Roth http://www.wisebread.com/taxonomy/term/2212/all en-US 7 Investment Accounts All 30-Somethings Should Have http://www.wisebread.com/7-investment-accounts-all-30-somethings-should-have <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/7-investment-accounts-all-30-somethings-should-have" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/woman_tablet_000065136353.jpg" alt="30-something learning which investment accounts she should have" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>You're in your 30s now. If you're finally looking to get settled in your financial life, you may want to consider ways to build wealth over the long term. But that checking account alone isn't gonna cut it. It's time to examine the options out there for someone in their 30s who finally has a little bit of money to invest.</p> <p>Here are seven essential investment accounts all 30-somethings should have.</p> <h2>1. 401K, If Available to You</h2> <p>If you're employed full-time, your company may offer a retirement plan that gives you access to a number of mutual funds and other investments, plus the great tax advantages that come with it. Under a 401K, 403B, or similar plan, contributions are deducted from your pre-tax income, and most employers will match a certain percentage of what you put in. Now that fewer employers are offering pensions, the 401K has become the primary vehicle for saving for retirement. Pumping cash into this account while you're still relatively young gives your investments plenty of time to rise in value and give you a sizable nest egg. Even better, your investment is tax-deferred until you begin making withdrawals.</p> <h2>2. Traditional IRA</h2> <p>You don't necessarily need a traditional Individual Retirement Account if you have a 401K with an employer match. But if you have 401K from an old employer, it might make sense to roll it into an IRA, because you have a much broader choice of investments to choose from &mdash; many with lower fees. With an IRA, you can invest in practically anything, including individual stocks, mutual funds, bonds, and even commodities. Traditional IRAs are also great for people who are self-employed or otherwise don't have access to a 401K. Like a 401K, your contributions are deducted from your taxable income. You can open an IRA at most discount brokers such as Fidelity, TD Ameritrade, and E*TRADE.</p> <h2>3. Roth IRA</h2> <p>This account is a little bit like a 401K in reverse. The tax advantage is on the back end, when you can withdraw money upon retirement without paying tax on the earnings. That's because contributions to a Roth IRA come from earnings after tax, unlike 401Ks, which draw on pre-tax income. Under a Roth IRA, you can contribute up to $5,500 annually, and you can withdraw contributions (but not your gains) before retirement age without paying a penalty.</p> <h2>4. Taxable Brokerage Account</h2> <p>While your main focus should be investing in tax-advantaged accounts that are designed for retirement, it's good to have some investments available in this type of account due to the flexibility. You don't need to wait until retirement age to access funds in this account, for one thing. That means you can use it to boost your income now, through the sale of stock or the gain of dividends. If you hold on to investments in a taxable account for a long time (generally over a year), you'll pay only the long-term capital gains tax (mostly likely 15%) when you sell.</p> <h2>5. 529 College Savings Plan (If You Have Kids)</h2> <p>College is pricey, so nearly every state enables people to save for college by investing money for education in a tax-advantaged way. A 529 plan is similar to a Roth IRA, in that investments will grow tax-free until they're withdrawn, as long as they are spent on higher education. In many states, you also get a tax break from the contributions. It's possible to open a 529 for your child as soon as they have a social security number. Even if you don't have kids yet, you can designate a beneficiary now &mdash; such as a niece or nephew &mdash; and change it to your own child later. (See also: <a href="http://www.wisebread.com/the-9-best-state-529-college-savings-plans?ref=seealso">The 9 Best State 529 College Savings Plans</a>)</p> <h2>6. High-Interest Savings Account</h2> <p>Everyone knows you need a basic bank account, but if you want to boost your savings, it's helpful to have a savings account with a higher-than-average interest rate. These days, interest rates are extremely low, but you can still find returns of above 1% in money market accounts and online banks such as <a href="http://www.wisebread.com/capital-one-360-review">Capital One 360</a>. (See also: <a href="http://www.wisebread.com/5-best-online-checking-accounts?ref=seealso">Best Online Checking Accounts</a>)</p> <h2>7. Peer-to-Peer Lending Account</h2> <p>In addition to making it easier to invest in stocks, the Internet age has also made it possible for individuals to invest in other people's debt. There are thousands of people who have hopped onto sites such as LendingClub and Prosper and report consistently solid returns. These sites generally work in the same way as banks, except that those in need of money are borrowing from individuals, who are seeking to make money on the interest. In most cases, people can invest based on the risk level of each borrower; those who aren't as creditworthy promise a potentially higher return &mdash; but more risk &mdash; to the investor. Popular personal finance blogger Mr. Money Moustache has reported more than an 11% annualized return since 2012, and many others report similar gains. (See also: <a href="http://www.wisebread.com/how-to-make-money-with-peer-to-peer-lending-service-prosper?ref=seealso">How to Make Money with Prosper</a>)</p> <p><em>How many of these accounts do you have?