How to Keep Your Money Safe in 2009 – Part 1

Each one of us has a different way of responding to a recession.
Think about it.

• Have you stopped investing in your 401K, keeping your money in cash until the market improves?

• Have you ignored the fluctuations in your investment accounts, opting to avoid all the hype and instead count on the natural trends of the market?

• Are you waiting for Barak Obama to push forward an economic stimulus package that will save the day?

We all want to do the right thing in times like these—to protect the assets we’ve worked so hard for. But, extreme anxiety, avoidance, and inaction might not be the best path right now. Because this time, the market isn’t the only place where things are changing fast. The rules are also changing in 2009.

In today’s post and the next, we’re highlighting a few areas of your financial life that you might want to check up on.

Is your employer matching your 401K?
If your employer does match, it’s a good idea to stay invested in your 401k—it’s just too much of a great thing to have “free” money put away into a long-term investment vehicle (all depending on how much time you have until you retire, of course). One thing to possibly change: might want to save the money remaining after you max out your contributions for the year, and put it towards paying off various loans.

If your employer doesn’t match, consider reducing your 401K deposits and using more of your paycheck to pay down debt, or pay off your mortgage. Also look into opening a Roth IRA account for long-term benefits.

Did you convert your Rollover IRA into a Roth too soon?
Did you already move your money from a Rollover IRA into a Roth when the market was pretty healthy? That means that you were taxed on the amount that you originally converted, which has most probably gone down due to poor market performance. Here’s an example: even though you moved $20,000 into a Roth, it is now worth only $10,000, but you have to pay taxes on the original converted amount of $20,000… right?

Well yes, unless you do a recharacterization.

The IRS lets you do-over or take back your IRA conversion, so basically, you go back to your original “setting” of having a Rollover IRA (and no taxes due because you voided the conversion). Then, you can do the conversion in a down market, converting the now low sum of $10,000 from your Rollover IRA (because remember the market has gone down), into a Roth. Now, you will only pay taxes on $10,000 that was rolled over into a Roth—that’s quite a bit of savings, don’t you think?