Roth IRA

Why Health Care Should be Part of Your Retirement Savings Plan, Too

Emily Guy Birken — Wed, 27 Jun 2018 08:30:15 +0000

You might think that retirement planning should be all about the fun and rewarding stuff you are saving up for: remodeling your home, traveling, spoiling your grandkids, and enjoying life. But only thinking about the good parts of your retirement leaves a major piece of your future unfunded: health care.

The fact of the matter is that health care could be your largest retirement expense — by a lot. Each year, Fidelity calculates the average cost of medical expenses for a 65-year-old couple retiring during that calendar year. In 2018, Fidelity has calculated that the average couple will need $280,000 in today's dollars to cover medical expenses in retirement — and that figure does not include long-term care.

As heartburn-inducing as that number is, it's not time to panic. Even people earning average incomes can prepare for health care costs in retirement without robbing a bank, moving in with their children, or learning to practice medicine on oneself. Here's what you need to know about medical care in retirement, and how to prepare yourself and your budget for it. (See also: 4 Affordable Retirement Spots With World-Class Health Care)

Your health in retirement

Let's start with the bad news: It's likely that your health will deteriorate in retirement.

In some ways, it's harder to think about declining health than it is to think about mortality, since we know the latter is inevitable. The statistics on preparing for death vs. preparing for poor health in retirement bear this out, since 42 percent of Americans have a will or estate plan in place, according to a Care.com survey, while the Economic Policy Institute found that only 30 percent of Americans have more than $1,000 saved for retirement.

But declining health as you age is a fact of life. According to the CDC, three out of every four Americans over the age of 65 have multiple chronic conditions. These are defined as illnesses or medical conditions that last a year or longer and require ongoing medical attention or limit daily activities.

In addition, the Alzheimer's Association reports that one out of every three seniors dies with Alzheimer's or another form of dementia. What is so pernicious about these medical issues is the fact that dealing with chronic health conditions or dementia can be devastating to a retirement budget. (See also: Don't Let Poor Health Kill Your Retirement Fund)

What about Medicare?

What is most concerning about the Fidelity calculation of $280,000 for medical care costs in retirement is the fact that the numbers are based on a 65-year-old retiring couple, which means they are eligible for Medicare. In fact, Medicare premiums make up 35 percent of Fidelity's calculation, or $98,000. (The remaining breakdown is 45 percent to co-payments, coinsurance, and deductibles, and 20 percent to prescription drugs.)

Medicare costs more than you realize, and covers less than you'd expect. It's important to understand what Medicare does and does not cover. (See also: 5 Common Medicare Myths, Debunked)

Medicare Part A

Medicare Part A, which is also known as hospital insurance, charges no monthly premium for the majority of enrollees. However, Part A coverage is quite sparse. It is called hospital insurance for a reason — because it only (partially) covers inpatient hospital care, inpatient care in a skilled nursing facility, home health care, and hospice care. In short, Medicare Part A will only pay for a serious medical problem that either lands you in the hospital or is expected to be fatal. It does not cover doctor's visits or prescriptions.

In addition, Part A only partially covers this care. You will still have to meet a deductible of $1,340 (for 2018) for each benefit period, and you will be responsible for a coinsurance amount of $335 per day if you stay more than 60 days in a hospital and $167.50 per day if you stay more than 20 days in a skilled nursing facility. (See also: 4 Common Mistakes to Avoid When You Enroll in Medicare)

Medicare Part B

This is the part of Medicare that works like regular health insurance. The majority of beneficiaries will pay a monthly premium (which can be deducted from their monthly Social Security check) for this program. As of 2018, the monthly premium for most Medicare Part B beneficiaries is $134, although higher income beneficiaries may have to pay more.

On Part B, you will pay all costs for covered services up to the yearly $183 deductible. Once that has been met, you will generally pay 20 percent of the Medicare-approved amount for most doctor services, outpatient therapy, and durable medical equipment. However, Medicare Part B does not cover long-term care (nonmedical help that the elderly may need for daily living), prescription drugs, routine dental or eye care, dentures, hearing aids or exams for fitting them, or routine foot care.

These coverage gaps can help explain the astronomical amount of money Fidelity calculates for health care needs in retirement. (See also: How to Make Sense of the Different Parts of Medicare)

Why you shouldn't panic

While none of this is good news, it's still no reason to go on a bank-robbing spree or start playing the lottery. There are a number of savvy strategies you can adopt right now to help make sure health care does not overwhelm your retirement budget.

1. Take care of your health

Adequate sleep, exercise, and healthy eating may not seem like part of your financial plan, but they can potentially have a greater return than any traditional investment. Taking better care of yourself can help to improve your health and potentially reduce the need for medical care as you age.

However, it's important to remember that even the most fit ultramarathoner who consumes only kale smoothies is not immune to the vagaries of poor health. But you will never regret taking care of yourself, because at the very least, it helps you to feel better in the present. (See also: 7 Smart Ways to Invest in Your Health)

2. Investigate long-term care insurance

One of the biggest coverage gaps in Medicare is long-term care, which is help that a senior might need with daily living activities such as bathing, dressing, eating, and mobility. Private health insurance also does not cover this kind of care, which means any retiree who needs it will be on the hook to pay for it herself. And according to the Department of Health and Human Services, the average 65-year-old today has a 70 percent chance of needing long-term care at some point in the future.

Long-term care insurance can potentially fill the coverage gap. This kind of insurance will help pay for your nonmedical long-term care after you have reached the end of the "elimination period," which can last anywhere from 20 days to 120 days. Until that point, you will pay for your care out of pocket.

Long-term care insurance isn't cheap, though. Prices vary, but a 60-year-old couple could expect to pay between $2,700 and $5,600 per year for a policy that pays for $150 per day in care, for a benefit period of three years. (See also: The Best Age to Buy Long-Term Care Insurance)

This kind of insurance is the best option for about 20 to 30 percent of retirees, according to the Center for Retirement Research at Boston College — those who have a moderate nest egg. For many others, it will make more sense to exhaust their assets to become eligible for Medicaid, which will cover long-term care. (See also: 5 Ways to Make Long-Term Care More Affordable)

3. Consider a health savings account

If you are in good health as you approach retirement, you may want to sign up for a health savings account (HSA). This account, which works a little like an IRA, allows families to contribute up to $6,900 (as of 2018) and individuals to contribute up to $3,450 in pretax income. If you are over the age of 55, you can contribute an additional $1,000 above these limits. The money grows tax-deferred, and as long as you use any withdrawals for qualified medical expenses, they are also untaxed.

The downside of HSAs is that you must have a high-deductible health insurance policy to qualify for one. To be considered a high-deductible policy, your insurance must have a deductible of least $1,350 per individual or $2,700 for a family, and an out-of-pocket maximum that is at most $6,650 per individual plan or $13,300 per family plan.

This makes HSA plans a bit of a difficult choice. If you enjoy good health as you approach retirement, they can be an excellent option, since you can also make penalty-free nonmedical withdrawals after age 65 (although you will pay taxes). That means your HSA can be one part of your retirement nest egg that can be used for something other than medical care if you continue to have good health.

But the high-deductible health plan puts you in a bad position if you get sick before reaching Medicare eligibility. You might end up having to raid your HSA before your official retirement. (See also: How an HSA Could Help Your Retirement)

4. Open a Roth IRA for health care savings

Roth IRAs are tax-advantaged investment vehicles that allow you to put aside already taxed money into the account, where it grows tax-deferred. As long as you keep the Roth IRA for at least five years and are over age 59½, you can withdraw funds from the account tax-free. As of 2018, you can set aside $5,500 per year, and savers over the age of 50 can contribute an additional $1,000.

This makes the Roth IRA a good place to earmark funds for health care in retirement. Since there is no penalty or tax on withdrawn funds, you do not have to worry about how a big withdrawal for medical care could affect your taxes in retirement.

You can determine the asset allocation of your Roth IRA based on your health expectations. If you are in good health as you approach retirement, plan on investing mostly in growth-oriented stocks, since you don't anticipate needing expensive health care until 10 or 20 years after retirement. If you already have a chronic health issue or know that certain medical problems run in your family, you may want to put most of your money in more stable investments, and only allocate a portion for growth. (See also: The Right Way to Withdraw Money From Your Retirement Accounts During Retirement)

The good, the bad, and the healthy

Health care in retirement does not need to overwhelm your budget. If you make sure you recognize the potential costs and understand Medicare's coverage gaps, you can prepare for your medical needs as you age. (See also: Follow These 5 Steps to Full Health Care Coverage in Retirement)

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Stop Believing These 5 Myths About IRAs

Alicia Rose Hudnett — Thu, 07 Jun 2018 09:00:21 +0000

Here's an important life lesson you may not have been told in childhood: You will spend your entire adult working years saving for one main goal — retirement. And one type of retirement account that almost everyone has access to is an individual retirement arrangement, or IRA.

IRAs come in two main formats, the Roth and the Traditional. And while both are valuable, they each bring plenty of confusion regarding some of the rules and regulations about saving in these types of accounts. Here are five IRA myths that may be preventing you from using this valuable retirement-savings vehicle.

