A common challenge that most investors will encounter is selecting the best advisor. The main reason is because most sound good. Yet, underneath it all their track record is less than desirable. In the case of retirement planning, having the wrong individual can lead to disastrous results. Over the course of time, this can make it difficult in having sufficient funds to cover the upcoming expenses down the road. To ensure that everything works smoothly in the process of planning for retirement requires asking advisors a series of questions. This will help in deciding the best advisor for handling the portfolio.

What is your philosophy on investing?

Understanding the philosophy of the advisor will assist in determining how the portfolio will reach the objectives. This means looking for signs of what tools will utilized during the process. For example, in a discussion with a potential advisor an individual learns that he has a consistent track record of 10% a year. The basic philosophy is to purchase well-known companies. These areas will provide strong dividends and growth. This is telling the investor how the advisor could be a possible match. The reason why is because they are focused on purchasing conservative companies to achieve the individual’s investment objectives.

Do you have any complaints?

Photo credit: Alex E. Proimos

Always conduct an investigation of any potential advisor. The best places to locate information about the disciplinary record of the firm / individual are: through FINRA or the state securities commission. In all cases, the advisor and the firm should provide you with their CRD number. This is given to anyone who is licensed in the securities industry. Once the regulators are contacted is when they will list all disciplinary action taken. This will help in determining if a particular firm or individual is a good match.

Does the strategy make sense?

If a specific person or firm will refuse to discuss their strategy it is a dangerous sign. The main reason is the investments could be in areas that are very risky. This is designed to increase the overall return. In most cases, these tactics are often associated with hedging. This is an approach that involves purchasing derivatives (options) to reduce the risk. The problem is that when options are used there is the possibility of increased volatility. Once this happens, is when the value of the portfolio could have increasing amounts of pressure. As a result, investors need to find someone who will explain the strategy (in a way that makes sense). Anyone, who will not do this (outside of legendary investors like Warren Buffet), will more than likely not be able to outperform the markets over the long term.

Obviously, selecting the right advisor can be challenging for most investors. The reason why is because they do not know how to do this (based on their lack of knowledge and experience). Those who are able to use the above questions will identify the right person for reaching their retirement goals.  This is the point that all investments will be focused on achieve consistent results for the portfolio.

Related posts:

1. How Do I Plan To Reach My Investing Goals For Retirement?
2. How Much Should I Save Per Paycheck To Reach My Retirement Goals?
3. Financial Advisors Are A Dime A Dozen (Or Less) – Get A Legion Of Them (FOR FREE) To Help You If You’re Unsure Of Financial Waters

By Jason Van Steenwyk

Congratulations on taking the initiative to learn more about the investment world! It’s vitally important, and no one is going to be more interested in looking out for your future than you are. Mutual funds are crucial investments for most of us – especially for those of us who aren’t covered by a traditional pension plan at work. Mutual fund selection and analysis is a huge subject. But there are five key criteria to be aware of if you’re a beginning fund hunter.

Category

Analysts divide mutual funds into categories depending on what they invest in. A fund that invests mostly in stocks would be called a stock fund, or a growth fund, because most stocks are growth investments. We buy them as much or more on the theory that their share prices will rise than on the expectation of dividend income. However, there are many stocks that pay a healthy dividend.

An income fund, on the other hand, would own securities designed to kick out a reasonably steady income stream, such as bonds. A growth and income fund would combine the two approaches. A bond fund would normally be categorized as an income fund, since bonds generally pay steady interest payments.

International funds would buy investments from outside the United States, while global funds would own investments from all over. In theory, it is good to have some representation in the growth category as well as the income category, plus at least some fund shares in the international or global category. Don’t go overboard in any one direction.

Style

Funds can be conservative or aggressive. Conservative funds are managed with a primary objective of avoiding severe losses. Aggressive funds are managed to maximize long-term gains – even at the expense of short-term volatility. Again, you want a mixture of conservative and aggressive, at least when you’re young. As you get close to retirement age, though, roll back on the aggressive investments and increase your income-oriented holdings.

