Wealthy Turtle

Roth IRAs vs Traditional IRAs – Which is Best for You?

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Many people wonder which IRA is best suited for them. Should you stick with the Traditional IRA or go ahead with Roth IRA? In certain cases, it’s easy to decide. For example, the Roth IRA becomes your obvious choice if you are ineligible for a Traditional IRA due to income levels or an employer-provided retirement plan. But how do you decide when you do have a choice?

Well, both IRA options offer significant tax advantages, but one might be more suitable than the other based on your income level, age, and needs. They differ primarily in the way your contributions are taxed. Let’s analyze both traditional and ROTH IRAs before you decide which one is right for you.

Traditional IRA

The contributions you make to a Traditional IRA are tax-deductible in that year. For example, if you contribute $5,000 to a Traditional IRA, you can deduct $5,000 from your current taxable income. However, the withdrawals you make after retirement will be taxed as part of your ordinary income. This is especially beneficial for people who are in higher tax brackets at present, but expect to be in a lower tax bracket after retirement.

A potential downside of the Traditional IRA is that it requires you to start taking minimum distributions at age 70 ½, even if you don’t need the money, and there are stiff penalties if you don’t withdraw at least the required minimum distribution every year. Additionally, if you need to withdraw money before the age of 59 ½, there will be an early withdrawal penalty along with the taxes.

If you have a high income and expect your income to drop in retirement, a Traditional IRA may be the right choice in saving money for retirement. Why? well it’s simple.. You’re putting money in at a high tax bracket and pulling money out at a lower tax bracket.  Also a Traditional IRA doesn’t have any income restrictions, and your contributions can be invested in almost anything.

Roth IRA

A Roth IRA is completely opposite of Traditional IRA in the way taxes are levied. With a Roth IRA, the contributions you make will not be tax-deductible in the same year, i.e., you have to pay taxes on the contributions you make in a particular year. However, when you start withdrawing money after retirement, the distributions will be tax free. This is advantageous especially for people who anticipate being in higher tax bracket after retirement.

To qualify for Roth IRA, your modified adjusted gross income (MAGI) should be less than $122,000 if you are single. The limit for married tax filers is $179,000.

It is not mandatory with a Roth IRA to start taking the required distributions upon reaching age 70 ½. If you already have a Traditional IRA, Pension Plan or employer-sponsored retirement plan such as a 401(k), you can still contribute to Roth IRA within certain income levels.

Besides these benefits, the Roth IRA has very simple rules for withdrawals. It allows you to withdraw the contributions (not gains) before 59 ½ without any penalty or taxes. You’re allowed to withdraw earnings federally tax-free after the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, death, disability, qualified first-time home purchase. In case you withdraw for any other purpose, you have to pay a 10 percent early withdrawal fee.

Have a Combination of Both if Possible

No kidding. You don’t know what the tax rate would be after two or three decades, so it is safe to multiply your sources of retirement savings. If you diversify your tax liabilities, you will be better prepared for any major tax rate changes by the time you retire. Try to reach the maximum on both Traditional as well as Roth IRA contributions.

Diversification provides another benefit. This way you can prevent falling into higher tax bracket upon retirement. If the income from a Traditional IRA and other sources push you into higher tax bracket, you have the option to lower the Traditional IRA withdrawal rate and take out from the Roth IRA, which is tax-free in retirement.

What type of IRA do you have? Why did you pick that one? If you don’t have an IRA what are you doing to save for retirement?

12 Ways to Make Extra Money for Debt Repayment or Emergency Savings

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The holiday season can be tough on your wallet. If you are looking to increase your emergency savings or attack debt with a vengeance, there are some easy ways to find the extra cash.

We recently used several of these tactics to add $700 to our emergency fund in two weeks after a series of events battered our emergency fund. We are still raising more money and hope to have our emergency fund up to $3,000 in 4 weeks.

