Snowflaking is a play on words off Dave Ramsey’s Snowball psychologically-driven debt busting technique and it refers to putting small amounts towards your debt, snowflakes, to help eradicate debt. One of the ideas of snowflaking is that you can find small alternative sources of income and then push it towards your debt but you could really put it towards anything. You’re snowflaking when you drop your loose change in the piggy bank, so why not apply this towards retirement?

Snowflaking won’t work for things like a 401(k) since it will be a payroll deduction, but you could use it to fund your IRA, Roth or Traditional. I recommend using the piggy bank approach, putting small amounts of money into your piggy bank and then making one deposit each month, hopefully in addition to your monthly Roth IRA contribution. If you’ve maxed out your retirement fund, that’s wonderful and you can skip this. If you don’t max out your contributions to your Roth IRA each year, consider using snowflaking to help get you even closer. Remember, the 2008 Roth IRA contribution limit is $5,000 if you’re under 50 and $6,000 if you’re over (it’s the catch-up provision).

Recessions, or two consecutive quarters of negative GDP growth, have been on many people’s minds lately and this latest article, What job woes mean to you by Chris Isidore, probably doesn’t help. Economic cycles happen and with each economic burst will come a correction of sort, a regression to the mean if you will. However, if you plan for it, you can mitigate the negative effects of a recession as best as possible.

The greatest concern during a recession is job loss, the focus of that article, and you can mitigate that by solidifying your worth to the company you work for and boosting your emergency fund. I wrote about the decision making process for contributing to a retirement fund or an emergency fund in the past, still worth reviewing if you haven’t read it. After the 401(k) match, I recommended that after you’ve saved 6 months of expenses you should move back to your Roth - I still agree.

However, I would amend that article and increase the emergency fund period to 9 or even 12 months. One benefit of a Roth is that you can withdraw your contributions penalty free under many conditions, so you aren’t significantly hampered by contributing, but the key here is to increase your emergency fund because the probability of a bad event, such as job loss, has increased.

You can’t control, to a certain extent, what happens to you but you can control how well you prepare for it.

There are a lot of retirement options out there, so many that your head probably spins whenever someone talks about 401(k)’s, 403(b)’s, Roth IRAs, or Traditional IRAs… the list goes on. One topic that most people don’t talk about is saving part of your nest egg in a regular taxable brokerage or mutual fund account. They don’t talk about it because you get immediate tax benefits for contributing to a 401(k) (you can deduct your contributions from your income) and because you get deferred tax benefits for Roth IRAs (your distributions are tax free in retirement), but a regular taxable brokerage account should be a part of your retirement planning for X key reasons.

Tax Diversification

You shouldn’t put all of your eggs in one basket and that basket shouldn’t say “tax deferred.” 401(k)’s give you immediate tax benefits in return for taxing your disbursements. It’s nice because you pay less taxes now in return for paying more taxes, on a larger asset base, in the future. The only risk you have is in whether your tax rate increases substantially. If you are saving on 25% in taxes today but forced to pay 50% in taxes in 40 years, it’s less clear how good of a decision you’ve made. This is why it’s important to diversify your retirement account tax exposure. You can do this by going with a Roth IRA or, if you’ve exhausted that route, opening up a taxable brokerage account.

Flexibility & Access to Funds

When you contribute to a 401(k), the only way to get the funds is either borrowing against the 401(k) or withdrawing from the 401(k) and taking a 10% penalty (on top of the taxes). With a taxable brokerage account, you have the flexibility to access the funds whenever you need it! Give yourself the flexibility to access your funds, or at least part of your funds, and you won’t have to cripple your retirement by borrowing or withdrawing from a 401(k).

Tax Benefits

When you invest with a 401(k), everything is taxed at the short term capital gains rate when you begin taking disbursements in retirement. With a brokerage account, you can take advantage of the long term capital gains tax rate if you hold the investment for longer than a year. In a 401(k), everything that comes out of the account is taxed at your tax rate, regardless of how long you’ve held the underlying asset! Does the benefit of an immediate tax break outweigh the fact that all of your appreciation is taxed at the short term rate? That is for you to decide.

I’m not advocating that you select a 401(k) or a taxable brokerage account, I’m merely suggesting that a taxable brokerage account has value in a retirement plan. All three accounts (401k, Roth IRA, and taxable brokerage account) have their place in a solid retirement plan.

The Roth IRA contribution limits are:

As you can see, if you’re over 50 then you’re given a “catch-up” contribution.

The income phaseout schedule is based on your modified adjusted gross income, which is your income minus some deductions. The income phaseout schedule is:

The phaseout is linear, so if you are single then at $95,000 then you could contribute $4,000 in 2006. If you made $110,000 then your contribution is $0. If you made $100,000, then your contribution would be limited to $1333.33.

One little known fact: If you’re under the income ceiling, your phaseout’s minimum contribution is $200. So, if your MAGI were $109,999, your contribution limit is $200, not some miniscule proportionate number.