Roth IRA http://www.wisebread.com/taxonomy/term/8408/all en-US This One Thing Will Get You to $1 Million (Tax-Free!) http://www.wisebread.com/this-one-thing-will-get-you-to-1-million-tax-free <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/this-one-thing-will-get-you-to-1-million-tax-free" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/retirement-savings-163904331-small.jpg" alt="retirement savings" title="retirement savings" class="imagecache imagecache-250w" width="250" height="146" /></a> </div> </div> </div> <p>We're surrounded by financial advice, often in the form of lists containing 10 (or 25! or 50!) things you can do to help solve a particular problem. While much of this information is useful, it can also be overwhelming. Where do you begin? On what things should you focus your efforts?</p> <p>I'd suggest starting with the end in mind &mdash; with your ultimate goal &mdash; and let that guide you to the highest priority activities to help you achieve it. For most of us the end goal is financial independence, and that requires accumulating enough wealth to no longer rely on income from a job. (See also: <a href="http://www.wisebread.com/just-saving-isnt-enough-how-cash-flow-allocation-helps-you-retire?ref=seealso">How Cash Flow Allocation Helps You Retire</a>)</p> <p>Okay, here's where focusing on the highest impact activities comes in. For most Americans, only two financial items generate around 80% of their wealth: real estate and retirement savings. Let's tackle one of them, retirement savings. If you get that one thing right then hundreds of other, lower impact activities won't matter much.</p> <h2>Retirement Savings</h2> <p>So let's begin. What are some typical sources of retirement savings?</p> <ul> <li>Your employer (in the form of a 401(k), 403(b) or similar program, or in rare instances a pension).<br /> &nbsp;</li> <li>The government (Social Security retirement payments).<br /> &nbsp;</li> <li>Yourself.</li> </ul> <p>Unfortunately, the first two sources are becoming increasingly uncertain, so let's narrow our focus even further, on the one retirement savings source where you have complete control: Yourself.</p> <p>IMPORTANT! Before proceeding, I would strongly suggest that if your employer offers a matching 401(k) or similar program that you contribute an amount that gets you the maximum match. What we're addressing in this article will <em>supplement</em> that 401(k) savings plan, if you're lucky enough to have one.</p> <p>Alright, so what one thing that you have control over can get you to $1 million in retirement savings, tax free? Drum roll, please&hellip;.</p> <h2>It's a Roth IRA</h2> <p>Contribute $200 per month into a Roth IRA (where earnings on the account and withdrawals after age 59&frac12; are tax-free).</p> <p>That's it! Simple, isn't it?</p> <p>Actually, yes, it is simple. That's the beauty of it. But it does require meeting a few conditions.</p> <h3>1. Invest the Money in Stocks</h3> <p>You have the option of putting your Roth IRA contributions to work in one or a combination of investments such as bonds, treasuries, CDs, money market funds, and stocks. Unlike bonds, treasuries, and especially CDs or money market funds, stock market returns have historically outpaced inflation by a comfortable margin. Over the past 50 years stock funds invested in large companies have yielded a return of 9.2%. Over the past <a href="http://usatoday30.usatoday.com/money/perfi/columnist/krantz/story/2011-10-17/rate-of-return-for-stocks/50807868/1">20 years it's been 7.9%</a>. For our purposes, to be conservative I will assume an average return of 7.5%.</p> <h3>2. Stick With It!</h3> <p>Religiously. Even obsessively, if that's what it takes. Make that $200 contribution without exception every month until it becomes automatic. In fact, setting it up as an automatic transfer from each paycheck is the best way to go. That way you never see the money and therefore never miss it.</p> <h3>3. Wait</h3> <p>This is where the magic occurs. After contributing long enough you'll reach a threshold, where your total saved amount starts to achieve a dramatic upward trajectory due to compounding.</p> <h2>The Power of Compounding</h2> <p>To illustrate the magical power of compounding, consider the story of the king and the court jester. Legend has it that a long, long time ago a court jester's heroic act saved his king. The king was so moved by the jester's bravery that he offered to give the jester anything he wanted. The jester asked for one cent, doubled each day for a month. &quot;That's all?&quot; said the king. The wish was granted. (See also: <a href="http://www.wisebread.com/10-easy-ways-to-supercharge-your-retirement?ref=seealso">10 Easy Ways to Supercharge Your Retirement</a>)</p> <p>Halfway through the month the balance grew to only $164. But during the final week it started its rapid rise &mdash; it passed the threshold &mdash; and spiked upwards, ending the month at over $5.3 million.</p> <p><img width="605" height="303" src="http://www.wisebread.com/files/fruganomics/Whelan Chart.png" alt="" /></p> <p>As you can see in graph, it took some time for the small initial amount to grow. Eventually, though, the balance grew large enough so that with each doubling it started shooting up very rapidly. That's the threshold you want to reach. But to do so you need to start early &mdash; i.e. NOW!</p> <h2>How Long Will It Take?</h2> <p>So, how long are we talking about to reach this magic threshold? If you start at age 21 and your $200 monthly Roth IRA contributions grow at 7.5%, then you will reach $1 million, tax-free, at age 67, which is the current target age for receiving full Social Security retirement benefits if you were born after 1960.</p> <p>What if you were to start saving at age 31 instead of 21? Then your total will only be $360,000. Big difference. That's because you didn't quite reach the threshold where compounding really starts to kick in. But still not bad.</p> <p>Now I'm guessing that not everyone who reads this is 21 years old, so you're probably thinking &quot;What can I do to make up for lost time?&quot; Here are some ideas:</p> <ul> <li>At $200 per month your total annual contribution will be $2,400 but for most households the maximum annual Roth contribution is $5,500, so if you can afford it double your monthly contribution until you're caught up.<br /> &nbsp;</li> <li>If you have money in a savings account, consider transferring up to $3,100 from it to supplement your $2,400 annual amount.<br /> &nbsp;</li> <li>You can reach your annual contribution limit by transferring money from a tax-deductible account (such as a traditional IRA) to a Roth in the same year. (Check with a financial or tax professional to be sure you understand the rules for this kind of transfer.)<br /> &nbsp;</li> <li>Getting a tax refund? Put all or a portion of it into the Roth account.<br /> &nbsp;</li> <li>Take advantage of the Roth IRA &quot;float&quot; period, which allows you to count contributions made until April 15th towards the previous year's total.<br /> &nbsp;</li> <li>Over time, as your earnings grow and you can afford more than $200 per month, increase that monthly contribution by $50 or $100 or more. Consider having all or part of your annual raise in salary automatically added to your monthly Roth contribution.</li> </ul> <p>At a time when a slew of financial information and advice seems to be coming at us from all directions it's easy to feel overwhelmed. You don't need to be. Take back control by keeping things simple and focusing on this one activity. As you approach your golden years and reach the threshold, you'll be glad you did.</p> <p><em>Have you taken this one simple step toward putting aside money for retirement?</em></p> <a href="http://www.wisebread.com/this-one-thing-will-get-you-to-1-million-tax-free" class="sharethis-link" title="This One Thing Will Get You to $1 Million (Tax-Free!)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/keith-whelan">Keith Whelan</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement 401(k) compound interest investing Roth IRA saving Mon, 14 Jul 2014 09:00:05 +0000 Keith Whelan 1157120 at http://www.wisebread.com 4 Reasons Why You Must Open a Roth IRA Before April 15 http://www.wisebread.com/4-reasons-why-you-must-open-a-roth-ira-before-april-15 <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4-reasons-why-you-must-open-a-roth-ira-before-april-15" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/cash-469987685.jpg" alt="cash" title="cash" class="imagecache imagecache-250w" width="250" height="164" /></a> </div> </div> </div> <p>It's that time of year again. While tax season can bring a lot of stress, there are some things you can do to make it pay off for you.</p> <p>One of them is to open a Roth IRA, which is a little <a href="http://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs">different than a traditional IRA</a>. The key difference is that contributions to traditional IRAs are pre-tax, while Roth IRA contributions are after tax. There are a few other differences with respect to withdrawals, but rather than focus on all of that, let's look at four reasons you should consider funding a Roth IRA this year. (See also: <a href="http://www.wisebread.com/how-to-set-up-an-ira-to-build-wealth?ref=seealso">How to Set Up an IRA to Build Wealth</a>)</p> <h2>You Can Double Your Annual Contribution</h2> <p>If you open up a Roth IRA by April 15, you get a great opportunity &mdash; you're still allowed to make a contribution for the previous (2013) tax year.</p> <p>How much?</p> <p>The most you can contribute in 2013, depending on your income and filing status, is $5,500 if you're 49 years old or younger in 2013. But if you're 50 years old or older in 2013, then you're allowed to contribute an additional $1,000, bringing your total to $6,500.</p> <p>But that's just for 2013.</p> <p>In 2014, you can contribute another $5,500 if you're 49 years old or younger in 2014. Similarly, if you're 50 years old or older in 2014, then you're allowed to contribute an additional $1,000 &mdash; again bringing your total to $6,500. (Check out the<a href="http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits"> IRS page</a> for more details on contribution limits.)</p> <p>This means that this year, you can potentially put a total of $13,000 towards your Roth IRA to build a financially secure retirement.</p> <p>Don't think that the extra $5,500 for 2013 will make a big difference?</p> <p>If you put the $5,500 in an investment that grows 7% each year, then in 30 years it'll be worth over $41,800. Best of all, if you obey the rules in withdrawing the money, you get to keep all of it and won't have to pay any taxes.</p> <p>What could you do with an extra $41,800?</p> <h2>You'll Have Better Investment Options</h2> <p>A lot of people have employer-sponsored retirement plans, such as a 401(k). Many, however, complain that the investment fund options available to them are poor. Specifically, these funds tend to have high expense ratios, which are the fees that go toward managing the fund. (See also: <a href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k?ref=seealso">Why a Roth IRA May Be Better Than Your 401(k)</a>)</p> <p>Even though all funds have these fees, they tend to be much higher in employer plans. With a Roth IRA, on the other hand, you can invest with a company that offers funds with much lower costs.