Archives for 2012

Are Your Finances Over-Leveraged?

One of the realities of the financial world is that it's possible to use leverage to get more than what you would normally be able to afford. In simple terms, leverage is using debt to buy what you want. You leverage the capital you have right now as a down payment to allow you to borrow the rest.

For the most part, leverage is used to describe how you can increase the return on your investment by putting in a little capital and then borrowing the rest. The hope is that the return will be great enough to offset the cost of borrowing. When you are talking about your household finances, this return on investment is often about more than just the money. It often includes the emotional or sentimental value you get out of something, as well as the satisfaction that comes from instant gratification.

I recently bought a new car. I put a down payment on it, and financed the rest. I leveraged what I had in hand in order to borrow to get a more expensive car than I could buy right now with cash. I decided that getting the exact car I wanted, as well as getting it now (with dealer incentives so good and prices so low) instead of waiting another two years, was worth the cost of the interest I will be paying. I don't sell my cars; the car this is replacing was one we had for nearly 10 years before sending it to my in-laws. To me, the return on investment is worth it, even though I probably won't sell the car for money.

Consumer Leverage, and Drowning in Debt

The concept of leverage applies to a number of consumer purchases right now. When you use your credit card to buy things you don't have the money for, you are using leverage. On a larger scale, you use leverage when you get a mortgage payment. Many people use leverage to purchase an even bigger home than they expected. No matter the asset — or the liability — it's important to consider how leveraged you are. And whether or not you might actually be over-leveraged.

When you are over-leveraged, it means that you have borrowed beyond the point of your ability to repay the debt. In this situation, you aren't receiving enough of a return to justify how much you have borrowed, and how much you still owe. Pretty soon, your payments and interest begin eating up your available income. We sometimes refer to this as drowning in debt. You can't meet your obligations, and even the emotional returns you might have received from your overspending are fading. This becomes a serious problem, and it can lead to financial collapse.

Take a look at your financial situation, and consider your debt levels. Are you over-leveraged? Have you borrowed beyond the point that it makes sense? Will you be able to repay the loan — and still feel as though you have received a good ROI? You might be over-leveraged, and if this is the case, it's time to get serious about paying down your debts, and reconsider the ways you use debt to get what you want.

How To Do A 401k To IRA Rollover

By Mr. Money Leave a Comment

When you leave a job for whatever reason it can be a tough time in your life, a time of transition and a lot of change. All of the new things going on around you can be distracting, and if you're not careful it can lead to you not doing some things that need to be done.

One of the things that a lot of people don't really think about right away is rolling over their own company 401(k) to a new IRA retirement account. While it may not be the first priority on your list, doing a 401(k) rollover should definitely be on your punch list, especially if your old company 401(k) is in a plan that doesn't offer a lot of low cost options.

401k to IRA rollover

What Can You Do With Your 401(k) After Moving Jobs?

When it comes to your 401(k) there are several options of what you can do with your funds.

Need to roll over an old 401(k) but don’t know how to start? Use FiPath’s new rollover tool to compare your choices in secondsand find the right firm or financial advisor for your needs.Get started now.

Just leave it alone: A lot of people will just leave their old company 401(k) in the account with the plan administrator, and not move it at all. While this can be an OK idea if you've got some great low cost options for investments in your old plan, for most people it makes better financial sense to just move the account to their own IRA with a brokerage or mutual fund company.
Take the money and run: Some people will take their account balance and just cash it out. This isn't an ideal plan, however, because if you're not 59 1/2, you'll have to pay state and federal tax rates, along with a 10% early withdrawal penalty. After all is said and done you could be left with just over half your money after you pay your taxes and penalties. Who would want that?
Transfer funds to a new 401(k): Some people may find a new job and get a new 401(k) right away. If you do, you may be able to roll the funds over to the new plan. Just make sure it's a good plan with low costs. For most people, however, their best option is the one below, rolling the old 401(k) into an IRA.
Roll the 401(k) into an IRA: Rolling over your 401(k) to an IRA that you've set up at an external brokerage or mutual fund company is probably going to be your most ideal situation. You'll have a plan with more options, probably less costs and you'll have a whole lot more control. Check out FiPath's new rollover tool through the link to the right for help in finding a company to work with.

So for most people the best option is to do a 401(k) rollover to a good low cost IRA.

Why Would You Want To Do A 401(k) Rollover?

