There are so many different ways to earn extra money with your brain, the best question isn’t how can you earn extra money but how can you earn the most money the fastest. The place to start is determining which of your skills or specialized knowledge you have that you could turn into extra income.

In this article we’ll look finding a market for your skills and determining whether what you’ll earn will be worth the time and effort you’ll have to put in. Then we’ll finish up by taking a look at some resources for making extra money with your brain.

Your Brain is Money

Over the years, you’ve probably picked up special skill sets or valuable bits of knowledge that other people would pay to tap into if you could make your expertise available for sale.

It seems the challenge for most people when going through this exercise is figuring out what it is that you know that is valuable and unique enough that people would be willing to pay for it.  Of course it’s different for each of you but we can look at some scenarios and maybe those examples will get your brain going.

Shopping Expert – If you know where/how to always get a good deal when buying a popular product, you can buy it cheap and re-sell it on a site like eBay.

Digital Creator – If you know how to write software, layout web pages, design databases, or build mobile apps you can sell your services on sites like eLance or oDesk.

Handmade Creator – If you know how to create things with your hands (knitting, sewing, etc) you can make clothing, decorations, or other crafts and sell it on a site like Etsy.

Math or Science Whiz – If you understand & can explain calculus, chemistry, physics, or statistics you help tutor others on a site like Tutor.com.

Marketing Your Brain

Of course, having the knowledge isn’t any good for generating income if you can’t turn it into money. You have to decide if you want to market your expertise yourself (which typically takes longer to get going) or find an existing marketplace.

For example, my wife tutored kids one summer in our neighborhood.  She put up signs, passed out flyers, and worked her network of school teachers to find parents that wanted tutoring for their kids.  She wasn’t busy every day, all day long because it was her first year. If she’d have continued tutoring, over time she’d have built up her network and word of mouth and become more and more busy.  She probably would have been a lot busier that first year if she’d have signed up as a teacher on tutor.com.

If you don’t want to take the time to market your brain yourself, there are many websites available that have already created an online marketplace where you can find people in need of your information or skills.  The trade-off is that they’ll usually take a cut of your earnings, but they can start sending you customers right away.

Effort vs. Reward

When you’re selling your brainpower, one thing to consider is whether the work you’re putting in is worth the money you’re making.  The whole reason you’re leveraging your brain is to earn “extra money”; extra implying that it’s more money than you already make.

Of course this means you’re probably still doing all the things you normally would in a day, and working extra in your spare time for more money. Since you only have 24 hours in a day be sure that the time you spend is worth the money you’re making. 

Opportunity Cost

An important concept here is opportunity cost.  Let’s say you’re spending two hours a night and on average earn $30 for your efforts.  The extra money will be nice, but if there’s something you could be doing that would earn you $50 a night for two hours work; then by taking the lower paying gig, you’re missing out on the opportunity of earning an extra $20 a night.  The best way to avoid this is by researching the opportunities for all your skill sets before you commit to one.

Create Once, Earn Multiple Times

One last thing to consider. If you can make money more than once off the effort that you put in, then your earnings can increase without you having to put in as much time.  Take the Digital Creator scenario I discussed earlier for example.  If you find a client on eLance and write them some software for $100, then once the work is done you have to write another program for another client to make more money. 

On the other hand, if you write a useful program that a certain type of person or business would need and sell it for $25, then you do the work of creating software once and can sell it multiple times for $25.  There will be marketing involved but that will take less time than the work of creating, testing, documenting, and packaging the software.

Guides to Making Extra Money With Your Brain

As I mentioned earlier, coming up with ways you can sell your brain power is challenging for a lot of people.  I thought it might help to look through some examples, just to get the wheels turning.  Phil Taylor, from PT Money, has gathered together a free resource of 52 ways that you can make extra money.  Not all of them are focused on leveraging just your brain power but it’s a good starting point.

One way that you can build a platform from which you can sell your brain is to write regularly about your area of expertise online.  This approach can help people find you on the Web and allows them to get to know more about you and your expertise.

