In an ideal world, you would have enough money to fund both your retirement and everything else in your life. However, in reality, you often have to make decisions because your income rarely, if ever, satisfies every single need you have. For a lot of working Americans, the decision sometimes comes down to something you need soon, perhaps a home, and something you won’t realize for many years, such as retirement. Let me outline an approach I used to save for my retirement and come up with funds for an immediate need. In my case, the immediate need was some down payment funds for a home.

What it comes down to is priority and the immediate priority is a down payment for a home so many people just cut off retirement savings. I recommend that you reduce your retirement savings to the bare minimum and then focus on your other goal. In my case, I dropped my 401(k) contributions to the minimum that would ensure I received the company match. From there, I decided that contributing the full $4,000 (at the time, now it’s $5,000) limit for my Roth IRA was going to be important as well. I predicted that one day, hopefully, my income would exceed the contribution limits so I should get my contributions in while I still could.

So, I was able to save up some money for a down payment on a home and ratchet down my retirement contributions without, hopefully, causing much long term harm.

An AP article stated that many retirement investors had begun moving their money out of the stock market, something I see as a huge mistake. This is a big mistake when you’re talking long term, which most retirement investors are, because over the long run the market will give you solid returns if you let it. By selling during a fall you’re just as likely to miss any rebounds. For example, yesterday’s pre-market indicators would make you expect the market would fall 500 points at the opening bell. However, the Fed jumped in, slashed rates by 75 basis points, and the market opened down only 200. Then, in the afternoon, bargain hunters snatched up cheap stocks and the Dow ended up nearly 300 points. That all happened in ONE day. The stock market is a volatile beast, don’t try to time it and definitely don’t try to time it in something like a retirement account!

The game plan for a retirement account is slow and steady wins the race. You can’t realize any appreciation until retirement, so don’t go trying to play the stock market game. Slow and steady, don’t break the game plan!

With all the turmoil in the stock market lately, you may be tempted to stop contributions or adjust them from your original plan - don’t! The thoughts going through your mind are typical, especially in times of crisis, but this when you should be staying the course or even increasing your contributions. Many of the fundamentals about your investments have not changed, it’s merely the public’s perception (and reaction) that has affected the share price of many companies and it presents a great opportunity to buy.

You may not remember it but the last time we had this type of panic was back in 2001 when the dot-com bubble burst and the stock market went into a free fall. A mere five or six years later, the stock market recovered and people were speaking of prosperity as if it would never end. Five or six years is nothing in a retirement plan when your horizon is ten, twenty, or even forty years out, so you shouldn’t be at all concerned. Here are a few other reasons why you should keep investing:

401(k) employer match: If your employer matches a part of your contribution, make sure you put enough to get the maximum. That represents an automatic appreciation that puts you ahead of where you were before the contribution and something that you should always do.

Long run appreciation: It’s hard to see red on the ticker but if you consider that you won’t have access to the funds for a decade or more, you can play the waiting game until those stocks or funds turn it around.

Immediate tax benefits: Every dollar you contribute is one fewer dollar you need to pay taxes on, so you might as well contribute what you can and save it for your retirement.

We’re in a bumpy patch right now with the stock market but things will turn around, they always will. If they never turn around, the last thing you need to worry about is whether you have enough money.

If you’re interested in reading about the 2008 tax brackets as well as some of the increases for contributions, phaseouts, etc. then Blueprint for Financial Prosperity has a good writeup on the subject. In that look at the 2008 tax brackets, the site reviews the changes to the marginal tax brackets for 2008, compares them to the guesses of experts last September after the release of the inflation numbers, and then discusses some changes to contribution limits (for things like 401k/403b, IRAs) as well as phaseouts.

In 2008 and 2009, you will be permitted to directly roll over/convert a 401(k) into a Roth IRA as long as you’re willing to pay the taxes for the conversion and if your annual income does not exceed $100,000 (in 2010, the $100k rule expires). In 401(k) official terms, this means that you can convert a distribution from an employer-sponsored plan directly into a Roth IRA. For those keeping score at home, this may come as a surprise since you couldn’t do this in the past and because you are basically throwing all the Roth IRA contribution limits out the window. Currently you can only contribute $5,000 a year to your Roth IRA, subject to income phaseout limitations, and so being able to convert from a 401(k) into a Roth is something that would circumvent that since the 401(k) limits are $15,500 a year!

What happens when you convert? Easy, the amount that you convert will be subject to your marginal income tax rate but then it’s tax-free at disbursement, since it is a Roth IRA at that point. Do you have to convert the whole thing? No, you pick how much you want to roll over, just as you would if it were to go into a Traditional/Rollover IRA, and you only pay taxes on that which converts into a Roth IRA. If you are willing to wait until 2010, you can convert as much as you want and spread out the tax liability over 2010 and 2011.

Now, before you jump at the opportunity to convert everything over to a Roth, I would investigate your tax diversification profile because having all your retirement assets in tax-free is just as bad as having all of your assets in tax-deferred accounts. Make sure you are properly diversified from this perspective so you don’t get sticker shock down the road.

A recent Yahoo! Finance article discusses an option some companies offer in which you can get a debit card linked to your 401(k) account. With a simple swipe of the card, you can borrow money from your 401(k). Without going into details of how it works, the mere fact that you can have such easy access to something you shouldn’t be accessing in the first place is a huge mistake in my opinion. Your retirement is something you should enjoy when you retire and you put your future in significant jeopardy when you do something as risky as borrowing from your retirement account.

Mechanically, you establish a ReservePlus account and request a certain amount to be funded to that account. You are issued a ReservePlus card that debits from that account. With a regular 401(k) loan, payments are deducted from your paycheck but in this case the payments are made outside payroll. You would get a bill just like a credit card.