1. I can't save in a workplace retirement plan and in an IRA

Even if you currently contribute to an employer-sponsored retirement account at work (such as a 401(k)), you can still direct additional funds into a Traditional or Roth IRA. (See also: 401(k) or IRA? You Need Both)

For Traditional IRAs

Anyone under age 70½ with earned income can make contributions to a Traditional IRA. But if you are covered by a workplace retirement plan, the IRS may restrict the deductibility of your contributions. For 2018, if you are covered by a workplace plan, are single, and make less than $73,000, or if you're married, file taxes jointly, and earn less than $121,000, you can contribute to a Traditional IRA and deduct either all or a portion of your contribution.

If you are single and earn $73,000 or more, or if you are married, file taxes jointly, and earn $121,000 or more, you can still make a nondeductible contribution. When you make a nondeductible contribution to a Traditional IRA, you don't receive an upfront tax break, but your money will still grow tax-deferred in the account.

Note: As an alternative to putting nondeductible dollars into a Traditional IRA, some advisers recommend putting this money into a brokerage account instead. That's because even though money in a Traditional IRA grows tax-deferred, distributions are taxed at ordinary tax rates. Meanwhile, although you receive no tax break for investing in a brokerage account, you may be able to get the more favorable tax treatment on your capital gains when you withdraw those funds in retirement. Having said that, this still doesn't discount the need for an IRA. (See also: Where to Invest Your Money After You've Maxed Out Your Retirement Account)

For Roth IRAs

Whether or not you have a retirement plan at work has no bearing on your ability to contribute to a Roth, but the IRS does impose income limits on who can contribute directly to this type of IRA.

For 2018, if you are single and make $135,000 or more, or if you are married, file taxes jointly, and make $199,000 or more, you are prohibited from contributing directly to a Roth IRA. There is a workaround to this rule called a "Backdoor Roth," which involves making a nondeductible contribution to a Traditional IRA, then converting that to a Roth IRA. This is a common and standard practice, but see a financial planner or tax adviser to determine the tax implications for your own specific financial situation.

2. I don't make enough to contribute to an IRA

Every year that you earn income is an opportunity to save for retirement. The government allows you to contribute a certain amount of money each year into tax-sheltered accounts. If you miss a year, you miss saving for that year forever.

Anyone with earned income under the age of 70½ can contribute to a Traditional IRA, and anyone, regardless of age, with earned income (but within the income limits listed above) can contribute directly to a Roth IRA. Even if you are unable to contribute the maximum allowable amount, make a contribution count every single year. And remember that you have until Tax Day of the following year to make your contribution for the current year. (See also: 5 Dumb IRA Mistakes Even Smart People Make)

3. I can't contribute to an IRA if I don't have my own earned income

Unlike other savings accounts, IRAs must have a single owner and can never be titled as a joint account. And up until now, we've pointed out how the first criteria for contributing to an IRA is having your own taxable compensation. But the IRS does make an important exception to this rule for nonworking or low-income earning spouses by allowing them to piggyback off a working spouse's record of yearly income, whereby all the same rules apply. This is called a spousal IRA. This is a smart way for a couple to continue a diligent savings routine even in a one-income household.

4. I don't need an IRA

Let's get this straight: Everyone needs an IRA. Whether by choice or life circumstances, everyone will retire someday. And retirement is expensive. Even if you are already covered by a workplace retirement plan, an IRA can help you capture and save much-needed excess funds that will help you get by later in life.

If you have extra cash sitting in a savings or checking account (not counting your emergency fund), you can begin transferring that money to fund an IRA. As long as you have earned income for the year, it doesn't matter where the contribution money comes from. (See also: 6 Reasons Every Millennial Needs a Roth IRA)

5. I can't touch my money until retirement

The whole purpose of saving for retirement involves taking a long-term view and allowing your money to grow untouched. And it's true that when you use a tax-sheltered account to save for retirement, there will be penalties if you don't follow all the rules. While you always have access to your own money, there are a few guidelines to keep in mind.

In general, if you are younger than 59½, any money you withdraw from a retirement account will be considered an early withdrawal subject to income tax and a 10 percent penalty. But there are important exceptions to the rule, including for medical reasons or even to pay for some higher education costs.

All direct contributions to a Roth IRA are made with after-tax money, so you always have tax-free and penalty-free access to your original contributions. Note that there are different rules for Roth conversions; but if you follow the rules, you can still gain penalty-free access to your funds after a waiting period and possibly before retirement.

Retirement is your most expensive long-term financial obligation, and you'll need to save as much as you can for as long as you can. Don't let myths and misconceptions steer you away from the value of an IRA.

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This article is from Alicia Rose Hudnett of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Smart Financial Gifts to Give New Grads Besides Cash

Mikey Rox — Tue, 22 May 2018 08:30:42 +0000

Do new grads want cash? Yes — all day long. But you and I both know what new grads will do with it. Instead of setting them up for failure by handing over a hot wad of Benjis that'll burn holes in their pockets, steer them toward success with these financially valuable, money-inspired gifts.

1. Skill-based classes

I knew the basics of cooking and cleaning when I graduated college (I could scrub a toilet and do my own laundry, at least), but there were plenty of skills I lacked — like home improvements, vehicle maintenance, and, yes, money management. And while I had people around to help with many of those inconveniences, I was still kind of a disaster for the first few — OK, six — years on my own.

If someone had gifted me a help-yourself class or two, however, not only would I have been better prepared to enter the "real world" more confidently, but I could have capitalized on those skills to earn side income (because that's the real thing I'm great at). That would have come in handy when I was eating pizza bagels for every meal.

2. Starter emergency fund

New grads won't have the kind of emergencies that older adults do, but even the smallest crisis can turn into a major financial burden for someone just starting out. Lend a helping hand by setting up an emergency fund in their name at your bank (not theirs) so they're unlikely to drain it for early-20s nonsense.

Put aside $500 to $1,000 to start and add money as you see fit, or let the grad know that they can transfer money into the account when they have a little extra to spare. Their own contributions will provide even more padding when the going gets tough. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

3. Website domain

Most college grads — heck, even high-schoolers — are tech savvy, but they may not have thought to secure their name as an internet domain for future use. I love this idea because while it's not a tangible gift, it is a gift that can spark inspiration. If someone handed me a website domain and told me to run with it, I'd at least ponder the possibilities, and that's all some people need to go full steam ahead. (See also: 8 Surprising Ways a Personal Website Can Improve Your Life)

4. Loyalty points

If you've racked up loyalty points and want to save money on grad gifts, look into gifting these transferable rewards.

"Loyalty points are a great money gift to give new grads instead of cash," says U.S. Travel Association spokesperson Laura Holmberg. "Loyalty points allow them to cash in for unique travel experiences at the time and destination of their choice — maybe for a post-grad getaway, or to put toward that first vacation once they're in the 'real world.'"

5. Big-idea books

New grads might not want to crack open a book right away, but gifting self-help books that lie in waiting until they're ready will be worth every penny once they pick them up and implement the actionable advice.

Some of my favorites include author-entrepreneur David Pike's The New Startup and The Startup Playbook by Rajat Bhargava and Will Herman (both are perfect for grads trying to figure out what they want to do with their work life), as well as David Carlson's Hustle Away Debt (because there will be a lot of debt to hustle away). (See also: The 8 Classic Personal Finance Books You Must Read)

6. Gift cards for life's necessities

Gift cards are a safe and popular gift to give, but when buying for new grads, think practical instead of frivolous. They might not appreciate $50 to a supermarket in the moment, but there will come a time they'll recognize that gift card as perhaps the most thoughtful and useful of the bunch. Other sensible gift card ideas include cards for gas, a new interview suit, work supplies, and home essentials.

7. Student loan payment

Many college grads start life with student debt looming over their heads, and you can help alleviate that burden somewhat by providing a few initial payments as a gift.

"Sit down with them and go through the process of helping them make a payment toward their student loans or contribute installments to their budget to help them on a monthly basis for a few months after they graduate," suggests Alayna Pehrson, financial blogger for BestCompany.com. "Overall, student loans can feel like a major weight to many fresh college graduates, so this gift could really go a long way for your grad." (See also: 15 Ways to Pay Back Student Loans Faster)

8. Investment starter capital

Broke college graduates don't think much about making investments right out of school when they're peering down a dark tunnel of 10 to 20 years of student loan payments. As such, this is a great opportunity for you to take the lead where investing is concerned.

"You can do this by giving them money to invest and starting them out with a well-known investing app like Acorns," Pehrson says. "Again, going through it with them step-by-step can ensure that they actually invest that money."

Take some time to explain how investing works, too. It's scary for a lot of people, but knowing what to do, why, and when will help new grads wrap their head around why it's important to keep this option open as a lifelong financial tactic.

9. Roth IRA

Retirement is the farthest thing from a new grad's mind, but you and I both know the earlier you start saving for that glorious day, the better. And in terms of the ROI, a Roth IRA is near the top of the list of best grad gifts.

