11. Give every raise you get to your 401k/403b until you hit the annual maximum (2011 = $16,500) This could take a while.
So you are out of debt and participate in your companies 401k/403b to the point that you get the match. You also max out your Roth IRA to the tune of $5000.00 annually (6K if your over 50). The next logical tax shelter to take advantage of would be your 401k/403b. You will not receive an additional match but the tax shelter is worth it while your still employed. The idea is to fully fund all tax sheltered accounts first and then expand into more traditional investments.
Every time you receive a raise. Go to HR and ask to up your contribution by the same amount. The total limit in 2012 is $17,000.00. Depending on how much you make that could take a couple of decades worth of raises diverted to your 401k/403b. So what!, Since you already have to work you might as well let it do the heavy lifting when it comes to retirement saving. If you can afford more, do it! Shoot for 17k if you can. You will not regret taking advantage of these tax shelters while they are still available to you.
investing is incremental.
Sunday, January 15, 2012
Thursday, January 12, 2012
10. Give your raise to your Roth/IRA
10. Give every raise you get to your online Roth IRA. You can have any amount diverted from your paycheck to another account that funds your Roth IRA. When you get to $5000 a year in your Roth/IRA go to next step.
So you are out of debt and participate in your companies 401k/403b to the point that you get the match. The next logical tax shelter to take advantage of would be a Roth IRA. Why not just fund your 401k/403b higher? That is the easier path but not the cheaper one. I pay 2-3 times more in annual fees in my employers 401k/403b than I do in my online Roth IRA. I like using an online discount brokerage to house my Roth/IRA and brokerage accounts. They will help keep your costs down and allow you to be more flexible at re-balance time. Here is a link comparing different online brokerages
http://www.fool.com/how-to-invest/broker/index.aspx
No extra money in your budget? There is still a way. Take every raise you are given and have that money deposited in a separate account. This will take some math. If you make $40,000 a year and receive a 2% raise you get $800 more a year. Take that $800 and divide by your pay periods (26 if biweekly) = $30.00 per paycheck. Then set up your online brokerage to pull from the same account and BINGO you have your own retirement plan. You will literally not notice the difference in your paycheck and save more every year. If you do this with every raise (I even tossed in my Payroll holiday) you will hit $5000 (6K if over 50) fairly soon and move on to step 11.
No raises or hope of raises? Well there is one more stone to turn, Withholding. Do you get more than $500 a year in tax refunds? If so, you are giving the IRS a tax free loan on your money. You could adjust your withholding up and boost your retirement by the same amount.
A lot of families count on that refund being there every spring. So talk this over with your family and HR department before making a move.
So you are out of debt and participate in your companies 401k/403b to the point that you get the match. The next logical tax shelter to take advantage of would be a Roth IRA. Why not just fund your 401k/403b higher? That is the easier path but not the cheaper one. I pay 2-3 times more in annual fees in my employers 401k/403b than I do in my online Roth IRA. I like using an online discount brokerage to house my Roth/IRA and brokerage accounts. They will help keep your costs down and allow you to be more flexible at re-balance time. Here is a link comparing different online brokerages
http://www.fool.com/how-to-invest/broker/index.aspx
No extra money in your budget? There is still a way. Take every raise you are given and have that money deposited in a separate account. This will take some math. If you make $40,000 a year and receive a 2% raise you get $800 more a year. Take that $800 and divide by your pay periods (26 if biweekly) = $30.00 per paycheck. Then set up your online brokerage to pull from the same account and BINGO you have your own retirement plan. You will literally not notice the difference in your paycheck and save more every year. If you do this with every raise (I even tossed in my Payroll holiday) you will hit $5000 (6K if over 50) fairly soon and move on to step 11.
No raises or hope of raises? Well there is one more stone to turn, Withholding. Do you get more than $500 a year in tax refunds? If so, you are giving the IRS a tax free loan on your money. You could adjust your withholding up and boost your retirement by the same amount.