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/7-investment-accounts-all-30-somethings-should-have">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-7"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-financial-moves-you-will-always-regret">9 Financial Moves You Will Always Regret</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-you-pay-down-debt-first-or-invest">Should You Pay Down Debt First or Invest?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-steps-to-starting-a-retirement-plan-in-your-30s">8 Steps to Starting a Retirement Plan in Your 30s</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-10-biggest-myths-about-investing">The 10 Biggest Myths About Investing</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/11-investment-mistakes-we-all-make">11 Investment Mistakes We All Make</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Banking Investment 30s 401k IRAs lending mutual funds retirement Roth savings accounts stocks Thu, 03 Mar 2016 10:30:34 +0000 Tim Lemke 1665768 at http://www.wisebread.com 5 Important Things to Know About Your 401K and IRA in 2016 http://www.wisebread.com/5-important-things-to-know-about-your-401k-and-ira-in-2016 <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-important-things-to-know-about-your-401k-and-ira-in-2016" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/2016_money_finances_000078468345.jpg" alt="Learning important changes coming to your 401K in 2016" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>We can all agree that investing in a 401K, IRA, or Roth, while being a scary proposition at times, is quite frankly the best use of our money for saving long term. Retirement might be a long way off for you, but it's important to stay on top of the changes that take place for these accounts each year. They could shift your overall direction of planning for your financial future.</p> <p>Here is a list of what will and won't change for your 401K and IRA in 2016.</p> <h2>No Change</h2> <p>Before we look at what's new, let's look at what's staying the same.</p> <h3>1. Contribution Limits</h3> <p>&quot;No change&quot; usually implies something good is happening because it's consistent. In this case, no change for contribution limits means that you are limited to the same amount of money you could put away in 2015 for 2016. In 401K plans, that is $18,000 for people under the age of 50 &mdash; and in IRA and Roth plans, the contribution max will remain at $5,500 for those age 50 or younger.</p> <p>This may not seem like a big deal, but over time the ability to put away less for your retirement means that you will need to earn more on your money that is already invested. According to Vanguard 401K data, only about 10% of participants put away the max every year. There's no escaping the truth that the more you put away, the better off you are going to be in the long run.</p> <h3>2. 401K/IRA Combo</h3> <p>Many people believe that you can only have a 401K or an IRA, but not both. That simply isn't true. In fact, having a separate IRA and a 401K can be a smart financial strategy. The downside of having both is that depending on your income, you may or may not be phased out of deducting your contributions to both plans.</p> <p>In 2016, the income limitations will stay the same. If your adjusted gross income is between $61,000&ndash;$71,000 for single and head of household, or between $98,000&ndash;$118,000 for married couples, your deductible amount for contributions to your IRA will be phased out. If your income is lower, you will receive the full deduction. If your income is over those limits, you won't be able to deduct any portion of your contributions.</p> <h2>Change</h2> <p>And here are the details set to change &mdash; make sure you update your contributions to match.</p> <h3>3. Roth Income Threshold Limits Increase</h3> <p>Roth plans are very popular, especially with the Millennial demographic. They work in reverse of an IRA. Your contributions are made on an <em>after-tax</em> basis, but your distributions in retirement are tax-free. The objective is that you will be in a higher tax bracket when you retire, hence why you will ultimately save money on taxes that would've been due if you had an IRA. Roth plans have their own contribution income limits and are quite generous. In 2016, the contributions income threshold limits will increase by $1,000.</p> <h3>4. IRA for Non-Working Spouse</h3> <p>What about those spouses that don't work, but still want to contribute to an IRA? In 2016, IRA income limits will increase for spouses without retirement accounts by $1,000.