Consider this: A max contribution of $5,500 in the starter account you set up for the grad at age 21 will mature to a staggering $71,000 by age 65, assuming 6 percent interest — and that's with no further contributions. Given that 13 percent of Americans have $0 saved for retirement, according to a 2018 GOBankingRates survey, your generous gift puts them well ahead of the curve before life even begins. (See also: 6 Reasons Every Millennial Needs a Roth IRA)

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Job-Hoppers Can Keep Up With Their Retirement Savings

Tim Lemke — Mon, 16 Apr 2018 08:30:09 +0000

It's very common these days for young people to move from job to job. The days of sticking with a company for decades and earning a big pension are over.

Thankfully, 401(k) plans and individual retirement accounts allow workers to switch jobs without losing their retirement savings, but it's still possible for all that job-hopping to disrupt your ability to save. If you do switch jobs regularly, there are some sensible things you can do to ensure that your retirement plan stays on track.

Open a traditional or Roth IRA

If you are between jobs with no access to an employer-sponsored retirement plan, there are still things you can do to save. If you have any earned income at all, you can contribute to an individual retirement account, which allows you to invest with some tax advantages.

With a traditional IRA, any money you contribute is deducted from your taxable income. With a Roth IRA, your money is taxed upfront, but you will avoid paying any taxes on investment gains when you withdraw the money when you retire. IRAs can be very powerful tools for retirement savings for self-employed people, part-time workers, or those with irregular incomes. You can maintain and contribute to these accounts even after you get a 401(k) plan from a new employer. (See also: 401(k) or IRA? You Need Both)

Roll over your 401(k)

If you had a 401(k) from one employer and switch jobs, you can take the funds from the old account and add it to the new one. This is called a 401(k) rollover. There usually is no penalty if you don't merge the accounts right away, but over time the old 401(k) provider may start to bug you about it. You should consider a rollover if the retirement fund from your new employer offers better investment options, lower fees, or both. If you call the brokerage firm that is managing your old 401(k), they will usually be happy to walk you through the steps to carry out a rollover. (See also: A Simple Guide to Rolling Over All of Your 401Ks and IRAs)

Open a rollover IRA

If you no longer have access to a 401(k) or don't like the investment options in your new retirement plan, you can place your investments in a new individual retirement account. This is called a rollover IRA, and it can be better than a 401(k) because you usually will have many more investment options, from mutual funds and ETFs to individual stocks and bonds.

Look into a 401(k)-to-Roth IRA conversion

When you have a 401(k), you will eventually be obligated to pay tax on any gains when you begin withdrawing money in retirement. That's why some investors look into turning their 401(k) and traditional IRA accounts into a Roth IRA, which allows money to grow tax-free.

The big catch to making this conversion is that you must pay tax on any gains you've had up until now. That could be a big chunk of change that you may not be in a position to handle right now, but a smart move if you think your tax bracket will be higher in the future. An accountant or financial adviser can help you determine whether converting an old 401(k) to a Roth IRA makes sense for you.

Play catch up

Let's say you left a job and were not able to contribute to retirement accounts for three months. But, you land a new job with a higher salary than before. If this happens, consider bumping up your retirement contributions to make up for that lost time. Any time you get new or unexpected income, consider using that to backfill the retirement accounts you may have been neglecting.

Once you make those extra payments, you may find that you have the ability to contribute the higher amount on an ongoing basis. And that's great, because the more you are able to save, the more you'll have in the long run. (See also: 6 Ways Meeting the 2018 401(k) Contribution Limits Will Brighten Your Future)

Pay close attention to the employer match

Employers can vary greatly in how much they contribute to workers' 401(k) accounts. Some will provide direct contributions while also matching what the employee put in. Some offer a full match on contributions, while others match just a portion. And some don't contribute at all. It's important to remember this when switching companies, especially if you are moving to a company with a retirement plan that's less generous.

Ideally, you will want to make sure that the total amount of money going into your 401(k) remains the same or goes up over time. If your new employer is contributing less on a percentage basis, consider bumping up your own contributions to make up the difference. (See also: 7 Things You Should Know About Your 401(k) Match)

Don't forget about the vesting period

If you work at a company that contributes to your 401(k) plan, it's possible that you may not be able to keep those contributions unless you stay at the company a certain number of years. For example, the company may reclaim any contributions if you leave before two years. This is called the vesting period.

To get the full advantage of a company retirement plan, it makes sense to stay through the full vesting period. Some companies offer a tiered vesting schedule, in which employees keep an increasing portion of company contributions each year until they are fully vested.

Be sure to read the documentation on your 401(k) plan to understand the vesting policies. If you leave the company before you are fully vested, you may be leaving large sums of money on the table.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Things Teens Can Do Now to Prepare for Financial Independence

Emily Guy Birken — Tue, 03 Apr 2018 08:00:06 +0000

In the past couple months, it's become abundantly clear that today's teens are tenacious and enterprising. Add in the fact that they are "digital natives" and have a firm grasp on social media and technology, and it seems as if there is very little teens cannot do if they put their minds to it.

Unfortunately, there is one area where teens feel a little less optimistic: Money.

According a 2013 survey by Junior Achievement, an organization dedicated to teaching kids about money, 25 percent of teens believe they will not be able to support themselves without the help of parents until they are between the ages of 25 and 27. In addition, only 59 percent of teens feel confident that they will be able to support themselves between the ages of 18 and 24.

Some of this pessimism about future financial independence is a natural reaction to the relatively high unemployment rate among teens. But teens, with a little judicious help from Mom and Dad, can set themselves up for financial independence down the road. Here are a few things that every teen can do to prepare for financial independence in adulthood.

1. Set financial goals

One of the best ways to learn how to handle finances is through financial goal setting. Parents can help teens set realistic financial goals, such as saving up for a coveted iPhone, making a contribution to a college fund, or paying for the class trip. Teens can learn how empowering it is to create a written plan for achieving their financial goals and find ways to earn or save money toward those goals.

Parents can help foster this ability by asking teens to pay for wanted purchases on their own, while showing them how to create and follow through on a plan. (See also: How to Help Your Kid Build Their First Budget)

2. Track spending

One of the biggest stumbling blocks in achieving financial independence is ignorance of where the money goes. Without financial awareness, it's very easy to spend your way through a great deal of money without ever realizing how much is slipping through your fingers. This is why it's important for teens to learn the habit of tracking their finances now.

There are several ways that parents can help to encourage their teens to track their spending.

Make your teen's allowance conditional on tracking. According to former Vice President Nelson Rockefeller, this was how the famously wealthy family handled allowances: "All of us had to keep a record of where our money went. We were required to give 10 percent to charity, save 10 percent, and then account for how we spent or saved the other 80 percent."

Make tracking a family affair. It's much easier to encourage your kids to join in on something they already see you do than ask them to start doing something that seems foreign to them. Include them in money tracking and find a way to make a game of it among the family. For instance, you could have a contest to see who can get their weekly or monthly tracking done first — which will have the added benefit of encouraging all of you to track your spending as it happens.

Let them embrace financial technology. There are a number of apps and computer programs out there that will help your teen track money on the very device they are generally glued to. The best options for teens are systems like Mvelopes and YNAB, which both allow for manual tracking of cash transactions. Not only will manual tracking help get teens in the habit of always tracking their spending, but even young teens who depend solely on cash can use them.

3. Open a Roth IRA

Any teen who has earned income — that is, who has earned money from a job — can contribute to a Roth IRA. The contribution limit is $5,500 per year, or the maximum amount the contributor earned from a job — whichever amount is lower. For instance, a teen who earns $2,500 per year flipping hamburgers on weekends can only contribute up to $2,500 into their IRA or Roth IRA.

Getting started on a retirement account in your teens can make an enormous difference in your ability to retire. The magic of compound interest has more time to work if you start in your teens. In addition, getting in the habit of paying yourself (and your retirement account) first is an important aspect of achieving financial independence as an adult.

Since few teens will be interested in setting aside every single paycheck for a Roth IRA, parents can encourage their teens to put money in the IRA by offering to match anything they set aside.

4. Start investing

While getting teens into the habit of putting money into retirement accounts is incredibly important, it's also vital for them to feel comfortable with investing in general. This will not only help them make smart decisions with the investments in their retirement accounts, but it is also an important way to build wealth.

There are several ways to help your teens get involved in investing.

Encourage them to buy individual stocks that they find interesting. The stock market offers teens a chance to own a piece of the companies whose products they use every day. This makes investing feel more personal, and gives teens the opportunity to learn how their favorite brands are faring.

Ask them to defend their purchases before they make them. Financial professional Lawrence Sprung told U.S. News & World Report that he asked his 11-year-old son to defend his request to buy a particular stock. The article explains: "When his 11-year-old son declared that he wanted to invest in Walt Disney Co, Sprung asked him to prove his case. His son noted how Disney was unrolling a new Star Wars enterprise, enlarging and redeveloping some of its parks, and that people from all over the world would head to Disney's parks whether the economy was good or bad."

