IRAs in general, and the Roth IRA in particular, is a vast subject and many books have been written on it.

With these recent posts, I am trying to simplify this complicated issue and I hope that you are able to benefit from this attempt to clarify matters connected to Roth IRAs.

If you have been following my earlier posts, you probably have a fair idea of what a Roth IRA is and the general rules that govern it.

Since the Traditional IRA has been around for a longer time, people are more familiar with that, and a natural question would be what is the difference between a Traditional IRA and a Roth IRA?

This is what we will look at today.

Tax Deduction

The eligibility for a tax deduction is the first and most significant distinction between a Traditional IRA and a Roth IRA. Contributions made to a Traditional IRA are tax deductible while those made to a Roth IRA are not.

Thus when you are contributing to a Traditional IRA you are able to get a tax deduction which benefits you by reducing the cost of the contribution itself. By contrast, Roth IRA contributions are made from income that has already been taxed so you don’t enjoy any deductions when you make contributions.

Tax benefits in a Roth IRA accrue only when a person actually attains retirement age, as an early withdrawal of anything other than your contributions will trigger penalties and taxes.

As an example, if you make a contribution of $2000 a year to a Traditional IRA, then that two thousand is deducted from the total amount of taxable income. So if your annual income is $60,000 and you make a contribution of $2000, you then pay income tax on only $58,000. If you make that same contribution to a Roth IRA, you will pay tax on the full amount of $60,000 but when you eventually withdraw the amount and the money that principal earned in the intervening years will be yours tax free!

Taxes on IRA earnings

Whereas in a Traditional IRA, you pay taxes as and when you make withdrawals, in a Roth IRA, such withdrawals of the principal and earnings accrued thereon are wholly tax free so long as you follow the rules and regulations governing withdrawals from your Roth IRA. In fact with a Roth IRA, you can withdraw your principal contributions anytime, without any penalty.

The same is not true for the Traditional IRA because every withdrawal requires tax to be paid on it.

Mandatory Distribution / Withdrawal Age

With the Traditional IRA, mandatory withdrawals begin at age 59 and a half and these withdrawals are required to be continued until the age of 70 and a half.

The benefit of the Roth IRA is that it does not have this mandatory distribution age, and is therefore more flexible and adaptable to your own personal requirements.

Income Restrictions

There are no income limitations with a Traditional IRA, therefore anyone can make contributions. The Roth IRA requires that you fall within certain specified income brackets to make contributions.

If you plan on living a long and healthy life, and hopefully we all do, a Roth IRA seems to have several benefits so a person who actually reaches retirement age can enjoy tax free withdrawals in his or her twilight years.

What do you think? Have you given any thought to how you are going to plan for your retirement? Have you evaluated whether the Traditional IRA or the Roth IRA is best for your circumstances?

Let me know your thoughts.

If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of 8% on her investment, she’ll have $1.4 million saved by the time she retires at age 65. And the money is all hers — she won’t have to give the IRS a cent of it if she waits until retirement to cash out.

This sounded really good, but it is worth remembering that there are no guarantees of earning 8% annually.

I decided to do some spade work and see how the Roth IRA really works and what the rules are that govern it. There are quite a few eligibility criteria that determine whether you can or cannot enjoy the benefits of a Roth IRA. While there are a lot of upshots, there are some limitations as well.

Distribution/Withdrawal Rule

Like I said in my earlier post, contributions made to your Roth IRA are not tax deductible and if you wait until after the date you reach the age 59 and a half, you don’t pay anything back in way of tax when you take out the money. This is also subject to your having had your savings in your Roth account for a minimum of 5 years. Early withdrawals are generally subject to a 10 % tax. There are, however several exceptions to this rule of 10% tax on withdrawal: this includes certain disabilities, higher education expenses, or if you are a first time homeowner, etc.

The Phase-Out Rule

You qualify to contribute to your Roth account if you fall within certain income brackets. If you are single, and earn less than $99,000 (the sum for married persons filing jointly is $156,000 in this instance) a year, you can make the maximum contribution. Then the amount you may contribute reduces, or is phased out as your income increases. If you earn more than $114,000 (or $166,000 if married and filing jointly) a year, then the permissible contribution becomes zero, i.e. phased out. These limits are increased by $2000 ($3000 if married and filing jointly) for the year 2008. So this is the phase out rule of the Roth IRA. If however your income rises above the amounts mentioned above, your balance in the Roth account remains sheltered from tax.

Maximum Contribution Rule

There is a ceiling on how much money you can deposit into your Roth account each year. You can deposit up to $4000 for the year 2007 and $5000 for the year 2008. If however you are above 50 years of age, then under the catch-up provision you can contribute an additional one thousand a year ($5000 and $6000 for the respective years of 2007 and 2008). Beyond 2007 this limit will be revised subject to the inflation index.