</p> <p>If your spouse contributes to a <a href="http://www.wisebread.com/7-penalty-free-ways-to-withdraw-money-from-your-retirement-account">retirement account</a> at work, but <em>you</em> don't work, you can set up your own IRA and contributions will be tax deductible up to $184,000 for couples filing jointly. Your contributions begin to phase out from $184,000&ndash;$194,000, and are completely phased out above that income level (meaning they wouldn't be tax deductible). You can always still contribute up to the IRA contribution max, but you just wouldn't receive the deduction.</p> <h3>5. Saver's Credit</h3> <p>The saver's credit is arguably one of the most overlooked tax credits. It rewards lower income individuals and families for saving for their retirement in any retirement plan. If you qualify for this credit, it is worth anywhere from 10%&ndash;50% of the contributed amount &mdash; up to $2,000 for individuals and $4,000 for couples. The credit is available to singles with an income under $30,750, and for couples, under $61,500.</p> <p>Make sure your accountant is aware if you qualify for this credit so you can take advantage of this great benefit. Consider it the government's matching program for your retirement contributions.</p> <p><em>How's your 401K doing?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/shannah-game">Shannah Game</a> of <a href="http://www.wisebread.com/5-important-things-to-know-about-your-401k-and-ira-in-2016">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-you-choose-a-roth-401k-or-a-regular-401k">Should You Choose a Roth 401k or a Regular 401k?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k">4 Reasons Why a Roth IRA May be Better Than Your 401(k)</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/optimize-your-ira-and-401k">Optimize Your IRA and 401(k)</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-reasons-why-you-must-open-a-roth-ira-before-april-15">4 Reasons Why You Must Open a Roth IRA Before April 15</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/three-easy-steps-to-take-for-a-better-401k">3 Easy Steps to Take for a Better 401k</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Retirement 401k contributions IRA Roth saver's credit taxes Tue, 01 Dec 2015 14:00:24 +0000 Shannah Game 1617390 at http://www.wisebread.com Is This the End of the Back-Door Roth IRA Tax Loophole? http://www.wisebread.com/is-this-the-end-of-the-back-door-roth-ira-tax-loophole <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/is-this-the-end-of-the-back-door-roth-ira-tax-loophole" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/president obama speech_0.jpg" alt="president obama speech" title="president obama speech" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>One of America's most beloved tax-trimming strategies may soon be outlawed.</p> <p>Deep inside President Barack Obama's proposed <a href="http://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/budget.pdf">Fiscal Year 2016 budget</a> is a measure &mdash; &quot;Limit Roth conversions to pre-tax dollars&quot; &mdash; that could put the kibosh on a practice used by high earners to dodge the income limits on Roth IRA contributions. The verbiage in the budget proposal is succinct, and therefore unclear. But experts say those six little words could stop high earners from contributing to their Roth by way of the back-door strategy.</p> <h2>What's the Big Deal With Back-Door Roths?</h2> <p>The Roth IRA offers account holders something very valuable: tax-free income in retirement. Since contributions to Roths are made using <em>after-tax dollars</em>, these accounts are not taxed as they grow, and no tax money is due when funds are withdrawn in retirement. The catch is that you can only directly <a href="http://www.wsj.com/video/psstthe-backdoor-route-to-a-roth-ira/09198754-C88E-4767-84F5-1FAD8547EBE9.html">contribute to a Roth IRA</a> if your income is below a certain ceiling. For jointly filing married couples, that limit is $191,000. For single filers, it's $129,000. Folks with income beyond those barriers may instead contribute to a traditional IRA account.</p> <p>But high earners (who value the benefits of these Roth accounts as much as the everyman) have a way of dodging the contribution limits that prevent them from enjoying these tax perks. Using the back-door strategy, high earners can make after-tax contributions to a traditional IRA account, for which there are no income restrictions, and then convert that account into a Roth. This method affords all the benefits of a Roth account with few of the limitations. And it's precisely this practice that Obama budget proposal wants to eradicate.</p> <h2>Uncertainty Around the Proposal</h2> <p>&quot;It seems to me they're saying that was a good workaround, but we don't want you to do it anymore,&quot; IRA expert and CPA Ed Slott told Forbes.