Create a teen-run family investment account to help your kids understand the importance of diversifying. Hold regular meetings to discuss how the holdings are doing and go over investment strategies. This will help teens feel perfectly at home with the ins and outs of investing.

Make financial upkeep a habit

Teens can do a great deal to prepare for financial independence while still under their parents' roof. By getting into the habit of good money management — including setting goals, tracking spending, saving for the future, and investing — teens can be sure that they will reach financial independence and avoid the possibility of living in Mom's basement.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Alternatives to a 401(k) Plan

Tim Lemke — Mon, 18 Dec 2017 09:30:10 +0000

The status of 401(k) plans has been in the news a lot recently, as part of the wider discussion about tax reform on Capitol Hill. While it does appear that tax benefits for the popular employer-sponsored retirement plans will remain unchanged for now, even the prospect of change has left some people feeling unsettled about what to do with their money moving forward.

To be clear, a 401(k) plan remains a very powerful tool to help you save for retirement, especially if your company is generous in matching contributions. But if you are feeling confused or are not happy with what your current 401(k) plan offers, there are some other options available to help you build a retirement fund. Here's the skinny on a handful of 401(k) alternatives.

1. Roth IRA

A Roth Individual Retirement Account (IRA) is a popular option among people who don't have access to a 401(k) or other retirement plan through their employer. With a Roth, you can contribute up to $5,500 annually ($6,500 if over age 50), and since you contribute with post-tax dollars, the gains on those investments can be withdrawn tax-free when you retire. Roth IRAs are popular due to the flexibility to choose your own investments. It's also possible to use the account for certain emergency costs, such as medical bills or a home threatened by foreclosure, and you can even use it as a college savings account, though there may be penalties and taxes if you withdraw gains before age 59 ½. (See also: Using Your Roth IRA as an Emergency Fund — Ever a Good Idea?)

A Roth IRA is a good alternative to a 401(k) for those who don't have access to one. Even if you do have a 401(k), sometimes a Roth IRA is a better option, such as in cases when an employer does not offer matching contributions, or the fund choices are expensive or limited. (See also: 401(k) or IRA? You Need Both)

Roth IRAs are also useful because you can contribute as long as you have earned income; other retirement plans require you to begin making withdrawals by age 70 ½.

2. Traditional IRA

A traditional IRA is similar to a Roth IRA, but the tax advantages are more in line with a 401(k). In this case, any contributions to the account are deducted from your taxable income up front; you will be required to pay taxes on the gains when you retire.

It's entirely possible and sensible to have both a traditional IRA and a Roth IRA in order to get tax advantages both now and later. Note that with a traditional IRA, you must start taking required minimum distributions starting at age 70 ½.

3. Taxable brokerage account

There are no tax advantages to opening a good old-fashioned, regular, taxable brokerage account. But you do get flexibility that can't be offered by a 401(k) or IRA. With a regular taxable account, you can invest in whatever you want and buy and sell whenever you want without any early withdrawal penalties, though you will pay taxes on any gains. This type of brokerage account is great if you want to buy dividend stocks to boost your income, or use the investments for something other than retirement.

4. Peer-to-peer lending

This is a relatively new investment option that allows people to connect online with borrowers and collect interest income. Through peer-to-peer lending sites such as Lending Club and Prosper, you become a lender and loan money to someone in need of cash, profiting from the interest on that loan.

With peer-to-peer lending, lenders can earn considerably more than what they might earn from interest from the bank, and may even outpace stock market returns, depending on the riskiness of the loans they buy. But there is always some risk that the borrower will default. And keep in mind that interest from peer-to-peer lending is taxed as normal income, rather than investment gains. (See also: Everything You Need to Know About Peer-to-Peer Investing With Lending Club)

5. Stick your money in the bank

Putting your money into a savings account is always an option, though not the best one on this list. These days, interest rates are so low that in many cases the growth of your savings will barely outpace inflation. You may be able to find better-than-average rates at some online banks or by opening a certificate of deposit, but there's no chance you'll be able to match the returns of the stock market over the long term. It's fine to use a bank account for your emergency fund, but for long-term savings, look elsewhere.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Yes, You Can Pay for Education With an IRA

Anum Yoon — Wed, 04 Oct 2017 08:00:07 +0000

When most people think of saving for a college education, they usually think of 529 savings plans or Coverdell Education Savings Accounts (ESA). These accounts allow you to grow your money by investing in select mutual funds, much like a typical retirement account does. (See also: 5 Smart Places to Stash Your Kid's College Savings)

While both of these accounts are great investment tools to pay for a college education, there's another option you may not have considered. A Roth IRA can also be used for educational expenses. There are pros and cons for each way to save for college. Here's a brief rundown:

Coverdell ESA	529 savings plans	Roth IRA
No tax deduction from contributions.	No tax deduction from contributions.	No tax deduction from contributions.
Withdraw your contributions tax free.	Withdraw your contributions tax free.	Withdraw your contributions tax free. (If you withdraw interest, it will be taxed.)
Annual contribution limit: $2,000 per beneficiary.	No annual contribution limit but most states limit total contributions to $300,000.	Annual contribution limit: $5,500, or $6,500 if age 50 or over.
Anyone can contribute but the amount they can contribute is limited by their modified adjusted gross income. Ability to contribute phases out once modified AGI reaches $220,000.	Anyone can contribute.	Must have income in order to contribute. People with high incomes ($181,000 for married couple) are prohibited from contributing.
Can be used for higher education and qualified K-12 expenses. Beneficiary must use account by age 30.	Can only be used for higher education expenses.	Can be used for higher education, first home purchase, qualified medical expenses, and retirement.
Account under guardian's name won't impact beneficiary's FAFSA.	Account under guardian's name won't impact beneficiary's FAFSA.	Withdrawals will increase your earned income and can affect beneficiary's FAFSA.

Roth IRAs

A Roth IRA differs from a traditional IRA in that the income you contribute is already taxed. The beauty of a Roth IRA is that the distribution you take from your contributions is not taxable (as long as the use is approved).

Let's say your child is a college freshman. You withdraw $15,000 from your Roth IRA for their first year of school. None of this money will be taxed, as long as it is from your own contributions and not from the interest earned. Withdrawals are considered returns of contributions initially, for tax purposes. They are considered interest earnings second.

Now, you are likely thinking, "But aren't IRA withdrawals subject to penalties if you withdraw them early?" Generally, yes. Normally, you must be age 59 ½ or older, and have had the account for at least five years to withdraw without incurring a 10 percent tax penalty. Why? Well, all IRAs are retirement funds, primarily. They are designed to be withdrawn only as folks approach retirement.

But no penalty applies if the withdrawal is for qualified educational purposes (or a first home purchase, or qualified medical bills). Even if your child or grandchild has a scholarship for full tuition, it's no problem. Roth IRAs can be used for any qualified educational expense, including room, board, books, and supplies.

If your child or grandchild ends up not going to college, or not needing all the money, you can simply keep the money to continue funding your retirement. Note that to place money back into a Roth IRA, it will be subject to annual contribution limits ($5,500 if under age 50, and $6,500 if age 50 or older).

Traditional IRAs

You can also use traditional IRAs to pay for college. Essentially, traditional IRAs reverse the tax advantage of a Roth. You get a tax deduction upfront for all money contributed to a traditional IRA — but all withdrawals will be taxed at the federal and state level.

As with a Roth IRA, if traditional IRA distributions before age 59 ½ are used for qualified educational expenses, they are not subject to the 10 percent penalty. However, they will be subject to tax. The IRS will get its money whenever you withdraw from a traditional IRA, regardless of what you withdraw it for.

Because of the tax implications, while it is possible to use a traditional IRA for educational expenses, it may not be the most prudent move. If you want to tap into IRAs for college expenses, a Roth IRA is the better bet financially.

An important caveat

Realistically, tapping your IRA to pay for your child's education should rarely be your first choice. It can be a smart move if you have a considerable amount saved and a lot of time left before retirement to pay it back. Otherwise, you'll be draining the account of funds you very much need. It may be wiser to use an educational savings account to save for your child's education instead. (See also: Why Saving Too Much Money for a College Fund Is a Bad Idea)

However, there are still benefits of using an IRA over an educational savings account if you know your retirement will still be secure. For example, by combining the funds into one account, you will have more flexibility in choosing whether to spend your savings on education — and how much — or to continue to hold it for your retirement.

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This article is from Anum Yoon of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Money a Mess? Try This Personal Finance Starter Kit

Emily Guy Birken — Tue, 22 Aug 2017 09:00:05 +0000

I recently joined a meal delivery kit service, which has completely changed my cooking game. Every week, I receive a couple of boxes of pre-chopped and presorted fresh ingredients, along with a step-by-step recipe that helps me get a meal on the table in under 30 minutes. (See also: Are Meal Prep Subscription Boxes Worth It?)

As I put together one of these meals last week, I started wondering why we haven't applied this concept to money yet. Where is the deliverable personal finance starter kit that will make handling your finances as easy as putting a quick and delicious meal on the table?