Eligibility Rule

There is no age limit or minimum required age to make a Roth contribution, any child with earned income can make it and a person can do so even over the age of 70 and a half, provided they have an earned income.

Stay tuned for more on the Roth IRA in upcoming posts.

Have you ever asked yourself the following questions:

What is a Roth IRA? How does a Roth IRA work? What are the Roth IRA rules?

If so you need to stay tuned, as over the next few weeks we will explore Roth IRAs in more depth.

Today we will begin with an overview just to get you started in the right direction.

An IRA, which stands for Individual Retirement Arrangement – although many people refer to it as an Individual Retirement Account as well – is not just about planning for your ultimate retirement in the dim and distant future. It is also about a safe and effective means of attaining financial stability and having a sound fall-back in place, should you need it in a crisis.

And remember, crisis will not wait until your retirement to strike!

If you have been keeping track of previous posts here – such as 7 Steps to Save You Money, 9 Tips to LBYM, How to Trim Your Budget, and The Right Approach to Credit Cards – you are probably on your way to being debt free or perhaps already there!

So the next step is to find a safe haven for your hard earned dollars; your income that has already been taxed – which is where the Roth IRA comes into play. It is true that contributions made to the Roth IRA are not tax-deductible, but that is pretty much the only downside. This is because what you then withdraw (of your contributions only unless it is a qualified distribution) from the account is tax free!

That is the one great plus about the Roth IRA in particular. It is flexible and far less hide-bound than Traditional IRAs.

The Roth IRA, described by many experts as a “gift from Uncle Sam” works like this: You open an account (many banks, credit unions and even mutual fund companies offer you this facility) with any institution that suits your requirements. Be sure to check for eligibility, initial minimum investment etc. as each institution may be different.

Since you have many options as to where you can invest your Roth IRA, such as stocks, bonds, mutual funds, certificates of deposit, or even real estate, you need to choose accordingly. Once you have made your initial contribution to your new Roth IRA, subject to the maximum Roth IRA contribution limits, you are ready to begin investing.

Then you watch your little nest egg grow, providing you with financial stability and a wonderful sense of security!

While I would like to believe that the majority of the people in this country are actively planning and saving for their retirement years, unfortunately the numbers tell a different story.

Whether you find yourself in the group that has a solid plan in place for your retirement years or the group that is scratching their head wondering why you need to save anything when you have Social Security – or maybe somewhere in between – NewRetirement.com is a site dedicated to helping you find the information you need to plan for a secure retirement.

There are two key areas of the site that will likely be the area that you spend the most time – Retirement Planning Information and Retirement Calculator.

Retirement Planning Information
The Retirement Planning Information section contains a long list of topics that will be relevant to many people that are attempting to get a grasp on their retirement.

The type of information that you will find in this area includes information on reverse mortgages, annuities, debt consolidation, retirement risks, and more. The information appears to be well-balanced overall and provides both the pros and cons of certain retirement strategies. However, there are some topics that could use a little more discussion on the negative side such as annuities – which are rarely the best option for many people.

There is plenty of information to keep you busy reading for quite some time.

Retirement Calculator
One of the prominent features that you will see as you first visit the site is the free retirement calculator that is offered.

The calculator is intended to give you an idea of how long your money will last in retirement.

It only takes a few minutes to enter the required data, although it might take a little longer depending on how familiar you are with your current savings and income expectations.

There is a handy graph that will update as you enter your information that displays how long your retirement funds will last.

The type of information that you will be asked to enter includes your birth date and expected retirement age, current income and expenses, estimated retirement income, assets and debts.

For your current retirement assets, the calculator uses an assumption that your assets will grow at a rate of 5% per year – including the value of your house – from now through your retirement. There is much debate on whether you should use the value of your home in your retirement planning and it might be too aggressive to assume your property will appreciate at a rate of 5% every year.

Once you enter all of the information, you will see the updated graph as well as a handful of suggestions on additional steps that you can take to secure your retirement.

While completing the calculator for my own planning, I used very little in terms of estimated retirement income as there is no guarantee that social security will provide anything and the likelihood of having a pension are very slim. Therefore the calculator indicated that the retirement expenses were far too high for my retirement income – as my retirement plan relies solely on my savings.

The calculator can be a very handy tool if you do not currently have a clear picture of your retirement or if you would like to examine how various changes can impact the security of your retirement years.

Areas For Improvement
As beneficial as the Retirement Planning Information and the Retirement Calculator can be in your retirement planning, the Answers and Retirement News sections are lacking real substance.

