IRA - Traditional...Roth...what is this about?

You may have heard me mention the term IRA in some of my past posts. Even if you don't know what it means, you have probably determined that it is 1. a good way to invest your money for the future and 2. something you don't want to think about until ten years from now. Let me explain it to you and hopefully next time you hear someone talking about it you will be able to chime in intelligently.

IRA - Individual Retirement Account

The government has setup this retirement savings program to encourage people to save for retirement before it is too late.

This year, if you are age 49 or below, you can contribute up to $5000 of your own money into your IRA account (up to $6000 if you are 50 or above). This account can be set up with most any financial institution. Each year, the maximum amount that can be deposited into your account increases due to inflation. Once you put money into your IRA you cannot withdraw the funds until you reach the age of 59 1/2. There are a couple circumstances where you can withdraw earlier than that (if you become disabled or want to contribute up to $10,000 toward a residence), otherwise you will face an early withdrawal penalty.

The advantage for a traditional IRA is that any money you pay into your account is tax-deductable. If you put in $5000, you will only pay income tax on your annual income minus the $5000. Once you put the money into your IRA, it is up to you on how you want to invest it. You can use it to purchase specific stocks, mutual funds, or other investments. Once you begin withdrawing your funds after the age of 59 1/2, you will then be required to pay taxes on those funds.

The Roth IRA is different in that you put money into the account that you have already paid income taxes on. You can still make your own decisions on how you want to invest your money until you begin withdrawing the funds. The advantage of the Roth IRA is that you don't need to pay any taxes on your profits when you retire.

The best way to determine whether you should do a traditional IRA or a Roth IRA is to consider the tax bracket you are in now compared with the tax bracket you see yourself being in when you retire. The more money you make, the higher your tax bracket will be. And most people intend to make more money in the future than they do today. That said, the Roth IRA is becoming a more popular choice, especially among younger people.

If you are wondering why you would want to put this money into an account you can't access for decades, think about how it would work if you just put your money into a regular investment account. If you invest your money in a basic money market account (non IRA) you will have to pay income tax on your profits every time you sell a stock or mutual fund. Over the course of many years, all of the money paid to the IRS would have added up to a lot if you were able to reinvest it.

It takes a lot of discipline to save an extra couple thousand dollars every year, but if you can do so, and make that money work for you, you will be happy in the end.

I'm out of debt!...now what?

I received an email from a reader last week and I would like to respond to some questions she had. So often these days, the only kind of financial advice you see deals with getting out of debt. But what about those of you who have worked hard to save your money and have not spent more than you have in your bank account?


Dave Ramsey is a financial guru who has excellent advice concerning getting out of debt and saving for a brighter future. You'll find a link to his website here at The Dollar Dance. Check it out and listen to his radio show. Listen to him for just one week and your whole mindset of money will completely change.


Whether you have debt or not, one of the first things you want to do is set some money aside as an emergency backup. It is most often the unexpected and unfortunate circumstances that put us behind financially. Take note though, groceries and an oil change are not emergencies. Any expenses you expect, even potential car repairs, should be built into your budget. Some things that do qualify as emergencies would be an unexpected medical operation, a deductible from a car accident or an unfortunate death in the family.

After this is established, (assuming all debt is paid off) start contributing money toward a down payment on a house, or your kids' college funds. Also, it's never too early to start saving for retirement. If your employer offers a 401(k) program, take advantage of the matched contributions. A Roth IRA account is also a very good way to set aside savings every year.

I realize I just threw out a lot of terms and have certainly brought up more questions. Over my next few posts I will go over each of these things starting with setting up a budget. Until then, start listening to Dave and keep the questions coming!

Together or not Together

I would like to respond to the blog I linked to the other day entitled, “Get Your Act Together, Sisters!”

I want to first address the question regarding the effects marriage has on one’s credit score. I won’t go into detail today about what factors go into calculating a credit score, but you should know that your credit report is tied to your social security number. Even after marriage, each spouse has their own credit score. There is no “average score” or anything like that. The financial decisions each of you have made up until marriage are completely separate. Now, after you say “I do,” things can start to change once you open accounts together.

I highly advocate joint checking and savings accounts (for married couples) for a few reasons:

1. It forces communication between the two of you and provides accountability.
2. It gives you a common goal together as you work to improve your financial situation.
3. It serves as a reminder that the two of you have become one and are committed to a lifetime together.

I would also argue that financial management is just plain easier with fewer accounts to manage, especially if one person is doing the majority of the banking.