Try these tactics to find extra money:

  1. Turn in your change. If you keep loose change in a jar, turn it all in. Make sure to go to a bank rather than Coinstar, which keeps a 10% commission (unless you choose to get your money as a gift card).
  2. Cash out reward points. If you get rewards from your credit card or use a site like Swagbucks, cash out the money you have earned.
  3. Sell your outgrown kids’ clothes. If you have name brand clothes for your kids like Gymboree, Gap, Hanna Andersson and Janie & Jack, you can make good money selling on eBay. I buy my kids Gymboree clothes on sale with a coupon and then sell them on eBay when they are outgrown. In one week, I made $175 selling them. If you don’t buy those kinds of clothes, you can sell them on Craigslist or at a second hand retailer like Once Upon a Child.
  4. Sell your kids’ outgrown toys. Christmas is right around the corner, so now is the perfect time to list your kids’ toys on Craigslist and eBay.
  5. Sell your stuff around the house. Look in your basement and closets. What can you get rid of? I made $100 on Craigslist by selling 2 window guards and an old breast pump from my nursing days. We still have to list a brand new suitcase and some of my husband’s tools. Price the item just a little bit higher than you want to get and be willing to negotiate.
  6. Save reimbursements. Do you get reimbursements? If so, save those or apply them to your debt. We get reimbursements from FSA for health and childcare. We were also reimbursed from my husband’s employer for travel expenses he had to pay to attend a conference.
  7. Save raises. Instead of absorbing a raise into your budget, have the difference automatically withdrawn and put into savings. You won’t miss the money, and you will be growing your savings.
  8. Save your savings. Do you shop with coupons and a store loyalty card? Keep what you save and use it to pay down debt. If you saved $12 using coupons, put that money in the bank or on your credit card.
  9. Have a no spending challenge. Have one day, week or month where you decided not to spend. For a no spend day, you won’t spend anything. For a no spend week or month, you set an amount you will spend like no more than $20 for the week or $300 for the month. That amount will be used for entertainment, eating out, buying gas and grocery shopping.
  10. Have a pantry challenge. You probably have odds and ends in your cupboard like the fruit medley you never ate or the jar of cranberry sauce. Determine a period of time, usually 2 to 4 weeks, when you will only buy fresh fruits and vegetables at the grocery store. Everything else you eat will be food that you already have at home.
  11. Give up restaurants for a month. Many Americans eat out 2 to 3 times a week and spend $10 to $20 for each person each time. If you are single and don’t go out to eat for a month, you could save anywhere from $80 to $240 or more!
  12. Find a side job. If you haven’t started a side hustle, now is the time to get one. If you are a teacher, maybe you could start tutoring. Someone with writing skill could start freelance writing. You could clean people’s houses. The ideas are really endless. My mom makes a few hundred each holiday season selling holiday cakes and desserts. People buy them and serve them at their holiday parties.

When you are short on money, you can feel desperate.  Take back control by using some of these methods to bulk up your emergency fund or pay down debt.

What is your favorite way to earn extra cash?

Seven Characteristics of The Millionaire Next Door

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If you want to stop living paycheck to paycheck and start building real wealth, you should look at these 7 characteristics that most millionaires have and you probably do not.

In their classic 1996 book The Millionaire Next Door, Thomas Stanley and William Danko share their findings about the factors that determine who becomes wealthy in America.   You might be surprised when you read their description of the average millionaire as many of the common perceptions we have of the wealthy are dead wrong.

According to their research, there are seven characteristics that are common to millionaires.  I’ll list each of them below along with a few thoughts of my own.

1. They live well below their means.  That’s not really surprising is it?  Common sense should tell you that if you want to build wealth you need to spend less than you earn.  If you spend every dollar you earn (or more than you earn thanks to credit cards) then you’ll have nothing left over to save or invest for your future.

2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.  That’s right…millionaires work hard to be successful.  They spend their time building businesses or planning and monitoring their investments.  They don’t just cross their fingers and hope for the best.  If you want to be wealthy you have to actually take steps to make it happen.  Remember that the next time you spend countless hours playing Call of Duty with your friends or stalking some poor girl on Facebook.

3. They believe that financial independence is more important than displaying high social status.  They’d rather invest $1,000 in dividend stocks than use it to buy a new flat screen TV because they don’t worry about how others perceive them and they don’t waste time trying to keep up with the Joneses.  They’re less concerned with looking wealthy than they are with actually being wealthy.

4. Their parents did not provide economic outpatient care.  In other words, their parents didn’t support them forever.  They were taught how to fish for themselves rather than being handed a package of fresh fish every day.  That taught them how to take care of themselves financially instead of relying on handouts.