A lot of families count on that refund being there every spring. So talk this over with your family and HR department before making a move.
Friday, January 6, 2012
9. Roth 401k/403b
9. If your company offers a Roth option take it. Any money you put in plus gains will be tax free when you withdraw it.
The money YOU put in goes into the Roth portion of your 401k/403b. It will grow tax free but will (unlike the old 401k/403b) not reduce your annual taxable income. The money your company puts in (The match) will be in a traditional 401k/403b and will not be considered taxable income. You will have to pay ordinary income taxes on that money when you withdraw it (If your at least 59.5). It will also be subject to mandatory distributions at age 70.5.
In my opinion it's a good thing to have multiple types of accounts (Roth vs Traditional). In retirement you may need money but do not want to increase your taxable income. The Roth is the clear choice here. You have already paid the taxes on this money plus the gains are tax free.
Or if you are far enough away from your next tax bracket you can use your traditional account for your needs. Keep in mind the mandatory distributions starting at age 70.5. If you haven't taken your distribution for the year and a need arises then the traditional account or combination of the two would be the winner.
I like to have options!
The money YOU put in goes into the Roth portion of your 401k/403b. It will grow tax free but will (unlike the old 401k/403b) not reduce your annual taxable income. The money your company puts in (The match) will be in a traditional 401k/403b and will not be considered taxable income. You will have to pay ordinary income taxes on that money when you withdraw it (If your at least 59.5). It will also be subject to mandatory distributions at age 70.5.
In my opinion it's a good thing to have multiple types of accounts (Roth vs Traditional). In retirement you may need money but do not want to increase your taxable income. The Roth is the clear choice here. You have already paid the taxes on this money plus the gains are tax free.
Or if you are far enough away from your next tax bracket you can use your traditional account for your needs. Keep in mind the mandatory distributions starting at age 70.5. If you haven't taken your distribution for the year and a need arises then the traditional account or combination of the two would be the winner.
I like to have options!
Wednesday, January 4, 2012
8. SEP IRA
8. If you are Self-employed you can open a SEP-IRA in addition to the $5000 (6k if you are over 50) in your Roth/IRA. This year you can save up to $49,000 in a SEP-IRA. It just has to be 1099 income.
If you receive a 1099 form at tax time you are eligible for a SEP-IRA. In addition to your Roth IRA and 401k/403b you can sock away 100% of your 1099 income up to $49,000. Otherwise they are treated as ordinary IRAs, Funds can be invested the same way as any other IRA just with a different wrapper. Contribution to your SEP-IRA will lower your taxable income that year. Qualified withdrawals at age 59.5 or older will be taxed as ordinary income. You are in control of contributions and can change the amount saved at will. You can use the same discount online brokerage as your Roth/IRA.
My take on the SEP-IRA is that it's a great tool to those of you that have some 1099 income. As long as you are maxing out your personal Roth/IRA and are at least putting in the minimum amount to get the full match in your401k/403b. (Assuming you have one). It may seem easier to just put more in your 401k/403b but the higher fees associated with my 401k/403b make it my last choice when it comes to tax shelters. Don't get me wrong. The 401k/403b are great tools for retirement savings but they are the most expensive of the three tax shelters discussed.
Tax shelters ranked by efficiency and fees
1st - Company matched 401k/403b (No match? move on to 2nd choice)
2nd - Personal Roth/IRA at discount brokerage
3rd - SEP-IRA
4th - Additional 401k/403b (Not matched)
If you maxed out all of these you could save $71,000 a year for retirement! There are other types of shelters to consider (Muni's, real estate, Health care) but work with these 3 first.
If you receive a 1099 form at tax time you are eligible for a SEP-IRA. In addition to your Roth IRA and 401k/403b you can sock away 100% of your 1099 income up to $49,000. Otherwise they are treated as ordinary IRAs, Funds can be invested the same way as any other IRA just with a different wrapper. Contribution to your SEP-IRA will lower your taxable income that year. Qualified withdrawals at age 59.5 or older will be taxed as ordinary income. You are in control of contributions and can change the amount saved at will. You can use the same discount online brokerage as your Roth/IRA.