</p> <p>But Slott says ending the back-door strategy is not so simple. One issue with Obama's l<a href="http://www.forbes.com/sites/ashleaebeling/2015/02/02/obama-budget-would-prohibit-backdoor-roth-iras/">oophole closure proposal</a> is that it doesn't jibe with the Internal Revenue Service's new rules on <a href="http://www.forbes.com/sites/ashleaebeling/2014/10/15/aftertax-401k-rollovers-advanced-version/">after-tax rollovers</a>, which actually make it easier to convert after-tax dollars into Roth IRA accounts.</p> <p>&quot;They didn't look at the practicality of how it butts heads with the rules that we're working with now,&quot; Slott says.</p> <p>Now, it's important to keep in mind that the president's budget is more of a wishlist than a decree. It's bound to get rewritten, trimmed, and cut as the budget vetting process continues in Congress. But it's an important indicator of what the administration is thinking. And if you're a high earner enjoying the benefits of back-door Roths, it may signal an upcoming change in your retirement planning.</p> <p><em>Do you think back-door Roths should be eradicated? Why or why not?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/brittany-lyte">Brittany Lyte</a> of <a href="http://www.wisebread.com/is-this-the-end-of-the-back-door-roth-ira-tax-loophole">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-important-things-to-know-about-your-401k-and-ira-in-2016">5 Important Things to Know About Your 401K and IRA in 2016</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-penalty-free-ways-to-withdraw-money-from-your-retirement-account">7 Penalty-Free Ways to Withdraw Money From Your Retirement Account</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-you-choose-a-roth-401k-or-a-regular-401k">Should You Choose a Roth 401k or a Regular 401k?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-ways-to-max-out-your-ira-contributions-by-april-15th">7 Ways to Max Out Your IRA Contributions by April 15th</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-reasons-you-should-really-fear-an-irs-audit">10 Reasons You Should Really Fear an IRS Audit</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement Taxes IRA Roth tax evasion Thu, 12 Mar 2015 13:00:08 +0000 Brittany Lyte 1333205 at http://www.wisebread.com Optimize Your IRA and 401(k) http://www.wisebread.com/optimize-your-ira-and-401k <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/optimize-your-ira-and-401k" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/apollo-4-liftoffa.jpg" alt="Apollo 4 Liftoff" title="Apollo 4 Liftoff" class="imagecache imagecache-250w" width="250" height="345" /></a> </div> </div> </div> <p>Your IRA and 401(k) (or 403(b) if you work for a non-profit) are great tools for deferring taxes, and have other advantages as well. But because they're labeled &quot;retirement&quot; accounts, people are much too likely to put the wrong investments in them. Here's how to use them correctly.</p> <p>Because of rules designed to discourage people from taking money out until they approach retirement age, people assume that they ought to put their &quot;long-term&quot; investments in their 401(k). But that's the wrong way to think about it.</p> <p>The key difference in a 401(k) or IRA account is not that it's supposed to be for your retirement. The key difference is that money that goes into the account--and money earned in the account--is tax deferred. If you let the fact that the accounts are called &quot;retirement&quot; accounts influence what assets you hold in them, you're unlikely to make maximum use of their key feature--and that amounts to throwing money away.</p> <h2>Use that tax deferral!</h2> <p>There are two steps to optimizing your various retirement accounts. The first is to get some money into them, and the second is to put the right investments into the right accounts.</p> <p>First of all, you probably want to put as a big chunk of your regular income into your 401(k), as you can.</p> <p>I say &quot;probably&quot; because there are a few reasons why you might want to limit how much money you put in your 401(k):</p> <ul> <li><strong>Your income is very low</strong>. If your income is low enough that you're being taxed at 10% or less, there's a pretty good chance that you'd pay higher taxes when you take the money out of your 401(k) after retirement.</li> <li><strong>Your income is very high</strong>. Both the IRS and your company limit how much money you can tax defer if you have a very high income.</li> <li><strong>Your employer's plan is crappy</strong>. Some plans have high fees or poor choices of investments.</li> <li><strong>You want to save money outside the plan</strong>, such as because you want to use it before you're retirement age.</li> </ul> <p>Of course, if your company still provides a corporate match, that plays into the decision as well.&nbsp; I've got a post on <a href="http://www.wisebread.com/when-not-to-put-money-in-your-401-k">when NOT to put money in your 401(k)</a> that talks about those issues in some detail. To what I'd say there I'd only add that federal income tax rates are currently at generational lows. That, combined with the current level of the deficit, suggests to me that future tax rates are likely to be higher than current tax rates--another reason why you might not want to put all your long-term savings in your 401(k).