Also, there are two primary approaches to buying stocks: growth and value. Different managers will have a different style. Growth-oriented managers seek to buy stocks with earnings that are rapidly growing, and will seek to own them even if the share price seems pretty high. The expectation is that the stock’s earnings will eventually catch up and then surpass the level that currently justifies the stock price. This style is typically thought of as aggressive.
A value investor, on the other hand, seeks to buy stocks that are priced cheap relative to earnings or assets. When the market realizes the true value of the stock, reasons the value investor, the share price will rise. Meanwhile, the stock will have a ‘floor’ equal at least to the value of the company’s assets if the company shut down tomorrow, paid off all its creditors, sold off all its holdings and sent the proceeds to shareholders.

Expenses

Look for a low expense ratio, relative to other funds in the category. The expense ratio is the percentage you pay the investment company to run the fund for you. The lower the expense ratio, the more of the fund’s returns you get to keep. The lower the ratio the better.  Most of the time, index funds will sport the lowest expenses. These are funds that aren’t managed by a team of analysts trying to buy stocks. Instead, the fund will buy every stock in a given market, such as the S&P 500. An S&P 500 index fund owns all the largest 500 stocks traded on the New York Stock Exchange and only those stocks. The fund gets all the performance of the index, but gives up a much lower expense ratio. In practice, this usually beats more expensive funds with active managers with portfolios trying to beat the market.

Manager Tenure

How long has the manager been on the job? Has it been at least one market cycle? If so, that gives you a chance to look up how skillful the manager has been in good times and bad, compared to others. A manager with a great track record in both up and down markets is rare… but may be worth paying a somewhat higher expense ratio for.

Load or No-load?

Loaded funds carry a sales charge, which goes to pay a commission to the broker or advisor who sold the fund to you. If you need the help picking the fund, it may be worth paying a broker – but you should get some good analysis or assistance for that money. The broker who gets your commission should provide value in some way, through advice, service, analysis, etc. Otherwise, there’s little point in paying a commission to a broker. In this case, or if you are confident in investing on your own, you can save money by buying a no-load fund over the Web.

These are just a few basic criteria. But if you understand them, you are a long way ahead of many investors, who seemingly buy funds at random. More fund criteria are coming in a future article.

Photo Credit: Images of Money

Related posts:

1. What Is A Target Date Mutual Fund And Should I Use It?
2. How many “Best Mutual Funds of 2007″ can there really be?
3. Should I Buy a Loaded Mutual Fund?

Photo by John Morgan

By Jason Van Steenwyk

In the end, it’s not about how much you earn, but about how much of it you get to keep. In most cases, this means that you want to minimize your current year tax bill. There are, however, cases where it is better to pay the tax bill now in order to avoid having to pay higher taxes in future years.

November and December are prime time for forward-thinking individuals and business owners to do some tax planning for the year. Moves you make now can pay off very quickly. Here are some of the things you can accomplish now, before the end of the year, to keep the tax man at bay.

• Do an AMT assessment. AMT stands for “alternative minimum tax.” The AMT is a supplementary set of income tax rules designed to ensure that families with significant incomes can’t use deductions and tax loopholes to avoid income tax altogether. When it was first passed in 1969, it was only intended to affect the wealthiest families. But they never indexed it to inflation. As a result, more and more middle class families are falling prey to AMT rules. If you have a lot of deductions, you own your own home, you normally have a significant state income tax liability, or you have several children, and your household income has been on the rise, or you got a bonus, you may well have an AMT liability this year.

• Contribute to an IRA. Provided you meet the income qualifications, a traditional IRA allows you to deduct up to $5,000 in contributions. Double that for married couples, and add another $1,000 each for qualifying individuals over the age of 55. Yes, the rules give you until April 15^th, 2012 to make your contribution for tax year 2011, and April 15^th, 2013 to make your contribution for 2012. But by contributing early, you give your investments that much more time to compound. You also set yourself up to make manageable monthly contributions to your IRA for 2013. Better yet, you don’t even have to itemize your deductions! Traditional IRA contributions are “above the line” adjustments to income. You can deduct the full contribution, provided you meet the income guidelines, even if you don’t itemize.