My take on the SEP-IRA is that it's a great tool to those of you that have some 1099 income. As long as you are maxing out your personal Roth/IRA and are at least putting in the minimum amount to get the full match in your401k/403b. (Assuming you have one). It may seem easier to just put more in your 401k/403b but the higher fees associated with my 401k/403b make it my last choice when it comes to tax shelters. Don't get me wrong. The 401k/403b are great tools for retirement savings but they are the most expensive of the three tax shelters discussed.
Tax shelters ranked by efficiency and fees
1st - Company matched 401k/403b (No match? move on to 2nd choice)
2nd - Personal Roth/IRA at discount brokerage
3rd - SEP-IRA
4th - Additional 401k/403b (Not matched)
If you maxed out all of these you could save $71,000 a year for retirement! There are other types of shelters to consider (Muni's, real estate, Health care) but work with these 3 first.
Friday, December 30, 2011
7. Participate in your company's 401k or 403b
7. Participate in your company's 401k or 403b at least to get the company's match.
A 401k and 403b are virtually the same thing. A 401k is the retirement plan you get at a for profit company. A 403b is the retirement plan you get at a non-profit or not for profit company. 401k/403b are the actual numbers in the IRS tax code allowing retirement plans.
Why should you participate in your 401k/403b?
-Matching funds. Most companies elect to match a certain amount of the money you put in. This varies from company to company. Some change the amount based on how the year went. Some have a set rate. A typical scenario is you putting in 3% and your company matching that 3%. At least put in the minimum that is required to get a company match. Check with your HR department for the low down.
-It is another tax shelter. You can put up to $17,000 of your money in 2012. This limit does not count any funds your company may match.
Make sure you know what each fund in your 401k/403b charges for annual fees. Your HR department should have this info. Look for index funds charging less than 1% and diversify from there. My employer's plan only offers one index fund. It is indexed to the US stock market. If that was my only account I would be heavily weighted in US Stocks. I diversify in other accounts. This allows me to be in the cheapest fund and still be diversified. Watch for my upcoming post on asset allocation.
A "Target date" fund may be an option if this is going to be your only retirement account. They self adjust to give you the "right" mix of funds for your age and take the work out of diversification and rebalancing. I am not a big fan of them. I prefer set asset allocation myself. They also charge more than index funds. Plus there was quite a bit of discussion on how the target date funds didn't really protect the folks near retirement during the Great Recession.
The moment you leave employment with your current employer move your retirement account to your own IRA. With a typical 401k/403b you will pay 0.75% to 2% in annual fees. This is OK because of the matching funds and tax shelter. Once you don't work there anymore get your money out of there and into cheaper funds. At an online brokerage you will pay 0.05% to 1% annually depending on your fund choices. Plus a one time transaction fee per fund purchased (usually $4-$10).
A 401k and 403b are virtually the same thing. A 401k is the retirement plan you get at a for profit company. A 403b is the retirement plan you get at a non-profit or not for profit company. 401k/403b are the actual numbers in the IRS tax code allowing retirement plans.
Why should you participate in your 401k/403b?
-Matching funds. Most companies elect to match a certain amount of the money you put in. This varies from company to company. Some change the amount based on how the year went. Some have a set rate. A typical scenario is you putting in 3% and your company matching that 3%. At least put in the minimum that is required to get a company match. Check with your HR department for the low down.
-It is another tax shelter. You can put up to $17,000 of your money in 2012. This limit does not count any funds your company may match.
Make sure you know what each fund in your 401k/403b charges for annual fees. Your HR department should have this info. Look for index funds charging less than 1% and diversify from there. My employer's plan only offers one index fund. It is indexed to the US stock market. If that was my only account I would be heavily weighted in US Stocks. I diversify in other accounts. This allows me to be in the cheapest fund and still be diversified. Watch for my upcoming post on asset allocation.
