Have your taxes from previous years?  Archive them!  Collect all of your forms for each year, digitize them, and make sure they're backed up to the cloud—Google Drive, Dropbox, whatever.  The IRS can audit three to six years into the past and you can file a corrected return up to three years back, so make it a habit to keep this information organized.

Pieter Brueghel the Younger's The Tax Collector's Office, 1640.  I bet the IRS looks like this too.

If you're missing a year, or if you'd like to see what information the IRS has on your earnings for this or previous years, you can download tax account, income, and tax return transcripts online.  Just head over to the IRS transcript website and make an account!  Transcripts are free and can be downloaded immediately.  When you're doing your taxes for this year, this is an easy way to verify that you have all of the W-2s and 1099s that the IRS does.

Like most things in life, it's best to be proactive about tax return errors.  If you've made an error, correct it before Uncle Sam comes knocking with additional fees and interest.  You can file an amended return to correct tax errors up to three years ago.

If you had earned income in 2012 and you'd like to make an IRA contribution on that tax year, it's not too late!  You can make IRA contributions to the previous tax year up through April 15th of the following year, the day that tax forms are typically due.

Already filed your taxes?  There are no tax consequences if you contribute to a Roth IRA, so you can still contribute toward last year's contribution limits without amending your tax return.

See Morningstar's full review here

Vanguard's Target Retirement Funds were awarded a gold rating last month by Morningstar (1), a leading investment analysis firm.  As discussed in my Roth IRA introduction, you can build a balanced portfolio simply by investing in one of these funds - they hold a balanced mix of Vanguard's highest-rated domestic stock, international stock, and bond market index funds.

The minimum initial investment is $1000 and the additional investment limit is only $100, so you can put some money in now and set up automatic monthly investments for only a $3.33 a day.  If $3.33 is still too steep, you can configure automatic investments to only occur every other month ($1.67/day) or once per quarter ($0.83).

Budget this - it's critically important.

With the exception of death and taxes, nothing in life is certain.  If in life you accumulate some substantial assets (real estate, a business, savings and investments) and you live in a country that levies an estate tax, the former may trigger more of the latter!

Estate taxes are levied on the total current value of all of the junk you leave behind.  Anything you leave to a nonprofit organization or to your spouse is exempt, and there are additional rules to protect family businesses, farms, and the like.

Digging back through seventy years of Congressional tax reform records (1), I was able to reconstruct the historical estate tax rates, brackets, and exemptions back through 1942 (2).  I used a dizzying array of spreadsheet functions to correct for inflation and generate this graphic of historical effective tax rates:

US historical estate tax rates. y-axis is year (2013 on top); x-axis is estate size ($0-127,000,000); each color is 8%

The scale on this graphic is truly massive, including the effective tax rates of estate sizes up to $127 million on the far right.  I considered using a log scale, but I wanted to stick to a linear scale to make this graph comparable with my Historical US Income Tax infographic.

The top estate tax rate from 1947-1976 was 77%; the top rate dropped to 55% for most of the 1980's and 1990's and now sits at 40%.  Meanwhile, the inflation-adjusted estate tax exemption limit - the estate size on which no taxes are paid - has risen substantially:
Estate tax effective rate declines began with Reagan's Economic Recovery Act (ERTA) of 1981 (3) and continued with George W. Bush's Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 (4).  EGTRRA contained provisions that phased out the estate tax between 2001-2009, ending in the complete repeal of estate tax in 2010.  The estate tax was repealed in 2010, only to be reinstated in Obama's Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJCA) of 2010 (5).