•  Pay your property tax early. These are normally deductible expenses. But if you are subject to the AMT, that deduction may be disallowed. If 2012 is likely to be an AMT year, but 2013 is not, you may be better off making the payment in 2012.

• Cancel out your capital gains taxes. If you sold property at a gain in 2012, you will probably have some capital gains tax liability. For long-term gains, this tax maxes out at 15 percent of your gains. If you held the property for less than a year, however, expect to pay taxes at your higher marginal income tax rate, which could be as high as 35 percent. However, if you have investments outside of retirement accounts that lost money since you bought them, you can sell some or all of them and cancel out some or all of your capital gains taxes – a technique known as “tax loss harvesting.” If you have excess losses, you can deduct up to $3,000 in losses against income per year, carrying any additional losses forward to future years. Beware, however, of “wash sale” rules. To get the benefit of claiming a capital loss, you cannot repurchase the same or substantially identical securities for 30 days.
• Use your Flexible Spending Account. If you have a flexible spending account at work, you may well lose that money at the end of the year. Now’s the time to schedule that Lasik surgery, or take care of that medical treatment you’ve been putting off. Otherwise, that money goes back to your employer and you lose the opportunity. Check with your HR department for your balance and to learn how the rules apply to you.
• Bunch medical deductions. Did you have substantial medical bills in 2011? You can deduct medical expenses against your income, but only to the extent they exceed 7.5 percent of your income. If you expect more medical spending in the following 2012, try to commit the funds this year, bunching your expenses into a single tax year. This will allow you to maximize your deductions, which would be substantially reduced if you spread them out between 2011 and 2012. Actually, this strategy works with all kinds of itemized deductions. Miscellaneous (non-medical) itemized deductions have to exceed a threshold of 2 percent of your income for you to begin benefitting from the deduction. Whether the applicable threshold is 7.5 percent or 2 percent of your income, you want to concentrate as much deductible spending as you can into one year. Otherwise, you’ll have to get all the way through the threshold amount all over again next year before you can begin taking deductions.
•  Give.  You can give up to $13,000 per year to any recipient you choose, without incurring any kind of tax liability (subject to a lifetime exemption of $1 million.) If you’re married, you and your spouse can give $13,000 each, for a total of $26,000 per recipient. A deliberate gifting strategy can be a great way to move money out of your taxable estate, as well as protect it from those who may target you in a lawsuit. It may also help you qualify for Medicaid in later years, provided you make the gift more than 5 years before applying for Medicaid benefits.
•  Pay down your mortgage. The interest you pay is normally deductible against income. By bumping up your payments in December, you can make a noticeable reduction in your tax bill for this year.
•  Put Off Profitable Sales. If you don’t have any capital losses to offset gains, try to put off selling property at a profit until after the end of the year. You may have some losses you can use to offset your gains next year, and you’re putting off the due date on capital gains tax liability.
•  Check Your RMDs. If you are over age 70, it’s time to pay close attention to required minimum distribution requirements. The IRS requires you to begin taking money out of your IRAs and 401(k)s beginning on April 1^st of the year following the year in which you turn 70½. Thereafter, you must take the distribution by December 31^st of each year. This will create an income tax liability for you, since distributions from these accounts are taxable. But the penalty if you miss the deadline is severe: If you blow your RMD, the IRS will assess a penalty of 50 percent of the amount you were supposed to have taken.

Remember, tax planning is complicated – even for professionals. Very few people who don’t do taxes for a living can efficiently keep track of all the tax issues, traps, pitfalls and planning opportunities that may arise. Except for the very simplest of cases, it almost always makes sense to invest in the services of a tax professional.

Related posts:

1. Hanks Holiday Handout winners! and a few year end financial tips…
2. Do I Have To Pay Taxes For Stuff I Sell On Ebay?
3. What Do You Say About Dumping Our National Income Tax And Switching To A National Sales Tax?