A "Target date" fund may be an option if this is going to be your only retirement account. They self adjust to give you the "right" mix of funds for your age and take the work out of diversification and rebalancing. I am not a big fan of them. I prefer set asset allocation myself. They also charge more than index funds. Plus there was quite a bit of discussion on how the target date funds didn't really protect the folks near retirement during the Great Recession.
The moment you leave employment with your current employer move your retirement account to your own IRA. With a typical 401k/403b you will pay 0.75% to 2% in annual fees. This is OK because of the matching funds and tax shelter. Once you don't work there anymore get your money out of there and into cheaper funds. At an online brokerage you will pay 0.05% to 1% annually depending on your fund choices. Plus a one time transaction fee per fund purchased (usually $4-$10).
Thursday, December 29, 2011
Question in response to #6 Emergency fund
I got this email from a reader today in regards to the emergency fund post. I think this deserves more discussion.
Here's what I always wonder about - when is it ok to actually use the emergency funds? Sounds like a dumb question - but really, it's complicated. Like, when my Spouse was out of work for 2 years, that money would have been gone right away. And was - because we had no choice but to use all savings to pay mortgage. (another reason we are downsizing so that won't happen again - any new mortgage we take on will have to be payable by one person only in case one of us loses a job)
Here's what I always wonder about - when is it ok to actually use the emergency funds? Sounds like a dumb question - but really, it's complicated. Like, when my Spouse was out of work for 2 years, that money would have been gone right away. And was - because we had no choice but to use all savings to pay mortgage. (another reason we are downsizing so that won't happen again - any new mortgage we take on will have to be payable by one person only in case one of us loses a job)
So - outside of job loss, what is the money ok to be used for and what is it not for? (medical bills, broken furnace, new roof, unexpected lawyer fees? Or none of the above)
For me it comes down to needs vs. wants. I would consider medical bills, broken furnace, new roof, unexpected lawyer fees to be needs. Therefore eligible for EF use. Some other examples of EF eligible needs are.
-Auto repairs and associated costs. As long as the vehicle is crucial for work. Getting your hotrod modified would not qualify.
-Speeding ticket or towing charge.
-An escrow shortage.
-Emergency home repair. Just repair not renovation. Water leaks, Gas leaks, Broken locks, Broken windows' main drain etc...
-Crucial appliance failure. Fridge, Furnace, Hot water heater, Sump pump etc... Is a clothes dryer crucial? Not for us, but maybe.
With medical bills I have a caveat. If the medical bill is so large that it would wipe out your whole emergency fund I would work out a payment plan with the medical service provider.
A job loss or potential job loss changes things quite a bit. You want to make the fund last as long as possible. When I was laid off in 2005 we started asking ourselves hard questions. "Can we live with a bucket under that leaky sink? If not can we shut off this sink for now?" We dumped our Dish and never went back. We found it wasn't necessary, even when fully employed.
If you get into a situation where you have to chose between paying medical bills or paying your mortgage, pay your mortgage. They can't foreclose on your body (yet) but they can kick you out of your home. Try to make a payment plan and keep in regular communication with the medical provider. Once they sell your debt to a collection agency the damage to your credit is done. Even if you tried to pay back the medical provider in full it would not come off your credit. Plus they probably won't take it and refer you to the collection agency. You have a lot of rights when it comes to collections. You can request that all future communication be in writing. They can not threaten you etc.. please check this link if you need more info on this.
The key is to not let it go to collections but if it does, do not jeopardize your families future to satisfy a collection. Medical debt on your credit is not the end of the world. A foreclosure on your credit would be pretty bad. If it is a huge debt they could sue you but they will most likely sell it to the next agency. I have been the victim of agencies looking up my name in the phone book thinking I was another Brandon Smith and trying to get me to pay their debt. DO NOT give them ANY information about yourself when they call. They really wanted my SS#. Which if I gave them, would be written down next to the fraudulent debt and make it much harder to get out of. I would respond "How do I know your not an Identity thief?" I would always make them prove it, which they couldn't. So the calls would stop. For a while. Until the next agency bought the fraudulent debt. Then the calls would resume and I would start the process over. After 3 or 4 rounds (about 2 years) it finally stopped, I hope.
The lesson? I am not scared of collection agencies. If you know your rights and read them back to the caller they back down fast. I could have sued them many times for violating the law but I am not a big believer in litigation unless I am seriously impacted.
It's a bit of a moving target but to simplify my answer.
Fully employed you can use your EF for needs you can not immediately meet. Use it to stay out of debt.
Fear or threat of job loss. use your EF sparingly.
Under or unemployed use your EF as sparingly as possible. Use it to stay in your home.
It's a bit of a moving target but to simplify my answer.
Fully employed you can use your EF for needs you can not immediately meet. Use it to stay out of debt.
Fear or threat of job loss. use your EF sparingly.
Under or unemployed use your EF as sparingly as possible. Use it to stay in your home.
Tuesday, December 27, 2011
6. Emergency fund
6. Save 6 months worth of living expenses in a money market fund or CD ladder. The money must be liquid (easily withdrawn)
Now that you are out of debt (bad debt anyways) start diverting the money you were using to pay off debt to build an emergency fund. You should sock away 6 months of living expenses in a money market or cash equivalent account. You can use your budget to tell you how much money that is. As far as the type of account is concerned you want be able to to access this money at a moments notice. Such as an online savings, money market, personal Savings, or CD Ladder.
To make a ladder divide your emergency fund by 5 and put the first 5th in a 5 year CD. The second 5th in a 4 year CD. The third 5th in a 3 year and so on. When the 1 year CD comes due put that money in a new 5 year CD. When the 2 year CD comes due put that money in a new 5 year CD and so on. After 5 years of this you will have five 5 year CDs. The CD ladder may make you more interest but it can be difficult to take it all out without penalty. In today's market, interest rates are so low that the difference between an online savings and a 5 year CD is negligible. The ladder can be adapted to bonds as well. This is how many people get their nest-egg to make them a regular income. When rates go up a few points I will reconsider using the ladder approach.
Some financial advisers suggest building up your emergency fund before you pay off your bad debt. I found this hard to do. I would build a little savings and BOOM car repair or BOOM medical bill. I had a much easier time focusing on my debt first. Plus as you pay off individual cards the "extra" money left over every month grows. This allows you to pay off the rest of them faster. If you have to pay all of the minimums while building up you emergency fund it can be a long slog.
Now that you are out of debt (bad debt anyways) start diverting the money you were using to pay off debt to build an emergency fund. You should sock away 6 months of living expenses in a money market or cash equivalent account. You can use your budget to tell you how much money that is. As far as the type of account is concerned you want be able to to access this money at a moments notice. Such as an online savings, money market, personal Savings, or CD Ladder.
To make a ladder divide your emergency fund by 5 and put the first 5th in a 5 year CD. The second 5th in a 4 year CD. The third 5th in a 3 year and so on. When the 1 year CD comes due put that money in a new 5 year CD. When the 2 year CD comes due put that money in a new 5 year CD and so on. After 5 years of this you will have five 5 year CDs. The CD ladder may make you more interest but it can be difficult to take it all out without penalty. In today's market, interest rates are so low that the difference between an online savings and a 5 year CD is negligible. The ladder can be adapted to bonds as well. This is how many people get their nest-egg to make them a regular income. When rates go up a few points I will reconsider using the ladder approach.
Some financial advisers suggest building up your emergency fund before you pay off your bad debt. I found this hard to do. I would build a little savings and BOOM car repair or BOOM medical bill. I had a much easier time focusing on my debt first. Plus as you pay off individual cards the "extra" money left over every month grows. This allows you to pay off the rest of them faster. If you have to pay all of the minimums while building up you emergency fund it can be a long slog.
Subscribe to:
Posts (Atom)