Warning About Snowflaking into Roth IRAs

June 6th, 2008  |  Published in Roth IRA  |  2 Comments

Snowflaking, or micropayments, is a clever idea but when it comes to paying off debt but when you are talking about contributing towards retirement, you have to keep several things in mind.

First, the rules of a Roth IRA, which will be easiest to snowflake into, state that you are only permitted to contribute earned income. If you don’t have a full time job and are relying on small irregular income such as filling out surveys or performing odd jobs, you won’t be able to contribute that to a Roth IRA unless you claim it as income. While you should always claim that as income, oftentimes people don’t and so you could find yourself in a quandary if you don’t claim it as income but still contribute into a Roth IRA.

If you have a full time job and the take home pay exceeds the $5,000 limit, you have nothing to worry. If you don’t declare that income, you have enough regular income to contribute so the snowflaking still works. If you don’t have W-2 or other earned income, you could run into problems.

Second, keep track of your contributions. If you are irregularly contributing to your Roth IRA, it may contribute too much in a year. If you do and have to make withdrawals, it can become a pain to roll back the contributions (you have to calculate how much of the annual appreciation is the result of your over-contribution and then pay taxes on it).

If you keep those two concerns in mind, everything should be dandy!

Snowflaking Your Way To Retirement

April 22nd, 2008  |  Published in Roth IRA  |  2 Comments

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).