Photo by: artct45If you’re between 20-40 years old, don’t do anything. Stay where you’re at, markets fluxuate. That is their nature and that should have been something you learned before you got it. If this is your first time hearing about it, don’t worry and more importantly, don’t run. Let the traders panic. That is their job. They’re pounding down 15 cups a coffee per day and enjoy the stress. Let them deal with it. You’re paying a person that the traders are relaying information to in your mutual funds. You’re 3rd tier on that – sit back and enjoy the cheap stocks you’re getting into.If you haven’t sold, you haven’t lost. Stick to your guns and don’t get scared out of the market, recessions happen. But they always come back. As long as you still have a job, you shouldn’t be worrying. If you HAVE lost your job, you should probably not be reading this blog, try this one.

Related posts:

1. Monthly Net Worth Update March 2008 (+2.42%)
2. Weekly Roundup #14 (January 26, 2008)
3. How Do I Plan To Reach My Investing Goals For Retirement?

Photo by: emdot

Only 0 days 5 hours 2 minutes left until Hanks Holiday Handout drawing!

To make my goal of having my net worth be $1,000,000USD by 2020 I need to have a plan laid out. Yes it will change through the years, My wife and I will get raises; we won’t get the return we’re shooting for with investments in some of the years, but as a base goal if we take our current principal of $75,000 and continue to invest $21,500 per year for the next 13 and that will put us just over the 1MIL mark. That first MIL is the hardest, Pinyo lays it out here.

Where do I find $21,500 per year to invest? We’re currently contributing 10% of each our salaries for about $16,000 per year to our 401k plans, then add in $4,000 each for our ROTH IRA accounts and we’re well over the limit there. We’re planning on bumps in the road, so that’s why I’m giving the $21,500 number. There are a lot of calculations that need to taken into account, but that is the same with any investment plan. At 10% return with those calculations we’re looking at just under 840k, and at 12% that puts us over the 1MIL mark.

We could have a year where we can’t pay contributions to either our 401k or ROTH, but on the same note, there could be years where we’d contribute MORE to those accounts, For instance, we’re planning on trying to bump the 401k contributions up to 15% in 2008 and that would be $24,000 in itself; add in the ROTH IRA contributions and we’re looking at $32,000 invested per year and in 13 years, that will be worth 1.33MIL.

Numbers are numbers – sticking to the path of just getting money in is the key. In 13 years I’ll still be nowhere near retirement, but the first million is always the hardest to make, after that, it is quite ridiculous how fast it grows. In 35 years on this same $21,500 per year at 10% return we’re looking at 8.5MIL. Which is dreaming, and a lot can happen in 35 years, but there is no time like the present to start planning on it!

Time, as usual, is the key piece of this financial pie; variables are always tossed in to make it interesting. As long as we’re putting in the $21,500 we’ll be on a good pace. I’m sure there will be other investment opportunities, more job promotions, more raises, maybe more kids, but staying on this basic path is the key to our specific financial goal. What’s your path?

Related posts:

1. How Much Should I Save Per Paycheck To Reach My Retirement Goals?
2. Shifting Your Investing Mindset During A Recession
3. Weekly Roundup #12 (January 12, 2008)

So after writing about how my Edward Jones ROTH IRA was invested in “B shares” of NFPBX and no response back from my Edward Jones rep questioning him if I could get out without paying the 5% deferred load or reallocate the funds elsewhere, I figured it was time to do something about it, and I have. As of yesterday at 9am, I turned off the faucet to funding that account. We’ll see if he calls me back now.

Either way I wasn’t very happy with the service he was giving me. He’s a nice guy, but it just seems to me like he is selling me a product instead of investing my money, very similar to my Universal Life Insurance policy I was sold on 5 years ago (of which I have also turned off the faucet, more on that later). But an advisor should be someone that is there to ADVISE you of where your money should go to help for YOUR retirement, not theirs. I am confident enough now to select my own funds and choose my own investing path, but it is nice to have someone to ping questions off if I DO have questions and for second opinions.