</p> <h2>Separate asset allocation from account selection</h2> <p>The allocation of assets among your various long-term goals is a completely different step from the selection of which account should hold which asset. <strong>Understanding this can add substantially to your wealth.</strong></p> <p>You probably have several long-term goals. Retirement (including early retirement) is one, but anything that requires years of saving qualifies as a long-term goal. (Examples: college savings for a young child, money to start a business, your dream home, a round-the-world cruise).</p> <p>Investments for all your long-term goals can <strong>and should be</strong> managed together. All your assets support all your goals; you just confuse yourself if you start thinking that <em>these</em> stocks are for retirement while <em>those other ones</em> are to put a new roof on the house someday.</p> <p>So, step one is to figure out your <a href="http://www.wisebread.com/best-asset-allocation-for-your-portfolio">ideal asset allocation</a>. This probably includes putting a large fraction of your investments in a broad-based, low-cost stock index fund, but may include investments in many other asset classes: mutual funds that invest in foreign stocks or dividend-paying stocks (or direct investments in such stocks), bonds, real estate, gold, silver, other commodities, etc.</p> <p>Only after you've figured out how you want to invest your entire portfolio do you want to figure out which accounts should hold which investments.</p> <h2>Choosing compartments</h2> <p>The key to this step is to put income-earning investments in tax-deferred accounts.</p> <p>Your asset allocation may include an investment in non-dividend paying stocks. They'd be part of a long-term investment strategy whose purpose is to produce growth over the next 20 or 30 years--but just because they're long-term does not mean that they should go in your 401(k)! Quite the reverse: a non-dividend paying stock that's a core holding in your portfolio should be in your regular brokerage account. If it does well you can go on holding it for years and years and won't have to pay any taxes until you sell--and when you do sell, you'll owe taxes at the low capital-gains rate.</p> <p>Holding that investment in your retirement account would be crazy. First, since you already don't owe taxes while you're holding it, you'd get no benefit from the tax deferral. Second, when you withdraw money from a retirement account you have to pay taxes on it as regular income--losing the favorable tax treatment for capital gains.</p> <p>(It doesn't work out any better if the investment does poorly--in your regular brokerage account you can use a capital loss to offset other gains before paying taxes, but losses in a retirement account are just losses.)</p> <p>You don't want the compartment decision to drive your asset allocation--you already decided what investments you wanted to hold. But those assets should end up in compartments based on tax considerations. Interest-earning investments like bonds go in tax-deferred accounts. So do investments with frequent turnover--if you make trades in your regular brokerage account you have to pay taxes on your profits every year.</p> <p>Dividends are a special case. Currently dividends are receiving favorable tax treatment, so you're probably better off keeping most dividend-paying stocks outside of your 401(k) at the moment. This is likely to change, though, so you'll have to monitor the situation.</p> <p>If you have a good 401(k) plan with lots of low-cost fund choices, it should be easy to hit your target allocation with most of your interest-earning investments (and investments that you might trade actively) inside the plan.</p> <h2>Limitations</h2> <p>In an ideal world it would be straightforward to allocate things to the different categories: You'd put the things that earned interest into your 401(k) and IRA while keeping things that produced capital gains (and currently dividends as well) in regular accounts.</p> <p>In the real world there are a bunch of constraints on that, the biggest being that many people, especially younger folks, have practically their whole wealth concentrated in their 401(k).</p> <p>This happens almost automatically: You get a job, you direct enough money into your 401(k) to get the full corporate match (back when companies actually paid a corporate match), and then you spent most of your take-home pay. You can't hold your stock portfolio in your brokerage account (where you'd get the maximum tax advantage of the capital gains and dividend tax breaks) because you just don't have enough money outside the 401(k).</p> <p>This and similar real-world considerations are going to limit your ability to get this exactly right--and that's to be expected. The important thing is to base your asset-allocation decisions on your best analysis of your goals and your expectations for the future. Below I've got a few tips for dealing with specific situations.</p> <p>The main limitation on your ability to optimize your 401(k) plan has to do with the choices your employer offers within the plan. Happily, you can work around even a pretty mediocre plan's limitations, as long as you at least some of your long-term savings outside your 401(k).