5. Their adult children are economically self-sufficient.  Just as the wealthy didn’t receive handouts from their own parents, they are less likely to provide financial handouts to their children.  They understand that handouts will only increase their children’s dependence on them while at the same time depleting their own financial cushion.

6. They are proficient in targeting market opportunities.   Even in turbulent economic times, there are always opportunities for those who have the insight to see them.  Certainly having wealth opens up many doors.  But grit and determination can open many doors too.  Remember, self-made millionaires didn’t just get lucky.  They probably worked their tails to the bone to create the opportunity that led to their success.  We make our own luck.

7. They chose the right occupation.  There is something to be said for following your dreams and pursuing a career that you really love and find rewarding.  But you have to be realistic and and accept the tradeoffs that come with having your dream job.  If you borrow $75,000 in student loans to get a Theater degree, don’t complain when you don’t earn the same salary as a doctor or lawyer.

8 Items You Shouldn’t Buy Until After Christmas

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Many people are excited by the Black Friday and Cyber Monday deals, but there are actually many things that you can buy at a steal after Christmas.  Stock up in late December and early January, and use many of the items throughout the year or save them for the Christmas season next year.

Why are so many items on sale?  Retailers want to clear out their holiday inventory and their heavy winter clothes as they prepare for the spring selling season.  In addition, January 1st is a heavily marketed period for those companies that help people get in shape and lose weight.

Here are some steals you can expect to find after Christmas:

1.  Anything with a holiday theme or pattern.  If you don’t have quite enough holiday decorations, buy them at 50% or more off after Christmas for next year.  This also applies to big purchases like artificial Christmas trees.  Now is also the time to buy Christmas cards for next year as well as wrapping paper.

You can pick up items with a holiday theme and use them all year long at a steal.  I frequently make muffins, and muffin liners usually cost $1.50 for a pack.  I stocked up on red and green ones after Christmas for .20 a pack, and we used them all year.  Another idea is to buy discounted candy like red wrapped Hershey’s Kisses and save them to give to kids and friends on Valentine’s Day.

2.  Winter jackets.  Retailers are looking to shed their winter inventory for the spring inventory, and they deeply discount winter jackets, snow pants, and boots as well as gloves and hats.  I always buy my kids’ winter clothes in January for the next year so I never have to pay full price.

3.  Gym memberships.  If you want to get in shape, your local gym will offer a steep discount on memberships to lure you in for a year or more.  Make sure you are committed, though; many people join a gym for a year but only actually use the membership for a few months.

4.  Exercise equipment.  Many people buy exercise equipment for Christmas presents and New Year’s resolutions.  Look to buy these in late January at  a deep discount.  Or, you can wait until March and buy exercise equipment from those selling on Craigslist once they realize they aren’t actually going to use the item and it is just taking up space!

5.  Jewelry.  Jewelry is often on sale in January.  If you are planning to give a gift of jewelry for Mother’s Day or Valentine’s Day, buy it during the January sales to save a bundle.

6.  Televisions.  Wait to buy until late January, and you could get a deal on a new television set thanks to Super Bowl sales.

7.  Calendars.  By mid-January, retailers will want the 2013 calendars gone.  If you don’t mind having fewer choices, you will save as much as 75% off by waiting a few more weeks to get your calendar.

8.  Toys.  Retailers stock up on toys for the holiday season and then want to down size their toy section after the holidays.  Many toys go on sale for 50% off or more.  This could be a good time to stock up on toys for upcoming birthdays or next year’s Christmas presents.

We are conditioned to think of the sales around big events like Black Friday and Cyber Monday, but there are many sales going on after Christmas that may save you even more money than the widely advertised sales.

What are your favorite items to buy after Christmas?

3 Ways to Help Your Child Pay for College If You Started Saving Late

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In a recent article, we talked about ways to find money to save for college, specifically through lifestyle changes such as living in a smaller house and driving a used car for 10 years or more.  However, life happens.  Maybe you didn’t have any extra money to save, or you thought you wanted your children to pay for college entirely themselves, but now that you have seen the sticker price, you are not so sure.

If you are coming to the college savings game late, there are still ways you can help your child pay for college.