So what are the main reasons why you would want to roll over your 401(k) upon leaving your old job?

401(k) plan investment options are usually limited: When you have a company 401(k) usually there is a plan administrator who chooses what funds to include in your company's plan. Some plans only offer limited choices with one option for index funds, maybe no international exposure, etc. Rolling over your funds allows you to choose better investments that are more suited to your situation.
401(k) plans have higher costs: The funds that have been pre-selected in your 401(k) by your plan administrator won't often be the best or lowest costs funds unfortunately. The expense ratios can often be quite outrageous. Besides that there are sometimes annual management fees or other miscellaneous fund fees. Move your funds to an IRA where you can better manage your costs with low cost fund options.

In some cases you may not want to do a 401(k) rollover. For example, if you're retiring early, planning a Roth conversion, or situations where you're dealing with a large amount of company stock. But those situations aren't very common. So let's move on to the next step, doing a 401(k) rollover, step by step.

401(k) Rollover Step By Step

Here is a step by step look at what you need to do when performing an 401k rollover to an IRA.

Open your IRA: The first step is to open an IRA at the company of your choice, be it a brokerage or mutual fund company. Here's how to choose a IRA custodian.
Get the forms your old 401(k) provider: First confirm that you don't have any restrictions on rolling funds over, and then request the forms that you'll need in order to get the ball rolling. When talking to your contacts, make sure to ask what information exactly that you'll need from your new IRA in order to do the transfer.
Verify account setup with new IRA provider: Talk to someone with your new IRA custodian to ensure that your account is ready to receive transferred funds. Make sure you have everything you need to fill out the forms from your old 401(k)'s company.
Fill out the 401(k) transfer paperwork: Fill out the paperwork that you received from your old plan's administrators, making sure that you have filled everything out completely. When you're satisfied that the paperwork is complete, submit it and wait for your funds to be transferred.
Verify direct rollover of funds: Make sure that you ask the old 401k company to do a direct rollover of funds, and not an indirect rollover. The difference is that with a direct rollover a check goes directly to the new IRA custodian, and you don't have to worry about taxes/etc. With an indirect rollover the check would be made out to you, with 20% taxes withheld, and then you are required to deposit the entire amount of the old 401(k) balance (by adding in your own money to compensate for withheld taxes) to the new IRA within 60 days. If you don't you'll be subject too taxes and penalties for early withdrawal. As long as you do deposit the entire balance you'll receive the amount withheld when you file taxes.

So that's how you do a 401(k) rollover. Not too difficult, right?

Doing A 401(k) Rollover Shouldn't Be Too Painful

Moving on from an old job can be a stressful time, and the things associated with finding a new job, moving, and so on can take up a lot of time. In the meantime doing things that don't seem that important, like rolling over a 401(k), can get pushed to the back burner. But it's still important to investigate your options when it comes to moving your account balance. In the long run it can be a difference of thousands of dollars.

So after immediate concerns have died down look into your options. In most situations that means rolling over your 401(k) funds into a new IRA account with a discount brokerage, mutual fund company or a company like Betterment.com. Just make sure that you don't let your money sit in an old account with high fees and no good investment options for too long. Good luck!

Rollover your old 401(k) now. FiPath’s new rollover tool will let you find your perfect provider to roll over your 401(k) to an IRA in minutes. Get started!

Home Business And Taxes: Doubling Up On Tax Day

By Miranda Marquit 1 Comment

When Tax Day rolls around, those who owe taxes are often a little disgruntled. But, if you have a home business, you need to be extra careful if you owe. Don't forget that you actually have two tax payments to make: What you owe from underpaying the year before, and your first quarterly estimated tax payment for the current year.

Quarterly Estimated Taxes

When you have side income, you might need to pay estimated quarterly taxes. If you are making regular income throughout the year, and not having it withheld by an employer, the IRS expects you to pay quarterly. A traditional employer pays taxes quarterly — including the amount of money withheld from your paycheck for the purpose. And if you are making income on the side, you are expected to pay quarterly as well.

Over the course of the year, this can be a helpful state of affairs. You make your quarterly payments, and you don't have to worry about coming up with the money to pay a huge bill on Tax Day. At least that's the theory. You still need to plan carefully, though, or else when Tax Day rolls around you could find yourself in trouble.