So, what are the good parts of this program? Reserve Solutions says that users generally use 35% less than what they applied for which sounds great in theory. It sounds like users ask for more than they really need and by using the card they end up not actually borrowing, and paying interest on, 35% of the balance they moved in. The only error I see with that logic is that the type of person requesting a loan for something like a house isn’t going to be using that same debit card system for something like groceries.

There are additional advantages and disadvantages for employees and employers that the article goes into so I invite you to read it if you’re curious for more information. Overall I think giving people such easy access to funds is a mistake, it implicitly encourages people to debit from their retirement account (even though they will repay).

When it comes to investing, the tax benefits of IRAs (both Roth and Traditional) and 401(k)s can’t be matched, as long as you use them properly. So, it always pays to make sure that you’re not putting tax advantaged investments into those accounts (unless that’s the only place you’re investing) because you generally can’t take advantage of them twice. While a little confusing, let me explain with an example.

Let’s say you invest in a bond that is federal income tax free. For our example, you are earning 3.9% APY from this federal income tax free bond and you invest a tidy little sum of $10,000. After the first year you have made yourself a nice $390 profit. If you kept this in a regular brokerage account and realized those gains, you wouldn’t owe any federal income taxes on those funds. In fact, if you are in the 25% tax bracket, you would’ve had to have earned 5.2% APY from a non-federal income tax free bond in order to get that equivalent yield.

Now let’s take the case in which you invested that money in a Roth IRA. After the first year, you get your $390 and you still pay no taxes on the realized gain. It’s the same thing right? Wrong because in the Roth case you could’ve invested in a 4.0% APY bond, non-federal tax free, and made more because of the tax advantaged status of the Roth IRA. See what I mean? Instead of being forced into finding a 5.2% federal income tax free bond because you have to pay taxes, anything above 3.9% is fair game in a Roth (you have to wait until retirement to withdraw it penalty free though).

So, be sure to take advantage of the tax advantaged nature of IRAs and 401(k)s in your investment decisions.

The latest article by Laura Rowley on the 401(k) fee flimflam involves how some 401(k) plan providers are charging exorbitant fees hidden behind a haze of complicated math and chicanery. The bottom line is that some employers are ill-equipped to properly analyze the fees of a plan provider and so sometimes make mistakes in picking one that has much higher fees that disclosed. Personally, I think the value in the article comes near the end where she explains how you can protect yourself.

Hutcheson suggests that employees ask their plan administrators or employers what the real economic cost of their 401(k) account is, the risk-and-return profile, and how participants can improve it. “The law requires the participant to know if the return is sufficient to justify the cost,” says Hutcheson.

They include a US Department of Labor article on 401(k) fees and tell you to ask about each of those fees so you have an accurate picture. If you’re being swindled, they warn that you should still contribute to get a match (don’t contribute if you don’t get a match) but then take the excess and consider putting it into a Roth. If you’ve maximized your Roth, consider a type of Traditional IRA.

401K rollovers are always tricky because they come at a time when there’s a lot of change in your life. Hopefully, it’s the result of a voluntary job change - you resigned amicably, you switched jobs, etc. Sometimes, it’s the result of an involuntary job change and those big changes are difficult; there’s no sense lumping on a few more financial mistakes with it right? The number one thing to understand with a 401k rollover is that you can wait. You don’t have to decide right now whether or not you’ll be rolling over your 401k into an independent Rollover IRA. If you have a lot on your plate right now, it pays to wait a little while before making the change.

If you are ready to do the rollover and you’ve analyzed the benefits and drawbacks, three of the five biggest rollover mistakes are:

• Cashing out: Cashing out is the worst possible thing you could do because not only do you pay taxes on the withdrawal but there’s a penalty on top of it. Ignoring the fact that you’re pilfering your future, doing so reduces your money so tremendously that it’s almost never worth it to cash out (that’s the point!).
• Not rolling over: This is a bit of a judgment call because your employer’s plan may not be all that bad, the risk is that you completely forget about it and decisions are made without your knowledge. It’s easy to just let it go on autopilot, especially if you don’t work at the company anymore, so oftentimes it’s better to roll it over to a brokerage and buy their funds. “Out of sight, out of mind” in this case is a bad thing.
• Not directly rolling over the funds. When you rollover, you can have the 401k plan provider write a check directly to your new brokerage, called a trustee-to-trustee rollover; or they can cut you a check and you can write a new one. The second way, the check, is dangerous because you have sixty days to deposit the funds or it’s considered a cashout. One trip through the postal service is certainly better than two trips, especially if the two trips has a time limit with a hugely negative downside.

The two others aren’t as big of a deal, certainly not as bad as the first three, and you can read about David Bach’s take on all of them in this Yahoo Finance article.

The Bush Administration is trying to push through a proposal in which 401(k) plan providers would have to fully disclose their fee structure to companies prior to being taken on as a provider of 401(k) services.

Companies selling 401(k) services should be forced to disclose all the fees and expenses that can drain money from workers’ retirement plans in writing before businesses trust them with their employees’ money, the Bush administration proposed Wednesday. … Under the proposed regulation, companies offering 401(k) and other employee benefit plans would have to submit in writing all services their plan offers and all direct and indirect compensation they get from the plan. Plan providers would also have to disclose any possible conflicts of interest that could affect the plan’s performance. The proposed regulation would also give protection to employers when plan providers don’t complete disclose required information.

I’m actually surprised this isn’t currently required, I would imagine that this level of information would be necessary for a company to make a decision on who would be providing services. To not have this means that company HR departments have been asleep at the wheel, right?