Posts tagged 'saving'
An important tax law change is coming that expands eligibility for a popular retirement account choice, the Roth IRA. Beginning January 1, 2010, Roth IRA conversion income limits will be eliminated, allowing anyone to convert a Traditional IRA or old 401(k) to a Roth IRA. Question is, should you? You’ll need to talk to an expert to have them assess your individual situation but you should certainly look into it.
There are at least five different kinds of IRAs each with its own rules and regulations. I included information about Education IRAs but they are rare. Two of them must be funded by your employer so I have excluded them.
You need to check them all out, preferably with some expert help, like a CPA or an attorney, family member or other expert before investing in any of them.
Traditional IRA
You are allowed to contribute up to 2,000 dollars per year into a traditional IRA. The amount of the contribution that is deductible on your income tax return depends on your Adjusted Gross Income (AGI) which can be found on your income tax form and whether you are covered under an employer’s plan. So, depending on your filing status (Single, Joint, etc), and your AGI, your contributions may range from fully deductible to totally non-deductible. Even though you are eligible to contribute to your IRA, you may be in a position where none of these contributions are in fact deductible.
Roth IRA
You can also put money into a Roth IRA. Roth IRAs have lots of rules, but if you follow them, any money you put into one is taxed at that time and even if it grows, you won’t have to pay any more taxes on it. For example, if your account doubled in value over the years, even when you cash out at retirement, you’d get half the money tax-free. Also you cannot withdraw your funds within the first 5 years after the establishment of the Roth without a penalty.
Education IRA
You can put away up to $500 per year into an education IRA, the money grows tax-free and receives a preferred tax treatment when the money is used for educational expenses. These plans are not very common in that they are very restrictive on who can make contributions to them, the amount of total contributions allowable each year, and the limitations on what exact education expenses qualify.
Just like you need lots of different shoes, you have quite a few different ways to invest your money. None of these options are mutually exclusive. You can have a brokerage account and a 401K. Or you could have a 401K with your current employer and an IRA which includes money from previous 401Ks.
October 19th, 2009
Retire, who me?
A 401K, is a retirement plan your employer can offer you if they so desire. Yes, I know retirement is a long, long way off but as a fashion fashionista you know how good it is to start saving early. You can only get a 401K through your employer. A 401K automatically takes money out of your paycheck—you decide how much, up to the federal limit—and deposits it into a retirement savings account set up for you. You then decide, based on the options the employer provides how your retirement account will invest your money. Usually your employer will offer a range of choices, ranging in risk from preppie conservative to cutting-edge fashionista.
The money you allow your company to deduct from your paycheck and put in your 401K is deducted pre-tax, meaning before you pay taxes on it. In other words, you do not have to pay any taxes on the money you put in. You get to invest this part of your paycheck, earn money on the government’s share of its taxes, and keep the money you earned on that share when you eventually withdraw the money from your account and pay the taxes on the amount you withdraw. So you have the use of the government’s money to earn interest until you are sixty-five or older and can withdraw the money.
If your employer offers a 401K plan you should take full advantage of it. It will force you to save because it takes money out of your paycheck before you ever see it. Plus, it will lower your tax rate, since it is money you won’t be taxed on, and, even better, some employers offer you an incentive to invest in a 401K by contributing to your account as well, which should make participating irresistible.
The amount your employer contributes is called a matching contribution and usually consists of a percentage of your paycheck up to a defined maximum. For example, an employer might offer to match you fifty cents for every dollar you contribute up to some specific percentage of your salary, usually three or four percent. So over the course of a year, if you invested one thousand dollars, your employer would deposit five hundred dollars into your account. This is like getting an instant raise with no extra duties required.
If you leave the company, you can take the 401K account with you and roll it over into an Individual Retirement Account (IRA), a kind of stand-alone 401K, or leave it with your former employer to administer even after you leave. Sometimes they charge you a fee for doing this so I suggest rolling it over into an IRA. (Also, if you plan to have more than one employer before you are sixty-five, it is nice to keep your accounts together in one place that you control.) IRAs are more flexible than a 401K; your money can be invested in whatever you want, not just what your employer has chosen—from stocks and mutual funds to bonds and real estate. There are lots of different kinds of IRAs so you need to check them all out. The downside of IRAs is there is a limit on the amount you can invest in them each year, although 401K rollovers are exempt from this limitation. The limit changes so you need to look up the limit for a particular year. You can Google “IRA” to learn more.