</p> <p>For instance, it's not uncommon that funds from employer plans cost around 0.9% each year. If you open up a Roth IRA, however, you can invest with a company that offers funds that cost about 0.2% each year.</p> <p>That small amount makes a big difference over time.</p> <p>Let's say you invest $5,500 each year in a fund that grows by 7% each year. If the fund costs 0.9%, in 30 years you'll have just under $439,000. That's not bad.</p> <p>On the other hand, what if you invest in a lower-cost fund? If you invest $5,500 each year in a fund that grows by 7% each year, but that fund costs only 0.2%, then in 30 years you'll have over $499,000.</p> <p>In other words, a difference of over $60,000. How much would it hurt you to lose $60,000?</p> <h2>You'll Have Tax-Free Money</h2> <p>With a Roth IRA, you contribute money that's already been taxed. But if you follow the withdrawal rules (the main one being to wait until you're 59 &frac12; years old), then you get a huge benefit. That benefit is the pleasure of spending the money &mdash; including the money earned via investments &mdash; without paying taxes. (See also: <a href="http://www.wisebread.com/one-simple-trick-to-get-the-best-tax-benefit-from-your-retirement-portfolio?ref=seealso">Get the Best Tax Benefit From Your Retirement Portfolio</a>)</p> <p>Let's say you invest $5,500 in a regular, taxable investment account each year, and your money grows by 7% each year. If you're in the 25% tax bracket, in 30 years you'll have just under $402,000.</p> <p>But if you contribute $5,500 in a Roth IRA each year, and your money grows by 7% each year, in 30 years you'll have over $555,000. (Check out<a href="http://www.retiresimply.com/roth-vs-taxable.html"> this calculator</a> to run your own numbers.)</p> <p>In other words, taxes would eat up over $154,000 of your retirement money.</p> <h2>You'll Have Emergency Access to Your Money</h2> <p>Lastly, your contributions (that is, the money that you put into your Roth) can be taken out at any time, free of taxes and penalties. This is not true, however, of earnings on your contributions, which have more complex rules. (See also: <a href="http://www.wisebread.com/how-to-balance-saving-for-retirement-emergency-fund-and-paying-off-debt?ref=seealso">Balancing Retirement Savings, Emergency Fund, and Paying Off Debt</a>)</p> <p>Of course, since this a retirement account, you should only do this in the event of a true emergency. But it's nice to know that some of your money is available if you really need it. This is not the case for most other retirement investments you could put your money in.</p> <p>Remember, tax time doesn't have to be associated only with stress. With opening a Roth IRA, there's a bright side to the season.</p> <p><em>What other reasons for opening up a Roth IRA can you think of?</em></p> <a href="http://www.wisebread.com/4-reasons-why-you-must-open-a-roth-ira-before-april-15" class="sharethis-link" title="4 Reasons Why You Must Open a Roth IRA Before April 15" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement investment IRA Roth IRA taxes Tue, 25 Mar 2014 09:36:14 +0000 Darren Wu 1132830 at http://www.wisebread.com 6 Valid Reasons Not to Contribute to Your 401(k) http://www.wisebread.com/6-valid-reasons-not-to-contribute-to-your-401k <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/6-valid-reasons-not-to-contribute-to-your-401k" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/6370170341_55c3507a97_z.jpg" alt="stop sign" title="stop sign" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>You&rsquo;ve heard that you should contribute to your company&rsquo;s 401(k), almost always. Don't feel bad or question your financial judgment if you've decided to invest elsewhere. There are valid reasons to be an exception to this general rule. (See also: <a href="http://www.wisebread.com/is-it-time-to-starve-your-401k">Is It Time to Starve Your 401(k)?</a>)</p> <h2>1. Your Company Doesn&rsquo;t Match Your Contributions</h2> <p>If your company doesn't match your contributions, then 401(k) participation is not especially attractive. When I worked for large corporations, I contributed to my retirement through 401(k) plans but never received an employer match. Although I enjoyed the automatic savings feature and reduced tax liability, I didn't get <a target="_blank" href="http://www.wisebread.com/6-ways-to-get-paid-for-saving-money">bonus money from my employers for saving</a>.</p> <p>Many advisors emphasize that you should set aside enough money to get the employer match. However, <a target="_blank" href="http://20somethingfinance.com/401k-match/">they often don&rsquo;t mention that nearly half of employers don't provide this incentive</a>.</p> <p>Not getting a match shouldn't automatically dissuade you from contributing to your 401(k) plan at work. But this scenario should encourage you to consider other <a target="_blank" href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">retirement account options</a>.</p> <h2>2. You Plan to Leave the Company After a Couple of Years</h2> <p>Even if you are eligible for the company match, you may not receive this money when you quit your job. Generally, you need to work for your employer for a while to become fully vested and receive the matching dollars. A notable exception is the <a target="_blank" href="http://www.dol.gov/ebsa/publications/401kplans.html">Safe Harbor 401(k) plan</a>, which requires all employer contributions to be fully available to employees regardless of tenure.</p> <p>Vesting schedules vary. Typically, you&rsquo;ll need to be an employee or participate in the plan for several years. Often, you&rsquo;ll get ownership of the match over time or at the end of a specified term (for example, you'll gain access to 20% every year for five years or get nothing for the first six years and then become 100% vested in year seven). Look at <a target="_blank" href="http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Vesting">your 401(k) plan documents</a> to determine when ownership of the employer match is transferred to you. Note that you always have ownership of your contributions.</p> <p>Just as not getting a match doesn't negate the value of the 401(k), having to wait to become fully vested doesn't mean that you should definitely skip enrollment. However, it's helpful to consider your career plans and vesting schedules when making this decision.</p> <h2>3. You Want to Pay Off High Interest Debt</h2> <p>If you are carrying thousands of dollars in high interest debt, then you may want to focus on paying off loan balances at home instead of contributing to your 401(k) plan at work. Diverting money from retirement funding to debt payoff for a couple of years could make sense, especially if you are burdened financially and psychologically by credit card debt.</p> <p>Company matching percentages, loan interest rates, loan balances, <a target="_blank" href="http://www.wisebread.com/tax-brackets-explained">tax brackets</a>, and investment returns play a role in calculating what is best for your situation. For a discussion of this topic, see Philip&rsquo;s post on <a target="_blank" href="http://www.wisebread.com/funding-your-401k-when-youre-in-debt?wbref=readmore-5">funding your 401(k) when you&rsquo;re in debt</a>.</p> <p>Your goal should be to establish a habit of financial discipline, whether contributing to your 401(k) plan or paying off loans. Consider your financial priorities and inclinations; if you opt to pay off credit card balances, commit to spending less than you earn and building your retirement account as soon as your high-interest balance hits zero.</p> <h2>4. Your Employer Offers a Lousy 401(K) Plan</h2> <p>You may choose to invest on your own rather than put money in your employer's 401(k) if the plan has undesirable investment options and unreasonably high costs.</p> <p>Look at the disclosures to gain insight into the worthiness of your company's 401(k) plan. According to the <a target="_blank" href="http://www.shrm.org/hrdisciplines/benefits/articles/pages/nohide.aspx">Society for Human Resource Management (SHRM)</a>, you should receive information on mutual fund performance compared to benchmarks as well as administrative, investment, and service expenses. See this <a target="_blank" href="http://www.401khelpcenter.com/401k/401k_fee_infographic.html#.UUdOAta7N14">infographic</a> for an explanation of the differences in these types of fees. In addition, check <a target="_blank" href="http://www.brightscope.com/">BrightScope</a> ratings to see how your employer&rsquo;s plan compares with its peers.</p> <p>Certified financial planner <a target="_blank" href="http://thechicagofinancialplanner.com/2013/02/06/4-signs-of-a-lousy-401k-plan/">Roger Wohlner gives tips on the types of mutual funds that may indicate a lousy plan</a>. For example, if your choices are limited to proprietary funds associated with the plan provider, one fund family (only T. Rowe Price funds in all asset classes, for example), or expensive share classes, then your plan may not be designed for the optimal benefit of employees.</p> <p>Examine your 401(k) to figure out if your employer is offering an excellent, average, or subpar plan. Based on your discovery, you may decide to <a href="http://www.wisebread.com/how-to-set-up-an-ira-to-build-wealth">open and fund an IRA</a> to build wealth instead of participating in your company's plan.</p> <h2>5. You Need Cash to Make a Down Payment on a House</h2> <p>While you can tap your retirement funds by taking a hardship distribution or borrowing on your balance, there is a simpler way to get money for the purchase of a primary (or principal) residence. Forgo 401(k) plan contributions for the moment, save in a regular account, and earmark funds for this purpose.</p> <p>If you <a target="_blank" href="http://www.wisebread.com/tax-penalties-for-early-retirement-withdrawals">withdraw money from a traditional 401(k) account prior to retirement age</a>, <a target="_blank" href="http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401(k)-Resource-Guide---Plan-Sponsors---General-Distribution-Rules">you will owe taxes on the distribution amount plus a 10% penalty in most cases</a>. Also, you won&rsquo;t be able to contribute to the plan for several months. Alternatively, you could borrow from the account; however, a loan detracts from your long term ability to save plus requires you to pay outstanding balances immediately if you leave your employer.</p> <p>So, rather than funding your plan at work, consider setting aside a certain amount to accumulate a down payment. Then, after you purchase the house, you can start (or restart) contributing to your 401(k).</p> <h2>6. You Want to Fund a Roth IRA</h2> <p>If you have a healthy balance in traditional retirement accounts (and your employer doesn't offer the Roth designated account within its 401(k) plan), you may want to skip contributions at work and put money into a Roth IRA.</p> <p>While traditional retirement plans give you a tax break now, the Roth allows you to withdraw funds tax-free when you reach 59&frac12; (or earlier in certain circumstances). Also, unlike regular IRAs and traditional 401(k)s, you can take money out of the Roth at your leisure rather than according to a certain schedule in retirement.