the refund, since from what i understand, we will never have to pay taxes on earnings vs the traditional.

If we are able to get more money back, we will add it to our emergency savings for which we now keep at our local Wells Fargo Bank in a CD. We cannot put our $2,000 into an IRA right now before april 15th because if we withdraw, we will have a withdraw penalty from WF.

As far as later on job prospects, we have talked about it, hubby does want to go to nursing school, but right now we just remain committed to building up some savings and something for retirement since we are so far behind on retirement and overall savings compared to other people, especially in this bogleheads board! Hubby does not want any more debt piling up (school loans, etc) until the child is taken care of, and then we'll go from there.
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Re: Poor couple looking for retirement IRA advice

Postby Breezy » Mon Feb 11, 2013 6:07 pm

Hi! I echo everyone in saying great job turning your lives around!

As far as your taxes, with your income you qualify for free tax preparation through VITA. Google "VITA" plus your city and see where you can go. They'll make sure you're getting all the credits you're able to. In my town, it's administered through the United Way.

Also, I want to mention again the need for you to increase your income. If you ask around, you should be able to find companies that have the best benefits in your town, and then focus on getting employed by them. Where I live, some call centers, for instance, are part of Fortune 500 companies that have phenomenal benefits, even for the lower-paid positions. If there is a Costco in your town, your husband could apply there - excellent benefits, from what I hear.

Best to you!
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Re: Poor couple looking for retirement IRA advice

Postby tbradnc » Mon Feb 11, 2013 6:13 pm

Love your story!

I am about 25 years ahead of you with the same story and hit Flagship status with Vanguard about 2 years ago.

Keep plugging away. :)
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Re: Poor couple looking for retirement IRA advice

Postby VGSailor » Mon Feb 11, 2013 6:17 pm

jeniox8 wrote:We have done our taxes but have not sent them yet. our AGI for 2012 after 401k deductions and health was $35,696. I never knew about this savers credit thing that you are all talking about. I guess I don't understand how we can claim a savers credit on his 401k contributions and our IRA contributions when, for example, his 401k contributions are already written off and deducted from taxes on his W-2 (not included in his wages, inc box). Isn't this a like getting a 'double credit' for the same thing? We will have to sit down, talk about, and refer to this bogleheads board and re-examine our taxes before sending them out. So, it's possible we can get an even bigger refund? Our tax bill is $1,434. (refund of $2,038). We would like to open a Roth IRA with the refund, since from what i understand, we will never have to pay taxes on earnings vs the traditional.



Hi Jeniox,

To get the saver's credit, fill out form 8880: http://www.irs.gov/pub/irs-pdf/f8880.pdf It's fairly straight-forward I think. Just enter in what your contributions to your 401k were (it's on your w-2) and then follow what the form says and you will calculate how much of a credit you will get. This credit gets subtracted from the tax that you owe so it's great for you!

Good luck.
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Re: Poor couple looking for retirement IRA advice

Postby beardsworth » Mon Feb 11, 2013 6:41 pm

I will "join the chorus" of congratulations. You have been liberating yourselves and can look ahead to future possibilities instead of backwards toward past problems.

You are getting some good advice and perspective already, as concerns things to do with the spare money you have. But in your original post I "picked up" on something that might account for some money you don't have: You own two cars for two people. So I wondered if it would be possible for the two of you to share a single vehicle, even if it means that one or the other has to do a bit of extra driving to take the other to work, or if one can use public transportation while the other has the car.

Each car a household owns consumes money to buy (of course); to fuel; to insure; to pay property tax (in most jurisdictions); to renew license plates; to pay parking fees; to buy replacement tires; to do an assortment of repairs. Another way to put it: the money spent on multiple vehicles is money that might be put in savings. Most people, if they added up the money they spend on vehicles, and then compare it to their wages, would be surprised at the amount of their "life energy" (work hours) that goes to supporting cars instead of other goals.

My wife and I have usually owned just one (fuel-efficient) car. Yes, one of us sometimes has to drive out-of-the-way to take the other someplace, but the cost of some extra mileage pales in comparison to the cost of buying and maintaining an additional vehicle, so we've saved a lot of money over the years.