Two Tax Bills Due on Tax Day

When I first started with my home business, I got on track with quarterly tax payments, and began making them faithfully. However, as my income grew, it was plain that the quarterly tax payments weren't enough to cover my total tax bill. I usually owed a couple thousand more at the end of the year. That didn't seem too bad — provided I was prepared for it.

However, one thing I didn't prepare for was the fact that the quarterly estimated payment for the first quarter of the current year is due on Tax Day. So, instead of making one tax payment, I actually needed to make two tax payments. And that didn't even count the bill owed for my state taxes.

One year, I discovered that, with what I owed the IRS from the previous year, plus the quarterly tax payment, plus state taxes, I had almost $8,000 due on Tax Day! While I was prepared to pay some of it, I had been so focused on paying what I owed at the end of the year that I forgot about my new quarterly estimated tax payment. The result, unfortunately, was raiding the emergency fund as a way to help pay what was owed.

It's true that many of us would rather owe the government, rather than get our own money back, without earning interest, through a tax rebate. However, there does need to be a level of preparation. And, if you are making quarterly estimated tax payments, it's important to consider that they may not be enough to cover what you owe throughout the year — especially if your income is growing. On top of that, remember that your first quarterly payment will be due the same day as your previous year's tax bill. Plan ahead for that reality, or you could find yourself stuck.

Learn The Basics Of The Roth IRA

By Mr. Money Leave a Comment

Jeff Rose over at GoodFinancialCents.com recently had an epiphany when talking to a college class about investing and retirement. He realized that today's generations really aren't thinking about retirement, and a lot of them don't even know what a Roth IRA is, what a 401k is and just how to get started investing. He wanted to get people started thinking about retirement, and came up with the idea to start the Roth IRA Movement, a movement of bloggers and personal finance journalists to get people thinking about the basics of saving for retirement, specifically with the Roth IRA – one of his favorite retirement vehicles (and mine).

Today 125+ bloggers are banding together in a one day event that will hopefully spur others to start thinking about retirement and saving for their future – in the Roth IRA or whatever retirement account best fits their situation. For my part in the event today I'm writing up a brief synopsis of the basics of the Roth IRA.

What Is The Roth IRA?

In 1997 the Roth IRA account came into existence when the Taxpayer Relief Act of 1997 was passed. The late Senator William Roth of Delaware was the main sponsor of the bill, and the account type bears his name to this day.

The Roth IRA (Individual Retirement Arrangement) is a retirement vehicle in which you can invest in securities, stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible as well).

Part of the reason the Roth IRA has become so popular in the past 15 years is because they offer a nice way to save for retirement that offers tax-free withdrawals at retirement. In other words, you are investing with money that has already been taxed, and when you pull the money out at retirement the contributions and earnings are tax free. Pretty nice, huh? The IRA is similar to the Roth IRA, but instead of contributing post-tax, you're contributing pre-tax and will have to pay taxes on the money withdrawn at retirement.

Contribution Limits For The Roth IRA

The Roth IRA account type has contribution limits associated with the account. So unfortunately that means you won't be able to just dump as much money as you want in there every year. They've given the account special tax free status on earnings, but along with that come contribution limits.

The limits haven't changed for the past few years. Since 2008 the contribution limits have remained at $5,000. For those age 50 and above you can make an extra contribution of $1,000 every year, which means you can contribute a total of $6,000. Here's a table showing the contribution limits for the Roth IRA since 2002.

Year	Age 49 and Below	Age 50 and Above
2002-2004	$3,000	$3,500
2005	$4,000	$4,500
2006-2007	$4,000	$5,000
2008-2012	$5,000	$6,000

Income Limits For Contributions

The income phaseout limits for contributing to a Roth IRA start getting phased out at about $110,000 for single filers, and at $173,000 for married filing joint filers on a Roth IRA.

IRA Type	Single	Married Filing Jointly
Roth IRA	$110,000 – $125,000	$173,000 – $183,000

So basically when you reach the bottom level of the income phaseout limits, your ability to contribute to a Roth IRA starts getting phased out. To figure out how much you can contribute, you would subtract your modified adjusted gross income (MAGI) from the upper end of the phaseout range, divide by the amount of the spread in the range. You'll get a percentage after you divide. That percentage is the amount of the full $5,000 that you can contribute. So if you're resulting number is 66% – you can contribute 66% of $5000 – or $3300.