</p> <p>To be clear, you don&rsquo;t have to <a target="_blank" href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k">choose between a Roth IRA and your employer&rsquo;s 401(k) plan</a> (however, there are income-based limits on Roth contributions). But if you meet income standards and have limited amounts of money to save for retirement, then you may want to stop participating in the 401(k) plan in order to fund the Roth IRA.</p> <p>Certainly, there are many reasons you should participate in a 401(k) plan, including the ease of setting aside money for your retirement on a regular and automatic basis plus the ability to save a large amount each year within this retirement account (more than $17,000 per year in a 401(k) plan versus just $5,500 in an IRA). But you shouldn't feel uneasy if you decide to take a different route, particularly for a year or two, depending on your circumstances.</p> <p><em>Have you decided not to participate in your company's 401(k) plan? Have you still been able to save for retirement?</em></p> <a href="http://www.wisebread.com/6-valid-reasons-not-to-contribute-to-your-401k" class="sharethis-link" title="6 Valid Reasons Not to Contribute to Your 401(k)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement 401(k) credit card debt loan payoff Roth IRA Mon, 25 Mar 2013 09:48:38 +0000 Julie Rains 971346 at http://www.wisebread.com How to Set Up an IRA to Build Wealth http://www.wisebread.com/how-to-set-up-an-ira-to-build-wealth <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-to-set-up-an-ira-to-build-wealth" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/6881496274_b0d1973e75_c.jpg" alt="cash" title="cash" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>Here's some food for thought &mdash; if you save just under $11 a day in an investment that grows 8% each year, and in 40 years you'll have $1 million.</p> <p>What would you do with a million dollars? Would you travel the world, visiting a new country every month? Support a cause that's dear to your heart?</p> <p>How would you feel? More secure, knowing that you accomplished the goal of being able take care of most of your expenses?</p> <p>To put this in perspective, you'll put in less than $150,000 of your own money, yet you'll end up with over six times that amount. That demonstrates the time value of money and the incredible power of compound interest.</p> <p>And it gets even better. An IRA is a great place to do all your saving, because you'll get some <a href="http://www.wisebread.com/16-great-tax-deductions-you-may-have-overlooked">nice tax benefits</a> &mdash; benefits that'll put even more money in your pocket.</p> <p>Let's get started. Here's how to set up a wealth building IRA in four simple steps. (See also:&nbsp;<a href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">Choosing a Retirement Account:&nbsp;What's Available, and What's Best for You?</a>)</p> <h2>Step 1: Traditional or Roth?</h2> <p>There are two types of IRAs, and the first step you need to take is to decide which one of the two you want to open &mdash; a Traditional or Roth IRA.</p> <p>What's the difference between the two?</p> <p>With a Traditional IRA, your withdrawals at retirement are taxed, but your yearly contributions are tax deductible. This means that if you contribute $5,500 every year and you're in the 25% tax bracket, you'll also save $1,375 in taxes every year.</p> <p>With a Roth IRA, you contribute with after-tax money, but your withdrawals at retirement are tax free. This means that if you retire with $1 million, you won't have to pay taxes on a single penny of that $1 million.</p> <p>Which one should you choose?</p> <p>If you're <a href="http://www.wisebread.com/14-proven-strategies-for-landing-jobs">just starting out in your career</a> and have a relatively low salary, it may make more sense to pay taxes now while you're still in a low tax bracket. In this case, choose the Roth IRA.</p> <p>But if you're making the big bucks and you're at the height of your earnings potential, you'll probably be in a lower tax bracket in retirement. In this case, choose the Traditional IRA.</p> <p>There may be other factors that come into play when deciding between the two, but the guidelines above provide a good starting point. If you want help making a more informed decision, check out the <a target="_blank" href="http://www.irs.gov/Retirement-Plans/Individual-Retirement-Arrangements-(IRAs)-1">IRS's guide to IRAs</a>.</p> <h2>Step 2: Which Company?</h2> <p>Once you decide which type of IRA is best for you, the next step is to decide which company you want to invest with. The main things you want to look for in a company are:</p> <ol type="1" start="1"> <li>The availability of good mutual funds</li> <li>Low fees</li> <li>Low minimum opening requirements</li> </ol> <p>Several reputable companies meet these three criteria. Two of the well-known ones are Vanguard and Fidelity. As such, they're the ones I'll be referring to in more detail below.</p> <h2>Step 3: Which Fund?</h2> <p>After you decide which company you want to invest with, the next step is to choose your investment. There are several ways to invest, and several types of investments to consider.</p> <p>But I'll share with you the two methods that experts in the personal finance community suggest. These methods will save you money and build more wealth.</p> <p><strong>Hands-Free Funds</strong></p> <p>The first method is for those of you who want to stay hands-off, yet still earn a good return on your money. If you don't want to actively monitor your investments, then target date retirement funds are for you. Just pick the fund with the year closest to the time you want to retire, and you're good to go. Set it, and forget it.</p> <ul type="disc"> <li><a target="_blank" href="https://www.fidelity.com/mutual-funds/asset-allocation-funds/freedom-funds/overview">Fidelity Freedom Funds</a> have a $2,500 minimum in order to open an account. They come with expense ratios between 0.44% and 0.76%.<br /> &nbsp;</li> <li><a target="_blank" href="https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList">Vanguard Target Retirement Funds</a> have a lower minimum, requiring just $1,000 in order to open an account. They're also cheaper to own, with expense ratios just between 0.16 % and 0.18%.</li> </ul> <p><strong>Hands-on Funds</strong></p> <p>The second method is for those of you who want to be more hands-on and pay less in fees. If you want to reduce your costs of investing, consider building a portfolio that you manage yourself.</p> <ul type="disc"> <li>Most Fidelity index funds have a $2,500 minimum, and expense ratios between 0.10% and 0.34%.<br /> &nbsp;</li> <li>Most Vanguard index funds have a $3,000 minimum, and expense ratios between 0.18% and 0.24%. By buying a few different funds at different dollar amounts, you'll end up paying less in fees.</li> </ul> <p>If you'd like to see an example of how I do it, check out the <a target="_blank" href="http://moneytobless.com/simplify-your-investing-with-the-core-four-portfolio/">Core Four Portfolio</a>.</p> <h2>Step 4: Contribute Regularly</h2> <p>After you've chosen your investment, the last &mdash; and most important &mdash; step is to contribute to your IRA on a consistent basis.</p> <p>Remember that million dollar example at the beginning of this post? For the time value of money and the <a href="http://www.wisebread.com/the-false-allure-of-compound-interest">magic of compounding</a> to work for you, you need to invest regularly. Fortunately, this is simple to do.</p> <p>Just like you can invest in your 401k automatically every two weeks through direct deposit from your paycheck, you can also automatically invest in your IRA in the same way. By setting up automatic transfers from your checking account to your IRA, you'll build wealth with much less effort.</p> <p>Remember, just $11 a day can deliver a million dollars your way.</p> <p><em>When will you set up an IRA and begin building wealth?</em></p> <a href="http://www.wisebread.com/how-to-set-up-an-ira-to-build-wealth" class="sharethis-link" title="How to Set Up an IRA to Build Wealth" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement IRA retirement accounts Roth IRA Tue, 19 Mar 2013 10:00:42 +0000 Darren Wu 969859 at http://www.wisebread.com Best Money Tips: The Retirement Edition http://www.wisebread.com/best-money-tips-the-retirement-edition <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/best-money-tips-the-retirement-edition" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/1519834253_c94a914076_z-1.jpg" alt="The Retirement Edition" title="The Retirement Edition" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Welcome to Wise Bread's <a href="http://www.wisebread.com/topic/best-money-tips">Best Money Tips</a> Roundup! Today, we found many great articles relating to retirement!</p> <h2>Top 5 Articles</h2> <p><a href="http://www.girlsjustwannahavefunds.com/retirement-planning-how-to">5 Basic Steps for Retirement Planning</a> &mdash; When you plan for retirement, don't forget to periodically rebalance your portfolio. [Girls Just Wanna Have Funds]</p> <p><a href="http://www.freemoneyfinance.com/2012/07/youll-need-11-times-your-salary-for-retirement.html">You'll Need 11 Times Your Salary for Retirement</a> &mdash; Delaying your retirement from age 65 to 67 can reduce the amount of money you need to retire to 9.4 times your salary. [Free Money Finance]</p> <p><a href="http://www.savvysugar.com/How-Invest-Retirement-22553330">Everything You Need To Know About Retirement</a>&nbsp;&mdash; In 2012, anyone can change an IRA over to a Roth IRA. [SavvySugar]</p> <p><a href="http://steadfastfinances.com/blog/2012/07/30/4-advantages-and-4-disadvantages-of-early-retirement/?utm_source=feedburner&amp;utm_medium=feed&amp;utm_campaign=Feed%3A+SteadfastFinances+%28Steadfast+Finances%29">4 Advantages and 4 Disadvantages of Early Retirement</a> &mdash; While retiring early can be good for your health and increase your life expectancy, it also means a reduction in your future savings. [Steadfast Finances]</p> <p><a href="http://parentingsquad.com/retirement-account-vs-college-fund-should-we-really-put-ourselves-before-our-kids">Retirement Account vs. College Fund: Should We Really Put Ourselves Before Our Kids?</a> &mdash; There are many ways to cover your child's college education expenses, so go ahead and fund your retirement account first! [Parenting Squad]</p> <h2>Other Essential Reading</h2> <p><a href="http://christianpf.com/important-changes-coming-to-your-401k-statement-soon/">Important Changes Coming Soon To Your 401(k) Statement</a>&nbsp;&mdash; The new 401(k) statement law requires employeers to make employees aware of fees that are being applied to their accounts. [Christian Personal Finance]</p> <p><a href="http://www.smartonmoney.com/3-things-to-consider-when-investing-during-retirement/">3 Things to Consider When Investing During Retirement</a> &mdash; When investing during retirement, reconsider the 60/40 stock/bond allocation. [Smart On Money]</p> <p><a href="http://www.getrichslowly.org/blog/2012/06/07/the-retirement-outlook-for-20-somethings/">The Retirement Outlook for 20-Somethings</a> &mdash; 20-somethings need to redefine their image of retirement. Things aren't the same as they were for their parents or grandparents! [Get Rich Slowly]</p> <p><a href="http://www.goodfinancialcents.com/can-you-roth-ira-rollover-rules-from-401k/">Can You Rollover Your 401k to a Roth IRA?