June 2nd, 2009
Too good to be true? Actually yes, but we’re getting closer. Scientists have discovered a type of fat in our bodies called brown fat. I know more fat is hardly cause for celebration. But we LIKE brown fat! Turns out, brown fat burns calories. Yes, you did read that correctly, burns calories. And, even better, it’s activated by low temperatures. So turn off your thermostat, don’t buy that pea coat, and scrimp on sweaters. You’re wallet and waistline will thank you!
http://www.cnn.com/2009/HEALTH/04/10/brown.fat.obesity/
April 13th, 2009
In your bank account – how big is yours?
Actress/model/waitress. Writer/Waiter. Investment banker/Dog walker. No matter how you slash it, finding a job in this economy is difficult. That’s why savings matter. When times are good, it is so easy to spend a little here, spend a little there – after all what’s a $20 drink between friends. When times are bad, those carefree habits can hurt. Suddenly you find your cushion – or complete lack of one – stressed to the limits. That’s why it is so important to save. You should save when times are good and it is relatively painless. You should also try to save when times are bad and it hurts.
How much should have in savings? Three months worth of living expenses is the minimum. That means enough to cover the things that really matter, for example your rent, loan payments, groceries, utilities. Six months would be better. As we have seen in this economy it can take at least that long – if not longer to find another position.
Some cuts are easy: did you go out to lunch today? That money could have been put in the bank. Did that sweater set, the one on sale, the one that makes your cropped pants perfectly perfect, cause spontaneous credit card use? That too, could have gone in the bank. Did you have more than one or two drinks when you were out this weekend? You get the idea.
If you are already way past those kinds of cuts you’ll have to dig deeper. That may mean canceling your land line and relying on your cell. Or canceling cable and relying on network TV. Hard times call for hard choices. Finding a way to live within your means can be incredibly challenging – but it is worth it.
So next time someone asks, “does size matter”, you’ll be able to answer yes with a smile and cash cushion.
April 6th, 2009
Dorothy Parker once said: “Take care of the luxuries and the necessities will take care of themselves.” She obviously said this before this recession started (plus she died in 1967).
These days, you must take care of the necessities. One important necessity people often forget about is a cash cushion – ideally three months of living expenses. Start by saving up to one month’s worth of living expenses. This may take awhile, but it is really crucial. You want to be able to take care of yourself if you hit any bumps. Work your way up to three months and then promise yourself you won’t touch that money unless there is an emergency.
The sooner you start saving, the better. I urge you to start saving now – even if you only have a little bit left over every month. For example, if you are 21 and do not have any savings, but can start saving one hundred dollars per month (25 dollars per week), and earn five percent interest on your money, by doing nothing more, you will have saved a little over 78,000 dollars by the time you are fifty. (See my January 19, 2009 blog on Interest). If you wait until you are 31 to start saving the same 100 dollars per month, when you are 50 you will have a little less than 38,000 dollars. In this example, by waiting 10 years to start your savings meant you saved 40,000 dollars less. The higher the interest, the bigger the difference will become between saving now and saving later.
Dorothy Parker also said, “I’ve never been a millionaire but I just know I’d be darling at it.”
Fashionista Fact:
Dorothy Parker (www.en.wikipedia.org/wiki/Dorothy_Parker) was an American writer and poet who is best known for her acerbic wit, wisecracks and sharp eye. You could do a lot worse than to read her.
March 10th, 2009
You’ve been really good. The statement chandelier earrings you were lusting after will have to sparkle on someone else. You’ve curtailed your spending and finally have some extra money this month. What should you do with it? Are you better off paying down some of your debt or tucking it away in your savings account? For overall finance purposes, paying off debt and saving are the same. Incurring debt is negative savings; paying down debt is savings; and savings are savings. That being said, the single best thing you can do for your finances is to pay down your credit card debt (see Barbie: January 23, 2008; Interest: January 15, 2008 and Gift Yourself: December 1, 2007).
Once your credit debt is gone, make sure you have some savings. You should have a minimum of three months living expenses saved up. This may take awhile, but it is really crucial. You want to be able to take care of yourself if you hit any bumps. Promise yourself you won’t touch that money unless there is an emergency.
Then turn your attention to your other debts – high interest, non-tax beneficial ones first. Just like there are good trends and bad trends, there is such a thing as good debt and bad debt. Not all debts are created equal.
For example, a college or graduate school education and a home are sometimes considered good debt because although you had to borrow money to pay for them, you have something of value after you have paid back what you owe, interest and all. You also get to deduct a portion of these debts from your taxes. Credit cards and car loans are often considered bad debt. The value of what you purchased tends to decrease after you borrowed the money to pay for them. Worse, you cannot deduct any portion of these debts from your taxes.
So pay off your bad debts first – as an added benefit, once you have paid them off your monthly income will increase. Earrings, here you come!
February 3rd, 2009