Feb 09

During the recent State of the Union, we were introduced to a new flavor of retirement account, the MyRA. Even the president had a tough time spitting out the words, he started to say, “My IRA,” and then corrected himself, saying, My R A, meaning My Retirement Account. A few days later, the Treasury issued a press release to clarify the details regarding this account.

It has the same limits and tax status as a Roth IRA, and will be offered only through employers, presumably those who don’t offer a 401(k). It offers just one investment, a treasury product that offers a guaranteed rate, pretty low, of course, but with no downside risk. Once he account reaches $15,000, it must be transferred to a regular Roth IRA account.

Let’s start with Michael Kitces’ The New MyRA Roth IRA Proposal: A Financial Planner’s Guide To Everything We Know So Far. I’ll warn you, Michael’s discussion approaches 4,000 words, he looks at the rules for this account as well as the potential impact.

The Patriot Post comes right out and says it – MyRA Proposal Is a Head-Scratcher. They quote National Review’s Kevin Williamson, “Does anybody know why savings bonds went out of fashion? Because they are a terrible way to save money.” They conclude it may be the first step toward nationalizing our retirement accounts.

Next is myRA: What You Need To Know About The Newest Retirement Plan. Jay at The First Million is the Hardest sees one real benefit, the low $25 initial deposit. This may help people kickstart some savings. The downside? the low guaranteed return.

Money Reasons isn’t too high on the account either – I think the MyRA will be a poor investment option. That says it all. Don doesn’t care for the low return and sees the guarantee as an issue, feeling no good can come of governments guaranteeing anything.

The Oblivious Investor, Mike Piper, explained MyRA: Not “Like a Roth IRA.” It IS a Roth IRA. The distinctions are listed, including that it’s through your employer, and how it must be invested.

I’ve read enough about the MyRA to have my own opinion. It offers nothing that prompts me to say “great, that will help a certain group that needs a bit of help.” Part of the issue is that 62% of adults do not have an emergency fund to fall back on. I suspect that most of these 62% are cashing Friday’s paycheck at 5 pm to put dinner on the table at 7pm. It’s a sad reality. Those with no 401(k) can till use an IRA or Roth IRA to get the start this program offers. The problem remains, when you have no money to set aside, even a $1 minimum deposit wont make a difference. Sorry to appear such a cynic on this issue. I’m in favor of raising the minimum wage as a first step to helping people who are willing to work, but aren’t earning a living wage. How to get them to save for their future is a bit more complex.

What do you think? Will the MyRA help? A year from now will it be a success or go over like a lead balloon?

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Mar 11

I recently read a question from a fellow blogger Briana, who posts at How’s Married Life asking how much she should save to her retirement account each year. As I saw comments come in, for me the larger question wasn’t how much, but simply ‘how.’ Should she save pretax, or post? In the big picture, this question might take second place to the first, after all, the question of how much is such a large factor toward retirement success.

Let’s look at my concern, how she should handle the tax status issue. In her question, she shared her gross salary is $33K.  In 2013, the 15% bracket runs from a taxable $8,925 to $36,250. With no mortgage (yet), I’ll trust she’s taking the standard deduction  of $6100 along with an exemption of $3900. Pretty neat, this adds to exactly $10000 that comes off the top. At this stage of her life, I’m expecting good things in her future, and that includes a higher income.

I suggest that she start now with the Roth 401(k) and Roth IRA for the money she’d like to save. The Roth 401(k) to get the full match her company offers, and the Roth IRA for any more deposits above that. It will take some time before she’s starting to hit the 25% bracket. After all, she would need an income above $46,250 for that to occur when the standard deduction and exemption are included.