</p> <p>First, take a close look at the investment choices you've got and compare them to your desired asset allocation. Maybe there's no bond fund, but there is a balanced investment fund that's half-and-half stocks and bonds. If you wanted 20% in bonds you could get that by putting 40% of your money into the balanced fund. (That would also put 20% of your money into stocks--which is fine, as long as your stock allocation is at least 20%, which it probably is.)</p> <p>Second, where you really can't find the investments you need within the plan (no international fund, perhaps, or no gold fund) you have to cover that fraction of your asset allocation elsewhere--which is also fine, as long as you have some of your long-term investments outside the plan. If the investment is one that ought to be tax-deferred, see if you can't buy the appropriate asset within an IRA.</p> <p>Generally, make hitting your asset allocation your number one priority. Maximum tax efficiency is a secondary consideration--but to the extent that you can keep your bond investments (and any investments where you make frequent trades) inside a tax-deferred plan, you'll come out ahead.</p> <p>As a secondary matter, start saving some money outside your 401(k). As the sum grows, use it to invest for capital gains (and, for however long they remain tax-advantaged, dividends)--and simultaneously shift your 401(k) toward interest-earning investments that make maximum use of the 401(k)'s tax advantages.</p> <p>For most people this will probably be a long-term problem: Unless you become quite wealthy, your 401(k) will always be larger than the amount of money you want to hold in bonds. But that's not a big problem. Just stick with your asset allocation and emphasize capital gains and dividends outside the 401(k).</p> <h2>Using a Roth</h2> <p>A Roth IRA is a special case. If you follow the rules (wait until your Roth is 5 years old and until you're 59-and-a-half), you can avoid paying any taxes on money earned in a Roth.</p> <p>The upshot is that most of these issues don't really apply to a Roth. Just invest according to your asset allocation and don't worry about it.</p> <p>Remember that tax rates always change (and everyone's individual tax situation is different), so be sure to check and understand how the rules will actually apply in your case.</p> <p>Whatever mix of retirement accounts you end up using, don't let the fact that they're called &quot;retirement&quot; accounts distract you from the essential features that distinguish those accounts: the tax advantages. Taking maximum advantage of those features can add significantly to your wealth over the next few decades.</p> <p><em>&nbsp;[Update 6 August 2009:&nbsp; This post was included in the </em><a href="http://www.christianpf.com/famous-money-quotes-copf/"><em>Carnival of Personal Finance</em></a><em>.]</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/optimize-your-ira-and-401k">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/retirement-accounts-and-money-to-spend">Retirement accounts and money to spend</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-financial-moves-you-will-always-regret">9 Financial Moves You Will Always Regret</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-important-things-to-know-about-your-401k-and-ira-in-2016">5 Important Things to Know About Your 401K and IRA in 2016</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-despair-over-small-retirement-savings">Don&#039;t Despair Over Small Retirement Savings</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/this-is-why-you-cant-postpone-planning-for-your-retirement-and-how-to-start">This Is Why You Can&#039;t Postpone Planning for Your Retirement (And How to Start)</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance 401(k) 401(k) plans 401k 401k plans investing investments IRA long-term Roth savings tax tax-advantaged tax-deferred taxes Wed, 29 Jul 2009 20:00:11 +0000 Philip Brewer 3442 at http://www.wisebread.com 3-6 months of living expenses? http://www.wisebread.com/3-6-months-of-living-expenses-0 <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/3-6-months-of-living-expenses-0" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/cash_wad_0.jpg" alt="wad of cash" title="wad of cash" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Personal-finance experts often recommend having 3-6 months&#39; worth of living expenses saved and easily accessible. In his July 1, 2007 <em>Getting Going</em> column (&quot;Popular Advice You Shouldn&#39;t Take&quot;), <em>Wall Street Journal</em> columnist Jonathan Clements offers alternatives to a cash account (e.g., savings account or CD). He&#39;s got practical ideas that relate to how people really think, live, save, and invest. </p> <p>Let&#39;s consider why experts make this recommendation so you can develop a personal-finance Plan B.