</a> &mdash; In order to roll over your 401k to a Roth IRA, you have to be separated from your employer. [Good Financial Cents]</p> <p><a href="http://retirehappyblog.ca/lifestyle-choices-in-retirement/">Lifestyle Choices in Retirement</a> &mdash; Some retirees choose to be busy homebodies while others choose to volunteer. Which lifestyle will you live in retirement? [Retire Happy Blog]</p> <h2>News &amp; Events</h2> <p><a href="http://www.wisebread.com/top-100-most-popular-personal-finance-blogs/news/2012/07/wise-bread-tweetchat-wbchat-2">Wise Bread's Tweetchat (#WBChat)</a> &mdash; Don't miss our weekly #WBChat at 12pm PST! We will be giving away prizes!</p> <p><a href="http://www.wisebread.com/top-100-most-popular-personal-finance-blogs/news/2012/08/the-plutus-awards-voting">The Plutus Awards Voting</a>&nbsp;&mdash;&nbsp;Be sure to vote in the 3rd annual Plutus Awards! Voting closes on August 14th.</p> <p>Be sure to check out our&nbsp;<a href="http://www.wisebread.com/top-100-most-popular-personal-finance-blogs/news">News &amp; Events Calendar</a>&nbsp;to see all the awesome upcoming events in the personal finance world!&nbsp;</p> <a href="http://www.wisebread.com/best-money-tips-the-retirement-edition" class="sharethis-link" title="Best Money Tips: The Retirement Edition" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/ashley-jacobs">Ashley Jacobs</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Retirement 401(k) best money tips IRA retirement Roth IRA Thu, 09 Aug 2012 10:00:42 +0000 Ashley Jacobs 947049 at http://www.wisebread.com Step-By-Step Guide to Rolling Over Your Old 401(k) http://www.wisebread.com/step-by-step-guide-to-rolling-over-your-old-401k <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/step-by-step-guide-to-rolling-over-your-old-401k" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/6087387101_b593dd86cc_z.jpg" alt="401k" title="401k" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Last year, I left my job at a bank holding company in the Midwest, packed my things, and headed to law school on the East Coast. There&rsquo;s one thing I forgot, though &mdash; my 401(k). Well, I didn&rsquo;t exactly <em>forget</em> it; I just left it hanging for the past year. But no more! It&rsquo;s summertime, I&rsquo;m out of school, and I&rsquo;m ready to get my finances in order. It&rsquo;s time to roll over my 401(k) &mdash; and tell you how you can, too. (See also: <a href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k">4&nbsp;Reasons Why a Roth IRA May Be Better Than Your 401(k)</a>)</p> <p>Before we get into the step-by-step guide of rolling over a 401(k), though, let&rsquo;s go over some basics.</p> <h3>What Is a 401(k)?</h3> <p>Sure, you probably know that a 401(k) is a retirement investment vehicle that allows you to put away pre-tax money, and that your contributions are often matched (if not dollar-for-dollar, then at least at some proportion) by your employer. You may not know, however, that there&rsquo;s generally a waiting period before new employees are allowed to invest in the funds (ours was two months). You might also be unaware that while employers may offer matching funds, they also often require you to remain with the company for a certain number of years before you&rsquo;re eligible to receive those funds. At my company, that period was five years. If you move on earlier than that, you forfeited all employer contributions to your 401(k).</p> <h3>Why You Should (Almost Always) Roll Over Your 401(k)</h3> <p>Why should I roll over my 401(k) in the first place, you ask? Well, here&rsquo;s a post we did a while back covering the considerations you might look at in <a href="http://www.wisebread.com/left-a-job-do-a-rollover">deciding whether to roll over your 401(k)</a>. In general, it is a good idea to move your 401(k) because plan administrators charge a fee for managing the account. While the fee is worth it when you&rsquo;re receiving employer contributions and contributing with pre-tax money, that benefit goes away as soon as your employment ends. What&rsquo;s more, if your 401(k) balance is less than $5,000, you&rsquo;re <a href="http://money.msn.com/retirement-investment/5-things-to-know-about-your-401k-smartmoney.aspx">required to cash out or roll over your account</a> upon leaving the company.</p> <h3>What Exactly a 401(k) Rollover Is</h3> <p>When you leave a job, you have several options regarding your 401(k):</p> <ol> <li>Leave it where it is (if it&rsquo;s over $5,000)</li> <li>Cash it out</li> <li>Roll the account into your new employer&rsquo;s plan</li> <li>Roll the account into an IRA or a Roth IRA</li> </ol> <p>The fourth option, rolling over your account into an IRA or Roth IRA, is what is traditional meant by a 401(k) &ldquo;rollover.&rdquo;</p> <p>We&rsquo;ve already established that it&rsquo;s rarely a good idea to leave your 401(k) with your former employer. It&rsquo;s also generally a very bad idea to cash out your 401(k) (you&rsquo;ll end up paying 30% or more in taxes &mdash; check out <a href="https://www.wellsfargo.com/investing/retirement/tools/401k-early-withdrawal-calculator-results">Wells Fargo&rsquo;s 401(k) Early Withdrawal Costs Calculator</a> to find out exactly how much you&rsquo;ll be paying). There&rsquo;s also no real benefit to rolling over your old 401(k) to your new employer. Your investment options are limited, there are other limitations that don&rsquo;t exist with IRAs, and your employer doesn&rsquo;t match those old funds in any way. The bottom line is this &mdash; if you&rsquo;ve left your job and you&rsquo;re not in dire financial straits, roll over your 401(k).</p> <h3>Choosing a Traditional or Roth IRA</h3> <p>Characteristics of a <a href="http://www.investopedia.com/terms/t/traditionalira.asp#axzz1zDR9Xx87">traditional IRA</a> are:</p> <ul> <li>Individuals can contribute pre-tax money to investments that grows tax-free</li> <li>Distributions taken after retirement are taxed as ordinary income</li> <li>There are no income limits</li> <li>Individuals must start taking minimum distributions by age 70&frac12;</li> </ul> <p>Characteristics of a <a href="http://www.investopedia.com/terms/r/rothira.asp#axzz1zDR9Xx87">Roth IRA</a>, on the other hand, are:</p> <ul> <li>Individuals cannot contribute pre-tax money (i.e., you pay with after-tax income)</li> <li>Qualified distributions taken after retirement are tax free</li> <li>There are income limits (you can&rsquo;t contribute if you make over $105,000 per year if single or $167,000 if married filing jointly)</li> <li>Individuals do not need to start taking minimum distributions at any point</li> </ul> <p>In general, if you&rsquo;re eligible for both a traditional and Roth IRA, you should go for the Roth <em>unless</em> you expect to be in a lower tax bracket when you retire. It can also be smart to go the route of diversifying and have one of each type of account. If you&rsquo;re like me (eligible for both but expecting to be ineligible for a Roth IRA as my income rises), you&rsquo;ll stick with the Roth for now and open a traditional IRA later. Check out CNNMoney&rsquo;s guide on <a href="http://money.cnn.com/retirement/guide/IRA_Roth.moneymag/index7.htm?iid=EL">which type of account is right for you</a> for more guidance.</p> <p>Importantly, note that if you&rsquo;re moving your money from a 401(k) (funded with your <em>before-tax</em> contributions) to a Roth IRA (funded with <em>after-tax</em> contributions), you will owe taxes at the time of conversion. After 2011, though, you can spread this over two years. For me, the benefit letting my money grow tax-free in a Roth IRA account outweighs the relatively small amount I&rsquo;ll owe in taxes.</p> <p>Last note &mdash; prior to 2010, if you wanted to convert your 401(k) to a Roth IRA, you had to go through an irritating two-step process of rolling over your 401(k) to a traditional IRA and immediately converting it to a Roth IRA. After 2010, all plans are <em>supposed</em> to offer the direct-to-Roth IRA option. Be aware, however, that some still do not offer this.</p> <h3>And Now, A Step-By-Step Guide to Rolling Over Your 401(k)</h3> <p>Once you&rsquo;ve decided that you should roll over your 401(k), there are four basic steps you&rsquo;ll need to take to actually move your money.</p> <p><strong>1. Open Your IRA or Roth IRA</strong></p> <p>Find and open an IRA/. Check out <a href="http://www.kiplinger.com/basics/archives/2002/03/story28.html">this article from Kiplinger</a> or <a href="http://www.getrichslowly.org/blog/2007/06/07/how-to-start-a-roth-ira-and-where-to-do-it/">this article from Get Rich Slowly</a> on how to choose the right Roth IRA for you.</p> <p><strong>2. Contact Your Old 401(k) Plan Administrator</strong></p> <p>For me, this one involves digging around in my records to find the retirement plan website and login information. From there, I can find the forms I&rsquo;ll need to fill out to make the transfer. Then I&rsquo;ll just need to fill them out and submit them.</p> <p><strong>3. Confirm That Your New IRA Is Able to Receive Your 401(k) Funds</strong></p> <p>Just in case, you&rsquo;ll want to confirm with your new IRA account provider that everything is in place to receive a direct transfer from your old 401(k).</p> <p><strong>4. Confirm Direct Transfer From Your 401(k)</strong></p> <p>While filling out paperwork and verifying transfers, make sure you go with the direct transfer option &mdash; that way, your old plan simply sends your money to your new IRA account. Your other option is to have your 401(k) plan cut you a check, which will be for 80% of the fund balance (20% is temporarily withheld for taxes). You&rsquo;ll need to deposit the full 100% old balance in your new IRA, though, (meaning you&rsquo;ll need to make up that withheld 20% from personal funds) within 60 days. If you do deposit the full amount, you&rsquo;ll get the 20% withheld when you file your taxes the following year. If not, you&rsquo;ll be subject to <a href="http://www.wisebread.com/tax-penalties-for-early-retirement-withdrawals">early withdrawal fees</a>.</p> <p>So there you have it &mdash; the guide to rolling over your 401(k), and how I&rsquo;m planning on rolling mine over in the next few weeks. Good luck!</p> <p><em>Had any experience with rolling over your 401(k) or thoughts on the matter? Share your thoughts in the comments!</em></p> <a href="http://www.wisebread.com/step-by-step-guide-to-rolling-over-your-old-401k" class="sharethis-link" title="Step-By-Step Guide to Rolling Over Your Old 401(k)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/janey-osterlind">Janey Osterlind</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement 401k rollover changing jobs IRAs Roth IRA Wed, 25 Jul 2012 10:24:37 +0000 Janey Osterlind 942736 at http://www.wisebread.com Investing 101: 5 Essential Steps http://www.wisebread.com/investing-101-5-essential-steps <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/investing-101-5-essential-steps" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/6976093174_f5d642a9ec_z.jpg" alt="happy woman" title="happy woman" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>For many people, investing is the toughest part of personal finance. It can be confusing, intimidating, and with the recent recession still vivid in our memories, scary.</p> <p>But it doesn&rsquo;t have to be. Here are five steps everyone can take to invest well. (See also: <a href="http://www.wisebread.com/5-killer-free-investment-tools">5 Killer Free Investment Tools</a>)</p> <h3>1. Make Sure You&rsquo;re Ready to Invest</h3> <p>You&rsquo;re ready to invest once you&rsquo;re <a href="http://www.wisebread.com/how-to-start-fighting-debt-today">out of debt</a> except for your mortgage (of course, it&rsquo;s fine to have paid off your mortgage as well, but you don&rsquo;t have to wait until then) and have <a href="http://www.wisebread.com/figuring-the-size-of-your-emergency-fund">an emergency fund</a>.