Just a thought in case it might work for you, too.
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Re: Poor couple looking for retirement IRA advice

Postby grabiner » Mon Feb 11, 2013 8:26 pm

jeniox8 wrote:I suppose that I should say that we are technically not completely debt free, my husband does have a 12 yr old son for which he has 6 years left in child support payment to make on or until he graduates school, but that is rolled into our monthly budget. His work matches 6% of contributions so I suppose we should get that max first and foremost.


Yes, get that for this year year; it's an immediate 100% return, which is better than you can do on any other investment.

We have done our taxes but have not sent them yet. our AGI for 2012 after 401k deductions and health was $35,696.


The magic AGI number is $34,500. If you contribute $1196 to a Traditional IRA for 2012, you can subtract that from your 2012 AGI and get the 50% Saver's Credit, which will get you most of that $1196 back. Anything more you contribute should go to a Roth IRA, since you are planning to owe no taxes. You can split the contribution between 2012 and 2013 so that you get the full saver's credit.

I never knew about this savers credit thing that you are all talking about. I guess I don't understand how we can claim a savers credit on his 401k contributions and our IRA contributions when, for example, his 401k contributions are already written off and deducted from taxes on his W-2 (not included in his wages, inc box). Isn't this a like getting a 'double credit' for the same thing?


The government uses the tax code to support a lot of things, not just to collect income. Thus, for example, there is an earned income credit to encourage families with children to work and help work keep them out of poverty; you probably aren't eligible for this because your husband's son is probably his mother's dependent, not yours. The saver's credit is another example, to encourage people to save for retirement, particularly low-income workers who might not even think of it.
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Re: Poor couple looking for retirement IRA advice

Postby bottlecap » Mon Feb 11, 2013 9:54 pm

I've been wondering what to add, because even "congratulations" doesn't quite cut it. You and your husband earned this and obviously have put yourself on the right track by working hard and taking responsibility despite what sounds like a rocky start. It's very impressive and reflects well on you both. You can also tell from your writing that you are intelligent people. I'm sure you will continue to do well and I wish you luck.

The other bit of good news is you're not that far behind. Many people don't find this forum or start saving until much later in life.

Whatever you can muster for an IRA account at this point would do very well in a target retirment fund. Vanguard's are among the best.

Good luck,

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Re: Poor couple looking for retirement IRA advice

Postby yeledbed » Mon Feb 11, 2013 10:30 pm

First of all, congratulations getting yourselves out of debt. You've worked hard thus far, so keep it up!
The magic AGI number is $34,500. If you contribute $1196 to a Traditional IRA for 2012, you can subtract that from your 2012 AGI and get the 50% Saver's Credit, which will get you most of that $1196 back. Anything more you contribute should go to a Roth IRA, since you are planning to owe no taxes. You can split the contribution between 2012 and 2013 so that you get the full saver's credit.


+1. Grabiner's advice is spot-on. That is what you should do.

I have only two points to add:
1) Are you doing your taxes by hand? Don't. You're likely to miss credits (like the saver's credit). There are many free online tax preparation sites on the web that will calculate your taxes for you and help minimize your taxes. You can experiment with different inputs to instantly see how your refund changes. Just google "free tax software 2012".
2)You don't have to put the money in to the IRA before you file your taxes to get the credit. The money needs to be put in by April 15, 2012. You can fill out your taxes assuming the amount you plan to contribute, but do ensure you contribute by the deadline.
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Re: Poor couple looking for retirement IRA advice

Postby crowd79 » Mon Feb 11, 2013 10:45 pm

Hi Jeniox8! Now that we have more information, here is exactly what I would do if I were in you and your husband's shoes, Step by Step. Follow carefully, this is VERY IMPORTANT.

STEP 1. Your husband needs to max out his 401k to 6% of the match from Walmart as soon as he is able to do so. That little bit of less money from his paycheck coming in each week into the household will be made up in STEP 8 as you will see below.

STEP 2. Go to Wells Fargo and close the CD immediately. I don't care what penalty you pay, since Wells Fargo's rates are terrible to begin with, your penalty on a $2,000 CD won't likely be more than $10 bucks. Oh, the CD penalty can be written off on next year's taxes as well.

