Before you judge me too harshly, let me remind you that Americans overall are guilty of clutter. In fact, we are besieged with clutter. The average U.S. household has at least 35 unused items taking up room in their homes, which is remarkable given that the size of an American home has grown by 53% in the past 30 years. Our clutter is so bad that fully 25% of people with two car garages can’t park their cars in that space because of the mountains of junk we store there.

  We have bought and saved so much stuff that one out of every 11 Americans now rents a self-storage space for approximately $1,000/year. No wonder that storage facilities have grown to a $154 billion industry.

On average, it must cost me about $10/square foot in lost living space to store all the junk in my house. If I had to bet, I would guess I’ve spent at least one whole year of my life just looking for lost items amid the stacks of boxes and crates in my basement, attic and spare rooms.

In our house, clutter had grown so acute that at times there was barely enough room to walk through piles of furniture and other items. Fortunately, it is a weekend house which we frequent less and less so we don’t have to live with the mess full-time. I realize now that it has doubled as our storage unit for the last decade or so.

During that time we lived in Manhattan where we changed apartments frequently. Every time we moved, we would dutifully pack the contents of our living space into two piles: one for the new apartment and the second to be stored in the country house for further sorting. The problem was we never sorted.

Instead we just added and added to the boxes already in the basement until we couldn’t open the door. At that point the clutter started to back up into every spare bedroom, hallway and living space that wasn’t in use.

In hindsight, it probably increased the time we spent cleaning by 40% and our stress levels by 100%. And don’t get me started on the books. Did you know that Americans discard an average of 4,583 pounds of books and magazines annually and I contribute more than my weight to that statistic?

So how did I find religion?

It came to a head when we decided we were not using the place as often as we had in the past. We didn’t want to sell in this market but discovered that rental properties in our area are in great demand right now. The first thing we did was contact a rental agent to take a look at the space. After a brief inspection, she made it quite clear that before anyone would even consider renting the property, we would have to get rid of the clutter—all of it.

I credit my wife, Barbara, for most of the rest. Believe it or not, we are in our fourth weekend of extreme downsizing and apart from my back ache, it actually feels good. Getting rid of stuff was not as easy as we thought. We didn’t want to go the yard sale avenue because we felt the process would take too long and the money not worth our time. 

We actually tried to give it away over two weekends after advertising in the local newspapers and internet. Only six people showed up the first weekend and less the following week. Then we called Goodwill. They took a truckload but that barely made a dent. Then we rented a 10 yard dumpster, which we filled in just two days. Only then could we begin to see the walls of the basement.

This last weekend, we started on the clothes closets and have already filled six huge trash bags of perfectly wearable sweaters, vests, swim trunks and jeans. That leaves four more closets before we can get started on the living spaces. I have taken to calling it “The House of Pain.”

So far there have already been some cost savings. I have found some replacement items that have saved me from going out and buying new running shoes, gym clothes, winter gloves and other items. There is also a benefit to the soul in donating these things to charity. I also didn’t realize the stress all this clutter was causing in our lives; maybe there is something to this Feng Shui stuff.

 After a few more weekends of this, I might actually be able to visualize a home where I would want to entertain guests. As the clutter declines, I’m beginning to see the original beauty that prompted me to purchase the house in the first place. Who knows, if things continue to go this way (and my back holds up), we may just end up spending more time here and forgetting all about the rental idea.

Under the current 1977 tax law for Roth IRA conversions, individuals are permitted to convert a traditional to a Roth IRA but only if your adjusted gross income(whether married or single) is no more than $100,000. In May, 2006, President Bush changed the rules for one year only. Starting in 2010 taxpayers earning more than $100,000 will be allowed to convert and the taxes due on the conversion can be spread out over two years. So a 2010 conversion amount can be included as taxable income in 2011 and 2012 lessening the impact of the tax bite.

Now removing the cap for one year doesn’t mean that any one can open a Roth IRA. Taxpayers are still restricted based on the amount of income they earn. For example, married couples, filing jointly earning between $166,000-$176,000 and singles earning between $105,000-$120,000 are phased out of contributing beginning at the lower number.

Obviously, the draw in converting your IRAs is based on how they are taxed. Traditional IRAs are tax –deferred meaning the money you contribute each year is not taxed until you start withdrawing it when you retire when hopefully your tax bracket is much lower. In a Roth IRA, the money you contribute is after-tax income but tax-free when you withdraw it (there is a minimum holding period of five years).

There are two concerns in converting that I can identify. Taxes as I’ve mentioned before are already at historically low rates as are marginal tax rates. How do you figure your marginal rate? That’s easy. Let’s say the money you earn this year puts you at the very top of the 25% tax bracket. Then you make $200 more in a bonus, that money will be taxed at the next higher tax rate (the marginal rate) which is 28%. That’s the rate at which the IRA conversion will take place in 2010.

But if you keep your money in your traditional IRA when you retire and start to withdraw you will be only taxed at your tax bracket not at the higher marginal rate. Depending on how much you have in your traditional IRA that could be a substantial tax savings.
Your accountant will also tell you the cardinal rule of tax management which is to defer, defer, defer. Don’t give the government one penny before you have to. By paying in 2010, you forego the ability to grow that money tax-free in your traditional IRA for how ever many years before your retirement.