As time passes, and she sees her income rise, I suggest monitoring that line on her 1040, “taxable income,” this is the line that tells you what bracket you’re in, and as she slips into the 25% bracket, it’s time to take advantage of the pre-tax retirement accounts as well. Say, she’s finishing her return one March and sees the taxable income is $1000 into the 25% bracket. That’s the time to deposit exactly $1000 into the pre-tax IRA, and start using the pre-tax traditional 401(k) as well just for a portion of her deposits. Say she’s decided to target 10% of her income towards the retirement accounts. It will take $51,389 gross income and a pretax deposit of $5,139 to net that $46,250 I mention was the gross cutoff for the 25% bracket. Keep in mind, that’s in today’s dollars, with today’s tax brackets and current standard deduction/exemptions. These numbers are all inflation adjusted each year and this combination will help shift that target 15% limit as Briana’s income rises. It may take as long as a decade or more for this to occur, which is fine. Ten years of saving post tax money in these accounts before making the shift to pretax savings means her tax burden after retirement will be that much lighter.

The story doesn’t end here. If, and when, she has a new addition to the family, there are more tax deductions that come with the new bundle of joy. Briana may have spent a bit of time fighting off a 25% tax rate only to take a bit of time for maternity leave and drop back to 15% again that year. The good news is that with a bit of planning each year for the year to come you may find the 15% solution works to keep your taxes low while your working and then at retirement when you find your funds have a decent share as post tax Roth flavored money.

On a final note, recent changes in the tax code permit a conversion of 401(k) funds from the pre-tax account to the Roth 401(k). Since matched deposits always are deposited to the pretax traditional side, you’ll still accumulate pretax money over time. If you have extra money you’d invest for the long term and the 401(k) fees are reasonable, it may make sense to do the conversion if you will still be in the 15% bracket. There’s no recharacterization option, so plan wisely.

Briana, I wish you health, happiness,  and wealth. Best of these to you!

written by Joe \\ tags: , ,

Apr 01

Earlier this week, in an unprecedented example of Personal Financial Blogger cooperation, nearly 150 of us accepted Jeff Rose’ invitation to write about the Roth IRA and promote the cause on twitter with hash tag #RothIRAMovement. It was quite a success, and Jeff got some well deserved recognition, from Reuters Can Twitter make Roth IRAs trendy for young? The Huffington Post Roth IRA Movement Takes To Twitter, and The Wall Street Journal’s Happy Roth IRA Day! Wow, what great press, congrats, Jeff. My own effort went to the launch of RothMania, where I’ll focus on this particular flavor of retirement account.

At Enemy of Debt, Ashley guest posted, 10 Things on Which to Never Spend Money. With everyone trying to get us to part with our money, this is a great list of things to avoid. My favorite on the list? “Anything a telemarketer is selling.”

Financial Samurai asks What Would You Do If A Major Income Source Went To Zero? and explains the importance of income diversification. Not too many people have more than their day job as income, I imagine. It’s never too late to start thinking about this important topic.

At Out Of Your Rut, Kevin tries to understand how someone can be Struggling on a Six-Figure Income. The media has offered stories of those earning far more than this ($350K, anyone?) yet they manage to burn through every cent. Sympathy? Not too much from me.

Remember how Al Capone was finally caught by the law? Tax evasion! Even if you are in an illegal business, you are not exempt from paying taxes. So my frugal tweep, Sandy at Yes I am Cheap shared Nine Tax Deductions That Prostitutes Can Claim. I’m not judging, just passing along what appears to be good tax advice.

And to wrap up a great week, Why I Played the Lottery Even Though I Know It Is Such a Horrible Idea, from Kevin at No Debt Plan.  By the way, the lottery was worth $640 million dollars, I played too. I didn’t win.

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Mar 25

This week we start with the remarkably prolific Miranda Marquit’s article How to Rollover Your 401k to an IRA, an excellent overview of this tricky process.  The only minor point I’d add the her article – if you wish to convert from the 401(k) to a Roth IRA, it’s preferable to first transfer to a traditional IRA. This lets you accomplish two things. First, a controlled transfer, the ability to convert just enough to keep from getting into the next bracket. And second, you will have the ability to recharacterize should your investments tank, or your income increase enough that you are above the bracket change.