The personal finance blog network is one resource, but I like to have the option to ask a question to a certified financial planner if I can as well. It’s advantageous to have as many resources in your investing bullpen to help along the way with any decisions. So I will keep the Edward Jones account open for nothing more than to utilize the resource he’s given me; I won’t close the account because he’s not the one holding the bag for the 5% deferred “ladder approach” to investing, it is the actual fund, NFPBX. The ladder approach the Edward Jones rep refers to is that the 5% deferred load on the fund will decrease each year I stay in it, up until the 5th year, at which time my account will be converted into “A” shares and the load will be gone.

His explanation of the reasoning behind this is that “it will keep me honest in my investing, and force me to invest for my future”. Well, duh, I know I need to stay in for the long haul, but I don’t need to be investing in HIS future, nor the futures of the fund managers. I think they’ll do just fine without me. I also don’t mind keeping the cash in with NFPBX because it IS a decent fund; repeat, DECENT fund. I hate the deferred load, and the expense ratio of 1.48% isn’t in my sub 1.0% range, but it HAS returned 16% this year, and I can’t balk at that. But I think I can find better ways to manage the $.

In comes Charles Schwab – Honestly, it is the infancy stage, and I’m sure there may be bumps along the way. But they’ve been nothing but cordial in my journey thus far. Yea, I know, they want me for my money. If I find they’re not doing me a service, I have no qualms leaving them either; after all, I can open as many ROTH IRAs as I’d like if I really feel like it. But I am very happy so far. The one sticker so far I’m dealing with then is the fact that I’m NOT transferring my current ROTH or cashing it out (for $400 via the 5% deferred load is what I’d have to pay to get out now) so I don’t have any capital or $ to be sending to a ROTH right now, so I’m starting with the payments I PREVIOUSLY had going to Edward Jones of $100.

The payments will now be headed towards my new ROTH with Charles Schwab under one of their funds, SWEGX. SWEGX has been doing alright this year and it’s basically a mutual fund of mutual funds because it’s holdings are smaller funds, also held by Schwab. Morningstar gives it a 5 star rating. It has a 0.80% expense ratio that I like, and is a no-load fund. Finally it’s got a 12.4% rate of return so far this year, which isn’t too bad either. We’ll see how it does over the next few months, but as a starter fund and only have 100$ to start investing with, it is going to do the trick nicely I think.

Welcome to the family SWEGX!

Related posts:

1. My Edward Jones ROTH IRA Account Is Invested Nn B Shares – Is That Good?
2. A conversation with a Charles Schwab associate about funding a ROTH IRA and their options for it. (Part 3)
3. Should I Buy a Loaded Mutual Fund?

I recently had the pleasure to interview Will Sugg, a fellow personal finance blogger that works towards his fortune with Self Directed IRAs. I am no professional in the arena, so he was very willing to answer the few questions I had about them – I hope they can demystify the Self Directed IRA questions YOU may have.

1. What is an Self Directed IRA?

A Self Directed IRA is an IRA that allows you to buy or invest in things other than Mutual Funds, Stocks and Bonds. Self Directed also means that the custodian is merely a holding bank account for your retirement funds and you have to “Direct” them to buy or invest in the Asset you want to hold in your retirement account. The “Direction” for the custodian that I use is a several page form that you fill out with all the details of the investment, then I fax or email it to the custodian. It tells them what to do, what to expect, and where to send a check. I think of a Self Directed IRA as “The Do It Yourselfers” retirement account/plan. If you have specific knowledge bout some area that makes money then you can profit from that in your IRA. There is very little that you cannot invest in with IRA funds. See a list below.

2. Who can use a Self Directed IRA?

Anyone can open a Self Directed IRA as long as you have earned income or your spouse does. Basically if you can open an IRA with a bank you can open Self Directed IRA. Business owners can benefit significantly once they realize the potential of this type of IRA or 401K.