Peter Anderson, from the site Bible Money Matters, offers a resource, called Blueprint For How To Make Money With A Blog, that is a good overview of using a blog to make extra money.  Peter has personally used the approach to earn money writing about personal finance but you can apply the concepts to most any area of expertise you might have.  I got a review copy for free before Peter made it available for sale but I’d say it’s definitely worth the price if you’re thinking about getting started with this approach.

So there are some tips and tactics for earning extra money with your brain.  If you’re looking to make extra money, take a few days to let the concepts simmer and start coming up with a list of skills you have that people would be dying to get their hands on.

Even if you buy into this mindset, though, it can be tough to think like an entrepreneur in a 9-to-5 job. An employee has a fundamentally different way of viewing the world than an entrepreneur does.  One of the main ways you can tell if you’re an employee with an entrepreneurial mindset versus an employee with an employee mindset is this:  do you worry about being at your desk at 5:00 PM (and also, 9:00 AM)?

If you have the employee mindset, you’ll want to make sure you’re a team player. You’ll have a contract specifying a minimum of 40 hours per week, and you’ll watch that clock to make sure you are in your seat 40 hours (at a minimum).  The employee mindset says that the “where” (sitting at your desk) is more important than the “what” (getting results).   The employee is banking on ‘face time’ being the critical measurement of success.  If you have ten hours of work to do or two hours, the hours will be the same.

The entrepreneurial employee’s mindset is different. If you’re in at 10 and leave at 3, it doesn’t matter as long as you get the job done.  If you need to be there at 5 (or 6, or 7), fine.  If you can leave early, also fine.  The employee with the entrepreneur’s approach knows that his or her “brand” is based on whether or not goals were met.  Whether you sat in your desk an extra two hours after your work was done for the day, just so you were there at 5, doesn’t matter.

Has anyone in a professional career has ever bragged in an interview about how they could always be counted on to stay in the office until 5:00?   Employers don’t care.  Clients don’t care, either.  Skills and results are the only thing that matters, right?

Unfortunately that’s not true. A lot of lip service is given in the corporate environment to work/life balance and the idea that only results matter, but anyone who spends more than a day or two in a cubicle knows this isn’t true.  Whether or not you have butt firmly planted in chair at 5:00 matters nothing to your next job, true.  But in office politics – the business of surviving in and flourishing in your current job – ‘face time’ is critical.  Look around the office and see how many people are coasting, working at less than full potential, simply so they have their tired face visible when 5:00 rolls around.  These people may understand, deep down, that there is no real reason to be adhering to a 9-to-5 schedule, but that’s the corporate culture and it seems unlikely to change.

If you feel the desire to be in your seat at 5:00, fine. Many people are more comfortable not rocking the boat.  But if you feel that you NEED to be in your seat at 5:00 or you’re going to be disciplined, you’re not in an organization that values results.  You’re being paid to fill a budgeted position so a manager can move up the corporate ladder by pointing to his management of a team of 20.   And before you think you can just coast along showing up at 5:00, remember this:  managers with that mindset weren’t born.  They were sitting in your seat 20 years ago, waiting for the clock to move past 4:59…

If you read brip blap via RSS, you might want to visit the site and see the new theme; if you like it, it's the frugal theme and if you buy it through that link, you help support brip blap.
the 5 o’clock test is an original article from the website brip blap.

You can achieve a great wardrobe makeover even if you’re on a budget. Here are some ideas on where to get cheap clothes online and anywhere else.

My clothing budget is one of the lowest you’ll see around. I simply do not spend much money on clothes. I figure — if it’s functional, I’ll use it. Brand name or not, generic items or clever copies, I don’t really care just as long as I don’t pay much for it. As a true geek from Silicon Valley, I feel that trade shows are just as likely to be a source of new attire as anywhere else . It’s one budget category that can easily yield savings, if you know what to do. Surprisingly, you only need to be resourceful to make sure you continue to look your best despite not spending a fortune in the process. To illustrate this concept, check out these wardrobe makeovers, which don’t seem to take that much work or money to achieve (images are from ABCNews.com).

The takeaway here? Less skin = classy, especially when we’re talking about work attire.

