By Jason Topp4 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited June 27, 2010.
Everyone should be saving into a Roth IRA for retirement!
Have you heard those words before?
I’ve seen them strewn about the web here ‘n there on various blogs or in comments on other personal finance sites.
Is that true? – Should everyone be saving into a Roth IRA?
Not exactly.
Although Roth IRA’s have become a very popular retirement account over the last 10 years, and have contributed greatly to the whole “Tax Diversification” conversation, there are still some scenarios where they don’t make sense.
Let’s take a look at three reasons why you should NOT use a Roth IRA for retirement savings.
You Make Too Much Money
We all wish we had this problem right? Uncle Sam doesn’t want you to put money away that will be completely tax free if you are a high-income earner. They will actually phase you out of your contributions beginning at a certain income.
What exactly is a high-income earner?
Well, here is the breakdown for Roth retirement savings:
If you are a single filer and you earn between $105,000 and $120,000 you start getting phased out. Anything above $120,000 you cannot contribute to a Roth IRA.
If you are married filing jointly and make between $167,000 and $177,000 you get phased out. Anything above $177,000 you cannot contribute to a Roth!
So, here’s how this would apply – let’s say you are married and you’re knocking down$165,000 and you think your income is going up – do you really want to open a Roth IRA for possibly one year and then get phased out? Probably not, but at the very least you want to double check your figures and do what’s best for you.
So, if you make too much money – a Roth IRA may not make sense for you – or may not even be allowed.
Your Tax Bracket Will Be Lower in Retirement
Tax rates are at an all time low! What are the odds they’ll be going up soon? I’d say good to very good!
That being said, we generally don’t know for sure what tax rates will be when we retire.
Most folks do assume their brackets will be lower – and for good reason. If you’re making decent money through your peak earning years and expect your income to decrease drastically in retirement then there is a good chance you’ll have a lower bracket.
The reason you may not want to contribute to a Roth IRA in this case is because Roth IRAs use after-tax money for contributions. That means you’ve already paid the tax on it (in a higher bracket mind you) and will be pulling it out in a lower tax bracket.
The tax savings would not be legitimized if you are in a higher bracket now and a lower one later.
The difficult part is that we don’t know for sure what our brackets will be and also most folks want to maintain standard of living and might need the same amount of income in retirement, which means you need to carefully consider some numbers and figure out what the best route would be for you.
You Are Already Maxing Out a Traditional IRA for Retirement Savings
Let’s say that for whatever reason (you don’t have a 401k through work or you are using a Non-deductible IRA and then converting to a Roth) you are contributing to a Traditional IRA and are thinking about starting a Roth IRA – you need to be aware of the IRA contributions limits.
In other words, Uncle Sam only allows you to contribute a certain amount to all IRA’s no matter what kind.
So, if you are under 50 years of age, you can contribute up to $5,000 per year into an IRA. If you are over 50 – you can contribute up to $6,000.
If you are contributing the full $5,000 to a Traditional IRA, you cannot contribute another $5,000 to a Roth. It’s only $5,000 total!
So, where a Roth IRA would not make sense is if you really need the Traditional IRA to help lower your taxable income now rather than caring so much about tax-free down the road.
In that case you may want to max fund your Traditional IRA to reap tax benefits now.
If you are not max funding your Traditional IRA, you could split the difference (i.e. $2,500 to a Traditional and $2,500 to a Roth), but only if it makes sense for you from a tax standpoint after running some numbers.
At what age did you start thinking about investing? Is it when you started college? Maybe its after you started your career. What about high school? Maybe, but not likely, if not, you should, learn how to make money with 100 dollars, and be glad you did! Last year I was asked to be a guest speaker of a class of high school students at Carbondale Community High School. Before I came, I had the teacher take a poll of the students on the top five reasons why they think they should invest. The overachievers that they were, they gave me their top six reasons. Here are their top six reasons, and their reasoning behind them. I think you’ll crack a smile on a few.