</p> <p>I also make an exception to my no-debt suggestion if your employer provides a 401(k) match. That&rsquo;s such easy money, I&rsquo;d hate for you to miss out. So if you can make accelerated payments on any debts you carry, have an emergency fund, <em>and </em>can contribute enough to your 401(k) to get the match, great. If not, get out of debt and build an emergency fund. Then start investing.</p> <h3>2. Figure Out How Much to Invest</h3> <p>There are lots of free online calculators available that can help you estimate how much you'll need to have in an investment account by the time you retire, and how much you'll need to invest each month in order to hit that goal.</p> <p>One of the easiest-to-use calculators is on <a href="https://www.fidelity.com/retirement/calculators">Fidelity&rsquo;s web site</a> (click on &ldquo;myPlan Snapshot&rdquo;). You may need to register on the site, but you won&rsquo;t need to open an account.</p> <h3>3. Open an Account</h3> <p>If your employer offers a 401(k) or other type of retirement plan, this step should be easy enough. If not, consider opening a Roth IRA with an investment company like Vanguard, Fidelity, or T. Rowe Price.</p> <p>With a Roth, there's no tax break for the money you put in, but any interest earned is tax free. Plus you can withdraw the money you contribute at any time with no penalty. You can even withdraw the earnings before you hit retirement age under <a href="http://www.wisebread.com/7-surprising-facts-about-roth-iras">certain circumstances</a>.</p> <h3>4. Diversify Properly</h3> <p>You&rsquo;ve probably heard that it&rsquo;s important to diversify &mdash; spreading out the money you invest into different types of investments &mdash; and that&rsquo;s true. It&rsquo;s a way of managing risk. When one type of investment isn&rsquo;t doing so well, chances are another type will be doing just fine.</p> <p>One of the easiest ways to diversify is to invest in mutual funds instead of individual stocks. Mutual funds are inherently diversified because one fund typically invests in many different stocks, bonds, or other mutual funds.&nbsp;</p> <p>But here&rsquo;s the key point about diversifying your investments: <em>How</em> you diversify &mdash; how you divvy up your investment dollars between mutual funds that invest in bonds vs. those that invest in stocks, for example &mdash; is incredibly important. This is known as asset allocation, and it&rsquo;s been found to be <em>the single most important factor</em> that determines your investment success.</p> <p>In general, when you&rsquo;re young, you can afford to take more risk, so your ideal asset allocation might call for 90-100% equity investments (i.e., stock-based mutual funds) and 0-10% bond funds.</p> <p>One of the easiest ways to invest based on the proper asset allocation is to put your money in a <a href="http://www.mattaboutmoney.com/2011/07/13/investing-made-simpler/">target-date mutual fund</a>. Such funds set the asset allocation for you based on your intended retirement age. They then automatically make the allocation more conservative as you get older.</p> <p>Most of the big brokerage houses offer such funds, as do many workplace programs like 401(k) plans.</p> <p>If you prefer a more hands-on approach, determine <a href="http://www.mattaboutmoney.com/resources/links/">the right asset allocation for you</a> (scroll down to &ldquo;Investing&rdquo; and click on &ldquo;Asset Allocation Guidelines&rdquo;). Then you could either choose your own mutual funds within the various asset classes and in the right percentages or work with <a href="http://www.wisebread.com/do-a-background-check-before-hiring-your-financial-advisor">an investment advisor</a> to choose the right funds.</p> <h3>5. Get Started</h3> <p>Time is one of the most important ingredients for successful investing because it's what allows you to take the fullest advantage of compound interest.</p> <p>In essence, compound interest is interest earning interest. Let&rsquo;s say you invest $400 per month and get a 7% return. After 10 years, you will have invested $48,000, but it will have turned into over $69,000. Not bad.</p> <p>Now let's give it more time. After 40 years, you will have invested $192,000, but your account will be worth nearly $1,050,000! That's the power of compound interest. Clearly, it&rsquo;s important to start investing as soon as possible.</p> <h3>You Can Do It</h3> <p>Hopefully, this brief tutorial has taken away some of the confusion or fear that often surrounds investing. If you follow the steps above, you&rsquo;ll be headed in the right direction</p> <p><em>Have you taken these steps with your investments? What investment-related questions do you have? Let me know in the comments section.</em></p> <a href="http://www.wisebread.com/investing-101-5-essential-steps" class="sharethis-link" title="Investing 101: 5 Essential Steps" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/matt-bell">Matt Bell</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment 401k Beginning Investor diversification emergency fund Roth IRA Wed, 20 Jun 2012 10:36:08 +0000 Matt Bell 935182 at http://www.wisebread.com Is It Time to Starve Your 401(k)? http://www.wisebread.com/is-it-time-to-starve-your-401k <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/is-it-time-to-starve-your-401k" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/6793810655_5092d1476a_z.jpg" alt="basket of eggs" title="basket of eggs" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>In the early 1990s, I worked for a benefits consulting firm that managed retirement plans for employees of various companies. Though barred from providing direct investment or tax advice, my coworkers and I gave the standard 401(k) spiel that outlined the benefits of pre-tax contributions. It was a song-and-dance that was pretty much true at the time &mdash; &ldquo;contribute funds pre-tax during your working years; the investments grow tax-free (based upon market performance, of course), and when you withdraw upon retirement, your tax rate is likely to be lower.&rdquo;</p> <p>While the logic still makes sense, I&rsquo;m not so sure the root of that statement applies any longer, or that I could parrot it without some serious reservations now. Newly enrolled 401(k) participants probably still hear it, and I know it echoes in the minds of long-term investors who haven&rsquo;t looked up from their 9-5 (or 9-9) jobs long enough to consider the game may be changing. But as the U.S. faces staggering debt with two parties that seem intent only upon one-upping the other, and as the ripples of economic instability continue to wash over Europe, the only sure bet seems to be that taxes will go up eventually. (See also:&nbsp;<a href="http://www.wisebread.com/deciding-what-you-want-out-of-retirement">Deciding What You Want Out of Retirement</a>)</p> <h2>The 401(k) Problem<o:p></o:p></h2> <p>Focusing solely on 401(k) plans may create a trifecta of financial trouble for future retirees:</p> <ol> <li>A generation or two of savers who may not be considering the possibility that their tax bracket in retirement may be equal to (or potentially higher) than during their working years. <br /> &nbsp;</li> <li>Investors who have bought hook, line, and sinker the idea that 401(k) plans are a sure bet for retirement security.<br /> &nbsp;</li> <li>Employees who have maxed out their 401(k) contributions to the point that other potentially more valuable savings vehicles can&rsquo;t be properly funded.</li> </ol> <p>What&rsquo;s more, the convenience and hands-off approach that make 401(k) plans so popular tend to lull investors into auto-pilot mode where critical thinking and active investment strategies are replaced by <a href="http://www.wisebread.com/pay-yourself-first-what-it-means-and-how-to-do-it">automatic paycheck deductions</a> and only reevaluating investment funds once every blue moon. Are we setting ourselves up for a hard-fall later in life when the bill on all that pre-tax money finally comes due and our tax rate is less-than-optimal?</p> <h2>Another Retirement Savings Option</h2> <p>Though it may sound blasphemous, I think it&rsquo;s time to put our 401(k) plans on a diet &mdash; if not begin to starve them outright. But I make this assertion with two critical caveats. First, if your 401(k) plan offers a company match, don&rsquo;t walk away from free money. Contribute just enough to get those matching dollars. Second, don&rsquo;t starve one investment plan without fattening up another. Depending on your current tax situation and age, strongly <a href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k">consider a Roth IRA</a>. The money you put in a Roth goes in after-tax, but your investments grow tax-free and any withdrawals after age 59.5 are not taxed. You can learn more specifics about Roth IRAs by visiting <a href="http://www.rothira.com/">RothIRA.com</a>.</p> <p>Regardless of what side of the political fence you&rsquo;re on, the reality is that taxes must (and will) go up. The only real questions are how soon will it happen and how hard will it hit? If you want to be a defensive investor, it&rsquo;s time to shake off the old notion that a fat 401(k) balance alone will keep you in dancing in Florsheims and dining on steak in your golden years. More likely, a healthy 401(k) plan will become a smaller and smaller part of a broader strategy that&rsquo;s centered on one important truth &mdash; the tax man is coming.</p> <p><em>Do you have a plan B (or C) in place for retirement savings? What do you think will happen with income tax rates over the next 10 or 15 years?</em></p> <a href="http://www.wisebread.com/is-it-time-to-starve-your-401k" class="sharethis-link" title="Is It Time to Starve Your 401(k)?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/kentin-waits">Kentin Waits</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Retirement 401(k) income tax Roth IRA Mon, 04 Jun 2012 09:48:08 +0000 Kentin Waits 932657 at http://www.wisebread.com Ask the Readers: Have You Ever Heard of IRAs or Roth IRAs? http://www.wisebread.com/ask-the-readers-have-you-ever-heard-of-iras-or-roth-iras <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/ask-the-readers-have-you-ever-heard-of-iras-or-roth-iras" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/iStock_000011250544Small-1.jpg" alt="Have you ever heard of IRA or Roth IRA?" title="Have you ever heard of IRA or Roth IRA?" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p><em>Congratulations to </em><a href="http://www.wisebread.com/ask-the-readers-have-you-ever-heard-of-iras-or-roth-iras#comment-530523"><em>KelR1</em></a><em>, </em><a href="http://www.wisebread.com/ask-the-readers-have-you-ever-heard-of-iras-or-roth-iras#comment-530442"><em>Alissa A</em></a><em>, and </em><a href="http://www.wisebread.com/ask-the-readers-have-you-ever-heard-of-iras-or-roth-iras#comment-530024"><em>Peg Mooers</em></a><em> for winning this week's contest!