The idea behind Answers – where you can ask a question for your peers and experts to answer – is quite solid, but it falls short due to a lack of participation. There are quite a few questions without any answers at all and many sections haven’t had any interaction for months. The lack of activity is a little disappointing and will likely result in many people passing right by – which it seems is what most people have been doing.

The Retirement News section provides a variety of news sources that display relevant information. However, with the wealth of knowledge that is available on the news feeds it seems like NewRetirement is just scratching the surface.

My NewRetirement
The site offers the ability for you to create an account, which will be required if you plan to participate in the Answers or would like to save your retirement calculation data.

Given the earlier comments about the Answers section, it appears the only real benefit of creating an account is to save your results from the retirement calculator. Considering how streamlined it is to enter the calculator data, you might prefer to opt against creating an account – as I have done.

NewRetirement Blogs
Tucked away at the very bottom of the page is a link to the NewRetirement blog. While the blog appears to still be very new – it only contains eight posts – it would be nice to see this displayed in a more prominent location throughout the site.

The blog would appear to be a better solution than the Answers section, as reader participation might be higher within a blog as there is a given topic to direct the conversation.

Closing Thoughts
There are a few areas of the site that can use some attention and it would be nice to see a concerted effort to get the community more involved and active. And even though it is free to sign up for a NewRetirement account, it would be nice to see a little more value provided to account holders.

Overall NewRetirement.com appears to have a good deal of information that can help even the seasoned pro learn a little more about their retirement plan. In addition, the retirement calculator is fun to play with and can help you understand whether you are on the right path or if you need to ramp up your efforts.

Head on over to NewRetirement.com to see if your future is secure.

Disclaimer
This post has been a paid review and contains my thoughts on the positive and negative aspects of the site or service in question. With the intent of providing information that is valuable to my readers, if you object to this post please let me know.

When 2007 started, we had defined two financial goals for our family.

The first goal was to reduce our non-mortgage debt by 100% and the second goal was to increase our net worth by 35%. Throughout the year I provided monthly recap posts on the progress towards our goal and this post will highlight our final results.

Non-Mortgage Debt
You might recall that as we began 2007, our only non-mortgage debt was a balance transfer that we had with American Express.

The funds were sitting in our online savings account earning us interest and we were paying the minimum monthly payment. As the year progressed and the teaser rate was about to expires, I decided to transfer the remaining balance to a new attractive offer that we had received.

When we made this decision to utilize a new balance transfer offer, we agreed that we would not reach this goal as we preferred to keep the funds in our savings account until the new teaser rate expires in October 2008. As of right now the funds are still sitting in our HSBCDirect savings account earning interest.

Increase Net Worth
After surpassing our goal of increasing our net worth by 25% in 2006, we had set a more aggressive target with an increase of 35% for the year 2007.

We started off very well in 2007 and by mid-year we had already increased our net worth by approximately 20%. In July we experienced the first monthly decrease as the stock market had taken a hit over the last week of the month. Even though we had a decrease, we still expected to reach our goal.

However, during the month of July and early August, we decided to make a few home improvements that we had been contemplating. While we had already saved the money for the replacement windows, we decided to make a few additional improvements at the same time out of convenience.

Since we had not saved the money for the additional improvements ahead of completion, we had a decision to make on how to pay for the home improvements. After much discussion, we decided to use some money from our savings to pay for the improvements and then replenishing those funds over time.

With the decrease in our savings and a relatively lackluster market over the final months of the year, we failed to reach our net worth goal for 2007. We were still able to increase our net worth by a considerable amount, particularly when we consider the improvements that we paid for in our home, so it was not a complete loss.

Plans for 2008
With the teaser rate for our balance transfer set to expire in October, we will again be planning to eliminate all of our non-mortgage debt. At the present time we do not have any plans of extending this offer again but will continue to evaluate any offers that we receive throughout the year.

Even though we missed our goal to increase our net worth by 35% in 2007, we will keep the bar set high and make another attempt at increasing our net worth by 35% in 2008. With the major home improvements having been completed in 2007, we should not have any reason to deplete our savings this year and will have a good chance of reaching our goal.

When it comes to our family finances, we like to set aggressive goals for ourselves as we have found that the challenge can be very rewarding in many ways.

Here is to everyone enjoying a healthy and prosperous year in 2008!