1. Turn a Profit, or in Their Words, “Make Some Money.
Can’t argue with that, can you? Sure, having an income to sustain you through retirement is the driving force to why most people invest, but the only way to achieve that is making money, right? The students were just a little more direct with their logic. I can always appreciate that.
2. Retirement.
I asked the kids how they thought they were going to have an income when retirement came. One student responded that she expected to get money from her job or her employer when she retired. That led into discussion in talking about pensions, and how pensions have greatly reduced over the years. We then talked about 401k’s and how they have evolved. I made it clear that it was on them to choose their own investments and take charge of their financial destiny.
I then was able to bring a copy of my most recent Social Security statement, and showed them how much I would expect to receive if I retired at the age of 62, 67, and 70. I think it was a real eye opener for many, seeing how little that I would expect to receive by waiting 32 plus years, to start drawing my first Social Security check. One students comment of, “That’s it!” was priceless.
3. Bragging Rights.
This was by far my most favorite of their reasons. The logic behind the bragging rights was that the students felt that if they had investments that they could be able to boast to their family or friends about certain investments that they owned. While I never encourage this as a reason to invest, I get some humor out of this.
4. Tax Breaks.
All the students were in agreement that they don’t want to pay more tax that they have to. They all felt that investing would somehow decrease the tax they had to pay. We talked a bit about investing into dividend paying investments and also the rules on the Roth IRA. Not a better tax break than the tax free growth of the Roth.
5. Cash Flow/Real Estate.
One discussion that we had with the students was that I told them that investing does not always mean investing into the stock market. There are other ways to invest. You can invest into a business idea, you can invest into themselves, and they can also invest into real estate. I actually have many clients and acquaintances that have been very successful with real estate and have made, have been very successful without actually ever investing in the stock market.
6. For Children’s College.
Many of the students knew that college was around the corner and that was obviously on their minds. Knowing that student loans were in the foreseeable future they hoped that their kids would have just as good if not better opportunity that they will.
All in all, I think the students had some good reasoning on the why you should invest. They all admitted that they still have a lot to learn. If you have a child that is high school to junior high age, ask them why they think they should invest. I’d be curious to hear some more reasons and the support behind it.
Thanks to Mrs. Wilson’s class for participating! You all were great.
Because life insurance is such a vital purchase, you want to ensure that you’re making the best decision for you and your family. There are several different types of life insurance that you have to choose from, but the most popular option is term life insurance. Buying life insurance doesn’t have to be a long and painful process, we can make it quick and easy.
If you’re shopping for term life insurance, the two most important factors to your policy are how much coverage you need and how long your term should be. In this article, we’ll go in depth on how long you should buy term life insurance coverage.
While most consumers focus all their time on the amount of coverage, the length of the policy is also an incredibly important factor most consumers don’t put much thought into.
Since term life insurance doesn’t last forever, the premiums are much, much cheaper. Term policies are the best option if you’re looking for affordable life insurance coverage for your loved ones. However, how long should you have term life insurance for?
Good question! It’s depends on your situation. Probably not the answer you’re looking for, but we’ll guide you through the thought process below.
The Thought Process for My Term Life Insurance Policy
Lets start with my thought process when I purchased a term life insurance policy.
Last year, my wife and I purchased 20-year term policies when we had our first child. The logic was that we wouldn’t need life insurance once the kids were grown, out of college and could fend for themselves if something happened to us.
We both already had 30 year term insurance for income protection which would get us near retirement. This new 20 year term policy was “earmarked” to take care of the kids and make sure either of us wouldn’t have to work and can give our child any opportunity they wanted.
The point of our example is that determining how long of a term to sign up for can be just as difficult as determining how much coverage you need. We’ll add and possibly replace coverage as our needs change.
That’s the thing. Your life insurance program should be reviewed every few years or when big changes happen in your life. So when you purchase that cheap term life insurance policy, remember that it will probably be different in the future.