Since we probably won't be seeing any "Hello Cash" or "Green Apron" boxes arriving in our homes anytime soon, I figured I could take matters into my own hands and create such a starter kit for adult-level finances. Here are the specific "ingredients" you need to go from broke to bank.

What you need: A checking account

Opening a checking account is the first step to conquering your adult-level finances. That's because having a bank hold onto your money is the safest and least expensive way for you to access and spend it. Putting your money in a checking account gives you several benefits:

Security and protection of your money: Up to $250,000 of your money is FDIC insured by banks and NCUA insured by federal credit unions, meaning you do not have to worry that your money will be wiped out if the banking institution fails. State-chartered credit unions are backed by private insurers. (See also: Here's the Difference Between a Federal and Non-Federal Credit Union)

Free check cashing: Without a checking account, it is nearly impossible to cash a check without having to pay a fee, and those fees can take up to 3 percent of the value of the check. It's tough to get ahead financially if you have to pay to access your own money.

Free bill pay: A checking account gives you access to paper checks and online bill pay. Without such an account, you will have to pay your bills with money orders, which also cost as much as $1 per money order. (See also: 5 Reasons Paper Checks Are Still Relevant)

Access to a debit card: We live in a digital world, and it can be very difficult to handle your finances without a debit card or credit card. The majority of checking accounts these days come with a check card, which allows you to use your debit card like a credit card. (See also: Debit or Credit? Which One Should You Choose at the Checkout?)

To find the best checking account for you, consider your needs ― do you need an account with a low minimum balance, or do you plan to keep a high balance and want to earn some interest? Will an online bank cover all of your needs, or do you need a local branch? How often will you need to access the ATM? (See also: 8 Ways to Make Sure You Never Pay an ATM Fee)

Taking the time to find a checking account and bank that will fit your financial needs will help you keep more money where it belongs ― in your account and in your wallet.

What you need: A savings account

The next financial ingredient you need is a savings account. While the interest rates on savings accounts are still depressingly low, that does not change the fact that an FDIC or NCUA-insured savings account serves as the foundation for financial planning for the future. Here's why.

It makes it easier to pay yourself first: It's very hard to save money without a place to put it that is separate from your checking account. Opening a savings account gives you a more difficult-to-access spot for your money to grow. (See also: 4 Easy-to-Fix Reasons Your Savings Account Isn't Growing)
It can serve as your emergency fund: Financial hiccups, mistakes, and emergencies can hit anyone at any time. The difference between a financial emergency just being a nuisance and it becoming a catastrophe comes down to whether or not you have an emergency fund. Without one, you will be left scrambling to find money. With one, your emergency fund can simply absorb the cost of the emergency without affecting your usual spending. (See also: Where to Turn for Help When You Don't Have an Emergency Fund)

While it may be easy to open a savings account with the same bank where you already have a checking account, you might want to consider an account at a different bank. This can help keep the money out of your reach if you're likely to spend it, and could possibly get you a better interest rate, especially if you're willing to put your savings into an online bank. (See also: The Pros and Cons of Keeping All Your Accounts in One Bank)

Of course, opening a savings account is not enough. You need to actually use it regularly. The trick to getting the most out of your savings account is to set up regular, automatic transfers into it, so that your savings will grow without you having to think about it. (See also: Earn More Interest by Reducing Savings Friction)

What you need: A simple budget

Once you have a checking account, a savings account, and automatic transfers into savings, then you are ready for the next ingredient: your budget.

This is often the portion of financial adulting that makes the fainthearted run screaming into the distance. But budgeting is really about organizing your money so that you can spend it on the things that matter and scrimp on the things that don't.

The basis of budgeting is keeping track of your income and expenses. There are several ways to do this without having to break out a spreadsheet. You can use sites like Mint.com to track your spending for you and declutter the financial information coming in to you so that it's easier to track. (See also: Build Your First Budget in 5 Easy Steps)

When you have a decent idea of what you bring in and what you spend, then it's time to start managing your funds so that you spend less than you earn. How you manage your money is up to you, but the main idea is to save your splurges for the things you really value, and cut back your spending everywhere else. (See also: How to Manage Your Money — No Budgeting Required)

What you need: A Roth IRA

Your financial life is really starting to look good at this point, so it's time to add the next ingredient: a Roth IRA. This tax-advantaged retirement account is a great way to save for your future.

Roth IRAs are funded with post-tax dollars, which means you will not get a tax break when you make a contribution ― but any investment gains can be withdrawn tax-free anytime after age 59½. Since it's very likely that you'll be in a higher tax bracket by then, this makes the Roth IRA a great deal for newly-minted financial adults. You may contribute up to $5,500 per year to your Roth IRA, and there is no age limit on contributions since you will never be forced to take minimum required distributions on this account, unlike traditional IRAs and 401(k)s. (See also: Which Retirement Account Is Right for You?)

In addition, you can access up to $10,000 of your earnings penalty-free from your Roth IRA to put toward buying your first home. You may also access your principal at any time without having to pay a penalty, which is not possible with traditional IRAs and 401(k)s.

That being said, if you do have access to a 401(k) retirement savings account at work and there is an employer match for your contributions, you will want to make sure you contribute up to the full employer match before funding your Roth IRA. The employer match is free money, after all. (See also: 7 Retirement Planning Steps Late Starters Must Make)

The best way to make sure you max out your Roth IRA contributions is to make them completely automated, just like your savings.

The optional garnish: A rewards credit card

At this point, your adult-level finances should be working well and taking good care of you. The next level of financial expertise is to start using your regular spending to help you achieve more of your financial goals. You can do this with a rewards credit card that rewards you for your regular spending. With savvy use of such cards, you can earn anything from flights to hotel stays to plain old cash back.

But, there is a reason why this is an optional garnish, rather than one of the main ingredients of financial adulthood. Banks and credit card companies don't offer rewards cards to be nice to their customers ― credit card rewards can make even the most frugal financial grown-up forget their budget limitations. If you are able to pay off your credit card in full each month and just reap the free rewards, then a rewards credit card can be a delicious topper to your financial adulthood. (See also: How to Escape Reward Card Spending Traps)

If, on the other hand, you know that you will struggle to pay off your balance every month, then feel free to enjoy your financial adulthood sans rewards credit card. It's not a necessary part of your financial starter kit ― it just makes for a nice addition. (See also: 6 Smart Reasons to Pay Your Credit Card Bill Before It's Due)

Whipping up a financial adulthood

While it would be convenient if you could order a financial adulthood starter kit to show up at your doorstep, it's actually pretty simple to put together one of your own. Just know the basic ingredients you need, find the ones that work best for you, be consistent ― and, voilà! You'll go from broke to bank before you know it.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Save for Retirement When You Are Unemployed

Tim Lemke — Wed, 12 Jul 2017 09:00:14 +0000

When you're unemployed, saving for retirement may be the last thing on your mind. It may seem impossible to save for the future when you have no steady income to even pay basic bills.

But depending on your situation, it may still be possible to build your nest egg even if you're not working full-time. Here are some tools and suggestions for keeping an eye on the future during a period of joblessness.

Familiarize yourself with IRAs

Individual retirement accounts (IRAs) are great for people who don't have access to employer-sponsored retirement plans like 401(k) accounts. A traditional IRA is similar to a 401(k), in that any contributions are deducted from whatever taxable income you have. With a Roth IRA, on the other hand, earnings are taxed up front, but any gains you have won't be taxed when you withdraw money at retirement age.

IRAs are useful for people who are self-employed, or who earn money inconsistently through part-time or freelance work. So if you're not employed full-time but still have some earned income, these accounts can help you save.

Think of retirement savings as a necessary expense

When you're unemployed, it's important to get a handle on all of your expenses so that you know where you need to cut. You may find that there are a lot of costs (luxury purchases, eating out, cable TV) that can be taken out of your household budget, while other expenses (food, electricity, debt payments) are more necessary. If you think of retirement savings as a necessity, you will be forced to cut spending elsewhere.

Roll over your old 401(k)

If you've been laid off from a job, you will no longer be able to contribute to the 401(k) you may have had from your employer. But the account will still exist and the money is still yours. You can let the old 401(k) account sit, but it's better to roll it into a traditional individual retirement account (IRA). The IRA will give you more flexibility and investment options, and may also have lower fees. And you can begin contributing to it once you have any earned income at all.

Focus on rebalancing

You may not be able to add much to your retirement accounts, but you can work to make sure they are optimized. This means making sure you have the right mix of investments based on your retirement date, and getting the optimal blend of stocks in various industries and asset classes. It's always smart to examine your portfolio to ensure you are not over- or underinvested in any one area.

Look for higher bank interest rates

If you're not taking in much income for the time being, you need to have your cash savings working for you. That means any cash savings you have should generate as much income as possible. Interest rates are still quite low, but many online banks offer interest rates on CDs and savings accounts that are higher than average.

Avoid the temptation to cash out

It may be tempting to take money out of your retirement funds, but you should avoid it if at all possible. One of the best ways to see your retirement savings grow is to let your investments do their thing. You can see a meaningful increase in your retirement savings just from market gains, even if you're not contributing for the time being.