STEP 3. Place that ~$2,000 from above into an existing savings account, or open an online Savings account at Ally Bank or Barclays, which have no monthly minimum fees and pay higher interest, probably even higher interest than that lousy WF CD you will have had.

STEP 4. Open a Traditional IRA at Vanguard (not a Roth) in you or your husband's name and fund it with $2,000 before April 15th. Buy a Target Retirement fund, either Vanguard Target 2045 or Vanguard Target 2050 with that money. You're instantly diversified in either fund.

STEP 5. Nobody here is joking or kidding about the Savers Credit. You and your husband qualify. You will get back your entire tax refund from 2012 and have no tax liability. Go the this link and print out FORM 8880 from the IRS: http://www.irs.gov/pub/irs-pdf/f8880.pdf
***Fill in this information on 8880, line by line****
1a (You) $2,000 (or husband 1b $2,000....note that 3a would be $0, and 3b would be $3,006 below instead, etc...)
2b (Spouse) $1,006
3a $2,000, 3b $1,006
4---skip----
5a $2,000, 5b $1,006
6a $2,200, 6b $1,006
7 $3,006
8 This is your AGI. NOTE that since you opened a Traditional IRA, your AGI has decreased to $33,696. Write in $33,696. ***Now go back to your tax form, 1040, to line 25. Write down $2,000 where it says "IRA Deduction." You will have to adjust the rest of your taxes line by line on 1040 to account for this.
9 enter x.50
10 $1,503
11 $1,434 (this is your tax, as you say)
12 ??? (do you have any other credits from these lines listed in form 1040 or 1040A?). I will just assume $0 for this and for figuring out step 13 & 14 below.
13 $1,434
14 $1,434 Congratulations, this is your "Savers Credit for 2012". You've got an extra $1,434 coming back that you did not expect.

STEP 6. Now that you've got $3,472 ($2,038k + $1,434) coming back, put that into your savings account as an Emergency Fund. If your husband wishes to do so and you say he's thinking of going to Nursing school in the future, I would take $1,000 out of that fund and buy an I-Bond at Treasury Direct, let it sit for 5 or 6 years or whenever he planning to go to school, and then cash out that bond free from state & federal taxes when used for qualifying school expenses. You still have $2,472 in an EF, more than you had even expected, right?

STEP 7. It gets better yet. I assume that you or your husband did not claim the Savers's Credit in prior years for his 401k contributions. File amended returns using FORM 1040X for up to the past 3 or 4 years (...?? someone correct me on this if I am wrong) and claim all of his 401k contributions at Wal-Mart which is something like $3,000 combined, right?? It's likely you've got even more money coming back if you file amended returns for prior years.

STEP 8. Take that money from Amended returns and put it in a separate savings account. This money will cover the expected less take-home pay from your husband increasing his retirement contributions from 4 to 6%.

STEP 9. You said you wanted to open a Roth IRA. Good news is that at any point in the future, (even this year), you can convert your Traditional IRA to a Roth IRA, however keep in mind you will have to re-pay the deduction taxes when you go to convert.

I hope all of this helps you and sets you on the right path. There you have it. Congratulations, you've got a lot more money coming back that you probably would have never even thought of. Investing some of your time on Bogleheads has already paid big dividends for you. Cheers, mate! :beer
Last edited by crowd79 on Mon Feb 11, 2013 11:04 pm, edited 1 time in total.
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Re: Poor couple looking for retirement IRA advice

Postby cherijoh » Mon Feb 11, 2013 10:54 pm

grabiner wrote:One more point: check your tax forms, and in particular, look at the limits on IRS Form 8880:

http://www.irs.gov/pub/irs-pdf/f8880.pdf

If you can get your income for 2012 to $34,500 or less, then you qualify for the maximum 50% Saver's Credit, which could wipe out your entire tax bill.

A married couple with $34,500 in income, reduced by the $12,200 standard deviation and $7800 for two exemptions, owes $1448 in tax on $14,500 taxable income. Therefore, if you contribute $2000 and your husband contributes at least $896 (to an IRA or 401(k)), you will get a credit of 50% of $2896, which is $1448, and owe no income tax. (In contrast, if your income is over $34,500, the credit is 20%, and the largest possible credit is $800 if you each contribute $2000.)

If you contribute to a Traditional IRA, that will decrease your income, and you can make a 2012 IRA contribution through April 15, 2013. Thus, if your current tax form says that your Adjusted Gross Income is $35,800, then you can contribute $1300 to a Traditional IRA (between the two of you) to get down to $34,500, and all the rest to a Roth IRA (which is better since you aren't paying any taxes to deduct.)


Grabiner,
I think you meant standard deduction and not standard deviation as you posted above :wink:
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Re: Poor couple looking for retirement IRA advice

Postby grabiner » Tue Feb 12, 2013 12:02 am

crowd79 wrote:STEP 4. Open a Traditional IRA at Vanguard (not a Roth) in you or your husband's name and fund it with $2,000 before April 15th. Buy a Target Retirement fund, either Vanguard Target 2045 or Vanguard Target 2050 with that money. You're instantly diversified in either fund.


Since you only need $1196 in the Traditional IRA, open a Traditional IRA with that amount, and a Roth IRA with the rest of the money you are planning to save. $1000 is Vanguard's minimum for a Roth IRA, but if you only need, say, $400, to get the full benefit of the Saver's Credit, you can designate $400 as a 2012 contribution and $600 as a 2013 contribution to get a start on next year's Saver's Credit.

This is where tax software will help you with the planning. If you tell the software that you contributed $1196 to a Traditional IRA, you will see your refund jump. If you then increase your Roth IRA contributions, you will see your refund increase even further, until eventually your tax bill is zero and any further contributions should be made for 2013.

Remember that only $2000 per person counts towards the Saver's Credit; if your husband contributed more than $804 to his 401(k), then you need to make the $1196 contribution to the Traditional IRA in order to get the credit.

STEP 7. It gets better yet. I assume that you or your husband did not claim the Savers's Credit in prior years for his 401k contributions. File amended returns using FORM 1040X for up to the past 3 or 4 years (...?? someone correct me on this if I am wrong) and claim all of his 401k contributions at Wal-Mart which is something like $3,000 combined, right?? It's likely you've got even more money coming back if you file amended returns for prior years.


Thanks, crowd79; I didn't think of this.

You can file an amended return up to 3 years from the due date. Thus, if your husband contributed in 2009, you can amend your 2009 tax returns (due April 15, 2010) through April 15, 2013.

Note that it may take several months for the IRS to process your amended returns; current-year returns get processed much faster. You will receive the refund with interest but will have to pay tax on that interest in the following year.

One more thing to do:

STEP 9: File new Forms W-4 with your employers, claiming several more withholding allowances, so that you don't get too much tax withheld. If you can get $50 a week in reduced withholding for the remaining 46 weeks of 2013, rather than a $2300 tax refund in April 2014, you'll get your emergency fund built much faster, and you won't have to wait for your tax refund to make your IRA contributions next year to get the Saver's Credit.
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Re: Poor couple looking for retirement IRA advice

Postby sschullo » Tue Feb 12, 2013 12:51 am

Great story because we started late too with youthful issues. It wasn't till our middle to late 30s when we started saving for retirement and it wasn't until our 50s that we learned to invest. I didn't start saving until I was 37. I am a late bloomer with just your plain and ordinary indentity issues in my 20s. He had a drinking problem in his 20s and eventually went to AA. My husband and I wrote a personal financial book about our late start.
You can turn your life around and it sounds like you are doing it now. Both of you are young enough to recover and grow prosperously.
Congratulations on your new life.
Steve
“It’s what you learn, after you know it all, that counts.” - John Wooden
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Re: Poor couple looking for retirement IRA advice

Postby Carl53 » Tue Feb 12, 2013 6:46 am

crowd79 wrote:STEP 7. It gets better yet. I assume that you or your husband did not claim the Savers's Credit in prior years for his 401k contributions. File amended returns using FORM 1040X for up to the past 3 or 4 years (...?? someone correct me on this if I am wrong) and claim all of his 401k contributions at Wal-Mart which is something like $3,000 combined, right?? It's likely you've got even more money coming back if you file amended returns for prior years.