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2 Tips For Determining How Long To Buy Term Life Insurance
So here are the 2 biggest things to consider when deciding how long your term life insurance coverage should last:
1. Consider the Purpose of the Coverage
My #1 tip is to consider WHY you’re buying this coverage to determine how long you should buy your life insurance.
Like our example above, the purpose of the coverage should be your main deciding factor. If you’re buying to protect your children, then buy coverage until they can earn their own living.
If you’re considering coverage for your family to protect your income, you’ll want to buy coverage until you hit retirement age, or at least near retirement age. That doesn’t mean that once you’ve reached retirement that you’ll no longer need life insurance. You will still have to evaluate your specific situation and determine your life insurance needs from there.
If you’ve buying coverage to cover your mortgage, choose a term length that equals the amount of time left on your note. This is one of the most important factors to consider. If you were to pass away, your family would be left paying for the mortgage, which can put serious financial strain on a grieving family. Having the proper length of life insurance will prevent this and give them the money they need to pay off those expenses.
The purpose of coverage should always lead to your desired term length.
2. Consider the Cost of Coverage
Once you determine how long you need the coverage, make sure you’re comfortable with the premiums. The longer the term length, the more expensive your premiums will be. The best way to determine cost is by utilizing instant life insurance quotes on this site. You can ballpark the cost of term life insurance at different term lengths. In most cases, term life insurance is much more affordable than most applicants think. It’s a great way to get your family the life insurance protection they deserve without breaking your bank.
Also, as attractive as no medical exam life insurance can be, make sure you can afford it. Bypassing the medical exam can make life insurance more expensive. If you can afford it, it’s a quick and easy way to purchase coverage and we highly recommend it. If you can’t, opt for the medical exam.
ANY health issues you have can increase your premiums and will force you re-think the term length you’re considering. If this is the case, opt for a shorter term length and re-visit purchasing a longer term length in the future when you’re health issues are under control.
If you do have poor health, or any serious health complications, don’t automatically assume that you don’t qualify for a term life insurance plan, or that the premiums will be too expensive. There are dozens of insurance companies that specialize in insuring high-risk patients with health problems. Our agents can help connect you with the perfect insurance company that is going to view your application favorably, which can be the difference in being denied for coverage, or finding an affordable policy.
Bottom Line
Working through the purpose of coverage, factoring in your term life insurance rates and the best life insurance companies in order to meet your needs, should make you confident in your decision of how long you should buy your term life insurance policy.
Remember that your life insurance needs will be changing throughout the years. It’s not uncommon to own multiple policies to meet your needs as they change. Everyone goes through major life changes that impact their life insurance needs.
You should always review your policies every few years, or when you have major events to see if your policy is still giving you the protection you need. Since the earlier you buy coverage, the less expensive it is – you usually keep your policies when you buy more coverage down the road.
If you’d like to discuss how long you should buy term life insurance, please don’t hesitate to contact us. We can answer any questions about you have about term life insurance and ensure that you and your loved ones are getting the best possible plan.
Our agents at Life Insurance by Jeff are independent agents, which means that we don’t represent one single company. Instead, we represent dozens of highly rated companies from across the Untied States.
Working with one of our agents during the life insurance process can help you save both time and money on your policy. We can give you quotes from best-rated policies from dozens of companies, no calling and answering the same questions.
You never know what’s going to happen to you tomorrow. You can’t predict the future, but you can always protect your loved ones against the worst. Don’t wait any longer to purchase a life insurance policy that will provide for your family, regardless of what happens to you.
Thanks to thriving metropolises like Louisville and Lexington, Kentucky continues to grow, but the city is made up of charming small towns, too. The best banks in Kentucky offer a variety of amenities, while also putting the community first.
From college towns like Bowling Green to Bourbon Trail towns like Bardstown, you’ll find plenty of banks, making it easy to find the bank that’s right for you.