Example: If you are married filing joint and you make $180,000, you would take $183,000-$180,000=$3000. $3000/$10,000=.30. $5000*30%= $1500.

Want a more detailed explanation of figuring out how much you can contribute? Check out this post on Roth IRA Eligibility.

Eligibility For The Roth IRA – Any Age With Earned Income

Anyone with earned income along with a W-2 or 1099 can contribute to a Roth IRA. There aren't any age restrictions for contributing to a Roth IRA, so as soon as your child has earned income (that modeling job they got paid for may count) they can invest in a Roth IRA. The earlier they get started, the better their gains will be!

It's Easy To Open A Roth IRA

Opening a Roth IRA doesn't require an advanced finance degree, and just about anyone can do it within an hour or two. There are only a few questions you need to consider to start:

Where to open the account (bank, discount brokerage or full service mutual fund company): I would personally open an account at a low cost mutual fund company like Vanguard, or if you want to be even more hands off, via an account with a company like Betterment.com.
How you'll be adding money to your account: You'll need to figure out how you'll be funding the investments – if you'll be depositing $5000 for the year all at once, of if you'll be making regular deposits throughout the year.
What types of things you'll invest in: Depending on where you invest you may have different mutual fund and stock options. For example, if you open a Roth IRA with Betterment you'll be limited to a pre-selected set of ETF index funds. With Vanguard or Fidelity you'll have a wider range of options. You'll want to do your research to figure out what's best of your situation.

For a further more in-depth discussion of opening an account, check out this post: How To Open A Roth IRA And Where To Open An Account

Conclusion

The Roth IRA is a great investment account option that most people should consider. It allows for tax free withdrawals at retirement, high income thresholds, and no age requirements so even your kids can contribute once they have an earned income. Why wouldn't you consider opening one? I know I already have!

How Would You Handle A Financial Setback?

By Miranda Marquit 4 Comments

Chances are that at some point in your life you will experience some type of financial setback. Indeed, emergencies are part of life. Businesses fail. Medical bills need to be paid. The house floods.

When you experience a financial setback, it can be difficult to get back into the swing of things. However, it's important that you do what you can to get back on top of your financial situation.

Deep Breath: What are Your Options?

Before you do anything, stop, take a deep breath, and evaluate your options. When you are in the moment, it is easy to panic and start making impulsive decisions about money. Before you make decisions, take some time to figure out what your options are.

Can you arrange a payment plan? Does it have a reasonable interest rate?
Is it possible to raise money another way, perhaps through selling some of your items or starting a side hustle?
Have you prioritized your bills? If you have to let some slide, which ones will have the least impact on your situation?
Are there community services, charities, or religious organizations that can provide you with help? Food pantries, or special heating programs, and other services can help you weather a storm.
Would downsizing help? What services can you do without (cable, subscriptions, gym memberships, etc.)? Does it make sense to move into a smaller place?
Can your extended family help?
What is your last resort? If things are truly bad, you may need to resort to letting your home be foreclosed on, or trying to navigate your problems through bankruptcy.

In many cases, a combination of help and payment plans can help you get back on track. However, you need to make decisions after some thought. Most of the time, you can wait two or three days — or even longer — after a catastrophe or setback before you have to make a decision. Take your time and make a plan.

Preparation: The Best Way to Handle a Setback

Of course, there is no substitute for preparation. Careful preparation can reduce your exposure to the risk of a financial setback, although it might not completely protect you from all problems. There are three main things you can do to help your prepare your finances for a setback:

Live below your means: One of the best things you can do is live below your means. This means that you take in more money each month than you spend. It's not just about budgeting so that you spend all your money. It's about making sure you have extra money, and that you aren't living up to your income. You want to have room to cut things out, if possible. Plus, if you are used to living less lavishly than you could, it's easier to cut out unnecessary spending.
Purchase adequate insurance coverage: Adequate insurance coverage can help protect you from some costs. Auto, home, and health insurance policies can all reduce the amount of money that you pay out of pocket in a financial setback. Protect your assets, and you will be better prepared.
Build your emergency fund: We all hear about how we should have an emergency fund — and it is important. Build up your emergency fund so that you can pay deductibles, pay bills, and take care of other financial problems during a setback.

What would you do in in a financial emergency?

A Traditional IRA Or A Roth IRA: Which Is Best?

By Britt Gillette 3 Comments

Which is best – a Traditional IRA or a Roth IRA?