Withdrawing from retirement accounts, however, has consequences. First, any money you take out has no chance to grow and help you expand your overall retirement savings. Second, there are penalties and taxes associated with taking money out of retirement accounts early. (See also: 5 Questions to Ask Before You Borrow From Your Retirement Account)

Continue to focus on growth, if you can

If you are unemployed and have some investments in a taxable brokerage account, you may be tempted to shift them to dividend stocks or other income-producing investments. This can give you extra income at a time when you may need it. But making this kind of adjustment could have a long-term negative impact on the overall growth of your portfolio. If dividends, bonds, or other income-focused investments will help you keep the lights on, fine. But it's best to focus on finding other sources of income, or reduce your spending first before going this route.

Reinvest dividends, if you can

If you do have dividend stocks already, you can still contribute to your retirement portfolio by reinvesting any dividend income you get from stocks. You may be tempted to use that investment income to pay bills and help get through your unemployed period, but if you can get by without it, direct the dividends to buy more stocks and other investments instead. Even small contributions added to your retirement accounts can add up to considerable savings over time.

Get your spouse involved

Perhaps you never thought to include your spouse in retirement planning because you felt it wasn't necessary while you were working. Now his or her income can be directed to help you save. This may be a challenge, since they are now also working to help pay more of the bills. But there are some ways to use your spouse's income for your own retirement accounts. If you have a traditional or Roth IRA, your spouse's earned income can go toward your account. (Note: This is only allowed if you file your taxes jointly.)

Plan to pay into accounts later

If you are unemployed but expect to be working in short order, you can postpone contributions to your IRA and add money later, even if it's after the end of the year. In fact, you can contribute to an IRA all the way up until April 15 of the following year. So for example, let's say you planned to max out your IRA by making monthly payments. (This would be about $458 monthly for a total of $5,500 for the year — the maximum amount allowed by the IRS for people under 50.) But let's say you are out of work from August through October of that year. You can hold off on contributing during that time and make up the difference in later months, even the first few months of the following year, if necessary.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Reasons Every Millennial Needs a Roth IRA

Tim Lemke — Thu, 01 Jun 2017 09:00:11 +0000

You're young. You're earning a bit of money. You know you need to start saving for retirement. So what's the easiest way to get started?

One of the best vehicles for retirement savings for millennials is a Roth IRA, which is a type of account that offers a great selection of investment options and tax advantages. You contribute to a Roth with money that's already been subject to income tax, but when you withdraw it in retirement, everything you've earned in the fund is tax-free. In comparison, you don't pay tax on 401(k) or traditional IRA contributions until you take out the money in your later years. Both have benefits, but there are reasons you might particularly want to consider a Roth while you're young.

It's easy to open a Roth IRA through most popular online brokerage firms, and you don't need a lot of money to get started. (See also: 5 Retirement Accounts You Don't Need a Ton of Money to Open)

Here are some reasons why a Roth IRA is an essential part of any millennial's investment plan.

1. You may not have a 401(k)

If you work for a company, you may be offered a 401(k) plan, which allows you to invest in a variety of mutual funds and deduct any contributions from your taxable income. In many cases, your company will match a portion of any contributions you make.

But these days, an increasing number of millennials are performing a variety of contract or "gig" jobs, rather than working full-time with a single company. A Roth IRA is not tied to an employer, so anyone can invest as long as they have earned income. If you are earning income but don't have access to a 401(k) plan, a Roth IRA may be your next best option.

2. You have a 401(k), but it's lousy

If you have a 401(k), it's wise to take advantage of it, especially if your company offers a match. But be aware that your 401(k) plan may not offer a wide range of things to invest in, and there may be high fees. This is why many financial planners suggest contributing to a 401(k) up to the company match, and then placing any additional savings in a Roth IRA, which may offer lower costs and more investment choices.

3. There are some tax advantages over a 401(k)

The key feature of a Roth IRA is that any investment gains can be withdrawn tax-free anytime after age 59½. If you are a millennial, this is a big deal — because unless you're making big bucks already, there's a good chance you will be in a higher tax bracket when you are older. This tax advantage is in contrast to a traditional IRA or a 401(k) plan, in which the tax advantages come upfront.

4. You can use it to pay for education

Typically, if you withdraw from an IRA before age 59 ½, you must pay a 10 percent penalty on the withdrawal, plus any income tax. But the one big exception involves qualified higher education expenses.

If you use a Roth IRA to pay for education, and limit your withdrawal to your contributions but not your earnings, there are no penalties or taxes. If you do decide to include Roth earnings in your withdrawal, those funds will be subject to income tax. This is a helpful feature for millennials, who may consider going back to school. Parents can also use a Roth IRA to pay for educational expenses for their children. Keep in mind that money from a Roth IRA could impact financial aid calculations. And of course, any money taken out for college means less money in the account for retirement.

5. You can get cash quickly in an emergency

It's not the best idea to withdraw money from a retirement account, because you'll lose out on the potential investment gains from the cash you take out. But, you are permitted to take out your contributions from a Roth IRA without penalty at any time. This makes them potentially useful as emergency savings accounts.

Just remember it's only the money you put into the account, not the gains, that can be taken out penalty-free. When you're young and not earning much, it helps to have funds that you can tap whenever a crisis arises. Just don't get in the habit of using a Roth IRA this way too often; the account is meant for long-term investment gains and will benefit you the most if you leave your money alone to grow. (See also: Using Your Roth IRA as an Emergency Fund — Ever a Good Idea?)

6. You can keep contributing for as long as you want

If you are a millennial, it's impossible to know when you will retire. You may choose to retire at age 60, or keep working until you're 100. Thus, it makes sense to have an investment account that will let you contribute for as long as you want.

One of the nice things about a Roth IRA is that you will not be forced to make withdrawals at any time. This is in contrast to traditional IRAs, which require you to begin pulling out money by age 70½. (This assumes, of course, that rules don't change between now and then.)

(Editor's note: An eagle-eyed reader pointed out that any Roth earnings used to pay for education would be subject to income taxes. We've corrected the text to reflect that.)

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Retirement Accounts You Don't Need a Ton of Money to Open

Kat Tretina — Mon, 24 Apr 2017 08:00:10 +0000

When I graduated from school and started working, my parents and friends told me repeatedly how important it was to start saving for retirement. But when I looked into opening an account, most institutions required $1,000 or more to get started. I didn't have that much money to set aside, and it seemed so overwhelming. So I didn't open an account until years later.

I'm kicking myself for it. The earlier you start saving for retirement, the more compound interest it builds and the less you need to invest to retire comfortably. I missed out on years of interest because I was too intimidated by account minimums, and didn't think of alternatives. (See also: 10 Signs You Aren't Saving Enough for Retirement)

Instead of making my same mistakes, you can start saving for retirement today by opening a Roth IRA. Below, find out why Roth IRAs are such a useful option and where you can open one without a lot of startup cash. (See also: 4 Reasons Why a Roth IRA May be Better Than Your 401(k))

What is a Roth IRA?

If you're just starting out, don't have access to a 401(k), or want to supplement your retirement nest egg, a Roth IRA is a fantastic savings vehicle.

Unlike a 401(k), where you make your retirement contributions with pretax dollars, with a Roth you contribute your after-tax income. While that means you don't get an upfront tax break, you won't owe money on account withdrawals once you retire. You already paid taxes, so you can take out the money free and clear.

A Roth IRA is a perfect tool for young people just starting out. Because your contributions are made after taxes, you can take out the principal from the Roth IRA in the case of an emergency without owing any penalties or fees. While you should never touch your retirement savings except in the most dire of circumstances, having money in a Roth IRA can give you additional peace of mind. (See also: Using Your Roth IRA as an Emergency Fund — Ever a Good Idea?)

Roth IRAs with low minimums

While many institutions require a minimum investment of $1,000 or more to open an account, there are several reputable firms where you can open a Roth IRA without a minimum investment.

1. TD Ameritrade

TD Ameritrade does not charge any setup, low-balance, or annual fees for Roth IRAs, and they do not have a minimum startup investment. You can open an account with just a few dollars. There are commission and brokerage fees, but TD AmeriTrade's fees are low compared to other big-name banks and brokerage firms.

2. Capital One

Capital One is one of the oldest online brokerage firms around, and they offer low fees and automatic contribution and investment options. There are no minimums to open a Roth IRA and they do not charge inactivity fees, but you do need to be a Capital One 360 customer. If you have a checking or savings account with Capital One, you can sync your account so you can view them all at once and make contributions or withdrawals between them.

3. Scottrade

With Scottrade, you can open a Roth IRA with no minimum investment, zero account maintenance fees, and trades for as little as $7 each. You can invest in stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

4. Merrill Edge

Merrill Edge offers Roth IRAs with no minimum investment. Ranked #1 in Kiplinger's Best Online Brokers list in 2016, the company charges just $6.95 a trade. And right now, they're offering up to $600 in cash bonuses to new investors who open an account.