12 Best Banks in Kentucky
Kentucky has a wide range of banks, from large, corporate banks to small community banks. This list of the best banks in Kentucky takes a look at the various types to help you find the best option for your banking needs.
1. Fifth Third Bank
Headquartered in nearby Cincinnati, Fifth Third Bank has branches in Kentucky, Ohio, Florida, Georgia, Illinois, Indiana, Michigan, North Carolina, South Carolina, Tennessee, and West Virginia.
The best deal comes with the Fifth Third Bank Momentum Checking account, which is a free checking account with no minimum balance requirements or opening deposit. You’ll get fee-free cash access at Fifth Third Bank ATMs, as well as at more than 40,000 partner ATMs nationwide.
Fees:
No monthly service fee
$37 overdraft fee
Balance requirements:
No opening deposit
No minimum daily balance required
ATMs:
Fee-free at more than 40,000 Fifth Third Bank and partner ATMs nationwide
$3 charge per transaction at out-of-network ATMs
Interest on balance:
0.01% APY on savings
0.01% APY on money market accounts
Up to 4.55% APY on CDs
Additional perks:
2. Chime
If you don’t need a local Kentucky bank branch, an online banking option like Chime may be the best deal. You’ll get all the mobile banking features you’d find with a national bank without the fees. The checking account comes with no monthly maintenance fees or balance requirements.
As long as you have at least $200 directly deposited into your account each month, you’ll qualify for up to $200 in overdraft protection. The automatic savings feature rounds up debit card purchases and puts the money into your savings account, which earns 2.00% APY.
Fees:
No monthly service fee
No overdraft fee (with qualifying direct deposit)
Balance requirements:
No minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at more than 60,000 ATMs nationwide
$2.50 for each out-of-network ATM transaction
Interest on balance:
2.00% APY on savings accounts
Additional perks:
SpotMe covers up to $200 in overdrafts
Each purchase on your Visa debit card can be rounded up for automatic savings
3. First State Bank
First State Bank is a Kentucky bank with branches throughout Breckinridge County. If you prefer a community bank, First State is one of the best banks in Kentucky, whether you’re looking for personal or business checking accounts. But where this local bank falls short is in its ATM presence.
Branches and ATMs don’t cross the Kentucky line, although you’ll find ATMs throughout the state. They do make up for it, though, by having a low out-of-network usage fee. You’ll pay only $.75 per transaction on the First State side. Keep in mind, though, that this is in addition to any fees charged by third-party ATM owners, which First State doesn’t refund.
Fees:
No monthly service fee
$20 overdraft fee
Balance requirements:
$25 minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at First State Bank ATMs (limited to Breckinridge County)
$0.75 charge per transaction at out-of-network ATMs
Interest on balance:
Rates aren’t disclosed
Additional perks:
Business checking accounts with personalized support
Heavy branch presence for Breckinridge County-area residents
4. Chase
If you like the amenities of a national bank, Chase has multiple locations throughout Kentucky. You’ll get fee-free access to more than 16,000 Chase ATMs nationwide, as well as solid mobile banking options. Chase is currently offering a $200 bonus for new Total Checking accounts as long as you maintain a $1,500 balance or have at least $500 in direct deposits each month. If you’re looking for wealth management services, Chase offers that through its parent company, JPMorgan.
Fees:
$12 monthly service fee (waived with qualifications)
$34 overdraft fee
Balance requirements:
No minimum opening deposit
$1,500 minimum balance required to waive service charge (or $500 in direct deposits)
ATMs:
Fee-free at more than 16,000 Chase ATMs nationwide
$3 charge per transaction at out-of-network ATMs
Interest on balance:
0.01% APY on savings accounts
Up to 4.00% APY on CDs
Additional perks:
Account options for children and college students
Overdraft Assist lets you remedy overdrafts before fees kick in
5. GO2bank
Another online banking option is GO2bank, which offers a free checking account and a variety of mobile banking services. But the best feature of GO2bank is its 4.50% APY savings account, which is above what many competitors offer. You can also withdraw cash at more than 55,000 AllPoint locations and deposit cash at nearly 90,000 retail locations nationwide.