• September 2007 Update
• August 2007 Update
• July 2007 Update
• June 2007 Update
• May 2007 Update
• April 2007 Update
• March 2007 Update
• February 2007 Update
• January 2007 Update
• 2007 Financial Goals

Non-Mortgage Debt
You may recall that our only non-mortgage debt is the 0% balance transfer offer from Chase that is currently sitting in our online savings account at HSBC. The current plan is to continue making the minimum monthly payment until a month before the teaser rate expires and then transfer the money out of HSBC to pay the final balance.

During the month of September, we reduced our non-mortgage debt by approximately 2% and that will remain fairly steady as we continue with our repayment plan.

It would have been nice to see the online savings accounts stick with the higher interest rates to maximize the earning potential on the funds that we have in savings. But even with the decline in the interest rate, we will still be earning enough to make it worth my time and effort.

Using the 0% balance transfer to our advantage has worked out well for us and earns us a decent amount of money. Granted it is not for everyone but if you have eliminated all of your consumer debt, it is something to consider.

Increase Net Worth
October brought another positive gain to our net worth, although it was less of an increase than we had last month. The increase to our net worth in October was approximately 1.4%.

We recently opened a new checking account and we have directed a portion of the funds that were intended for our eFund to build a small cushion in the checking account. With our checking account, I prefer to maintain a cushion just to allow some flexibility and have a small surplus should expenses increase in a given month.

Plans for November
The year is quickly coming to a close and the holiday season is upon us. We have already completed the majority of our Christmas shopping, although we will likely still pick up an item here and there if we see a great sale somewhere.

I am somewhat disappointed as I had been shooting to see our net worth increase more than it had in September and we fell short. For the month of November, I would like to see an increase over October to gain a little ground. With only two months left in the year, it looks like we will miss our goal of a 35% increase to our net worth but I still want to see how close we can get.

Hope you are doing well on your financial goals!

• August 2007 Update
• July 2007 Update
• June 2007 Update
• May 2007 Update
• April 2007 Update
• March 2007 Update
• February 2007 Update
• January 2007 Update
• 2007 Financial Goals

Non-Mortgage Debt
At the beginning of the year I had stated a goal to eliminate all of our non-mortgage debt, which consisted of a 0% balance transfer from American Express that was sitting in our HSBC account.

As you may remember from last month, I’ve acted on a new balance transfer offer from Chase and doubled the amount that I had borrowed from American Express.

It is a little disappointing to see that HSBC, as well as most other online savings options, lowered their rates but that was to be expected. But with a little more than a year before the funds need to be returned, I’ll still earn a nice amount of money.

Increase Net Worth
After two months in a row with a decrease to our net worth, it was important to come back to the positive side in the month of September. Our home improvements are behind us now and everything has been paid, although we need to direct funds back into our eFund.

For the month of September, our net worth increased by 3.67% and that eliminates roughly half of the decline from the previous month. The decision to take money out of savings to pay for our home improvements will make it very difficult to achieve the goal of a 35% increase in our net worth.

Plans for October
October is a relatively quiet month with a few family birthdays and our annual festivities around Halloween. It is amazing that we are already entering the final quarter of the year and the holiday season will be here before we know it. In addition we typically will begin to do a little Christmas shopping towards the end of October and early November.

Our goal for the month of October will be to see another month with an increase to our net worth and I will be shooting to exceed the 3.67% increase from September.

How are you doing with your financial goals?

What was one of his biggest mistakes?

As you might expect, one of the biggest mistakes was the asset allocation within his plan as he held a substantial percentage in company stock.

When the company stock began to decline, he was guilty of believing that the stock could not go much lower and would make a nice rebound. At that time he actually put even more money into the company stock, that is how sure he was that the company stock would return to previous highs.

Unfortunately, that day has never come and the stock price continued to go down and down. With the declining stock price this man also saw the nest-egg that he had worked so hard to build disappearing before his eyes. To make matters worse, as a result of the drastic decline in stock prices the company was struggling and was conducting round after round of layoffs and eventually his number was called.

As we talked about his experiences, I was surprised to hear him say that he thought 401k plans should offer some sort of protection against losing the money that you have invested in the plan.

In the world of investing, there are very few guarantees and everything comes with some degree of risk. Looking at this man’s situation, it would appear that he was quite concerned with risking his money yet he had almost everything invested in one of the riskiest choices within a 401k plan – company stock.

With my own 401k plan, I invest a very small percentage in my company’s stock but by no means will I let that become a substantial percentage of my portfolio. Over the years and the different companies that I have been with, this is the first time I have invested in the company stock as I am very well aware of the risks involved.

As you examine your own asset allocation or begin investing in your company’s 401k for the first time, please be sure to understand how risky it can be to invest in the company stock. Even more important than that, remember that there are no guarantees with the money you invest into your 401k plan.