5. Betterment

If you are a hands-off investor and would like help choosing and managing your investments, Betterment may be for you. It's a robo-adviser company that assesses your financial situation, goals, and risk tolerance and calculates an investing strategy for you. There is no account minimum, and the management fee ranges from $4/month for investing balances under $20,000 to 0.25% for balances over $20,000.

Start investing

If you've been putting off opening up a retirement account because you thought you didn't have enough money, know that there are plenty of options, and a Roth IRA is a great place to start. Opening an account and starting the saving habit now — even just a little at a time — will pay off over the long-term.

This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Stocks Your Kids Would Love to Own

Damian Davila — Fri, 14 Apr 2017 08:30:13 +0000

When taking a look at your 401(k) or investment accounts, you may often daydream about how cool it would have been if you started investing earlier. That way, maybe you could have jumped on investments that turned out to be home runs, such as Apple [Nasdaq: APPL] and Berkshire-Hathaway [NYSE: BRK].

If you have children, you're blessed with the opportunity of granting them the greatest gift any investor could want: time. Let's take a look at some companies whose shares would make a great gift for your kids to not only help them learn about investing, but also get them excited about money and business in general.

1. Snap Inc. [NYSE: SNAP]

Do you know what's cooler than a million dollars? $3.4 billion, which is how much money the parent company of Snapchat raised in its March 1, 2017 initial public offering (IPO). Since it has been estimated that 60 percent of Snapchat users are under age 25 and nearly one in four hasn't finished high school, there's a very good chance that your children use this popular social media app.

Leverage their interest in the app to keep them focused on tracking a stock price and keeping abreast of the effects of company announcements, such as Snap's Spectacles, on the valuation of a publicly-traded company. Bonus: You could use Snapchat to send them their monthly allowance, keep a digital record of when you made that money available, and check how long it lasts them. (See also: 7 Modern Ways to Send Money to Your Kid)

2. The Walt Disney Co. [NYSE: DIS]

"Do you want to buy a stock share? Come on let's go and trade!" If you started reading that in Princess Anna's voice, then you're a Disney parent and your kiddos spend a lot of time singing along to similar tunes. Keeping interested in this stock is easy because your kids will read about movie productions, toy developments, theme park construction, and other family entertainment projects.

Disney is a great stock to hold onto for the long run, which is a maxim that you want to instill in any young investor. If you were to have held Disney stock from March 1, 2007 to March 1, 2017, you would have seen the stock price go from $34.39 to $111.04 (a 222.88 percent increase!). Plus, it's a dividend-paying stock, giving you a segue to introduce the concept of fixed income securities. (See also: What Are Income Stocks?)

3. Amazon.com, Inc. [Nasdaq: AMZN]

Parcel-delivering drones, robots that work in warehouses, and voice-activated speakers that can control other home devices. It'll never be dull moment chatting with your kid about recent news from the Seattle-based ecommerce giant.

If you have the budget, Amazon.com is one of those expensive stocks that are totally worth it. Just when you think that the stock can't hit new heights, an uptick during the early November and December holiday season gives the stock price another boost. Time your gift well before the holiday season and provide immediate gratification to your kids from a stock price bump.

4. Foot Locker, Inc. [NYSE: FL]

On the other hand, here's one stock to develop in your children an appreciation for delayed gratification. If your kid is a sneakerhead or sports jock, they'll include a new pair of athletic shoes in their Christmas list. With a current stock price close to $75 per share, one share of Foot Locker goes for about the same as a brand-new, high-quality pair of athletic shoes meant to last at least one year.

Give your child the option of the shoes or one share of Foot Locker, Inc. (Or pick another company that better matches the price of the shoes that they want, including Nike Inc. [NYSE: NKE] or Skechers USA Inc. [NYSE: SKX].) When your child chooses the stock over the shoes, they'll realize that they'll have more available after a one-year period. If they're still unconvinced, ask them to try selling a pair of old, smelly shoes after one year of (ab)use from a tween.

Setting a strong foundation for delayed gratification will boost your child's ability to save for retirement and build an emergency fund. (See also: 10 Investing Lessons You Must Teach Your Kids)

5. Tesla Inc. [Nasdaq: TSLA]

The concept of saving for retirement is completely foreign to most individuals under age 18, maybe even for some under age 25! Getting somebody to plan about 40 to 60 years ahead is a difficult task. One way to get your kid thinking about the future with a fun and optimistic tone is to gift them stock from Tesla, because this company is in the business of electric cars, energy storage batteries, and solar panels.

Plus, Tesla's CEO Elon Musk is so cool as to inspire the way actor Robert Downey Jr. plays Tony Stark in all Marvel films. By following the decisions of a cool and smart CEO, your child could gain further interest in business and entrepreneurship.

How custodial Roth IRAs can help with investing education

If your kid is under age 18 and makes some money on their own, such as through a hobby or during the summer, consider opening a custodial Roth IRA for them. This is a great way to educate your child about investing and providing a "sandbox" in which to make real-life decisions with investments. (See also: Does Your Kid Need an IRA?)

In 2017, your kid could contribute up to $5,500 to a custodial Roth IRA and watch those contributions grow tax-free forever. Many financial institutions require an account minimum of $100 to open a custodial Roth IRA. You could start with some stocks from this list or other stocks that your kid is interested in and eventually move on to index funds and mutual funds. To minimize fees, just keep post-contribution transactions at a minimum.

Gifting your child stocks paired with several years of retirement savings could be one of the best gifts you could ever give them for a brighter financial future.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Smart Places to Stash Your Kid's College Savings

Tim Lemke — Wed, 15 Feb 2017 11:00:11 +0000

If you're hoping to save the tens of thousands of dollars needed to send your children to college, you'll need to do more than stash money in a savings account. To accumulate enough cash to stave off future student loan debt, you'll probably need to invest, and do so over a long enough time horizon.

The good news is that there are several investment vehicles out there that can help you save money while also offering some tax advantages. Some are designed specifically for college savings, while others have different purposes but can be used to help with education costs.

When saving for college, consider stashing your money in one (or a combination) of these places.

1. A 529 Plan

Any conversation about college savings should begin with a 529 plan. These are investment plans offered by states that allow you to invest money tax-free, as long as the funds eventually go to college expenses. You can open a 529 plan as soon as a child is born and in many cases, begin contributing as little as $25 a month. In addition to seeing investments grow without fear of paying taxes later, you can also get matching contributions and additional tax benefits from some states. In most cases, there are no restrictions on which college a beneficiary can attend. A child enrolled Maryland's college savings plan, for example, can use funds to attend school in Ohio. (See also: The 9 Best State 529 College Savings Plans)

Most 529 plans offer a menu of mutual funds to invest in, though you may find your options limited to target date funds with relatively high fees. And it's important to note that if you don't use the funds for college expenses, you'll pay taxes and a 10% penalty.

2. Coverdell ESA

A Coverdell Education Savings Account is similar to a 529, in that you can invest money and will not see taxes on the gains. The advantage of a Coverdell is that you can invest in just about anything, and the money can be used for any educational expenses, not just college (even tuition for private high schools or grade schools would qualify).

There is a $2,000 annual limit on Coverdell accounts, however, so it's unlikely you'll be able to save for the full bulk of college costs. There are also income limits, as those individuals with a gross income of $110,000 (or $220,000 for parents filing jointly) can't open Coverdell accounts.

3. Taxable Brokerage Account

It's smart to look at other options before exploring a regular brokerage account to save for your kids' education. But it is one option that has some advantages over other accounts.

The main downside is that there are no tax advantages when you try to save money in a taxable brokerage account. When you withdraw your money, you'll be stuck with capital gains taxes, and no one is offering to deduct contributions from your taxable income. But, regular brokerage accounts do offer the flexibility of investing in just about anything, so you can seek out investments that have better performance and lower fees. Moreover, there are also no restrictions on how you use the gains, so it's no big deal if your child gets a scholarship or does not attend college.

4. Roth IRA

A Roth Individual Retirement Account isn't designed for college savings, but it can be used for that purpose. Under a Roth IRA, any money can be withdrawn tax-free at age 59 ½, so if you happen to have a college-aged child at that time, you can use that money for education with no penalty. Investors are also allowed to withdraw the contributions (but not the gains) without penalty at any time.

A Roth IRA will generally offer more investment options than a 529 plan, though for people under 50, there is an annual contribution limit of $5,500. If you do use a Roth IRA for college expenses, it's important to remember that saving for retirement should remain a priority over saving for college. So it's advisable to use this account for education expenses only if you have additional plans for your retirement savings.

5. Municipal Bonds

If you're seeking some tax advantages as well as safety, municipal bonds can be a good option for college savings. You won't earn as much going this route, but you may still be able to accumulate enough for college if you start early and contribute regularly.

Municipal bonds are nice because they are tax-free, and don't come with the volatility of stocks. Muni bonds with strong ratings can earn you a tax equivalent return of between 5% and 6%, which is quite solid. If you invest $5,000 annually into these kinds of bonds, you'll have well over $100,000 by the time the kids head off to school.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Using Your Roth IRA as an Emergency Fund — Ever a Good Idea?