Fees:
No monthly service fee
$15 overdraft fee
Balance requirements:
No minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at more than 55,000 AllPoint ATMs nationwide
$3 for each out-of-network ATM transaction
Interest on balance:
4.50% APY on savings accounts
Additional perks:
Deposit cash at nearly 90,000 retail partners nationwide
Up to $200 in overdraft coverage
6. Republic Bank & Trust Company
Headquartered in Louisville, Republic Bank & Trust Company is a local account with a variety of checking accounts. Republic Bank has an entry-level account, Simple Access, that has no overdraft fees, but you will have to either have one monthly direct deposit, one debit card transaction, or one online bill pay transaction monthly. Republic Bank has higher-than-average interest rates on CDs and savings accounts, as well as competitive rates on personal loans.
Fees:
$4.95 monthly service fee (minimum activity required)
No overdraft fee
Balance requirements:
$10 minimum opening deposit
No minimum balance
ATMs:
Fee-free at more than 90,000 locations nationwide
Interest on balance:
0.35% APY on savings accounts
Up to 4.15% APY on CDs
Additional perks:
Specialized loans like aircraft financing
Award-winning customer service
7. Whitaker Bank
Another local bank with plenty of physical branches is Whitaker Bank, a community bank with 34 locations across Kentucky. Whitaker has multiple checking accounts, but the least expensive is Whitaker FREE Checking, which has no fees or minimum balance requirements.
Like many local banks in Kentucky, though, the availability of ATMs could be a problem if you travel. Whitaker charges no fees for its own ATMs or out-of-network ATMs, but you will have to pay third-party fees.
Fees:
No monthly service fee
$34 overdraft fee
Balance requirements:
$100 minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at Whitaker Bank locations across Kentucky
No fees for out-of-network ATM transactions
Interest on balance:
.01% APY on savings accounts
Up to .05% APY on money markets
Up to .50% APY on CDs
Additional perks:
Multiple ways to bank, including by text
Free fraud alerts
8. American Bank & Trust
Southern Kentucky is a bustling area of Kentucky, thanks to Western Kentucky University. If you live in the Bowling Green area, American Bank & Trust is one of the best banks in the area.
American Bank & Trust offers a free checking account with no minimum balance required and overdraft fees of only $5 per occurrence. In addition to fee-free access to American Bank & Trust ATMs, the bank also refunds up to $16 in third-party ATM fees.
Fees:
No monthly service fee
$5 overdraft fee
Balance requirements:
$50 minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at AMBank ATMs, as well as hundreds of ATMs nationwide
Up to $16 in third-party ATM fees refunded monthly
Interest on balance:
.50% APY on savings accounts
Up to 2.75% APY on money markets
Up to 4.50% APY on CDs
Additional perks:
Competitive rates on personal loans
Bank My Change feature helps you set money aside
9. South Central Bank
With branches across Kentucky, South Central Bank is one of the best banks in Kentucky for friendly service and a variety of banking services. South Central offers multiple checking accounts, including several with no monthly maintenance fee.
With some checking account options, you’ll need to sign up for e-statements and have at least 15 monthly debit card transactions for the $6 fee to be waived. South Central also offers wealth management services, including investing and retirement planning.
Fees:
No monthly service fee
$30 overdraft fee
Balance requirements:
$100 minimum opening deposit
No minimum daily balance required
ATMs:
Fee-free at South Central Bank ATMs in Kentucky and Tennessee
Interest on balance:
Up to 4.50% APY on CDs
Additional perks:
$25 for each new account holder you refer
Small business checking and savings account options
10. Independence Bank
Headquartered in Owensboro, Independence Bank makes the list of best banks in Kentucky due to its competitive rates on CDs and variety of free checking accounts. There are perk-packed checking account options for active-duty military and veterans, as well as branches across the state.