Mr Money Mustache tells us Why I am SO Not Buying an iPad 3. While my high school English teacher would cringe at the use of “so” to mean something like “really,” I understand why the Mustachian is not getting the latest iPad. He had enough gadgetry in his life. I have it on my wish list. By the way, Apple has rebranded this product line. The latest iPad is not being called iPad 3 or iPad HD. It’s simply being called “iPad.” Me? I’m waiting for the Apple store to have it in stock, no lines, no waiting.

At Money Help For Christians Craig Ford answers the questions Is Credit Card Usage a Sin? Are Credit Cards Unbiblical? Craig offers a fair look at this topic, and reaches the same conclusion as I do when it comes to card usage.

At Darwin’s Money, a discussion of What’s Your REAL Inflation Rate? Everyday Price Index. Darwin looks beyond the numbers our government announces and instead, analyzes his person CPI. Let’s just say that a 42% jump in his health care costs really impact his numbers.

We’ll wrap this week up with Hank Coleman’s Top Ten Reasons To Own A Roth IRA. I love this top ten list. With one minor correction I left in a comment, this was a great list and if you don’t yet know what a Roth IRA is, here are ten reasons to learn.

Tune in this week, on Tuesday March 27th, the Roth Movement takes place across over 150 financial blogs.

 

 

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Mar 18

 

Let’s start this week with a recurring question –Does It Pay to Pay Off My Mortgage Early? Scott on Money addresses this question, offering discussion on what you should consider in making this decision.

The Time Management Ninja offered up a great list of 50 Things You’re Putting Off That You’ll Regret Later. Some of the list may seem obvious, but it’s a great list, and the theme for me was that these things just pile up, and by adopting a “just do it” approach you’ll have a heavy burden lifted off your shoulders.

This week Jeff Rose spoke to a group of college seniors at his alma mater, and was a bit taken aback when of the 50 or so in the room none raised his hand when asked if he knew what a Roth IRA was. To me, this raises new and troubling questions. Jeff’s response? Let’s Start a Movement (Roth IRA Style) And what a movement it will be. If I can quote Jeff – “On March 27, 2012, we’re going to have over 50 bloggers talk about why the Roth IRA is important, why they love it, and why every young investor needs to know more about it. ” 50? The movement is over 123 as I write this. The Roth can be a great tool to manage your lifetime tax bill, stay tuned and be part of the movement.

As the Roth conversation continues, Neal Frankle explains Roth IRA Recharacterization – What Your CPA Doesn’t Know. If Roth isn’t universally known, then the ability to convert from the traditional IRA to a Roth is even more obscure, and the concept of being able to reverse this through a recharacterization even less so. While we might forgive these CPAs, but we can also educate ourselves and potentially save a nice bit of money.

At Fabulously Broke, The Financial Blogger guest posted Early Retirement Extreme Idea or Reality? TFB has really worked out the numbers and is planning on retiring at 55. A nice goal. I wonder how many had a similar goal but the decade that just past changed their plans a bit. That would make an interesting research project.

I don’t usually include the major online papers in these roundups, but today, I’ll make an exception. Former Labor Secretary Robert Reich wrote Saving the Street From Itself, a reaction to the news that Greg Smith left Goldman Sachs and wrote a letter to the Times explaining his departure. After 12 years of raking in the big bucks he was sickened by how GS treated its customers. Without going into further detail, these two pieces are good reading and the Reich article has a comment of mine in the “NYT picks” tab, just one of a dozen chosen of the near 100 comments.

I guest posted at Best Rates In this week about how I am Taking Advantage of a Cash-Back Deal. There are some deals that are bit fringe, but I still had the urge to write about it, and was due to guest post elsewhere. A bit crazy, but the bucks add up fast on this one.

And to wrap it up, at My Money Blog – The Ethics of Credit Card Rewards and Bonuses. There are those who are concerned that signing up for a store card to get 10% off that day, but soon after, canceling, are being unethical. I can’t tell someone else how to feel, but I draw the line elsewhere. Doing so will hurt your credit score, but not your relationship with The Big Guy(tm).

Today’s roundup is named for the fact that J2’s basketball team made it to the finals, winning today’s game with the score above, and final game later today. Great to watch the kid’s get this far.

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