Also, one way to save a bunch of money on clothes and your appearance is by finding clever replacements for the more expensive stuff. Some time ago, I wrote about how to save money by buying replicas and the issues we face when we buy fake goods. But when it comes to clothing and accessories, “fake” seems to be the way to go in order to rake in some great savings — take the humble cubic zirconia, for instance.

There are certainly many more ideas for lowering your clothing costs. As promised, following are several steps that you can take to ensure that your wardrobe looks great and is budget friendly.

Tips To Get Cheap Clothes Online or Elsewhere

1. Shop at outlet malls.

Outlet malls offer the same quality clothing as retail stores but at deeply discounted prices. They typically feature outlets for the big name brand clothing stores like Liz Claiborne, Gap, Old Navy, Adidas, and more. I found a great pair of Adidas tennis shoes at an outlet mall for $20. These shoes normally sell for $75 at a retail store, but at the outlet mall, I got a significant discount.

2. Earn rewards when you spend.

If outlet malls are too far to travel to, then do some comparison shopping in the comfort of your own home. A lot of times, you can get great deals on apparel and other merchandise through deal sites and online shopping retailers. A deals portal like Ebates can help save you money when you shop (for more on how to earn cash back when you shop, check out our Ebates review). Always figure out how you can earn rewards or cash whenever you have to fork out anything: doing so will help soften the blow of your spending.

3. Look for coupon codes that you can use at online retailers.

Be a wise or shrewd shopper. Another great tip is to simply search for promotional codes before you visit an online store. As an example, you can get great deals for shoes by securing a Shoebuy coupon code or a Macy’s promo code prior to dropping by these sites to comparison shop or place orders.

4. Check out Freecycle.org.

Freecycle.org is a web site where members can give away and receive free items. Visit your local Freecycle.org and get to know the members in your community. It is very surprising to find what people are willing to give away: as they say, one person’s junk can be another person’s treasure. Some of the things you’ll find here include brand new or gently used clothing, shoes, and accessories as well as many other items.

5. Shop for seasonal items after the season is over.

This is essential to adding new items to your wardrobe. For instance, if you wait until after the holiday season, you can find great deals on holiday dresses and outfits. And to make sure that your purchases get a lot of mileage, you should try to stick with classic designs rather than trendy items. Classic styles and colors will still be appropriate the following year. This way, you have something new and different to wear every year, and you get it at a clearance price. Remember that timing could make a huge difference — just check out this article on the best time to buy stuff.

6. Use accessories to change the look of outfits.

You can essentially wear the same basic underlying items, and change the entire look of the outfit with accessories. Find stores that offer great prices on necklaces, earrings, scarves, hats, and belts. Each of these types of accessories can transform an outfit from business casual to a date night outfit. I personally love the accessories at New York and Company. They offer a variety of colorful necklaces, earrings, and handbags that jazz up any outfit and just bring the whole look together.

7. Shop at thrift stores and Goodwill.

I know it does not sound glamorous, but thrift stores and Goodwill often offer some of the most basic items that you need for your wardrobe. Black slacks, white shirts, cute tees, and jackets are just a few items I have found at the local Goodwill. I also found my favorite pair of jeans here. You do have to rummage through the place for a while, but when you find that piece that you absolutely love, the search pays off. On my most recent trip, I found two cute t-shirts and a pair of jeans, and my total cost was all of $8! That is less than I would spend on a pair of earrings at a store at the mall. Look for the basics at these stores, and spice them up with new items. For more tips, check out these great places to earn and save money on used items.

8. Hold clothing swaps or exchanges.

So you may own a few nice pieces while your friends do as well. When you find yourself in such a serendipitous situation, could it be possible to conduct a trade or clothing/item swap with your friends? I think that clothing exchanges are an awesome idea. And don’t worry about having unmatched wardrobe sizes either since you don’t have to limit these trades to clothing. After all, you can also decide to trade accessories and shoes (okay, that may be a bit of a stretch, but you get the idea). Get a list of all your friends and/or family members and find out who among them would be interested in a clothing/accessories trade. Not only does this help you find new items for your wardrobe, but you get to declutter your closet as well. In my case, I’ve receive a countless number of hand-me-downs from my generous sister and mother who both have excellent taste in fashion. I have them to thank for what’s in my closet!