You can also interact with live tellers through select ATMs, which Independence Bank labels “ITMs,” or interactive teller machines.
Fees:
No monthly service fee
$34 overdraft fee
Balance requirements:
$50 minimum opening deposit (waived with direct deposit)
No minimum daily balance required
ATMs:
Fee-free at more than 55,000 AllPoint locations nationwide
Interest on balance:
Up to .01% APY on savings accounts
Up to 4.80% APY on CDs
Additional perks:
Interactive ATMs offer enhanced services, including live personal assistance
Active-duty military and veteran account options
11. Community Trust Bank
Although Community Trust Bank is spread throughout Kentucky, it’s actually one of the many regional banks, with branches and ATMs in Kentucky, Tennessee, and West Virginia. You’ll find multiple checking accounts, including an option with no monthly maintenance fee. If you travel outside the CTB service area, though, you’ll be on the hook for ATM fees.
Fees:
No monthly service fee
Balance requirements:
$100 minimum opening deposit
ATMs:
Fee-free at Community Trust Bank ATMs in Kentucky, Tennessee, and West Virginia
$2.50 per transaction at out-of-network ATMs
Interest on balance:
Interest rates not disclosed
Additional perks:
Prepaid cards available
Competitive rates on personal loans
12. Hometown Bank
Corbin, Kentucky residents looking for a small Kentucky bank should consider Hometown Bank, a community bank with locations in Corbin, London, Barbourville, and Williamsburg. Hometown has multiple checking and savings account options, including a free option with no monthly maintenance fees or balance requirements.
Fee-free ATM use is limited to the few ATMs within its service area, though, so if you frequently travel, this might not be the best Kentucky bank for you.
Fees:
No monthly service fee
$34.50 overdraft fee
Balance requirements:
$50 minimum opening deposit
No minimum daily balance
ATMs:
Fee-free at Hometown Bank ATMs
Interest on balance:
Interest rates not disclosed
Additional perks:
Round Up Savings moves funds from debit card purchases to savings account
Children’s accounts available
With so many banks in Kentucky, there’s a little something for everyone. Whether you prefer national or regional banks or you like the feel of a small community bank, it’s important to find one that has the features that work best for you.
How to Choose the Best Bank in Kentucky
If you’re in the market for a new bank account, it’s essential to first identify the features that are most important to you. Here are a few things to consider as you choose your banking provider.
Online Banking Offerings
Even if you prefer a bank you can visit in person, online banking is worth considering. Chances are, you’ll occasionally want to check your balance online.
The best checking accounts offer mobile baking features like remote deposit capture and funds transfers. Mobile apps have become essential for most financial institutions, so make sure you check out a preview of a bank’s app before signing up.
Checking Account Fees and Requirements
Even small fees can add up over the course of a month. If you can find a fee-free checking account, it could save money.
Some of the best banks in Kentucky offer free bill pay and no monthly fees. If you need paper checks, make sure you add that to your criteria for the best checking account, as well.
Locations
Both local and national banks often excel in providing brick-and-mortar banks that offer that in-person customer service you prefer. But it’s important to make sure the locations are convenient for you.
If you prioritize local branches, make sure you check ATM availability. It’s great to have free ATM withdrawals near your house. However, when you’re traveling, if you need cash and can’t access it, you may end up paying more in fees than if you’d had a checking account with no fees.
A few weeks ago, I wrote about how I refinanced my mortgage for the second time in a year. The second refinance wasn’t actually part of my master plan, but I ended up having to refinance in order to remove my private mortgage insurance. And although refinancing our home again proved to be a huge pain, we are now saving $135 per month by no longer paying private mortgage insurance premiums.
Thankfully, we managed to secure a no-cost refinance that only cost us in time and effort. It’s a huge relief that the process is finally over, and I am fairly hopeful that this is the last time we will ever have to refinance.