Dan Rafter — Thu, 16 Jun 2016 09:30:21 +0000

You know you need an emergency fund, that pool of savings that you can dip into to cover the costs of replacing everything from a burst water heater to your car's blown transmission. But does it ever make sense to use a Roth IRA as that emergency fund?

The short answer? It might. If you're careful about your withdrawals.

You usually think about Roth IRAs as retirement vehicles. But with a Roth IRA, you can also withdraw from your contributions at any time without penalty, even if you are younger than 59 ½. That's because you've already paid taxes on your contributions.

No Penalties From Contribution Withdrawals

Because of this quirk, a Roth IRA can work as an emergency fund and retirement fund at the same time. You make your yearly deposits — for 2016, you can contribute a maximum of $5,500 every year into a Roth IRA (unless you are 50 or older, in which case you can contribute a maximum of $6,500 a year) — and watch that money grow as you near retirement. But if an expensive emergency comes up, you can withdraw the funds you need, as long as what you are withdrawing is coming from the money you contributed to your Roth IRA, and not from the dollars that those contributions have earned.

You'll Pay for Earnings Withdrawals

In other words, withdrawing your contributions is never penalized. Withdrawing from your Roth IRA's earnings, though, will leave you with a penalty and a tax hit. If you withdraw the money that your Roth IRA has earned before you hit the age of 59 ½ — aside from a few special circumstances — you'll not only pay taxes on those dollars, you'll also have to pay a penalty of 10% of whatever you withdraw.

Say you withdraw $2,000 worth of earnings on your Roth IRA before you turn 59 ½. Not only will you have to pay taxes on that money, you'll also have to pay a penalty of $200.

Fortunately, it's not easy to withdraw your earnings too early. You'll have to request the withdrawal from your brokerage, mutual fund, or bank. These financial institutions will know if your withdrawal request is high enough to cut into your earnings. If this does happen, it's best to find an alternative source of funds, unless you are not bothered by the idea of paying extra taxes or an additional penalty.

The Annual Cap Means You Can't Pay It Back

There is another disadvantage to using a Roth IRA as an emergency fund. Say you withdraw $2,500 to buy a new furnace. You can still only contribute your maximum to your Roth IRA each year.

If you can only contribute $5,500 each year, you can't make up for that $2,500 withdrawal by contributing $7,000 instead. This could slow the pace of your retirement savings.

You'll also need to be careful with your investments if you plan on using your Roth IRA as an emergency fund. You should place your money in safer, more conservative investment vehicles such as CDs and bonds. That way, the odds are greater that more of your money will be available in case of a financial emergency.

Whether you use a Roth IRA, a traditional savings account, or some other savings vehicle as your emergency fund, one factor doesn't change: You need to build and maintain that fund. How much money you need in your emergency fund varies, but most financial experts recommend that you have at least six months of daily living expenses saved up. More, of course, is even better.

Have you ever pulled money from a Roth IRA to cover an emergency? Would You?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

A Simple Guide to Rolling Over All of Your 401Ks and IRAs

Damian Davila — Wed, 18 May 2016 09:00:08 +0000

The median number of years that U.S. workers stick with their current employer is 4.6 years, according to U.S. Department of Labor. This means that sooner or later you're bound to quit, get fired, or get laid off from your current job. To avoid steep transaction fees, early distribution taxes, or losing retirement account contributions, you need to be ready to roll over your hard-earned nest egg when the time comes.

Establish How Much You Really Have

The first step is to determine the current balance of your 401K or IRA. While you'll eventually receive a separation from employment notice from your previous employer stating your total vested account balance, you can save time by researching your vested balance, net of any 401K loan balances you may owe.

Take Care of Any Outstanding Loans From Your 401K

Unlike IRAs, many 401K plans offer the option to take loans from your retirement account. As long as you keep up with your payment schedule, you generally have up to five years to pay back your loan in full. However, when you change jobs, the unpaid loan balance becomes due within 60 days.

Any unpaid loan monies by the deadline or transaction date of your rollover are subject to federal income tax, a 10% early distribution penalty for those age 59 1/2 and under, and state income tax or penalty, if applicable. You can't roll over unpaid 401K loans.

Know the Vesting Schedule

Your own contributions to your 401K or IRA are always fully vested. However, contributions from your employer to your retirement account may be subject to a vesting schedule. Trying to retain top talent as long as possible, employers may require a minimum period of employment before employees gain full control on part of their retirement accounts. The two most common vesting schedules are cliff vesting (100% vesting is only provided after a set number of years) and graded vesting (a vested percentage is provided every year).

When you separate from your employer, you forgo any non-vested contributions to your retirement account.

Once you know your outstanding loan balance and vesting schedule, you have a clear idea of how much you can rollover.

Choose Rollover Options

Under most scenarios, you have six options for your total vested account balance:

Keep your account;
Rollover account into a new or existing IRA;
Rollover account into a new or existing qualified plan;
Do an indirect rollover;
Request a full cash-out of your account; or
Do a mix of the above five options.

Let's analyze each one of these scenarios, because some of them may trigger taxes.

1. Keep Your Account

All retirement accounts stipulate a minimum amount required to remain in your old employer's plan, usually ranging from $1,000 to $5,000. If you're happy with your current financial provider, you can choose to keep the account.

Make sure to read the fine print because some providers may strip away some services (such as certain investment options or coverage of fees) and gain the right to convert your 401K into an IRA without your input. According to a Plan Sponsor Council of America survey of 613 plans with eight million participants, 57% of 401K plans transfer balances between $1,000 and $5,000 to an IRA when the participant leaves the employer.

While such forced-transfer IRAs don't trigger early withdrawal penalties or income taxes, they are often subject to high fees and low investment returns. A November 2014 report from the U.S. Government Accountability Office (GAO) found that forced-transfer IRAs have administrative fees, ranging from $0 to $100 or more to open the account, and $0 to $115 annually to retain the account.

2. Rollover Account Into a New or Existing IRA

Whether you have a 401K or IRA, your current provider will provide you the option to request a rollover to an existing IRA, or open a new one through any of their partner institutions. Either option triggers no income taxes or distribution penalties. Under this scenario, keep in mind that you're not bound to the offerings from your old employer's financial institution and have the option to shop around for a new IRA with other financial institutions, as well.

There are two types of IRAs: traditional IRA and Roth IRA. The main difference between them is that you pay taxes up front with the Roth IRA, and that you pay taxes at withdrawal with the traditional IRA. One of the advantages of owning an IRA is that there are many penalty-free ways to withdraw money from your retirement account before age 59 1/2. (See also: 7 Penalty-Free Ways to Withdraw Money From Your Retirement Account)

3. Rollover Account Into a New or Existing Qualified Plan

Besides an IRA, you can also rollover your retirement account into a 401K, 403(b), 457, Federal Thrift Savings Plan, or employer qualified plan, as long as the target plan allows those funds. Rollovers into new or existing qualified plans trigger no income taxes or early distribution fees.

The IRS provides a useful rollover chart to determine to which accounts you can rollover retirement contributions. However, the most surefire way to find out is by contacting your plan's customer service center.

4. Do an Indirect Rollover

Direct rollovers are only possible if you already have a retirement account with a previous or new employer or are able to open a new plan on your own. In the event that you think that you can find a new job offering a retirement account within 60 days, then you could try to do an indirect rollover.

Your old employer would cut you a check, withholding the necessary 20% for income tax purposes. Once you have a qualified plan with your new employer, you would deposit the check in full and add the 20% withholding out of pocket. The IRS will return you the 20% withholding when you file your tax return. Make sure to deposit the full amount because any gap is subject to applicable income taxes and penalties for those age 59 1/2 and under.

5. Request a Full Cash-Out of Your Account

This is the least desirable of all options because not only do you pay incomes taxes and trigger early distribution fees, but also forgo investment returns. At age 20, a $600 balance on a 401K may not seem like much. However, assuming an investment return of 6% compounded annually and a target retirement age of 65, you would be saying goodbye to an extra $8,258.77 for your nest egg.

Every year you have a ceiling on how you much contribute to your 401K or IRA. By cashing out that past contribution, you'll never be able to make it up.

6. Do a Mix of the Previous Options

Depending on your unique situation and set of rules from your old and new retirement accounts, you could use portions of your old account for different purposes. For example, you could cash out 10% of your vested account balance, subject to income taxes and early distribution penalties when age 59 1/2 and under, and rollover 90% of vested account balance to an IRA.

Doing a mix of rollover options requires careful planning and plenty of legwork, but it may provide the solution that is better suited to your financial goals.

The Bottom Line

Knowing how to rollover your 401K or IRA is a skill that you'll use many times throughout your work years. The process is relatively simple but requires many steps. Before rolling over funds, make sure to plan ahead by minimizing loans from your 401K and maximizing total vested balance. Contact your old and new plan managers so that you are aware of all applicable rules and can make an informed decision. Keep an eye on the deadline for a rollover so that you're not forced to take a cash-out or forced to transfer to a high-fee IRA.

Have you ever rolled over your 401K or IRA? How did you do it?

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: