Archives for June 2010

How To Open A Roth IRA And Where To Open An Account

You've finally been convinced that opening a Roth IRA is a good idea, and you've decided to take the plunge. Great! But what's next? How do you open an account, and where are some good places to hold your Roth IRA?

Today I'd like to cover the basics of opening a Roth IRA and look at a few good low cost brokerages where you can keep your account.

Take Care Of The Basics Before Your Roth IRA

Before we even jump into the basics of opening a Roth IRA, I suggest that you first get the rest of your financial house in order. That means doing the following things:

Save up an emergency fund: We've saved up 12 months of expenses to cover just about any eventuality that might come up. I'd suggest you save at the bare minimum $1000, but even better – 3-6 months of expenses.
Pay off all debt: I suggest you pay off all debt that you might have. If you don't any gains you might realize by investing will be offset by large debt interest payments. Get it paid off ASAP!

Once you've paid off all your debt and saved for a rainy day, you're probably read to start investing. At our house we follow the Dave Ramsey plan – but not to the letter. He suggests investing 15% of income. We're going to invest closer to 20-25%.

So what's an easy way to get started investing? When you've paid off all your debt, take the money you were paying on that debt, and instead start investing it.

My suggestion for investing is as follows. Invest in a company 401(k) or other employer sponsored plan up until the match (100% return!). After the match switch over to the Roth IRA (which we're talking about today!). After the Roth IRA switch back over to your 401(k) until it is maxed out. So again – this is the order:

401(k) til employer match is reached.
Roth IRA til maxed out.
401(k) (or other plan) til maxed.

How To Open A Roth IRA

Opening a Roth IRA shouldn't take very long, and in most cases can actually be done in a half hour to an hour.

When opening an account usually you'll need the following information – although it may vary a bit from institution to institution.

Social security number.
Bank account information.
Information about employment.
Money to open the account. (You may need $25 or you may need $3000 depending on where you open your account. )
An hour or so.

Before you even open an account, however, you'll need to figure out what financial institution, mutual fund firm or brokerage you want to open your account with.

Banks

Your local bank or credit union can often open up an account for your Roth IRA. While having an account with your local bank is usually convenient, it isn't often the best option. The reason? The banks usually have limited investment options for your account, usually limited to CDs, money market funds, and other cash accounts. The fees they charge are also often higher than the fees you would find with a discount brokerage or full service mutual fund firm.

Full Service Mutual Fund Firms

Full service mutual fund firms are typically one of the better places to start your account because they will have a nice variety of mutual fund options with low expense ratios and varied investment options. They are quite often the best place to purchase index funds, target date retirement funds, mutual funds and similar investments. Some of the better options that offer Traditional and Roth IRAs and many investment options include.

The downside to investing at one of these firms is that they often have minimum investments that you can make, which if you don't have a lot to start your account with can mean you're not able to invest with some of the companies. Some will also charge more for individual trades, and have account management fees. Some of these fees can be waived if you make a certain minimum investment and/or if you commit to investing a certain amount every month. Before you sign up, make sure you know what the minimums, fees and other account terms are.

The key to opening an account with a mutual fund firm is to do your research and to know what you're getting into. Never invest in something you don't understand.

Discount Brokerages & Robo Advisors

If you're a more hands on investor or you like to invest in single stocks an online discount broker might be a good option for your account (I like to buy index funds at a mutual fund firm and forget it myself!). Discount brokerages will allow you to access stock trades, options trades, Exchange Traded Funds (ETFs), mutual funds and other assorted investments. Individual stock trades will usually cost in the $2 – $10 range, which is probably going to be cheaper than making stock trades at a mutual fund firm listed above. Some of the options I recommend:

Listing Of Mutual Fund Companies And Brokerages

To bring it all together, here's a list of some of the best mutual fund companies, discount brokerages, and their fees.

	Account Minimum	Mutual Fund Commission	Stock Commission	Annual IRA Fee	Reviews
OptionsHouse	$1,000	$9.95	$3.95	none	OptionsHouse Review
Motif Investing	$1000		$9.95 (per motif/bundle of stocks)
TD Ameritrade	none	$0	$9.99	none	TD AmeritradeReview
Zecco	none	$10	$4.50	$30
TradeKing	none	$14.95	$4.95	none
Scottrade	$2500	$17	$7.00	none	Scottrade Review
Vanguard	none	$0	$7.00	$20
tradeMONSTER	none	$15	$7.50	none
Fidelity	none	$0	$7.95	none
Schwab	$1,000	?	$8.95	none
ShareBuilder by Capital One	none	$19.95	$6.95	none	ShareBuilder by Capital One Review
Etrade	none	Up to $19.99	$9.99	none
optionsXpress	none	$14.95	$14.95	none

What To Invest In

The next most important thing to decide is what to invest in once you open your Roth IRA. If you're just starting out like I am I'd probably suggest to find a good index fund and some low cost mutual funds. If you're newer to investing as I am or if you don't want to be actively managing individual stocks/etc, starting out with a good index fund will probably be a good option. Depending on which Roth IRA account custodian you choose, your options for investments may vary. Again, do your homework, and choose one that works best for your situation.

Do you have a Roth IRA? What type of account custodian did you choose (mutual fund firm, discount brokerage, bank or credit union)? What types of things are you investing in? Tell us your thoughts on opening a Roth IRA in the comments.

Bush Tax Cuts Set To Expire In 2011. Will You Be Paying More?

By Mr. Money 19 Comments

One thing that hasn't received very much notice lately I think is the fact that at the end of 2010, the 2001 Bush tax cuts will be expiring for all taxpayers. If you remember, the tax cuts were across the board for all taxpayers, meaning if they aren't renewed, all of us who pay taxes will be seeing an increase in our taxes next year.

Thankfully for many of us Obama has declared that he wants to renew the tax cuts for all taxpayers making less than $250,000 a year.

Obama wants tax breaks proposed by President George W. Bush to expire this year. His budget would eliminate tax breaks on those making more than $250,000 a year, a move almost certain to be opposed by Republicans and perhaps some Democrats as the economy crawls out of the recession.

“We extend middle-class tax cuts in this budget,” Obama said Monday at the White House, but “we will not continue costly tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can't afford it.”

While that's all fine and good, the tax cuts haven't been extended yet, and some are wondering if in the end they actually will be.

To prepare you for either scenario, here's a graphic from springfieldnewssun.com showing what everyone's tax rates will be if all tax cuts expire, along with if only the tax cuts for those making less than $250,000 (joint) are extended. Personally, I hope they're extended.

What Effect Will Tax Increases Have?

Your Credit Report May Be Re-Checked Just Before Your Closing (And It Could Cost You Money)

By Mr. Money 8 Comments

The closing date on the new home that you put a purchase agreement on is coming up and you've been approved for a loan. You were given a decent rate, and you think you're all set to go.

After you were approved for the loan, your credit took a hit because you financed a new car and put some purchases on your credit cards. You're not too worried about it because your credit has already been checked, and you got the rate you were hoping for. Nothing to worry about – right? Maybe not.

Fannie Mae has put out new lending guidelines called their “Loan Quality Initiative”, which means that lenders have incentive to revoke a mortgage approval, right up until the time the loan is funded at closing.

Fannie Mae's Loan Quality Initiative

This program that Fannie Mae is putting out is being called the Loan Quality Initiative and it is their attempt to try and minimize the bad loans that have become so common since 2007. Fannie Mae is asking lenders to take more ownership for the loans that they give, and is then giving them the responsibility if things go bad. From themortgagereports.com

The Loan Quality Initiative is Fannie Mae's response to the foreclosure surge since 2007. The program shifts the onus of mortgage guideline compliance away from the the government-backed group and to the individual banks responsible for making loans…

For the most part, mortgage applicants won't be bothered with the changes. It's just extra work for the bank. Things like Social Security Number validation checks and borrower occupancy standards.

There is, however, one major consumer hurdle.

The hurdle? The last minute credit check!

Credit Checks Right Before Closing

Normally the loan process works like this:

Apply For The Loan – Credit Check – Underwrite & Approve – Fund Loan.

Because of the Fannie Mae Loan Quality Initiative the process is changing for many borrowers – there is an added credit check right before the loan is funded.

Apply For The Loan – Credit Check – Underwrite & Approve – Credit Check – Fund Loan.

The reason for the added credit pull? Fannie Mae wants lenders to verify that an applicant and their credit profile doesn't change while the loan is in underwriting. If the profile does change Fannie Mae may refuse to buy the loan from the bank because of the added credit risk. That means the bank is on the hook for that loan, and they don't want that.

Things That Will Be Looked At

To make sure the loan can be sold to Fannie Mae, banks will be looking for the following events occurring after the loan was underwritten:

Are there new credit cards?
Do existing cards have new charges on them?
Were there any major purchases financed since the loan was approved?

If there have been changes since the original credit pull the mortgage may need to go through the underwriting process again – and it could be subject to being turned down. Even if it isn't turned down, it could result in the borrower paying a higher interest rate on their loan because their credit situation has changed – for the worse.

If You're Trying To Buy A House – Be Careful

Fannie Mae's Loan Quality Initiative is meant to improve Fannie Mae's loan pool, decrease defaults and reduce the burden that foreclosures is putting on the taxpayers.

Trying to be more responsible about the loans they give isn't necessarily a bad thing, but it does mean that you need to be extra careful when you're in the process of buying a home.

In other words while you're in the process of buying a home don't sign up for new credit cards, don't put new charges on existing cards, and don't make any major purchases unless it's done with cash. In other words – don't do much of anything that might show up on your credit report because it could mean that your loan will be denied – even if your loan was already cleared to close beforehand.

What do you think of the new Fannie Mae initiative? Is it a good thing in the long run? Will it cause you to be more careful when buying a home? Tell us your thoughts in the comments.

10 Things That Broke People Do (That Keep Them Broke)

By Mr. Money 28 Comments

We've all got friends in our lives that are nice people, but they always seem to be broke.

They don't have a dime to their name, and if you ask them why, they don't have a clue.

It never seems that they can figure out why they're short on cash.

Today I want to look at a few reasons why broke people are broke, and why they'll most likely continue that way (unless they make some major changes).

10 Reasons Why You're Broke

Here are a few of the reasons why people find themselves without money.

Their problems are never their fault: Broke people don't like to take responsibility for their problems, they will often shift blame and say it's someone else's fault. They blame their friends, family and the government. They believe the old saying, “the little guy just can’t get ahead“.
What's a budget?: A lot of people who are broke find themselves that way because they have no idea where their money is going. They've never done a budget. Their money quickly disappears every month into an endless black hole of large and small expenses.
They don’t plan for the future. Today is all that matters: Money doesn't stick around for future uses because it is all spent today. Saving and planning for the future are foreign concepts.
Money gets spent on things that aren't needed: We've all got those friends who just can't help themselves – they already have a couch, but they find a design they like better and buy it – even though they can't afford it. They have a phone, but decide to buy the newest greatest Iphone.
Keeping up with the neighbors: Far too often people will buy a house in a neighborhood they can't afford, and then they end up spending even more money on the other lifestyle accessories to keep up with the Joneses. They end up buying a nicer car, a boat, expensive landscaping, etc. One bad spending decision begets another.
You paid what?: Broke people far too often don't know how to find a good deal and even more often don't negotiate to get a better deal. Why pay more than you have to?
Credit is their best friend: They don't practice delayed gratification, and they would never save for something they want. Just put it on the credit card until it's maxed! We'll figure out how to pay it some other time!
They rely on others to get them out of trouble : We’ve probably all know someone who always ends up going to their parents, family or friends to help them pay for one of their debts. They get in debt up to their ears, and then when they can't pay for it, it's back to mommy and daddy's house to beg for money.
Why budget for the future when I can have fun today: They don't like to plan ahead for tomorrow because it seems so far away. Instead, let's eat drink and be merry today!
They are all about appearances: Broke people often are broke because they would rather have others think they are doing well, or are wealthy, than actually do the hard work of actually finding a way to be wealthy. The result? They spend a bunch of money on things they don't need in order to appear like they've got power and influence.

Obviously this list of things that broke people do isn't exhaustive, but it is more of a way to get people thinking about how and why they're making the decisions about their money that they are.

If you can catch nip some of these behaviors in the bud, you'll be much better off for it.

Have you ever engaged in any of these behaviors? Do you have a broke friend or family member that just can't seem to get out of a hole? Tell us about it in the comments!

Roth IRA Eligibility Guidelines

By Mr. Money 1 Comment

I‘ve been talking quite a bit since I launched this site about Roth IRAs, and why they're such a great idea. After all, who doesn't like tax free money at retirement? (Can you tell that I like them?)

One thing I haven't examined very closely, however, is the fact that Roth IRAs are not available to everyone. It's like when you were a youngster and you saw that they were giving out full sized candy bars at one house at Halloween. Everyone got one until they got to you – and the candy ran out! Sorry!

Roth IRAs are like those full sized candy bars – they aren't available to everyone, and you may be left out in the cold if you don't meet the requirements.

Age Restrictions?

Roth IRAs are available to anyone regardless of age, however, there is a catch. The child needs to have claimed “earned income”. That means that your child will actually need to have received a W-2 or 1099 showing the income made. So that babysitting job they had last week, or the job cutting the neighbor's lawn probably won't cut it. So, no age restrictions, but there is a need for “earned income”.

Modified Adjusted Gross Income Affects Roth Eligibility

Your MAGI or Modified Adjusted Gross Income will be one of the most important factors determining whether you are eligible to contribute to a Roth IRA. Your MAGI calculation will be used to determine if you exceed the Roth IRA phaseout limits to be able to contribute funds.

If you fall somewhere in the middle of the phaseout range, it can mean some fancy math trying to find out how much you can exactly contribute to a Roth. First, here's the phaseout limits:

IRA Type	Single	Married Filing Jointly
Roth IRA	$105,000 – $120,000	$167,000 – $177,000
Traditional IRA	$55,000 – $65,000	$89,000 – $109,000

Example: Let's say you make $110,000 and you're single. How much could you contribute to a Roth IRA since you're smack dab in the middle of the phaseout range? Here' s how you figure it out.

Find out the phase you fall into. In this case you fall into the $105,000-$120,000 range.
Subtract your MAGI from the upper range of the phaseout range. In this case that would mean $120,000-$110,000 = $10,000.
Divide the number in step two by the amount of the spread in the range ($10,000/$15,000 = .6667 or 66.67%)
You are able to contribute 66.67% of the $5,000 limit. Since you can contribute 66.67% of the limit that comes to a total contribution for the year of $3333.33.

Under The Phaseout Roth IRA Contribution Limit

For the 2010 tax year Roth IRA cntribution limits stay steady at $5,000. For those over the age of 50, you can make a catch up contribution of $1,000. That means for 2010 you have a total contribution limit of $6,000. If you’re married, that’s $6,000 for you and $6,000 for your spouse.

Start A Roth IRA Today – Time Is Your Friend!

If you're eligible for a Roth IRA and you've decided to open one, do it now! The longer you invest your money for, the greater the effects of compounding interest! So get moving!

How Do You Get Away From The “We Deserve It” Attitude?

By Mr. Money 9 Comments

Over the weekend my wife and I took a quickie vacation for the memorial day holiday. It was just meant as a quick getaway in lieu of our normal full summer vacation that we're not taking this year. Even if we're not able to get away for a full vacation, it's still nice to be able to get away for an extended weekend to just relax.

What was meant to be a cheap in-town hotel getaway quickly became more expensive than we anticipated. We had paid $119/night for our nice hotel room for 2 nights, but those costs quickly got larger as we started justifying more expenses. We started to get into the whole “we deserve it” attitude that says – “We work hard, why not spend some extra money? We deserve it!”.

The $240 we spent on the room quickly ballooned as we also paid for room service several times. Our breakfasts were supposed to be on the house, but we ended up ordering extra at those meals – meaning an extra $25-30 bill. When all was said and done, instead of spending around $300 as we had planned on spending – we actually spent over $400. Small things add up quick!

All in all, our little mini-vacation was extremely relaxing, and we didn't go as overboard as we could have, but we still ended up spending more than we had planned.

So how do you keep yourself from justifying expenses – and keep yourself from getting into a “we deserve it” attitude? Have you ever been on vacation and ended up spending more than you had budgeted? Tell me in the comments!

Links And Carnivals

Here is some good reading from around the web this week. Have some free time at lunch? Check out these links:

Links

Carnivals

Best of Money Carnival: I was chosen as #4 in the top 10 money articles of the week for my article on cosigning.
Carnival of Debt Reduction: My article about the Dave Ramsey debt snowball was included in the mix.
Carnival of Personal Finance: My article about Roth IRA contribution limits was included.

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