That's a great question, and there's no cookie cutter answer which is applicable to everyone. Each person's financial situation is different, and different needs call for different solutions.

And while you don't necessarily have to choose one over the other (you can invest in both a Traditional IRA and a Roth IRA), keep in mind that your annual IRA contribution limit applies to both retirement accounts, so a contribution to one means less money you can potentially contribute to the other.

For example, if your annual IRA contribution limit is $5,000, you can NOT contribute $5,000 to your Traditional IRA and $5,000 to your Roth IRA. If you contribute $5,000 to one, you can't contribute any amount to the other. And if you contribute $3,000 to one, the most you can contribute to the other is $2,000. So you have a big decision to make when it comes to allocation of your retirement savings.

Below are just a few of the factors you need to take into account when trying to decide whether you should invest your hard earned money in your Traditional IRA, your Roth IRA, or some combination of both.

Roth IRA Vs Traditional IRA

Tax Deductibility

One of the primary factors to consider when evaluating the benefits of your Traditional IRA vs. your Roth IRA is tax deductibility.

Generally speaking, contributions to your Traditional IRA are tax deductible – meaing you make your contribution with pre-tax dollars, which lowers your taxable income, and then you pay your taxes. On the other hand, contributions to your Roth IRA are non-deductible – meaning you pay taxes on your gross income first, and then make your contribution with after-tax dollars.

Which is best? It really depends on a number of factors unique to your own financial situation, but as a general rule, if you're in a high tax bracket now and you anticipate being in a lower tax bracket when you retire, you might want to take advantage of the tax deductibility of your Traditional IRA. But if your tax bracket is lower now than you expect it to be in retirement (or you think it will stay the same), then you might want to take advantage of the tax-free withdrawals offered by your Roth IRA.

Taxes Upon Withdrawal

Another factor to consider is how your money is taxed when you finally make withdrawals during retirement.

With your Traditional IRA, you owe income taxes on any funds you withdraw during retirement (since you originally made tax deductible contributions), but under the Roth IRA rules, all qualified withdrawals are tax-free when you retire (since you originally made non-deductible contributions).

Which is best? Obviously, we all prefer tax-free withdrawals from our retirement savings, but again, you can't look at these two factors in isolation. You need to weigh each option relative to the type of contributions you make (deductible vs. non-deductible). In most cases, it's a wash. You either pay the taxes upfront (non-deductible Roth IRA contributions) or you pay them later (taxable Traditional IRA withdrawals).

However, keep in mind that if you're capable maxing out both accounts, you end up with more money in retirement if you choose your Roth IRA. Why? Because you're able to contribute more.

For instance, let's say you contribute $5,000 to your Roth IRA and your spouse contributes $5,000 to a Traditional IRA. You invest both accounts in identicle assets so that when you reach age 60 both accounts are worth $200,000. If you're in the 15% tax bracket, your Roth IRA is still worth $200,000, but your spouse's Traditional IRA is only worth $170,000 because any withdrawals are subject to income tax.

Required Distributions

One last factor you need to consider is required distributions.

By law, you must begin taking annual distributions from your Traditional IRA at age 70 ½ whether or not you want to. But with your Roth IRA, you don't have to worry about required distributions. If you so choose, you can continue investing in your Roth IRA until the day you die, regardless of how long you live.

In this respect, your Roth IRA is a superior option because it gives you more flexibility. You choose whether or not to withdraw funds from your retirement savings, and no arbitrary rules dictate a forced withdrawal. This gives you greater freedom to plan your finances during your retirement years. After all, not every 71 year old needs to withdraw funds from a retirement account. Many are still working, and among those who are retired, many can live comfortably off of social security benefits, pension income, and other investments. So why paint yourself into a corner?

Which Is Best?

Aside from the required distribution provision which forces you to withdraw funds from your Traditional IRA, you can't make a blanket statement applicable to everyone regarding which is the better option – a Traditional IRA or a Roth IRA.

Only you can decide which one is your best option, and you do so by examining your individual financial situation, assessing your current and projected tax brackets, using a Traditional IRA vs. Roth IRA calculator, and/or taking into account any additional forms of income you may have in retirement.

In the end, you may find one is a clear winner over the other, or you may decide to hedge your bets and split your annual IRA contribution between the two accounts.

This is a guest post from Britt at http://www.your-roth-ira.com, the Web’s #1 resource for Roth IRA information.

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