3. What is the difference between a SD IRA, a Traditional IRA, and a ROTH IRA?

There is really only 2 choices in IRAs; Roth or Traditional. Either can be Self Directed.

4. Where can I sign up for one?

You open a Self Directed IRA with a custodian that understands what they are. I’ve listed several on my blog here.

5. Why should I use a SD IRA over a ROTH or a Traditional IRA?

You can have either as Self Directed. If you are opening a new account and you’re not yet retired I would say that you should open a Roth account since the growth it creates is tax free on harvest. I have both a Traditional and Roth Self Directed IRA but almost all of my investment activity is done in the ROTH. The reason you want to Self Direct your IRA is so that you can use your specific knowledge to help your retirement account grow instead of relying on others opinions and management skills.

6. How much can I invest in one?

If you already have a Roth or Traditional IRA established at another custodian you can roll it over to a Self Directed custodian. If your opening a new account with a Self Directed Custodian. Right now the IRA says you can contribute 4,000.00 per year. That figure can change as dictated by the IRA and congress. Of course for the Roth type you are also constrained by the Earned Income limits set by the IRS.

7. Can I roll a ROTH or Traditional IRA over to an SDIRA? How about my 401k?

Sure you can roll over either type of IRA into a Self Directed Custodian. It’s very simple and painless.

8. How long have you been investing in SD IRAs?

I’ve been using my Self Directed IRA for investing for the past 4 years.

9. Where did you learn about SD IRAs?

I learned about using an IRA to buy Real Estate from talking with family, friends, and some business contacts that were using theirs to do the same thing. Then I did a lot of research on the internet to determine which custodian I like better and opened an account. I first rolled just a small amount into it so I could do one transaction. Once I got the hang of it and understood how this could significantly help my retirement plan I rolled the rest of the money I could into my account.

10. What CAN’T I invest in with an SD IRA?

There are such things as Prohibited Investments and you need to learn what they are. Here is a short list:
- Artworks
- Rugs
- Antiques
- Metals
- Gems
- Stamps
- Coins
- Alcoholic beverages
- Certain other tangible personal property

But most folks wouldn’t want to invest in these any way. Here is the IRS language about Prohibited Investments in case you want to see everything. You also can’t profit from the IRA meaning you can’t loan yourself money from it or buy a Rental Property and then go live in it, that is considered Self Dealing.

11. I want to invest in real-estate through my SD IRA. How do I go about telling my brokerage account that I’m buying a house with my SD IRA?

This example is just to illustrate of the process there is Due Diligence you need to perform to ensure that the investment is prudent for you. It also assumes that you have the entire purchase price in cash. You first open a Self Directed IRA with a Custodian that understands what that really means.
Not all IRA’s are self Directed so that you can buy Real Estate in them. Check out the short list from above, all of those custodians are real Self Directed Custodians. After you have the account open and funded, you find the investment. In this case some Real Estate property and get it under contract. Have your agent if there is one open Escrow. Then it’s merely ending the Custodian the “Direction of investment” forms and them sending a check for the purchase price. Once Escrow closes the transaction and records the deed your IRA is now owner of the property. Your SDIRA can borrow money to fund the purchase, however the down payment required is usually 30% or more. That however is another topic for another day…

12. When can I withdraw from my SD IRA?

The same times as you can with any other IRA or 401K plan (59 1/2).

13. Is my SD IRA funded by pre-tax or post tax dollars? Do I pay a tax
when taking it out?

Depends if your IRA account is Roth or Traditional.

14. Can I have an SD IRA for my spouse if they are unemployed (contribute
twice as much)?

If you can do it with a Roth or Traditional IRA you can do it in a Self Directed IRA.

15. Is there a phase-out schedule like in the ROTH IRA that pertains to an SD IRA?

Yes, these apply to your Roth IRA whether or not it’s Self Directed.

14. What is your SD IRA invested in?

My Self Directed IRA is 100% invested in Promissory Notes secured by either Real Estate or in some cases by Mobile Homes. Some of the Notes I bought at a discount and others I lent the entire amount of the Note to the Borrower. I’m still in the cash generating mode of investment so I am investing to get cash flow going. Once I build up a nice monthly cash flow I may move to another type of asset. Certainly in the long term goals I have I want to own Real Estate.