My second concern is the government itself. I don’t trust the politicians. Just because the lawmakers promise you something today doesn’t mean they won’t take it back tomorrow. In 1986 when a third of American had an IRA and 75% of them were middle class taxpayers, Congress arbitrarily imposed severe restrictions on the deductibility of contributions. Even now our 401(K) plans are being “reexamined” by the Hill and there is the possibility that some higher income earners may have their tax exemptions restricted.

Then there are tax changes. For example, marginal tax rates have been all over the place over the last century ranging from 7% for those making above $500,000 in 1913 to 94% for those making above $200,000 in 1944 to 35% currently on income above $385,000. Tax brackets have been stretched like rubber bands as well.

So will taxes be higher or lower when you retire? That naturally depends on how old you are now and how long before your retirement. It is a real crapshoot but given the deficit, the Social Security and Medicare issues, does anyone seriously believe that tax brackets and marginal rates in the near future won’t be higher?

If you are wealthy( I mean $4 million or more wealthy) making half a mill a year or if you are just starting out and expect to earn big bucks in the future then converting is a definite winner. In a Roth, unlike a traditional IRA, there is no minimum required distribution starting at 70 ½ years of age. That means you could conceivably leave all that tax-free money to your heirs.

For the rest of us, whether to convert or not is a question that should be studied, possibly to ask your tax accountant or financial planner. Which ever way you go you have almost a year to decide.

I see your eyes rolling and I can commiserate. The vast majority of us are still struggling to make ends meet. What with the kid’s clothes, putting food on the table and paying a higher price at the pump just to get to work it’s how much, if any, can we “afford” to contribute.

Maybe it’s the timing. Somehow all the good intentions we had last year about contributing evaporate as the first of the holiday season credit card bills begin to arrive. Even though we can pay them we still “feel” poor. We resolve to start contributing “next year.” After all, retirement is a long way off. Sound familiar?

But maybe its time to change our thinking since tax deferred savings plans are a good deal for a variety of reasons and not all of them have to do with retirement. The assumptions behind the retirement plan are that your money earns income tax-free through investments. With the right investments you could possibly double your money every ten years. At age 70 ½, your are required to take a yearly minimum required distribution taxed at a rate presumed to be lower than the one you are in now. If you withdraw the money prior to 59 ½ you pay a ten percent penalty plus tax.

The first point to remember is every dollar you contribute now is still yours. Those you don’t are gone forever. The government takes them and can spend it on things like $250 toilet seats or the war in Iraq. There are also other benefits.

IRAs are a great vehicle for acquiring the down payment on that first house, the number one dream of most American families. That’s right, a one- time withdrawal of up to $10,000 is allowed penalty free for first time homebuyers.

You can also withdraw funds for education, either your own, for your spouse or your kids. That’s not all. Do you work with your hands? If you do, one of your nightmares may be a serious injury on the job. A penalty-free withdrawal to cover medical expenses exceeding 7.5% of adjusted gross income is also an option.

There are more benefits but you get the idea. So what’s the best way to begin? Open an IRA at any bank and have your company direct deposit money from your paycheck. How much is up to you but $96.15 a week would max out your yearly contribution. What tends to happen is that we hardly miss the weekly shortfall in our paycheck. An added bonus comes at the end of the year. We usually receive a bit more from the government than we expected at tax time. By the way, if you’re married, your spouse is also eligible to contribute the same amount in a separate IRA account.

Next time we’ll talk about the non-deductible Roth IRA and why it makes just as much sense for some people to contribute after tax money in exchange for tax-free income after only five years.

So where’s the catch? For one thing, you can’t claim a tax deduction like you can with a traditional IRA contribution. Second, you can’t contribute if you make more than $95,000 a year ($160,000 if married and filing jointly). Old guys like me usually don’t qualify because our income climbs as we grow older and gather more experience. Younger Xers also have more time on their side when it comes to savings.

So which is better for you if you’re on the cusp, traditional or Roth? If you’re still young and expect to earn more in the future it makes more sense to invest in a Roth because the money you contribute now will be taxed at a lower rate. As you grow older your income will grow as will your tax rate. Think of it like spring planting season. With the Roth, the small seed you plant is taxed now but the harvest will be tax-free providing you follow the rules.

You have to keep the money in a Roth for five years before it qualifies as tax-free. Like a traditional IRA, money withdrawn before age 59 1/2 is subject to a 10% tax penalty. But unlike a traditional retirement account, the minimum distribution requirement doesn’t apply that means you don’t have to start taking money out at age 70 ½. You can also withdraw funds in an emergency after the five- year period, tax-free, although you still pay the 10% penalty if you’re younger than 59 ½.

What about the Baby Boomers, is it too late for us to utilize the Roth? Not necessarily, especially if you believe, as I do, that tax rates, including the minimum tax, in this country will continue to rise. Washington’s legacy of spending, budget deficits and the long-term funding needs of social security make future tax increases inevitable.

I still have clients, well past sixty, who religiously contribute to their Roths. Some work part-time and now qualify to contribute for the first time since the Roth was enacted as part of the Taxpayer Relief Act of 1997. Other retirees are converting their traditional IRAs into Roths to lower their tax bills or because it makes sense as part of an overall estate planning strategy.

One final benefit: if you open a Roth IRA before the mid April deadline and make a contribution for the year 2006, you will only have four more years to go before it’s all tax-free.