1.  Teach your children about college expenses before their junior year.  Kids begin looking at colleges their junior year of high school.  Before that happens, sit down with your child and speak honestly about what you are able to afford.  Make sure your child understands the repercussions of paying back excessive student loans.  With this knowledge, perhaps your child will decide to look at a cheaper college option such as a local community college or a local university or a state university to save on costs.

2.  Let your child take out student loans and pay them off if you are able.  Regardless of what school your child attends, she may have to still take out student loans.  Go ahead and let her.  Then, when she graduates, if you are financially able, you can help your child pay off the loans.  Maybe you will pay the first 5 years of the loan while your child obtains a secure job and a good salary.  Maybe you will pay off one loan entirely and leave another for your child.  The choice is yours, but this option helps you wait a few more years to determine if you are financially able to help your child.

3.  Raid your Roth IRA.  If you choose this option, proceed with extreme caution as you don’t want to help your child at the expense of your own retirement.  However, Roth IRA rules allow you to pull out the principal (the money you have deposited over the years, but not the interest you have earned) to pay for your child’s qualifying educational expenses without paying any penalties for withdrawing the money.

If you use this option, there are a few things to keep in mind–you can only put $5,000 a year (to be bumped up to $5,500 in 2013) in your Roth every year if you are under 50.  You can’t add the money back in after you withdraw it, so you are minimizing the amount of tax free money you will have available in retirement.

Also, check with the college financial aid office to see how paying for your child’s education for one year will impact next year’s financial aid award.  In some cases, you will be expected to pay more in subsequent years.

College tuition is not getting any cheaper, and as parents, we should do what we can to minimize the next generation’s college loan burden.  That may mean helping our kids make smarter decisions about which colleges to attend and how much they can reasonably pay back in student loans as well as helping them pay for college if we are able.

If you started late saving for your child’s college education, what strategies did you use to help them?

Tips for First Time Home Buyers

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Buying a home can be a daunting process.  I’ve been through it twice now so I figured it would be good to share some of the things I learned along the way to help you first time home buyers keep your cool while waiting for the transaction to be completed.

Let’s begin with a few things you should do before you even start to look at homes and then take you right through the process.

Check Your Credit Score

It’s shocking how many people have no idea what their credit score is and then wonder why they can’t qualify for a loan.   Your three digit credit score is based on several factors including your length of credit history, payment history, and debt to credit ratio.  Lenders use this number to determine how likely you are to repay the money you borrow.  A low score means you either won’t qualify for a loan at all or you’ll be stuck paying a higher interest rate.

Figure Out How Much You Can Afford

There is no sense looking at or bidding on homes you can’t afford, so it is wise to use one of the many free mortgage calculators to figure out how much you can afford (Bankrate has an easy to use one here).  Don’t forget to include property taxes and homeowner’s insurance in your calculations.

You’ll want to leave yourself some wiggle room here.  There will inevitably be things you’ll need to do to your new house and property taxes only go one way…up.  Don’t spend your last dime on the house itself or you may quickly find yourself in financial trouble.

Get Pre-Approved for a Mortgage

Having a pre-approval letter from your lender will show that you’re serious and ready to make a deal.  Many realtors and home-owners won’t even be bothered with buyers who aren’t pre-approved because there is no guarantee that they will actually be able to get a loan.

Shop around with a few different lenders and compare their interest rates and closing costs.  Many lenders offer special programs called first time buyer mortgages which will allow you to put less money down, though there may be increased fees for that.  A fee-based mortgage broker may be able to find you the best loan possible. Take the time to educate yourself on the nomenclature so you’re fully understanding the terms and context of the documentation you’re reviewing.

Find Yourself a Realtor and an Attorney

While not required, you will be glad to have these knowledgeable professionals on your side.  They’re likely been through dozens or hundreds of real estate transactions and they will help guide you and answer your questions along the way. Ask friends or relatives who have bought a home for referrals.

If you’re lucky you’ll find an attorney you can use for years to come.  The attorney I used to buy my house also set us up with wills and handled the estate when my father-in-law passed away.

Be Prepared to Compromise

We looked at close to 50 houses before we found the one we are living in now.  It was tough trying to find everything we wanted for a price we could afford.  In the end we got pretty close.  Our house has almost everything we wanted, and there is the potential to add the few things that were missing.

It’s likely you too will have to compromise and decide which features are “must haves” and which are just “would be nice”.  One bit of advice…almost anything can be done to a house, but the one thing you can’t change is location.  Keep that in mind if your dream home is located on a busy street or next to a bowling alley.