(1) http://en.wikipedia.org/wiki/Category:United_States_federal_taxation_legislation
(2) https://docs.google.com/spreadsheet/ccc?key=0AiEk9zzYZVLgdDRBcEE1dndoVGVQWDZBVjduNmV2UlE#gid=4
(3) http://en.wikipedia.org/wiki/Economic_Recovery_Tax_Act_of_1981
(4) http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_Reconciliation_Act_of_2001
(5) http://en.wikipedia.org/wiki/Tax_Relief,_Unemployment_Insurance_Reauthorization,_and_Job_Creation_Act_of_2010

In recent discussions about the US federal budget, much of the conservative rhetoric has pivoted on the argument that heavily taxing the wealthy is unfair.  The latest budget out of Congress added a new tax bracket, 39.6%, that applies to the wages of those earning more than $400,000 (single filers) or $450,000 (joint filers) instead of the old 35% bracket (1); this led to the infamous 'sad rich people' infographic in the Wall Street Journal (2).

These discussions piqued my interest in the history of income taxes in the US.  How do current taxes compare to the historical rates?  Thanks to the IRS (3) and the Tax Foundation (4), I can do more than wonder.  I used data from these sources to create my own infographic:

US historical income tax rates. y-axis is year (2013 on top); x-axis is earnings ($0-1,275,000); each color is 10%

This graphic represents the inflation-adjusted effective income tax rates in the US over the last century.  Effective tax rates have been much, much higher than they are today for most of the US' history.  From 1942 to 1981, taxpayers with wages over $1 million in today's dollars were paying 60-80% income tax; from 1944-1963, the top tax bracket was over 90%.  The Apollo space program, President Eisenhower's Interstate Highway System, education improvements beginning with the National Defense Education Act, payoff of World War debts, and all of the other projects of the Greatest Generation were in part funded by these taxes on the rich.

This doesn't take into account payroll taxes (Medicare, Social Security), state taxes, sales tax, or any other kind of tax, so I can't say how the overall tax burden has changed for the average American over this time period.  That being said, it's clear that the rich in previous generations haven't shied from contributing.

The graphic also doesn't take into account the various tax deductions available to eligible taxpayers; on this topic, however, I was able to find some interesting data on the history of the Personal Exemption (5):
It looks like the Personal Exemption was originally supposed to entirely exempt enough money to live on, but this concept didn't survive World War II.

The Google Spreadsheets in which I calculated the inflation-adjusted exemption data (6) and created the income tax graphic (7) are available.

(1) http://taxes.about.com/od/Federal-Income-Taxes/qt/Tax-Rates-For-The-2013-Tax-Year.htm
(2) http://online.wsj.com/article/SB10001424127887323689604578220132665726040.html
(3) http://www.irs.gov/pub/irs-prior/
(4) http://taxfoundation.org/
(5) http://taxfoundation.org/article/federal-individual-income-tax-exemptions-and-treatment-dividends-1913-2006
(6) https://docs.google.com/spreadsheet/ccc?key=0AiEk9zzYZVLgdFpQMXlaVkc1UVQ3bXBEdUl2S0tBTmc
(7) https://docs.google.com/spreadsheet/ccc?key=0AiEk9zzYZVLgdFNSd1QwVHhMbXR1VHd5M2Ryd25IN0E

After my post on Roth IRAs, I received a bunch of questions about the practical aspects of setting up a Roth IRA.  Here are, to the best of my abilities, the answers!  First: questions from people who already have some investments.

1) I already use a different brokerage.  Can I buy Vanguard mutual funds?

Senator William Roth

Maybe!  What you can invest in is completely up to your brokerage.

Virtually all brokerages offer Vanguard funds, but most charge a transaction fee.  For Fidelity, they hit you for $75 a transaction; at E*Trade, it's 'only' $20.  Schwab hits you with a $76 transaction fee and only accepts subsequent investments in $500 chunks (versus $100 at Vanguard).

You can research and compare all of Vanguard, Fidelity, E*Trade, and Schwab offerings here:

Vanguard - https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc
Fidelity - http://personal.fidelity.com/research/funds/
E*Trade - https://us.etrade.com/investing-trading/mutual-funds
Schwab - http://www.schwab.com/public/schwab/investing/accounts_products/investment/mutual_funds

Vanguard is the industry leader and offers the lowest expense ratios and the best customer service.  You should only go somewhere else if you have a very good reason for doing so.