</p> <p>The primary reasons experts recommend cash reserves are 1) to pay for emergencies or unexpected, non-budgeted expenses such as medical bills or major home repairs 2) to pay regular expenses (e.g., your rent or mortgage, food) if you become unemployed, disabled, or lose income for some reason. They want you to avoid financial unpleasantness that may haunt you for years to come:</p> <ul> <li>Bad: you have to pay for emergencies using credit cards with high interest rates; you have to sell your mutual funds, ETFs, or stocks, during a market downturn. </li> </ul> <ul> <li>Worse: You have to pay tax penalties for withdrawing funds from your 401(k) or tax-deferred account. </li> </ul> <ul> <li>Catastrophic: you have to declare bankruptcy; you lose your house to foreclosure. </li> </ul> <p>Try to prevent or calmly, wisely deal with financial emergencies: </p> <ul> <li>Don’t go a day without health insurance, especially now that the insured get discounts not typically available to the uninsured; </li> </ul> <ul> <li>Get an estimate of costs ahead of medical bills and start setting aside money before the bills are due (In my experience, healthcare providers are slower than other vendors in forwarding bills as they often wait for insurance reimbursement before requesting payments from consumers); </li> </ul> <ul> <li>Ask for a payment plan from vendors (When I was in my early 20’s, my dentist offered to let me pay a small portion monthly until my balance for extensive dental work was paid in full; my childhood dentist didn&#39;t believe in novacaine so I avoided dentists while in college); </li> </ul> <ul> <li>Buy disability insurance; </li> </ul> <ul> <li>Have your home inspected or do a home inspection yourself, figure out what items need to be replaced or fixed before they completely disintegrate, and start planning for major home repairs now; </li> </ul> <ul> <li>See if your homeowner’s or renter’s insurance can cover unusual expenses. </li> </ul> <p>Note that there are scenarios where losing your job wouldn’t be financially catastrophic:</p> <ul> <li>You have a spouse/significant other who can cover regular expenses (which means, most likely, that you have purchased much less house or less car than you can afford by lenders’ standards or you have a high-earning spouse/significant other); </li> </ul> <ul> <li>You can adjust your living situation easily (e.g., move in with your parents while looking for another job or recovering from an injury); </li> </ul> <ul> <li>You work in a field and/or live in a market that makes finding a new job with pay comparable to your current one relatively easy (but if your company compensates you extremely well compared to its competitors, start socking away money now!) </li> </ul> <p>In <a href="http://online.wsj.com/public/article/SB118323893642354294.html?mod=sunday_journal_primary_hs" target="_blank" title="http://online.wsj.com/public/article/SB118323893642354294.html?mod=sunday_journal_primary_hs">Popular Advice You Shouldn&#39;t Take</a>, Mr. Clements suggests these alternatives to saving cash: </p> <ul> <li>fund your 401(k) to receive company matches and tax benefits; </li> </ul> <ul> <li>save some money in a conservative, taxable account; </li> </ul> <ul> <li><strong>open, fund, and, if necessary, access contributions to a Roth account</strong> (your contributions can be taken out without tax consequences although earnings generated from the investments can not be used without penalty; see this article on the <a href="http://moneycentral.msn.com/content/Savinganddebt/Savemoney/P147209.asp" target="_blank" title="http://moneycentral.msn.com/content/Savinganddebt/Savemoney/P147209.asp">Roth</a>) </li> </ul> <ul> <li>make a down payment on a home using funds you&#39;ve saved by not having traditional cash reserves, and then </li> </ul> <ul> <li>take out a HELOC (home equity line of credit), which should carry a lower interest rate than a credit card. </li> </ul> <p>Please know that Mr. Clements and I do want you to set aside money now for future use; we just want you to consider investing your money rather than putting funds in accounts with low returns. When you can enjoy the fruits of not spending (buying a home, getting company-match dollars, growing your portfolio), you&#39;ll be motivated to keep on saving and investing. </p> <p>(edited for placement of link to Mr. Clements&#39; article)</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/3-6-months-of-living-expenses-0">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/managing-your-short-term-money">Managing Your Short-Term Money</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/figuring-the-size-of-your-emergency-fund">Figuring the Size of Your Emergency Fund</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/sensible-ways-to-raise-cash-for-a-wedding">Sensible Ways to Raise Cash for a Wedding</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/when-to-use-savings-to-pay-off-debt">When to Use Savings to Pay Off Debt</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-smart-things-to-do-with-your-settlement-money">8 Smart Things to Do With Your Settlement Money</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance cash cash reserve emergency financial emergency Jonathan Clements Roth Thu, 05 Jul 2007 19:08:38 +0000 Julie Rains 810 at http://www.wisebread.com