Great catch crowd. As I started looking at my in-laws taxes a few months ago, I realized that I may have overlooked a credit on my state taxes. Off went the amended return, and a few hundred came my way.

Jeniox8, prior year form 8880s had different limits for 50% credits for married couples.
2009 $33000
2010 $33500
2011 $34000
2012 $34500
If you were not married or did not file jointly in one of those years the limit would likely have been one-half that amount. Even if you do not fall under the number cited above and since you have no means of lowering your income like you still can for 2012 via a traditional IRA, all is not lost as you and your husband would likely still qualify for either a 20% or 10% credit depending upon your income that year.

The following links are to forms 8880 for each year. I'm not sure tax software that would allow you to amend a form back as far as 2009. So you may have to fill out paper copies along with the 1040X.

http://www.irs.gov/pub/irs-prior/f8880--2009.pdf
http://www.irs.gov/pub/irs-prior/f8880--2010.pdf
http://www.irs.gov/pub/irs-prior/f8880--2011.pdf
http://www.irs.gov/pub/irs-pdf/f8880.pdf
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Re: Poor couple looking for retirement IRA advice

Postby crowd79 » Tue Feb 12, 2013 1:45 pm

STEP 9: File new Forms W-4 with your employers, claiming several more withholding allowances, so that you don't get too much tax withheld. If you can get $50 a week in reduced withholding for the remaining 46 weeks of 2013, rather than a $2300 tax refund in April 2014, you'll get your emergency fund built much faster, and you won't have to wait for your tax refund to make your IRA contributions next year to get the Saver's Credit.


+1. Now why didn't I think of this? Goes to prove two heads are better than one. :sharebeer
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Re: Poor couple looking for retirement IRA advice

Postby Christine_NM » Tue Feb 12, 2013 2:00 pm

On crowd79's Step 2 -

I closed a CD early once at Wells Fargo and the penalty was 3 months interest -- not much!

As you can see, getting out of debt is step zero but somehow most people don't even get that far. Managing actual savings and investment can be a long learning process. Keep at it in a Bogleheadish way and you will succeed.
Savor the moment.
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Re: Poor couple looking for retirement IRA advice

Postby jeniox8 » Tue Feb 12, 2013 6:01 pm

Thanks so much everyone here for your support. The advice given out here has succeeded what I (we) could have ever imagined and has altered our plans and way of how to deal with the opening of this IRA.

Re: On husbands 401k. We've talked about it last night and he understands he needs to get his contributions up to 6%, however he does not want to do this until he sees the money coming in from somewhere else to make up the paycheck shortfall, as it would disrupt our current money to savings goal per week. I have told him that we ought to adjust our withholdings at work on our W4's so we get less money withheld from our paychecks and can put more money towards savings. we're in limbo over this but I think we'll come to an agreement, since there is no point for us to withhold more if we now experience the yearly refunds on taxes. How nice and thanks to grabiner for that one! and if we get more money back from savers credits then it'll be a shoe in!

Re: Wells fargo CD. Husband is closing out the CD tomorrow right after work. We're determined to get this IRA opened since it appears we can in fact use this as a deduction for our 2012 taxes. You are all soooo right about the savers credit. We are so very excited to see that we will get all of our tax money back. An extra $1434! Thanks so much crowd79 for proving it and your hard work!!!!

I called Vanguard this morning and discussed the IRA, in roth vs traditional and as pertaining to grabiners statement, we can put $1196 into traditional and rest in roth but the minimum is a thousand for each account. we have some money in our savings account that can cover that so we could open $1196 traditional and $1000 roth for total of $2196 and they told me extra $196 in roth can be classified at 2013 contribution and sooo, if we did this, we could still get the full $1434 extra tax refund even though roth is non-deductible, correct?

Re: amend returns. I can't believe that we could possibly get more money back from past years! this weekend, both hubby and I are off from work and we will both go to the library to amend past returns on the 1040X and the savers credit tax forms above provided by carl53. Thanks so much! Hubby dug up his 401k online for first time in forever and much to our surprises it actually is at $6,133 and is more than thought. I dug out our old taxes from 2009-2011 to glance at our AGI's and his 401k contributions and in 2009 we had--

2009 agi of $31,024 and 401k contribution of $865
2010 agi of $33,285 and 401k contribution of $935
2011 agi of $34,049 and 401k contribution of $968

we have been married for 10 years and always filed jointly.

in 2008 is when he started to save for the 401k and it is only $422 and income $30,869 but probably cannot claim that as cannot amend before then but over all it appears we can get even more money back perhaps if do the amends for tax years 2009-2012. for the first time in probably forever we are excited to do taxes! We will when done, have everything checked out briefly with a scheduled appointment with a tax advisor here in town next wednesday.