Be Patient, But Persistent

Once you have made your offer and the contract is signed, many of the details will be out of your hands.  There will be title searches, appraisals, surveys, and a million other things for your attorney and realtor to coordinate.  You don’t want to lose too much sleep over all this and you should definitely be patient and let everyone do their job.  At the same time, you have the right to speak up and demand action if they seem to be forgetting about you.  In the end it will be your home and no one will care about it as much as you.

Get the Home Inspected

Some home-buyers skip this step thinking they can save themselves a few hundred bucks but they almost always regret it.  Even if the home appears to be flawless there is no substitute for having a trained professional inspect the home.  If serious defects or hazards are discovered during the inspection you will be able to back out of the deal rather than getting stuck with a giant headache.

Shop Around for Movers

Ask your friends for referrals and get written quotes from at least a few moving companies before making your choice.  We got several quotes and the range from highest to lowest was over $1,000!  In the end we chose the second cheapest company because a friend had used them and we were very happy with our choice.

If you’re a homeowner, do you have any tips for first time buyers?  If you’re buying your first home, what are your biggest concerns?

Dividend Investing in Plain English

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One of the best ways to build wealth is to invest in stocks that pay dividends. 

Dividend stocks not only give you the opportunity to make money through capital appreciation, they also provide a steady source of income as long as you own the stock.

But what exactly is dividend investing and how do you get started?  This article aims to answer those questions in plain English that anyone can understand even if you don’t know the first thing about investing.

First, let’s answer the most common question people have:

What is a Dividend?

When a company earns profits they can use those funds in different ways.  They can use profits to pay down debt, put them toward future projects to grow the company even more, or return them to shareholders in the form of a dividend.

In other words, a dividend is an individual investor’s share of the company’s profits.

Of course not all companies pay dividends.  Generally speaking, companies that are young and still rapidly growing don’t pay dividends to shareholders because they need to keep funneling all of their profits back into the company to continue growing.  This is why most of the exciting new startups and tech stocks that you hear about on the news don’t offer dividend payments.

Older companies that are more mature and stable are more likely to pay shareholder dividends.  They still want to grow their business, but they have proven over time they can sustain a level of success and share their profits with investors.

Apple is one example of a company that went many years without paying dividends because they were always busy coming up with the next craze to take the world by storm.  But these days they can’t make the iPad and iPhone fast enough and they literally have more money than they know what to do with, which is why they are paying some of their cash reserves back to shareholders through dividends and stock buybacks.Advantages of Dividend Investing

Stocks that pay dividends have several advantages over non-dividend paying stocks…

Passive Income.  Once you purchase the shares, dividend income is almost entirely passive.  Just sit back and watch the dividends come in each quarter.  You can take them as cash to supplement your income or reinvest them to purchase more shares which will in turn generate their own dividends.

Stable Companies.  As we noted above, most companies that pay dividends have already proven they can stand the test of time.  Of course, there is no guarantee that a dividend company won’t run into trouble down the road.  A good way to guard yourself from troubled companies is to obtain a financial report on the company you are looking to invest in.

Profit without Selling Shares.  With non-dividend stocks, any increase in value is only paper profits unless you actually sell the shares.  But with dividend stocks you can take a portion of those profits as dividends and still keep your ownership stake intact.

My Dividend Investing Strategy

I’m a big fan of stocks that pay dividends.  I enjoy taking advantage of the power of compounding by reinvesting dividends to purchase more shares.

I have an account with Sharebuilder that I call my Dividend Machine.  I contribute to it every month and buy a handful of large company stocks that pay dividends.  I mostly focus on the Dividend Aristocrats, which is a group of companies that have increased their dividend payout each year for at least 25 years, but there are many other great dividend paying stocks that are not part of that group.  You can also purchase dividend ETFs which focus on purchasing dividend paying stocks.

Although the reinvested dividends start off small, they grow quickly if you continue making contributions.  Imagine rolling a small snow ball down a hill and watching it grow into a giant avalanche as it gathers more and more snow on its way down the hill.  Given enough time a small dividend investing account could turn into an unstoppable financial juggernaut.

What do you think about dividend investing?  Do prefer stocks that pay dividends or those that don’t?