• July 2007 Update
• June 2007 Update
• May 2007 Update
• April 2007 Update
• March 2007 Update
• February 2007 Update
• January 2007 Update
• 2007 Financial Goals

Non-Mortgage Debt
As we entered the year, our only non-mortgage debt was a 0% balance transfer from American Express that was sitting in our HSBC account.

The plan was to pay a set amount each month and then make the final payment before the teaser rate was set to expire. Well, I’ve taken a detour with this plan and will not be eliminating the non-mortgage debt by the end of the year.

Last month I had talked about a few new balance transfer offers that were rather appealing and I decided to act on one of them.

With an offer from Chase, I’ve transfered the remaining balance from American Express over and took an additional sum that will be added to our HSBC account. This new offer came with no balance transfer fees and the rate is good until October 2008.

There was one hurdle with this offer as Chase would not allow me to deposit funds into my checking account. To get around this issue, I had them send an amount over to one of my cards that had a $0.00 balance, essentially resulting in a large credit balance on that card. I then called them to have a check cut to me for my credit balance. It took a few extra days to go this route so I will miss a little bit of interest.

In 2007 we have now actually increased our non-mortgage debt by 4.15% since I requested a larger amount with this latest balance transfer. Since the new 0% balance transfer offer with Chase does not expire until October 2008, I will continue to make regular payments that meet the minimum required payment but will not repay the entire balance until next year.

Increase Net Worth
This month our net worth took a dive down because we decided to tap into our emergency savings to cover the cost of a few home improvements.

The reason that we decided to pay for the home improvements out of our e-Fund was because the convenience of the timing was more important to us than saving the additional funds until March of next year. Now we will direct those funds back into our savings to have the e-Fund fully replenished by March.

For the month of August, our net worth declined by 6.83% and that puts a dent into our overall progress for the year. This decline may make it difficult to reach our goal of increasing our net worth by 35% but with all of the home improvements checked off, the kids back in school and my wife back at work we should be able to save a little more aggressively.

Plans for September
With fall quickly approaching, we don’t have too many things on the schedule. September will bring my birthday and the beginning of football season. The kids will be busy with homework as well as the fall league of baseball and skateboarding lessons.

I have a feeling that the last few months of the year are going to be a blur so hopefully September will bring some time to sit back and relax before our schedule gets a little more hectic. The goal for September will be to have an increase to our net worth as the last two months have seen a decrease and we need to get back on track.

Hope everyone is doing well with their annual goals!

A common situation that befalls the members I work with goes like this:

1. A close relative passes away
2. Said relative leaves a substantial inheritance
3. A receiver of the inheritance doesn’t want to blow the inheritance, so they come see me.

Generally, they do not want to spend the money, they want to save it.

They don’t want it easily accessible, but they would like to change their mind on that in a few months or a few years, and they are not interested in uninsured investments (stocks, mutual funds, etc.)

The strategy I suggest is known as Laddering, and it’s a great way to make CDs more liquid without sacrificing interest.

How does one ‘ladder?’

Let’s say that the inheritance was $40,000. In a 12 month CD, that would earn a good amount of interest, but since we want access to a good amount in 3 months, that one-year CD would be foolish for the full $40,000. What we’re going to do is break that $40,000 into 4 $10,000 chunks, and we’re putting one in a 3 month CD, one in a 6 month CD, one in a 9 month CD, and one in the 12 month CD. This is the first four rungs of the ‘ladder.’

The interest on shorter-term CDs is less than on longer-term CDs, so when the first CD comes due, we take the $10,000 plus interest and we put it in another 12 month CD. Now our portfolio looks like this: 3-month CD paying 6 month’s interest; 6-month CD paying 9 month’s interest; 9-month CD paying 12 month’s interest; and a 12-month CD paying 12 month’s interest. We’ve now put the newest rung on our ladder.

Once the first 12-month CD comes due the ladder cycle is considered to be complete.

Variations

I’ve seen several variations to help fit some unique needs. There was a retired woman who had a lot of money from her husband, and had a monthly ladder in place where the interest would deposit into her checking account when the CD came due. The result was that she got roughly a $600 paycheck on top of her social security and pension every month, and had more money than she knew what to do with. Her grandchildren are adequately spoiled.

I also worked with a college student who had a great job (he could afford to go to school from just what he earned) but he took out student loans every semester anyways. His ladder was every 6 months (every semester) and he just put his student loan money in there to earn interest. Because of the grace period on his loans before he had to pay interest, he was able to get out of student loan debt and have an extra $1000 in his pocket on graduation.

You can be pretty creative with laddered CDs, and if you have a solid banker who you trust you can even turn a safe, federally-insured profit from them.