Will clearly has a vast knowledge about the subject and I’m happy he was willing to take an interview for it – I suggest you all check out his website regularly at http://willsugg.com/irablog/ to keep up to date on the latest happenings in the SDIRA arena!

Related posts:

1. A conversation with a Charles Schwab associate about funding a ROTH IRA and their options for it. (Part 3)
2. How Do I Plan To Reach My Investing Goals For Retirement?
3. Weekly Roundup #14 (January 26, 2008)

Why should I choose a ROTH IRA? Why should I choose a Traditional IRA? What’s the difference? I’ve been hit with both questions – The main advantage of a traditional IRA versus a Roth IRA is the tax benefits immediately realized. To receive the maximum tax benefits of a traditional IRA the taxpayer must have either of the following qualifications:

The taxpayer can be a member of a company retirement program (401k) but must have an adjusted gross income (AGI) of less than $52,000 (single) or $83,000 (married). If the traditional IRA account holder is not a member of a company sponsored retirement program there are no AGI limits.

If qualified, the yearly contributions to a traditional IRA are fully tax-deductible. A maximum contribution ($4000) would result in a tax savings of $1000 if paying taxes in the 25% bracket (AGI of $30,651 to $74,200). The maximum contribution will rise to $5000 in 2008.

The Roth IRA had an advantage when it comes time for disbursement of the account. With a Roth IRA, disbursements are tax free but these disbursements must be qualified. Contribution funds can be withdrawn at any time, penalty free, but don’t use that to fund anything else! A ROTH should be for retirement! Don’t use it for anything else!

Earnings can be withdrawn if the account has been in existence for five years and the account holder has reached the age of 59½, or has died, or has become disabled, or to pay for the construction of a first home.

Since Roth IRA disbursements are tax free a traditional IRA will only have a higher return than a Roth IRA if the tax savings are reinvested because traditional IRA disbursements are treated as regular income. There are guidelines to qualifying for a Roth IRA:

The holder must have earned income income under $99,000 for full contributions ($4000 under 50, $5000 over 50) income under $114,000 for a partial contribution. These numbers have “phase out” stages though, but can be off-set and drop your M.A.G.I. by investing more in your 401k contributions (but only investigate this if you’re making combined 150k-160k).

Benefits of owning an IRA account are undeniable. Which type or IRA to own can be a difficult choice, unless you make over $114,000 a year then there is only one option. Traditional IRAs do benefit the taxpayer in the short term, but are penalized when it comes time to withdraw. IRAs can be converted from traditional to Roth but not vice-versa. You can own both types of IRA accounts also, but the contribution limits are less (currently $4000).

Related posts:

1. A conversation with a Charles Schwab associate about funding a ROTH IRA and their options for it. (Part 3)
2. How Many ROTH IRA Accounts Can I Have Open? Can I Have Multiple?
3. I’m Ditching My Edward Jones Deferred-Loaded, “B” Shares ROTH IRA

So I decided to try out Flexo’s monthly expense template, and it isn’t looking too promising for me this month.  I’m doling out more than I am taking in this month.  Off the top, that sounds like it is bad, but really it isn’t TOO bad.  I figured my cash allowance was high this past month, so I had some room to spare since I have $6,000 in cash.  I’ll pay off the $4,300 on the credit card so as not to get a ridiculous fee charged for interest on it, but then I don’t get billed for anything for another 2 weeks.  So I’m alright there.

My expenses can certainly get a trimming though.  This is eye-opening to say the least though, as I KNOW that I’ve been right at breaking even for the past few months, especially after the trip to Australia that pretty much drained the rest of what I had from the sale of my house last year.  That’s ok though because my wife took home less because we bumped her 401k allocations to 10% matching mine, and I’m still contributing to my ROTH IRA at $200/month.  This pretty much smashed the urge to get the new car though – It’s certainly helpful to see everything out on paper to further the need to back away.  That’s maybe the allure piece grabbing me.