We still have a long ways to go, but we can both see the light. hubby cannot wait to further himself and get to school and go for nursing when we can get cheaper loans and or whatnot. we've gotten our credit reports checked out not too long ago and scores, and because of our debt payoffs and on time payments, we have been able to get our scores back to above 700 from being down in the dumps in the 500s just 10 years ago. we can now apply for better credit cards and cut out our fee-eating orchard bank card and applied for chase freedom, and we got approved. we can now earn some cashback on our monthly bills and food.

Once again I cannot thank you all enough for those here that have dished out the advice. Fate has brought us to this bogleheads board to post. As you know we did have rough growing up in our youth and 20s. my husbands father was killed in combat in Vietnam and he had a very abusive mother growing up. no family support. she's dead, but he never knew his father at all. My parents were extremely poor, my mother passed at 60 due to cancer she could not afford medical care for. I was raised by foster parents and biological Dad is still living today, but we have never really kept close contact. I see him once every blue moon but due to financial reasons and hardship, don't have the means to meet up when he and I are apart on opposite ends of the country. Needless to say these issues have led us through the troubling times, and infact, where we first met was in a jail cell for having done drugs! However all the credit in the world goes to my spirited, hard-nosed but loving Granny, who at 98 has watched out for us and guided us out of trouble i.e. counseling, rehab, finances, getting debts paid and gED's after dropping high school and the likes. I cannot express in enough words how much I (we) love her to death. She said "if you can turn your lives around, and be responsible, then i will leave something special from myself behind." That is what drives us. And I thank her and God for letting us see the light.
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Re: Poor couple looking for retirement IRA advice

Postby red5 » Tue Feb 12, 2013 7:01 pm

jeniox8 wrote:Re: On husbands 401k. We've talked about it last night and he understands he needs to get his contributions up to 6%, however he does not want to do this until he sees the money coming in from somewhere else to make up the paycheck shortfall, as it would disrupt our current money to savings goal per week. I have told him that we ought to adjust our withholdings at work on our W4's so we get less money withheld from our paychecks and can put more money towards savings. we're in limbo over this but I think we'll come to an agreement, since there is no point for us to withhold more if we now experience the yearly refunds on taxes. How nice and thanks to grabiner for that one! and if we get more money back from savers credits then it'll be a shoe in!


If it were me I would consider all money going to 401(k) and savings account as savings. If he upped his contribution to 6% then that would theoritically mean that there'd be 2% less going into a savings account every month but it would also mean 2% more (plus more if you count the match) going into a 401(k). At the end of the day you'd still be saving the same amount of dollars every week. Of course if you need the extra money to build up an emergency fund or of something similar that is a whole different story.

And definitely examine the withholdings. A refund merely means an interest free loan to good ole Uncle Same throughout the year. That money could instead be used to build up an emergency fund and contribute to emergency fund / savings / IRA / 401(k).
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Re: Poor couple looking for retirement IRA advice

Postby Carl53 » Tue Feb 12, 2013 7:41 pm

jeniox8 wrote:2009 agi of $31,024 and 401k contribution of $865 50% refund or $433
2010 agi of $33,285 and 401k contribution of $935 50% refund or $467
2011 agi of $34,049 and 401k contribution of $968 20% refund or $194]
Amending your old returns about $1100 :D
we have been married for 10 years and always filed jointly.

in 2008 is when he started to save for the 401k and it is only $422 and income $30,869 but probably cannot claim that as cannot amend before then but over all it appears we can get even more money back perhaps if do the amends for tax years 2009-2012. for the first time in probably forever we are excited to do taxes! We will when done, have everything checked out briefly with a scheduled appointment with a tax advisor here in town next wednesday.