</em></p> <p>Jeff Rose at Good Financial Cents is starting a movement: <a href="http://www.goodfinancialcents.com/roth-ira-account-movement/">The Roth IRA Movement</a>! Many people have never heard of an IRA or a Roth IRA, nor have they begun planning for retirement. Getting educated about saving for retirement is one of the most financially savvy things anyone can do. It is important to start saving for retirement today because without proper planning and saving, your dreams of retirement will never become a reality.</p> <p><b>Have you heard of an IRA or a Roth IRA?</b><span style="font-weight:normal">&nbsp;Are you procrastinating on your retirement planning or are you already taking steps to ensure you will be able to retire?</span></p> <p>Tell us if you have heard of an IRA or a Roth IRA and we'll enter you in a drawing to win a $20 Amazon Gift Card!</p> <h2>Win 1 of 3 $20 Amazon Gift Cards</h2> <p>We're doing three giveaways &mdash; one for random comments, one for random Facebook &quot;Likes&quot;, and another one for random tweets.</p> <h3>Mandatory Entry:&nbsp;</h3> <ul> <li>Post your answer in the comments below&nbsp;</li> </ul> <h3>For extra entries (1 per action):</h3> <ul> <li>Go to our <a href="http://www.facebook.com/pages/Wise-Bread/26830741467?ref=ts">Facebook page</a>, &quot;Like&quot; us, and leave a comment on this article telling us you did, or</li> <li><a href="http://www.twitter.com/">Tweet</a> your answer. You have to be a follower of our <a href="http://twitter.com/wisebread">@wisebread account</a>. Include both &quot;@wisebread&quot; and &quot;#WBAsk&quot; in your tweet so we'll see it and count it. Leave a link to your tweet (click the timestamp for the individual URL) in a separate comment.</li> </ul> <p><strong>If you're inspired to write a whole blog post OR you have a photo on flickr to share, please link to it in the comments or tweet it.</strong></p> <h4>Giveaway Rules:</h4> <ul> <li>Contest ends Monday, April 2nd at 11:59 pm Pacific. Winners will be announced after April 2nd on the original post. Winners will also be contacted via email.</li> <li>You can enter all three drawings &mdash; once by leaving a comment, once by liking our Facebook update, and once by tweeting.</li> <li>This promotion is in no way sponsored, endorsed or administered, or associated with Facebook.</li> <li>You must be 18 and US resident to enter. Void where prohibited.</li> </ul> <p><strong>Good Luck!</strong></p> <a href="http://www.wisebread.com/ask-the-readers-have-you-ever-heard-of-iras-or-roth-iras" class="sharethis-link" title="Ask the Readers: Have You Ever Heard of IRAs or Roth IRAs?" rel="nofollow">ShareThis</a><div class="field field-type-text field-field-blog-teaser"> <div class="field-items"> <div class="field-item odd"> Tell us if you have heard of an IRA or a Roth IRA and we&#039;ll enter you in a drawing to win a $20 Amazon Gift Card! </div> </div> </div> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/ashley-jacobs">Ashley Jacobs</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Giveaways Ask the Readers IRA Roth IRA Tue, 27 Mar 2012 10:36:23 +0000 Ashley Jacobs 913175 at http://www.wisebread.com Opening a Roth IRA for Your Kid http://www.wisebread.com/opening-a-roth-ira-for-your-kid <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/opening-a-roth-ira-for-your-kid" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/566087174_4b0055634f_z.jpg" alt="smiling mother daughter" title="smiling mother daughter" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>My parents have done a lot for me. But one of the things I am the most grateful for is that they opened up a Roth IRA for me when I was in high school, the first year that the account was available.</p> <p>Like many people, I didn't think much about long-term savings when I was younger. Most of my goals were relatively immediate, saving for things like a video camera, travel, or the security deposit for my first apartment. And I remained similarly short-sighted at my first couple of jobs post-college. Convinced I wouldn't be at my first job long enough for them to start matching my contributions, I&nbsp;passed on contributing to my 401(k). I felt extra sour about that particular company's retirement plan when I discovered that my holiday bonus &mdash; a deposit into my 401(k) &mdash; disappeared when&nbsp;I quit because I hadn't vested. So what did I do? I said &quot;screw it&quot; to retirement savings, and ignored the 403(b) at my next job, too.</p> <p>Flash forward to now &mdash; after several years of freelancing and learning about finances, I wish that I had the foresight to set up a 401(k) when I could have. But that also makes me extra thankful for the retirement account I do have, and have had since my teens &mdash; my Roth IRA. (See also: <a href="http://www.wisebread.com/why-roth-iras-are-ideal-for-young-professionals">Why&nbsp;Roth&nbsp;IRAs Are Ideal for Young Professionals</a>)</p> <h2>Some Roth IRA Benefits</h2> <p>Anyone who has earned income can set up a Roth IRA, and the accounts are generally very easy to open.</p> <p>Roth IRA account holders can withdraw any funds they contributed to their account, tax-free, at any time. While I don't think it's good practice to encourage people to tap into their retirement savings early, this can be helpful. For example, I once removed a couple thousand dollars from my Roth IRA so that I could buy an inexpensive used car without resorting to a loan.</p> <p>Even some Roth IRA earnings can be withdrawn before retirement time under certain circumstances, such as when you're <a href="http://www.wisebread.com/what-it-really-costs-to-own-a-home">buying your first home</a>.</p> <h2>Setting Up Roth IRAs for Kids</h2> <p>As I mentioned above, who has earned income can set up a Roth IRA. You can't pay your kid to do work, but if he has a summer or part-time job, he's eligible. Even cash jobs like babysitting can count. According to Janet Bodnar at <a href="http://www.kiplinger.com/columns/drt/archive/2008/dt080130.html">Kiplinger's</a>, if your child mows lawns for the summer, you just need to &quot;keep careful records of each job...And it would make a stronger case if he mowed lawns not just for you but for other customers as well.&quot;</p> <p>If your child has spent part (or, well, all) of her money, you can also kick in cash on her behalf &mdash; but the maximum contribution is $5,000 or the total of your child's earned income, whichever is smaller.</p> <p>Bodnar also notes in her piece that some companies will not open accounts for children under 18. Others, do, however; just know you might have to search around a little bit to find one.</p> <p>Did you set up a Roth&nbsp;IRA for your child? If so, what was your experience?</p> <p><em>The post is part of the </em><a href="http://www.goodfinancialcents.com/roth-ira-account-movement/"><em>Roth IRA Movement</em></a><em>.</em></p> <a href="http://www.wisebread.com/opening-a-roth-ira-for-your-kid" class="sharethis-link" title="Opening a Roth IRA for Your Kid" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/meg-favreau">Meg Favreau</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement children and money early retirement withdrawal investing for kids Roth IRA Tue, 27 Mar 2012 10:00:32 +0000 Meg Favreau 913196 at http://www.wisebread.com 7 Surprising Facts About Roth IRAs http://www.wisebread.com/7-surprising-facts-about-roth-iras <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/7-surprising-facts-about-roth-iras" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/grandparents_roth_IRA.jpg" alt="Grandparents" title="Grandparents" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Roth IRAs are a great way to build a nest egg for your retirement. If you&rsquo;re already contributing to your company&rsquo;s 401(k), adding a Roth IRA can give you added tax flexibility when you start withdrawing. Since you&rsquo;ve already paid the taxes on the money you contribute, you can take money out tax-free, and that will help minimize taxes from your 401(k). (See also: <a href="http://www.wisebread.com/optimize-your-ira-and-401k">Optimize Your IRA and 401(k)</a>)</p> <p>That&rsquo;s just one of the many benefits &mdash; here are seven surprising things you may not know about the Roth IRA.</p> <h3>You Can Take Your Money and Run</h3> <p>Retirement accounts have all kinds of rules and regulations, right? Well, the Roth IRA lets you take your money out whenever you want &mdash; with no penalties. Any investment gains are subject to different rules, but the money you put in is yours whenever you want it. So if you&rsquo;re worried that you might need the money, worry not &mdash; unless your investment goes down, of course.</p> <h3>A Roth IRA Can Fund Your First Home</h3> <p>If you want to take out some of those investment earnings, you can do so one time. You&rsquo;re allowed to take up to $10,000 of your earnings to put towards buying a home IF you&rsquo;re a first-time homebuyer.</p> <h3>Dividends Aren&rsquo;t Taxed</h3> <p>Any dividends you&rsquo;re paid on a stock or security you own in a Roth IRA account aren't taxed. This is a HUGE deal if you own a dividend-paying stock for many years. It can add up to thousands and thousands of dollars that you won&rsquo;t ever have to pay taxes on. Can&rsquo;t beat that.</p> <h3>It's Not for Everyone</h3> <p>Not everyone can contribute to a Roth IRA. These rules change annually, but for 2012 if you&rsquo;re single and make more than $125,000 or married (filing jointly) and make more than $183,000, then you can&rsquo;t contribute.</p> <h3>You Can Contribute After January 31</h3> <p>You have until tax day (April 15) to contribute towards to the previous year&rsquo;s limit. For example, you have until <a href="http://www.wisebread.com/15-surprising-facts-about-income-tax">April 15</a> to contribute towards your 2011 limit of $5,000 (or $6,000 if you&rsquo;re over 50).</p> <h3>Death Isn&rsquo;t the End</h3> <p>If you or your spouse dies, he/she can combine the two Roth IRAs into one without any penalty.</p> <h3>You&nbsp;Can Pass It On</h3> <p>The money in a Roth IRA can be passed on to an heir without any kind of <a href="http://www.wisebread.com/tax-penalties-for-early-retirement-withdrawals">penalty</a>. It&rsquo;s a really good way to pass money down to someone else.</p> <a href="http://www.wisebread.com/7-surprising-facts-about-roth-iras" class="sharethis-link" title="7 Surprising Facts About Roth IRAs" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/carlos-portocarrero">Carlos Portocarrero</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement buying a house Roth IRA tax free Tue, 17 Jan 2012 11:00:29 +0000 Carlos Portocarrero 867709 at http://www.wisebread.com 4 Reasons Why a Roth IRA May be Better Than Your 401(k) http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4-reasons-why-a-roth-ira-may-be-better-than-your-401k" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/iStock_000012042991Small.jpg" alt="retirement options" title="retirement options" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Retirement planning is wrought with &quot;rules of thumb,&quot; asset allocation recommendations, compound return assumptions, pension and/or Social Security income calculations, inflationary expectations, and more. Getting to &quot;that perfect number&quot; is an effort in futility unless you can see into the future with perfect clarity. So, aside from planning conservatively and starting early, a key consideration within your control now is the determination on <strong>where</strong> you direct your retirement dollars early in your career for the best net benefit in retirement. (See also:&nbsp;<a href="http://www.wisebread.com/the-end-of-the-4-rule">The End of the 4% Rule?