Get Cheap Clothes Online or Elsewhere With These Tips

"...those looking to buy and enjoy an Android smartphone for any length of time are in the dark as to what's coming next, on which carrier, and how long they'll have to wait for an upgrade—if it ever happens. Right now, the G1—only one year and four months old—is running Android 1.6, and looks like it may stay that way forever."

Android phones don't have that strong link between the operating system and the hardware. You may remember that Microsoft (via Windows Mobile) and Palm (remember their Sony PDAs) tried the model of an open OS and I don't there was one major success. I believe that Apple showed it's best to tie the hardware to the somewhere so you don't have three companies (carrier, hardware developer, software developer) all mixing things up.

Palm came along and gave people the best of both worlds... a physical keyboard, an open application market-place, changable battery, multitasking, availability on multiple carriers, and a strong tie between the hardware and software where your phone actually gets better through numerous updates. Palm has just one problem... no one knows about their phones. Lifehacker also mentioned recently that people tend to choose the most popular phone, not necessarily the best phone. Palm has to change that. How they do that, I simply don't know. They've made some poor advertising choices in the past, but even now that they've righted the ship, it doesn't seem to be getting good sales.

It seems like more and more people are gravitating to the IPhone or Droid devices. That has caused Palm to revise their earning estimates downward. Their stock in the last 18 months has moved from around $1 to $18 and back down to about $5.50. Earlier today, I decided to go long on Palm with a small amount of play money. I'm a sucker for the underdog when they have solid technology. Before following me, I warn you that I also invested in AMD a long time ago thinking that they could split the marketshare with Intel since their chips were just about as fast and much cheaper.

I was further convinced of Palm's death on a recent trip to Barnes and Nobles. There were at least 30 books on iPhone development, a few for Android development, and not a single book on the shelf for Palm WebOS development. So while I wallow in my future stock market losses, check out these personal finance links:

Money Writers:

• Brip Blap posts expatriate altruism.
• Digerati Life blogs vacation pay for unused vacation time?
• Frugal Dad on why you need disability insurance.
• Learn how to negotiate remote work with an employer at Generation X Finance.
• Million Dollar Journey points out who your worst enemy is when investing in stocks.
• Money Smart Life discusses medical expenses & income tax deductions.
• My Dollar Plan asks would you walk away from your home?
• The Sun’s Financial Diary shows readers how to file a tax extension.

Top PF Posts:

• Free Money Finance says you can avoid budget busters by curbing your worst impulses.
• Saving Advice talks about keeping control of your money.
• 7 Million in 7 Years writes the ideal perpetual money machine …
• Give Me Back My Five Bucks says I’m unemployed.
• Get Rich Slowly shares a reader story: how I paid off $18,000 in student loans while still in graduate school.
• The Smarter Wallet examines discount health plans vs health insurance: pros and cons.
• Wise Bread asks don't have enough to pay your taxes?
• Almost Frugal says this is what frugal looks like: The Green Gal.
• Grad Money Matters shares how to stop collection agency calls.
• Frugal For Life asks unemployment pay: personal integrity at risk?
• Money Ning posts change your vacation style to save money.

Related posts:

1. Addicted to Cell Phones (and Personal Finance Links) My name is Lazy Man and I'm addicted to cell...
2. Weekend Personal Finance Links (Palm Pre vs. iPhone Edition) I'd like to wish all the father's out there a...
3. Strong Personal Finance Articles from this Week (Palm Pre Edition) I was lucky enough to be able to buy a...
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Do you have any students in your family, or are you a student yourself? If so, then the American Opportunity Tax Credit may help you decrease your tax obligations for 2009 and 2010. Like the Hope Credit, you can claim this new tax credit for tuition and certain fees you pay for higher education either last year or in 2010. But there have been some changes to the benefit of students and those who claim students.

Below is a list of the new changes.

Higher Amount You can Claim

• The new tax credit limit is $2,500, up $700 from the Hope Credit

New Definition for Tuition and Qualified Expenses

• Tuition is still covered for this credit, but now course materials are also covered, which include books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance

Possible Tax Credit Payout

• Unlike the Hope Credit, you can now get up to $1,000 of the tax credit refunded to you by Uncle Sam or 40% of it; this will make a difference to lower-income taxpayers who owe smaller amounts of taxes

Help for Middle and Higher Income Earners

• Phaseout begins at $80,000 for single filers, or $160,000 for married joint filers
• Full credit is allowed to help offset the Alternative Minimum Tax

Years Three and Four of the Post-Secondary College Years can be Claimed

• This credit can be claimed for 4 years of post-secondary education, versus the first two years of the post-secondary education under the Hope Credit (although this credit is only good for 2009 and 2010 at the moment)

In order to claim this tax credit, you will need to fill out form 8863 and attach it to Form 1040 or 1040A. For further information, check out the IRS website.

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It’s common knowledge that everyone should save for and prepare for retirement. Most parents would like to be able to save towards their children’s future college costs as well. Problem is, in today’s economy, the vast majority of household budgets are stretched so incredibly thin, that there’s usually not even two cents left to rub together let alone put away for future needs. As the saying goes, the squeaky wheel gets the oil, and it’s easy to not hear or even completely ignore the distant cry of future needs when you’re struggling to meet the clamoring, nagging needs of today. All is, fortunately, not lost, however. Use the tips and strategies that follow to help you stretch today’s dollar now and minimize the cost of tomorrow.

Any Start Is a Start in the Right Direction

Forget feeling guilty about not being able to stash away more savings. As with anything in life, the first step is often the hardest. The sheer fact that you’re beginning to anticipate and prepare for future needs puts you that much farther ahead. Even if it’s just a token dollar or two, get in the habit now so that when you are capable of increasing your savings deposit, you’re already used to doing so.

Think Small over the Long Haul to See Bigger Results

Start early enough and you needn’t necessarily jeopardize today’s budget for tomorrow’s future financial needs. Regardless of the future expense, the earlier you begin saving, the smaller deposits you’ll need to make in order to reach your target financial goal. This is true for two simple reasons. One, you’ll be making deposits for a longer period of time, spreading out the total target savings amount. And, two, you’ll have the ability to accrue interest for a longer period of time which can really add to your bottom line and make your job of saving that much easier.

Get Help Wherever You Can

Take advantage of employer retirement programs that allow you to contribute via pre-tax payroll deduction. A true win-win situation, you’ll likely never miss the extra funds in your paycheck if you’ve never had them to begin with and you’ll lower your taxable income at the same time. If your employer offers retirement matching, make sure you take advantage. Failure to do so is the equivalent of giving free money away. If you have children, look into investing in a 529 plan (also known as “qualified tuition plans”). Not only do they aid in the process of stashing away the savings today for tomorrow’s future tuition bill, 529 plans can actually lock in the price of today’s tuition and allow your child to take advantage of it tomorrow potentially saving you (and your child) thousands of dollars. Parents who take advantage of qualified tuition plans do incur fees, and most plans also have limited enrollment periods each year. The good news is that even though each state offers their own 529 plan, parents are not locked into their own state’s plan. A word to wise parents everywhere, take the time to comparison shop the various state plans and determine which one best suits your and your child’s potential needs best. For more information or to compare the various state plans, visit the College Savings Plan Network (CSPN) site.

Don’t Overlook the Standbys

There’s a lot to be said for not fixing what isn’t broken. If you simply don’t have the leftover funds each month to make contributions to a retirement or college savings plan, stick with making albeit small deposits in a traditional savings account or consider purchasing savings bonds to help your money grow with much less expensive contribution amounts. After all very little bit counts, and if you start counting (and saving today) you’ll have far less to worry about tomorrow.

(To download and print a worksheet of this topic, click here.)

Photo credit: the queen of subtle

Original Post on The Sun's Financial Diary

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Today’s frugal fashionistas know a thing or two about creating an enviable wardrobe at a fraction of the cost of buying retail and they do this in a number of ways.  Some shop deep discount outlet malls to pick up their brand name attire while others dig diligently through the racks of the secondhand store in hopes of acquiring the precise type of apparel that they are looking for.  Other, more creative types, sit down with a sewing machine and a pattern and whip out designs all their own.  College students looking to recycle last season’s fashions, clear out their closet and host clothing swaps where each participant walks away from an evening full of fun with an armload of new attire and accessories to wear.  Families with small children shop yard sales and online auction sites to buy lots of gently used clothing for their little ones to wear. Rather than replace items on a whim, these parents wait to buy new clothes until their children wear them out or outgrow them.

Like past generations, a majority of today’s population works hard to reduce, reuse, and recycle the items that they purchase or acquire for free.  You can learn a thing or two from these individuals by learning how to look like a million bucks for less.  Here are a few secrets that they would like to share with you.

Don’t Overlook the Potential of the Thrift Store

On a regular basis, people find amazing brand name, quality items that are still in the box or have the tags hanging from them while shopping at a thrift store or secondhand shop.  I once purchased a brand new pair of Doc Marten boots for less than a dollar at the Salvation Army. And don’t forget the other side of the coin as well. If you have clothes you no longer wear you can basically put money in your pocket by donating it or even selling it at a second-hand store like Plato’s Closet.

Get Your Hair Cut, Colored, and Styled By a Student

Visiting a school that specializes in Cosmetology has its benefits.  In addition to helping a student acquire the hours that they need to graduate, you can have your hair cut, colored, and styled for next to nothing. Don’t be afraid of a bad haircut. Chances are you’re going to get a great cut or style and pay a fraction of the cost of going to a regular salon.

Join the Do-It-Yourself Bandwagon and Learn How to Alter and Reconstruct Clothing to Make It Look New Again

Ill-fitting or otherwise unattractive clothing can be cut, sewn, embellished, and repurposed into amazing shirts, pants, skirts, belts, handbags, and headbands.  Craft store sell yards of fabric, spools of ribbon, patches, leather fringe, beads, and buttons specifically designed to update the look of old duds.

Buy the Best Items That You Can Afford and Take Advantage of Life-Time Guarantees

Many companies guarantee the items that they sell you.  Take advantage of these policies and buy the best garments that you can afford.  A high quality item purchased from LL Bean carries a lifetime guarantee.  Although the initial cost of a new coat may seem overwhelming, it pales in comparison when you consider the cost of multiple new coats over the course of a few decades.

Familiarize Yourself with Freecycle

Free is the way to be.  Get to know your local Freecycle group.  Post items that you no longer want and request items that you know you will use.  Not only will you reduce costs, you will also help the environment by keeping perfectly good items out of the landfill.

As you can see, you don’t need to blow your budget buying all of the latest designer fashions, getting expensive hair cuts, or buying junk you’ll only use once or twice. Frugal is the new black, and if you’re smart with your money you can look like a million bucks without spending more than a few dollars.

Charissa Arsaoui is a freelance writer for ChickSpeak, Buzzine, DisFUNKshion Magazine, Student Stuff, and a guest contributor for Wisebread.  She loves thrift related topics and can spot a bargain a mile away.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

How to Look Like a Million Bucks For Less

As you probably know, there are no longer income limits for future retirees hoping to convert traditional IRAs to Roth IRAs.

Previously, only those with income under $100,000 could take advantage of the superior tax treatment of a Roth. Today, the Roth IRA conversion rules allow anyone to convert existing funds, even if you make too much to contribute new savings to a Roth IRA.

Why a Roth IRA is Good for You

A Roth IRA is the Cadillac of retirement plans. It is funded with after-tax dollars and allows you to:

• Withdraw your contributions tax- and penalty-free.
• Withdraw growth on your contributions tax-free after age 59.5.
• Keep your contributions and earnings in the account as long as you want, with no requirement for minimum contributions.

Roth IRA Conversions

If you are the owner of a traditional IRA, you may want to convert all or part of the funds to a Roth. The Pension Protection Act of 2006 also allows you to convert assets from 401(k)s or similar employer plans directly to a Roth IRA. You will have to pay tax on any deductible contributions. However, once the conversion is done you will never pay taxes on any eligible withdrawals!

If you are under 59.5, Roth IRA contributions generally have to remain in the account for 5 years after conversion before they can be withdrawn. So you should not convert any amount you might need in the next 5 years.

How to Convert to a Roth IRA

Converting to a Roth IRA is simple. It requires a little paperwork with your IRA account manager and reporting to the IRS. Specifically, you should take the following steps if you are interested in a conversion:

1. Decide if a conversion makes sense for you. Remember, you will pay taxes on all earnings in your traditional IRA as well as all non-deductible contributions.
2. Decide where you want to hold your Roth IRA. If you are converting from a traditional IRA, you will probably keep your account at the same financial services company. If you are converting from an employer account, you may need to look into options like Scottrade or Vanguard.
3. Contact the company where you will hold the Roth and request the applicable paperwork. If you are transferring assets from another financial services company you may need to open a traditional IRA first, then complete the conversion. A customer service rep will be able to walk you through the process and provide any necessary paperwork.
4. Complete the paperwork, which should specify how to invest the converted assets and how you intend to pay taxes (withhold from the converted amount or separate payment). Conversions must be done by December 31 of the tax year.
5. Report the conversion at tax time on your 1040 and Form 8606 and pay any applicable taxes.
6. Reap the benefits of your new Roth IRA!

Check back for articles on special 2010 conversion rules and specific situations when a Roth conversion makes sense!

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One thing I’ve recently been curious about is investing within a corporation and the resulting taxation.  More specficially, resulting capital gains when selling investments or assets.  Capital gains within a corporation works similarly to capital gains taxed personally but with notable exceptions.  The difference lies in the type of capital gains.  Capitals gains coming from the sale of capital assets that produce active income are taxed more favorably than capital gains from investments behind a corporation. 

If active income generating assets are sold (like a website within a media company), 50% of the profit is added as income to the corporation.  If the resulting corporate income for that year is within the small business rate threshold (16% in NL), then the overall taxation on the capital gain is 8%.  If investments are sold for capital gain, then the tax rate is higher.  50% of the profit in this case is taxed at the highest corporate rate (~50%), which will result in a ~25% tax on the gain.

One thing you may be wondering is what happens to the 50% that is not taxable? To put it simply, that portion can be flowed through to shareholders tax free.
 
Here are more specifics from Tax Guy:

One of the dilemma’s corporate business owners have is how to effectively get money out of the corporation.

If your corporation sells capital property, the gain is subject to the 50% inclusion rate. The 50% that is not taxed is added to a notional tax account called the Capital Dividend Account (CDA). You can then pay yourself a tax free capital dividend from the CDA.

I have another question if you have a moment. If I were to invest behind a corporation, I understand that dividend/interest income from those investments are taxed at a higher rate. However how do capital gains work within a corporate investment account? I realize that 50% is taxable on the capital gains, but at what rate? If my business qualifies for the small business deduction, and gets taxed @ 16% (in NL), does that mean that 50% of my profit gets added to corporate income and taxed at 16%? What happens to the other 50% of the profit that’s not taxable? Can shareholders withdraw it?

If the corporation sells property used in the production of active business, the rate of tax is effectively 8% (on the full gain). On the other hand if the corporation has passive investments (i.e. stocks and bonds), the tax rate is 1/2 of the maximum rate for a corporation or 24.34%.

As an example, if you sold investment held personally, that has a cost of $10,000 and a market value of $15,000, the tax on the capital gain would be $1,112.50 (22.25% of $5,000 assuming you are in the top marginal rate and the investment sold is passive). Your after tax gain is $3,887.50.

On the other hand, assume your corporation holds the same passive investment and sells it and flows the profits to you as a shareholder. The corporation has a gain of $5,000 of which $2,500 is taxable at 48.67% ($1,216.75) and the other half is added to the Capital dividend account. You can see the corporation paid $104.25 more tax.