I can't recommend paying for a tax advisor, particularly for for this.
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Re: Poor couple looking for retirement IRA advice

Postby Savvy » Tue Feb 12, 2013 8:05 pm

MarcMyWord wrote:I will "join the chorus" of congratulations. You have been liberating yourselves and can look ahead to future possibilities instead of backwards toward past problems.

You are getting some good advice and perspective already, as concerns things to do with the spare money you have. But in your original post I "picked up" on something that might account for some money you don't have: You own two cars for two people. So I wondered if it would be possible for the two of you to share a single vehicle, even if it means that one or the other has to do a bit of extra driving to take the other to work, or if one can use public transportation while the other has the car.

Each car a household owns consumes money to buy (of course); to fuel; to insure; to pay property tax (in most jurisdictions); to renew license plates; to pay parking fees; to buy replacement tires; to do an assortment of repairs. Another way to put it: the money spent on multiple vehicles is money that might be put in savings. Most people, if they added up the money they spend on vehicles, and then compare it to their wages, would be surprised at the amount of their "life energy" (work hours) that goes to supporting cars instead of other goals.

My wife and I have usually owned just one (fuel-efficient) car. Yes, one of us sometimes has to drive out-of-the-way to take the other someplace, but the cost of some extra mileage pales in comparison to the cost of buying and maintaining an additional vehicle, so we've saved a lot of money over the years.

Just a thought in case it might work for you, too.


I agree with this! If you can find a way to only have one car, I recommend it! My wife and I intentionally rent from a location that is on the bus line so that I can bus to work (and fortunately, it's only 2 blocks to work for her :D ). We share one car with 156K miles and that's all we need! Good luck, jeniox!
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Re: Poor couple looking for retirement IRA advice

Postby grabiner » Tue Feb 12, 2013 10:08 pm

jeniox8 wrote:I called Vanguard this morning and discussed the IRA, in roth vs traditional and as pertaining to grabiners statement, we can put $1196 into traditional and rest in roth but the minimum is a thousand for each account. we have some money in our savings account that can cover that so we could open $1196 traditional and $1000 roth for total of $2196 and they told me extra $196 in roth can be classified at 2013 contribution and sooo, if we did this, we could still get the full $1434 extra tax refund even though roth is non-deductible, correct?


You want to contribute a total of $2896 (including what your husband already contributed), because the saver's credit is nonrefundable and you get no benefit once you wipe out your entire tax bill. Thus, if your husband already contributed $1000, you want to contribute $1896, which means that the Roth would be $700 for 2012 and $300 for 2013. (The advantage of making the Roth contribution this way is that you get a head start on claiming the saver's credit for 2013.)

If you have tax software, you can confirm these numbers; tell the software that you contributed $1196 to a traditional IRA and $700 to a Roth, and see what it reports as your tax (zero in this example) and refund. Then change the Roth contribution to $800, and you'll see that the refund doesn't change; conversely, if you decrease the Roth contribution to $600, the refund decreases by $50 because you lose $50 of saver's credit.
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Re: Poor couple looking for retirement IRA advice

Postby crowd79 » Wed Feb 13, 2013 2:27 pm

Carl53 wrote:
jeniox8 wrote:2009 agi of $31,024 and 401k contribution of $865 50% refund or $433
2010 agi of $33,285 and 401k contribution of $935 50% refund or $467
2011 agi of $34,049 and 401k contribution of $968 20% refund or $194]
Amending your old returns about $1100 :D
we have been married for 10 years and always filed jointly.

in 2008 is when he started to save for the 401k and it is only $422 and income $30,869 but probably cannot claim that as cannot amend before then but over all it appears we can get even more money back perhaps if do the amends for tax years 2009-2012. for the first time in probably forever we are excited to do taxes! We will when done, have everything checked out briefly with a scheduled appointment with a tax advisor here in town next wednesday.

I can't recommend paying for a tax advisor, particularly for for this.


Ditch the advisor. You don't need to pay someone to "look and make sure it's correct" after you do your amended returns. Carl53 already did half your work for you above. $1100 + $1434 = $2534. Not too shabby for a payday for making 4 posts on Bogleheads. Good luck & use the money wisely! :sharebeer
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