</a>)</p> <p>The conventional wisdom on retirement savings has traditionally been that you should always invest in your 401(k) plan at least up to the limit of the company match. After all, who would argue against a free 100% return or whatever the match amounts to? But what about when you surpass that amount, which might only be the first 4-5% of income investments, if at all? </p> <p>If your company matches funds up to say, 5% of your salary, but you could reasonably afford to invest another 10% of your income for retirement, would your money be better off topping off the same 401K(k) account or would you be better of investing the same funds in a Roth IRA account (noting the Roth IRA limit of $5,000 per person annually)? (See also: <a href="http://www.wisebread.com/how-to-make-the-most-of-your-401K">How to Make the Most of Your 401K)</a></p> <p>Here are 4 reasons why those additional funds may well be better off in the Roth IRA.</p> <h3>Fees Matter!</h3> <p>With investors focused so much on stock market returns and volatility, the unsung hero of long-term investing is low fees. Even in the most aggressive conventional asset class, equities might reasonably be expected to return 9% per year including dividends. When you consider that inflation could reasonably average 3% or more over the ensuring decades, that's a net 6% return in real dollars. Now, factor in a difference of 1% in a high fee versus low fee mutual fund and the difference in compound returns really adds up!</p> <p>It's now becoming common knowledge that company-sponsored 401(k) plans often offer sub-par mutual funds that are both high-fee and generally don't even match their benchmarks. Contrast that with the ability to select a low-fee ETF or mutual fund in a self-directed IRA account and right off the bat, you're looking at improved returns over a prolonged period of time. Personally, I have funds in my company plan with expense ratios in excess of 1% while Vanguard offers many mutual funds closer to 0.10%. Over the 30 years I have until retirement, that 1% difference can add up to six figures or more!</p> <h3>More Options</h3> <p>Aside from being presented with higher fee options, 401(k) plans often offer only a single choice in a given asset class. Your plan might have all actively managed mutual funds based on say, Large Cap US, Small Cap US, European Growth and a Bond Fund. What about if you want to diversify further into Emerging Markets, commodities or even various high yield investments which can flourish in a tax advantaged plan since income accrues untaxed? You are strictly limited in your 401(k) plan while you have thousands of investment options in a Roth IRA ranging from mutual funds to ETFs to stocks to bonds (see the <a href="http://www.wisebread.com/etfs-offer-incredible-benefitswith-a-dark-side">risks/benefits of ETFs</a> over other investments). You can even own gold in an IRA, not that I'm an advocate.</p> <p>A friend of mine sells mutual funds for his firm to corporate clients for their 401(k) plans. He said what he hears over and over is basically a conservative mantra: &quot;We're not looking to be superstars here. We need to avoid being sued. We aren't going to offer our employees exotic or volatile funds.&quot; Companies aren't in the business of providing you a lot of options. They're trying to just keep up with the competition and offer a &quot;decent&quot; total benefits package which often includes a modest match and some funds to choose from. But probably not the range of funds you'd invest in if you had the choice &mdash; like you do in a Roth IRA you set up yourself.</p> <h3>Tax Rates Are Likely to Rise</h3> <p>The tradeoff with a 401(k) versus a Roth IRA is that with the 401(k), while the amount you invest is deducted from your taxable income in the current year, you have to pay taxes on the withdrawn amount in the future. Conversely, with a Roth IRA, you invest now with after-tax funds, but regardless of tax rates in the future, those earnings can be withdrawn tax-free. So, it often comes down to an assumption about tax rates.</p> <p>The &quot;conventional wisdom&quot; had always held that you're probably in a higher tax rate today than you will be in retirement because you won't be working the same full-time job and might only be collecting Social Security and some retirement income. However, this whole notion of tax rates needs to be reconsidered.</p> <p>See, it is a mathematical certainty that the US can't continue to meet its debt obligations without increasing taxes, especially on the upper-middle class and higher. Unless your income is very low on the spectrum (in which case, the ability to invest excess funds to this degree may be limited), there's a decent chance that in the coming years, tax rates will begin to increase. After all, we're in the midst of a temporary, controversial, negotiated &quot;Bush-era&quot; tax rate regime right now. But the political will and fiscal ability to make the current tax rates permanent just isn't there.</p> <p>Additionally, while my income may decrease in retirement, so will my deductions. I will no longer have a mortgage interest deduction and I won't be getting state tax deductions for <a href="http://www.wisebread.com/rethinking-the-529-college-savings-plan-strategy">529 Plan Investments</a>. Therefore, if you assume that your effective tax rate in retirement may be higher, or even just roughly equivalent to your present tax rate, then the &quot;conventional wisdom&quot; no longer pushes the equation in favor of 401K(k) investing and the other considerations above should take precedent.</p> <h3>Flexibility for Emergencies</h3> <p>Not that you want drawdown of your principal as a retirement planning philosophy, but in the event of extreme need, one can withdraw the principal portion of IRA contributions without penalty, whereas in a 401(k), there's a 10% penalty incurred plus the taxes of course, since they were deferred initially. There are some provisions of hardship associated with 401(k) plans, but the restrictions are rather onerous whereas the Roth IRA is flexible. This shouldn't be an up-front expectation that you'll be withdrawing funds prior to retirement, but it might be comforting to know that there's added flexibility in that portion of your retirement assets, as opposed to having everything in the 401(K) which would be subject to penalties and taxes.</p> <p>The reality is, nobody knows what's going to happen 20 or 30 years from now. But the priorities of diversification, minimizing expenses, and optimizing your tax liabilities may well push you more in the direction of Roth IRA contributions over 401(k) contributions once you exceed a company match.</p> <p>Note that 403(b) and other equivalent plans have similar attributes to the 401(k) and can be used interchangeably throughout.</p> <p><em>Where do you invest extra retirement funds?</em></p> <a href="http://www.wisebread.com/4-reasons-why-a-roth-ira-may-be-better-than-your-401k" class="sharethis-link" title="4 Reasons Why a Roth IRA May be Better Than Your 401(k)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darwins-money">Darwins Money</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement 401k 403b IRA Roth IRA Thu, 31 Mar 2011 11:36:08 +0000 Darwins Money 514471 at http://www.wisebread.com 4 Essential Financial Tips For Kicking Off Your Career http://www.wisebread.com/4-essential-financial-tips-for-kicking-off-your-career <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4-essential-financial-tips-for-kicking-off-your-career" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/graduate.jpg" alt="Happy graduate" title="Happy graduate" class="imagecache imagecache-250w" width="240" height="160" /></a> </div> </div> </div> <p>The time had finally come: I was an adult. Sure, I could vote when I was 18 and buy beer when I turned 21, but this was different &mdash; <em>very </em>different. No more hitting snooze until my 10 a.m. financial management class. It was time to start my career and begin the daily grind.</p> <p>Young adults have a once-in-a-lifetime opportunity to start their careers as well as their financial plans on the right track the first time around. If you have just finished college and are about to embark on your career path, the decisions you make today could have a lasting impact on the rest of your life. Dealing with the many changes taking place at this point in your life may be challenging. However, with a bit of planning, you can begin life's journey on the right foot to achieve all of your career and financial goals.</p> <h2>Establish Your Goals</h2> <p>The first step in achieving financial goals is to actually establish them. Just as you have your sights set for certain achievements in your career, your financial goals should be outlined as well. It is not enough to say you want to have enough money to retire in 30 years; you have to actually develop a plan that will turn your dreams into a reality.</p> <p>I knew that I didn&rsquo;t want to work until I was 65. My goal was to be able to be in the financial position so that if I wanted to retire at the age of 50, I could. But how was I going to do it?</p> <p>First, I knew that I had have a good job that allowed me the chance to increase my income over time.&nbsp; <em>Check.</em></p> <p>Second, I knew that I needed to save...<em>a lot</em>. I made a commitment to get all the free money in my 401(k) that I could and <a href="http://www.goodfinancialcents.com/7-things-to-know-about-roth-ira-rules-for-2010/">max out my Roth IRA</a> each year. <em>Definitely a good start.</em></p> <p>Some of the goals you may be working toward include buying your first home or saving for a special purchase. Whatever your goals, write them down and determine what actions you have to take moving forward to make sure you are heading in the right direction.</p> <h2>Manage Your Debt</h2> <p>Debt is sometimes unavoidable regardless of our best intentions. Following the recent decline in the economy, more people are paying attention to how and where they spend their money. For young adults just starting out, you may feel as if you have a lifetime to <a href="http://www.goodfinancialcents.com/how-to-pay-off-your-credit-cards-debt-fast/">pay off debt</a>, and in some cases, you are correct. If not properly managed, it will take a lifetime to pay off debt, and in the meantime you will have difficulty achieving other financial goals.</p> <p>I easily could have fallen into a feeling of self-entitlement when I got my first job and started making real money. Many of my fellow graduates did by buying new cars and electronics that they had lived without through their college careers. I, on the other hand, continued to live on my college budget and refrained from getting myself deeper into debt.</p> <p>For this reason you should avoid debt whenever possible. If you are starting out in debt as a result of student loans or other debts incurred while in college, make every effort to pay off those debts in the shortest period of time. This will allow you to focus on other short- and long-term goals.