Now for a more controversial topic…

I think it is most wise for an engaged couple to keep their finances separate until marriage. I realize an engagement is a huge commitment, but it is not a binding one before God or the state.

One of the main reasons I advocate this is that it forces both of you to live within your means. If one of you can’t afford to pay rent on your own, maybe you should be looking for a cheaper apartment. If you’re struggling to make your own car payments, perhaps you should sell the car. If both of you are living within your means, you should be able to survive independently through your engagement. Then, after you are married, you will see a financial benefit and will be in a much better position to contribute to your savings.

Maybe you are thinking, “What’s the difference? We’ll be married in less than a year anyway.”

Well, it doesn’t make much sense to have the benefits of marriage without the commitment of marriage.


Please comment with any ideas or questions you may have!

Who controls the money?

Hello,

I read a blog post today regarding finances within the marriage (and engagement, as well). I will post my thoughts on the topic in the days to come. But for now, I would like you all to read it and get a head start on the topic. And also, PLEASE email any questions you have on the topic. It will give me a better idea of what my readers are looking for.

Happy Valentine's Day!

Blog Post: Get your act together Sisters

High Yield Savings Account Part II

Hello All,

Sorry I did not post yesterday. I'm a partner in a concessions stand and we had a big event this weekend. Sales were good...so I guess I'm not that sorry ;)

I have found the top four high yield savings account offerings. (If you find something that I missed, please let me know.)

1. Etrade.com 4.40%
2. Hsbcdirect.com 3.55%
3. Capitalone.com 3.50% *Includes free checks and ATM card
4. Ingdirect.com 3.40%

Etrade seems like an obvious winner, especially if you are already looking for a place to trade stocks and mutual funds online. The free checks and ATM card with Capital One are also a very nice bonus. Don't forget that these are introductory rates and will most likely go down a bit after the first couple months.

Ultimately though, the interest rates are determined by the Federal Reserve. The government is currently trying to boost the economy in order to get out of the slump we have been in. They have lowered interest rates, which has given consumers less reason to save their money, and more reason to spend it (by means of lower loan rates) on houses, cars, and the like. I can explain this more at a later date, and how it effects the decisions you make regarding your life and money.

Hope this helps!

What to do with cash savings

You’ve always been told that you should save your money, put it in the bank, and earn interest. That’s how you will become rich – compound interest. It sounds like a wonderful (even inspiring) plan until you get your bank statement in the mail and realize you are earning only 0.10%. But don’t worry, as soon as your account reaches $10,000, you will earn a whopping 0.80%. Even at that rate, your interest earned will equate to just $80 a year.

There must be some mistake here. Inflation is reported to be around 3% and the banks are offering a mere tenth of one percent!

Say hello to High Yield Savings Accounts.

High Yield Savings Accounts offer a much higher rate of return and are typically done through online banks. I have a high yield account with Capital One. My last statement shows it is paying an annual percentage rate of 4.41%. That is down slightly from the introductory rate of 5%.

How are online banks able to offer such a high rate of return when brick and mortar banks do not?

It mostly has to do with overhead costs. Online banks don’t have to keep up with building maintenance, landscaping, and staffing hundreds of locations. Plus, I’m sure they wouldn’t mind if you signed up for a credit card or two ;)

If the high interest rate is the obvious advantage, what are the disadvantages?

You will have to get over your fear of online banking.
It takes about three days to transfer money from your High Yield Savings account to your original account.

I recommend keeping just enough cash in your checking account to cover bills, expenses, entertainment, et cetera, and then put the rest in your high yield savings.

Check back tomorrow for current rates from the most popular online banks. I’ll do a little research in the meantime…

Quicken Financial Software

One of the best things I have done to keep a good handle on our finances was to purchase Quicken Financial Software. If you currently do online banking with your bills, bank cards, and credit cards, you will find it is very simple to use. Some of the advantages to the software include:

Automatic uploading of all transactions in your online accounts

A budgeting feature that will not only help you form one but also keep to your goals

Customizable categories that help you keep track of spending in areas like groceries, dining out, fuel, and entertainment

You can also keep track of assets (investments or your house, for example) and liabilities (loans or credit card debt), and ultimately keep track of your net worth.

There is nothing more valuable in financial planning than being able to see exactly where every dollar is going. At the end of a week, month, or year, you can see what you spent in each category and make adjustments to your budget if necessary.

Quicken also has a section that helps you determine what you need to save today in order to achieve specific long-term goals.

The Starter Edition is only $30 and is perfect for the couple who wants to get organized and be in control of their finances.