After my last post on Roth IRAs, I got some feedback that a glossary of financial terms would be helpful for those with zero investment experience.  Okay, I can do that!

The Dow Jones Industrial Average, since 1974

To understand how tax-advantaged plans work and why they're desirable, it's helpful to review the workings of a taxable investment account and its tax consequences.

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The Taxable Brokerage Account

The Taxman Cometh

Anyone may open a standard taxable brokerage account with a brokerage firm such as Vanguard, Fidelity, Scottrade, Charles Schwab, T. Rowe Price, E*Trade, TD Ameritrade, etc.   You fund this account just like you would a checking or savings account, by transferring money electronically or by writing a check. Once inside the account, you invest this money by using it to purchase securities, which are financial instruments representing financial value—most commonly debt (‘bonds’) or equity (‘stocks’). You may exchange the securities you own for cash at the going market rate, which you may then reinvest or withdraw.

Taxable brokerage accounts funded with regular income experience double taxation.  The money that you use to fund the account is already ‘post-tax’ - you already paid income tax (and likely payroll tax) on that money when you earned it.  When you exchange a security and that security has increased in value, the resulting ‘capital gains’ earnings are taxed at the current capital gains rate.   If you’ve held the security for less than a year, your earnings are considered ‘short-term capital gains’ and they are taxed at the ordinary income tax rates - 10% to 39.6% in 2013, depending on your tax bracket.  If you’ve held the security for over a year, your earnings are considered ‘long-term capital gains’ and they are taxed at the long-term capital gains rates - 0% to 20% in 2013, depending on your tax bracket.  Additionally, your state will tax your capital gains at the ordinary state income tax rate.  By taxing away some of your earnings, the overall rate of return on your investments is reduced.

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Tax-Advantaged Retirement and Education Savings Plans

The government gives you an incentive to save for your own retirement by providing tax breaks for money placed in a qualified retirement plan account.  Sections have been added to the IRS code to create tax-advantaged investment plans that facilitate saving for education and retirement, and these investment plans are often named after the section of the tax code that created them (e.g. 401(k), 403(b), 529 Plan). Essentially, you are accepting a stricter set of rules on contributions and distributions in exchange for a reduction in your taxes.

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Contribution and Distribution Restrictions

The following terminology is useful when discussing tax-advantaged investment plans:

Contributions
Contributions are the transfers of money into the investment account.  While your contributions to a regular taxable brokerage are unlimited, tax-advantaged plans impose annual contribution limits.  These limits may be quite low ($5,500 per year for the Roth IRA) or quite high ($51,000 per year for a Solo 401k).

All tax-advantaged plans share the advantage of avoiding capital gains tax on the growth of the invested money, and many offer an additional choice: pay your income tax now, or pay it later.  If you pay it now, the contributions are 'post-tax' and will not be taxed at all when you make a withdrawal later on; if you'd rather pay later on the withdrawals, contributions are 'pre-tax' and you can deduct them from this year's income taxes.  This can be extremely useful for those who are currently making a lot of money and expect to be in a lower tax bracket when they're in retirement.

Distributions
Distributions are the transfers of money out of the investment account.  A distribution may consist of a mixture of principal—the money you originally placed into the account—and earnings—the money you've made in the account due to increases in the value of your investments.

A distribution that follows the rules and serves the intended purpose of the plan is called a ‘qualified distribution’; nonqualified distributions may trigger extra taxes and other penalties.   A distribution might be qualified if you're over a certain age or if it's used to pay for education expenses; it all depends on the specific account type.

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As already mentioned, there are several different types of tax-advantaged investment plans. These plans differ in terms of who is eligible to participate, whether contributions are pre-tax or post-tax, under what conditions a distribution is qualified, and how distributions are taxed. The type of plan that’s best for you depends on what you’re eligible for, the goals you have for your money, and your current and expected future tax situations.

Due to the extremely broad eligibility requirements, excellent tax advantages, and flexible distribution rules, the Roth IRA is an excellent choice for very many people.  Get the details here here and open that account!