</p> <h2>Save and Invest</h2> <p>There are few guarantees in life. However, one thing is certain. Every effort you make to save for future expenses, whether they occur six months down the road or twenty years in the future, will put you one step closer to achieving these goals. It is important to understand savings and investment strategies that will help you reach these goals. When you are just starting out, time is on your side, and this step is not one that should be placed on the back burner. Start saving immediately, and you will discover it becomes a habit that will last a lifetime.</p> <h2>Understand the Importance of Financial Planning</h2> <p>By thinking about the big picture and where you want to be 5, 10, or 30 years down the road, you can develop a financial plan that allows you to work toward those goals. Without a financial plan you are more likely to live in the moment, which undoubtedly results in poor financial choices. The steps you take today will set the pace for the rest of your life, determining your quality of life and long-term financial security.</p> <a href="http://www.wisebread.com/4-essential-financial-tips-for-kicking-off-your-career" class="sharethis-link" title="4 Essential Financial Tips For Kicking Off Your Career" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/jeff-rose">Jeff Rose</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/topic/career-and-income/career-building">Career Building articles from Wise Bread</a>.</div></div> Personal Finance Career Building 401(k) plans financial planning Roth IRA starting your career Thu, 02 Dec 2010 13:00:10 +0000 Jeff Rose 353434 at http://www.wisebread.com The Legal Way to Avoid Getting Taxed on Your Investments http://www.wisebread.com/the-legal-way-to-avoid-getting-taxed-on-your-investments <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-legal-way-to-avoid-getting-taxed-on-your-investments" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/taxman.jpg" alt="Tax Man Poster" title="" class="imagecache imagecache-250w" width="250" height="250" /></a> </div> </div> </div> <p>Tax time is coming, and that means trying to keep as much of our hard-earned money as we can. That may or may not make us <a href="http://www.thewriterscoin.com/2009/02/05/paying-taxes-are-we-all-hypocrites/">tax hypocrites</a>, but it's the truth: no one wants to pay more than we have to.</p> <p>In order to follow my tip, you'll need two things: <strong>a tax protected account like a Roth IRA and a stock or mutual fund <em>you like</em> that pays a dividend</strong>.</p> <h3>First Things First</h3> <p>You'll notice I italicized &quot;you like&quot; in that last sentence: that's important. Before you even decide to go down this route, you need to find an investment you like and want to own regardless of this strategy. I don't care if you think it's going up because you read something in a annual report, an analyst likes it, or because your palm reader told you.</p> <p><strong>Just make sure you have a reason and you like it.</strong></p> <p>As for the dividend: don't focus so much on how big of a yield it is; the important thing is that it pays one out. You may also want to check:</p> <ul> <li>How long have they been paying one? The longer the better.</li> <li>Have they ever lowered it? Not great.</li> <li>Do they have a track record of consistently increasing it? Very nice!</li> </ul> <p>I could spend hours on how to pick and investment, but not here. Once you have an investment you like that pays dividends, you can move on to part II.</p> <p>FYI: If you're interested in investing in real estate and dividends, <a href="http://www.investopedia.com/terms/r/reit.asp">check out REITs</a>.</p> <h3>Tax Sheltered Account</h3> <p>My favorite is the Roth IRA because the money you use to fund it has already been taxed. So once you put money in here you'll never have to worry about taxes again.</p> <p>Now what you do is buy the stock/mutual fund from step one inside this account and boom&mdash;you're done!</p> <p>Wait, that sounds too easy doesn't it? There is one more thing you have to double check: <strong>does your brokerage allow you to reinvest the dividends automatically, free of charge?</strong></p> <p>This is important because if they don't, the dividend payments will be credited to your account instead of being automatically reinvested. That means the money has to be contributed into the account instead of automatically going in. <strike>And it means it'll eat into the limits ($5,000 for 2010) set up for accounts like Roth IRAs.</strike></p> <p>Most brokerages will automatically reinvest dividend payments from mutual funds, but not for individual stocks, so make sure ahead of time that this is all set up.</p> <h3>Why This Strategy Rocks</h3> <ul> <li>You aren't taxed on the dividends you get paid</li> <li>You get to contribute the dividend automatically</li> <li>You set it and forget it: as long as you still like the stock/mutual fund you don't have to do anything</li> </ul> <h3>The Downside</h3> <ul> <li>You can't touch this money until you retire, so you aren't going to get rich quick with this</li> </ul> <p>If you want to read more about this strategy, check out my post on <a href="http://www.thewriterscoin.com/2010/03/08/investing-real-estate-raking-in-dividends-without-taking-a-tax-hit/">investing in real estate without taking a tax hit</a>.</p> <p><em>Thanks to Dangerman for the corrections on dividends counting towards your contribution!</em></p> <a href="http://www.wisebread.com/the-legal-way-to-avoid-getting-taxed-on-your-investments" class="sharethis-link" title="The Legal Way to Avoid Getting Taxed on Your Investments" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/carlos-portocarrero">Carlos Portocarrero</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Real Estate and Housing Taxes dividend investing Roth IRA Tue, 09 Mar 2010 17:00:02 +0000 Carlos Portocarrero 5675 at http://www.wisebread.com Backdoor into the Roth IRA: You're Invited to the Tax-Free Party http://www.wisebread.com/backdoor-into-the-roth-ira-youre-invited-to-the-tax-free-party <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/backdoor-into-the-roth-ira-youre-invited-to-the-tax-free-party" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/iStock_000001238529XSmall.jpg" alt="" title="" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Have you ever been waiting in a long line somewhere wishing you knew somebody that could get you in the backdoor? Or hoping that somehow you were the VIP and had immediate access to the hippest party around? When it comes to the <a href="http://www.goodfinancialcents.com/7-things-to-know-about-roth-ira-rules-for-2010/">Roth IRA in 2010</a>, everybody becomes a VIP and gets a chance to enjoy the &quot;tax-free&quot; party at retirement!</p> <p>I know what you're thinking: what's so cool about the Roth IRA? Look at it this way. If having to pay taxes is &quot;un-cool,&quot; then tax free money should be the coolest thing around &mdash; and that my friend is the Roth IRA. Unfortunately, not everyone has been able to enjoy the Roth. Higher wage earners have been left on the outside looking in, chomping at the bit to get a piece of the &quot;tax-free&quot; pie. In 2010, they will finally get their slice.</p> <h3>Roth IRA Conversion</h3> <p>Jason from Redeemming Riches did an excellent job highlighting the <a href="http://wisebread.com/what-you-need-to-know-about-roth-iras-in-2010">opportunity that 2010 presents for the Roth IRA</a>. The Roth IRA Conversion is an awesome opportunity for many to finally get some of their old IRAs and 401ks into the Roth. One piece of info that Jason did not touch upon is that while you'll be able to convert to a Roth IRA even if you're a higher wage earner, what about adding new money? Are you once again left out in the dark?</p> <p>Many people have wanted to take advantage of the <a href="http://www.rothira.com/">Roth IRA</a> for the past several years, but couldn&rsquo;t because they surpassed the Roth IRA phaseout limits. Many then settled for the pretax substitute of the traditional IRA. The only problem with the traditional IRA (other than paying taxes at retirement) is that after certain income limits you no longer get a tax deduction for contributing to one. You still get the tax deferred growth, but that&rsquo;s it. Not even near as cool as the Roth IRA.</p> <p>If you are an active participant (making annual additions or accruing a benefit) in a company retirement plan (think 401k) and make more than $65,000 as a single taxpayer in 2010 (or $109,000 as a married joint taxpayer) then you are disqualified from taking the full deduction. What you are then left with is the nondeductible IRA.</p> <h3>Introducing the Nondeductible IRA</h3> <p>In the past, there was nothing all that attractive about the nondeductible IRA. You did get tax deferral, but no immediate tax deduction and you still had to pay tax at retirement. With 2010 just around the corner here, the nondeductible IRA has become a very popular tool to allow high wage earners a way into the Roth IRA &mdash; a &ldquo;backdoor&rdquo; way. A high wage earner can contribute to a nondeductible IRA with the sole intentions of <a href="http://www.goodfinancialcents.com/2010-roth-ira-conversion-rules/">converting it in 2010 to Roth IRA.</a> Wait, did you catch that? Stated differently, <strong>if you are not eligible to contribute new money into a Roth IRA in 2010, you can open up a traditional non-deductible IRA and immediately convert it to a Roth.</strong> As I said, everyone is a VIP now!</p> <p>By contributing to the nondeductible IRA, you will only be responsible to pay what gains you&rsquo;ll have from now until you convert in 2010. If 2009 will be the first year to contribute (you still have until April 15th to <a href="http://cashmoneylife.com/2009/09/09/how-to-open-roth-ira-select-custodian/">open a Roth IRA</a> and make the 2009 contribution), then, unless you happen to pick a one in a million shot, your tax liability should be minimized.</p> <h3>Other Things to Consider</h3> <p>If you are considering doing this in 2010, remember that the IRS looks at all your IRA's together (all traditional and non-deductible) and will compute the tax on the conversion collectively. Let's look at a quick example:</p> <blockquote><p>Mary has an existing traditional IRA of $10,000, which she has only contributed $4,000 to. She now makes too much for a Roth and wants to use the backdoor nondeductble IRA we've discussed. When she contributes $5,000 to the IRA and immediately converts, she will have to add $10,000 to her income (67% of $15,000) instead of just the $5,000 of the IRA that maybe she was expecting.</p> </blockquote> <h3>It Can Get Complicated</h3> <p>As you can see, the Roth IRA conversion can get a little tricky. Be sure to weigh all your options before you pull the trigger. If you need more clarification, check out this step by step guide on the <a href="http://www.goodfinancialcents.com/2010-traditional-ira-to-roth-ira-conversion-tax-rules/">Roth IRA conversion tax rules</a>. Be sure to consult with your tax advisor before implementing this strategy.</p> <p><strong>*Restrictions, penalties and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.</strong></p> <p>&nbsp;</p> <a href="http://www.wisebread.com/backdoor-into-the-roth-ira-youre-invited-to-the-tax-free-party" class="sharethis-link" title="Backdoor into the Roth IRA: You&#039;re Invited to the Tax-Free Party" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/jeff-rose">Jeff Rose</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Non-deductible IRA Roth IRA Roth IRA Conversion Wed, 20 Jan 2010 20:00:01 +0000 Jeff Rose 4737 at http://www.wisebread.com