At this point, if you were to flow this money out of the corporation, the capital dividend would be paid to your tax free and you would pay out the remaining $1,283.25 as an ineligible dividend to which you pay 32.17% on.

After flowing these funds into the shareholders hands, the after tax gain is $2,500 capital dividend paid, plus $1,283.25 ineligible dividend, less $419.75 personal tax on the ineligible dividend. Or $3,363.50.

So you can see, by slowing out the investment income, you end up paying $524.00 more tax. Now keep in mind, that is assumes you need to flow the income out. You could retain the income in the corporation and continue to pay slightly higher tax on the investment income at 48.67% than you would personally and avoid an immediate tax hit by flowing out the income.

The strategy many corporation take is to either invest accumulated cash back into the business to produce active business income. When excess cash is accumulated (i.e. more than 10% of your assets) it eliminates your ability to qualify for the personal capital gains deduction and you need to consider flowing the money out via the CDA or by rolling out the excess cash to a holding company.

Other ways to get cash out of a corporation are via the estate plan and using a universal life policy.

So for those of you with corporations, do you have any other tax tips for me?

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When I was in high school I took a class called “Citizenship.” The coursework was divided logically between a number of “civic” topics such as taxes, politics, law, and even a very brief introduction to personal finances.

Since I began working the day after I turned 16, I was very familiar with basic checking and savings (well, I had a savings account, but save the $0.03 interest accumulations each month, I wasn’t very good at adding to it).

Back to Citizenship 101. The time came for students to balance our own checking register, write out our own checks and complete a deposit slip. My classmates were stumped, and I even made a little fun of a friend of mine for not knowing how to fill out a check.

He innocently responded that he had never even seen his folks write a check, and he joked that the only bank he knew of was his piggy bank. I suppose that is probably the average level of exposure kids are given to the world of personal finance. That is, until they are on their own and must learn on the fly. I distinctly remember thinking my kids would know how to navigate banking well before they had to know how.

Opening Savings Accounts for Children

It’s funny how fast 20 years seem to fly by. Fast forward a couple decades and here I am with kids who have been introduced to the concept saving and investing, but have not yet learned the mechanics of banking. Shame on me. My 16 year-old self would kick my butt for not teaching this before now. Better late than never, I suppose.

Last Saturday, my daughter and I strolled into our local bank to open a savings account for her. Until now, she saved at home, and I deposited larger amounts into an account for her online. While the interest rate was a little better for her online savings account, investing there caused us to bypass the act of allowing her to make a deposit herself – something I believe is important, psychologically.

With my guidance, she walked up to the teller with some of her hard-earned allowance money and completed deposit slip. In return, she received an updated account notice reflecting the amount of her deposit and increase in her balance. She updated the balance in her savings account register.

In a few weeks, we’ll receive her first savings account statement. I’ll point out the interest that has accumulated since the last statement (her first introduction to passive income), and we’ll update the register to reflect the new statement balance. At some point, I know she’ll want to withdraw a bit of this money for a purchase, and I’m fine with that. In fact, I’ll encourage it (and use it as another teaching opportunity)!

Witnessing the reverse of the deposit process is just as powerful. She’ll fill out a withdrawal slip, receive some cash from the teller and spend it. She’ll then have to reduce her savings balance in her register, and she’ll notice the balance reduction on her statement (and a smaller interest accumulation next month).

By then, she will have probably have forgotten what it is she took the money out for in the first place, and it’s my hope that the next time she considers withdrawing money, she remembers the disappointment she felt watching her balance dwindle.

A few years down the road, we’ll also add a student checking account for our children. We’ll practice completing checks, balancing her checkbook, and I’ll probably include something like “Lunch Money” in her allowance and let her write the check to her school to fund her account.

In the mean time, I’ll let the kids help me pay a few bills by check (I think I’m down to only one or two bills that I still write checks for). This way, they’ll get a lesson in how to write checks, and how much it costs each month to have water come out of the faucet!

Have you introduced your kids to banking concepts? Share your experience in the comments below.

Post by Frugal Dad