I’m probably going to start a new car fund though shortly because my 2001 burb isn’t going to cut it going forward.  I took it in last week to check out a “clunk” it was making and they quoted me at almost $1,900; 95% of that money was for upkeep, 60k lube and maintenance, a few leaky pipes, but ultimately I got out of it and fixed the clunking noise for $108.

So here is the first installment of my monthly expenses (click to expand):

Obviously I can cut down the Retail Store Purchases and Dining Out, and if everything goes as planned, I’m in the market for a raise in a few weeks; I’ll be certain to keep the post up on that one.  It’s pretty ridiculous what the ol’ government takes out each month, but it’s nice to actually see it out on [electronic] paper.  Daycare is a killer, but we get that back when we can write it off at the end of the year, but that takes a good monthly chunk, and we’ve got a GOOD rate!

My wife wants to have another in the next year and good grief that Daycare budget is only going to rise in time; add another kid and it is starting to get ridiculous…

Laying this information out has really been a beneficial exercise and I can get this info from my credit card each month.  I’m going to start doing this monthly from now on to get a better grasp on it so I can realize what we’re spending/saving.  I highly recommend doing this for anyone curious as to what they’re spending $ on.  Do you have a budget worksheet you can work off?

My wife has about $80 in Starbucks that I didn’t account for on here that I’m sure we can trim also!  Anyway, goal for next year is to get these numbers and stick to a budget more strictly going forward.  We’re making money off our investments, but we’re not getting the best bang for our buck because we’re leaking money in other areas when we could be putting it to better use.

Related posts:

1. Monthly Net Worth Update March 2008 (+2.42%)
2. Monthly net worth update February 10, 2008 (+35.68%)
3. Net worth update December 1, 2007 (+5.16%)

This question is another tricky one because it depends on who is asking it. If you’re 18 and asking this question, well, I’d say you’re starting off right by asking, and if you are putting away 10% – even if you’re only making $20,000 per year, you’re saving $2,000/year and in 50 years you’d be sitting on about $2,500,000 at 10% (yes, that is 2 MILLION off someone that makes $20,000 per year). You’d have put in $100,000 and interest would have accounted for the other $2,400,000 of it. Ridiculous how compoud interest works, eh?

If you bump it to 15%, you’d be investing $150,000 and your egg would be almost 66% larger at $3,800,000! Obviously this is taking some big assumptions, being that you’re going to continue making $20,000 for the next 50 years (which I hope you’d get a raise in there at some point), the return will be 10% (this can go up and down, but it’s a safe figure to estimate by, as another tangent, if your return is 15%, and investing $2,000 per year, you’re looking at almost $16,000,000), and it isn’t taking into account inflation (usually around 3% which would peg that 16MIL down to about 4.5MIL). But that’s all you really CAN do with 50 years to play with, however, that’s the big thing, get in early.

If you’re 40 years old and wondering where to start, you’re going to certainly need some catch up against the 18 year old putting in 10%; to match with the 18 year old investing $2000/year, you’re going to need to put in $17,000 per year to hit that 2.5 million plateau. Attainable yes, but preferred, probably not. Even at 40 years old and investing $2000/year you’re still going to be looking at $300,000 by 68, which isn’t bad, and is much better than $0.

A good rule of thumb I’ve read is 10% minimum, and 15-25% preferred of your salary should go to retirement. But that, of course is an estimate and should vary depending on your age – I’d say a better breakdown would be:

18-30 years old – 10-15% of your salary
30-40 years old – 12-18% of your salary
40-50 years old – 18-25% of your salary
50+ – 25% or more of your salary

Again, they’re estimates based on a lot of generalization, but the big key is start stuffing something, even if it’s not much. It’s amazing what time can do to the almighty $.

Related posts:

1. How Do I Plan To Reach My Investing Goals For Retirement?
2. Baby Boomer Without A Retirement Portfolio
3. Keep Your Investments Separate For Different Goals