Refinancing Has Its Perks
Luckily, I am no stranger to the benefits of refinancing. Not only did we refinance our primary residence, but we also refinanced our two rental homes within the past 18 months. We did so in order to take advantage of record low interest rates and to shorten the terms of their loans.
Now that we have refinanced our rental properties, they will be paid off much faster. In fact, our two rental properties are due to be paid off in about 13 years. Once they are completely paid off, we will then have another (somewhat) passive income stream and will be that much closer to our lifetime dream of early retirement.
Since I have refinanced properties so many times, I decided to write about some of the reasons that people choose to refinance. Like me, you may find that refinancing could save tens of thousands of dollars in interest and years of mortgage debt repayment. Unfortunately, it does take some effort to get the process started. However, the time and effort spent could easily be worth it depending on your situation. Here are some reasons that you may want to consider refinancing your home loan.
5 Reasons You May Want to Refinance
Refinance to shorten the term of your loan. If you have a 30-year mortgage, now may be a great time to consider refinancing. With record low interest rates, you may find that a 15-year mortgage is not much more expensive than the 30-year loan payment you have been paying.
Start by entering your information into a mortgage calculator to see what your new payment might be. If your new estimated payment is feasible, consider contacting a mortgage professional. (When we first refinanced our home from a 30-year mortgage at 5 percent to a 15-year mortgage at 3.25 percent, our payment only increased by about $200. Since the increase fit easily into our budget, the decision was a no-brainer.)
Refinance to lower your interest rate. As I mentioned before, interest rates are near a record low. And as I write this, 30-year mortgage rates are hovering above 3 percent and 15-year loans can be secured for an even lower rate. If your home is now financed at a higher interest rate, it may be a great time for you to consider refinancing. You could literally save tens of thousands of dollars just by taking the time to fill out the necessary paperwork and gather the needed documents.
Refinance to lower your payment. Refinancing your mortgage at a lower interest rate could mean drastically reducing your payment and saving tens of thousands of dollars in interest. Lowering your mortgage payment could also free up hundreds of dollars per month that could be saved or invested. Although refinancing to lower your payment could increase the term of your loan, it could make sense in your particular situation.
Refinance from an adjustable-rate mortgage to a fixed-rate loan. If you currently have an adjustable-rate mortgage, now may be the perfect time to refinance into a fixed-rate loan. Interest rates are low now, but they may not stay this low forever. Locking into a low, fixed rate can protect you from rising interest rates in coming years. Additionally, a fixed payment is easier to plan for and budget.
Refinance to cash out home equity. It’s a tempting proposition to cash out your home equity by refinancing your home. It could even be a great financial move in some circumstances. For instance, it may make sense to cash out some of your home equity in order to buy an investment property or start a business. It mostly depends on what you are trying to achieve and if you are someone who can manage your debts responsibly.
Can Refinancing Help You Meet Your Goals?
Before refinancing, consider what your goals really are. Do you want to lower your monthly mortgage payment? Do you want to pay off your mortgage and get out of debt faster? Only you can answer these questions.
It is also important to take all closing costs and fees into consideration. Depending on which new loan you choose, you may have to pay thousands of dollars in fees for your new mortgage. It may take several years to recoup the costs of refinancing, and it is important to identify your breakeven point. If you plan on moving in the near future, it may not make sense to refinance your home loan at all.
Do You Even Qualify For a Refinance?
Due to government-backed programs, you may be able to refinance your home even if you owe more than your home is worth. The Home Affordable Refinance Program, known as HARP, loosens requirements for traditional refinancing. According to MakingHomeAffordable.gov, your loan must meet several requirements in order to qualify:
The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
The current loan-to-value (LTV) ratio must be greater than 80%.
The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.
Consider Refinancing Decisions Carefully
There are many things to consider before refinancing your mortgage. Most importantly, you should weigh the pros and cons of your particular situation and act according to your own best interest. With some thorough research and planning, refinancing your mortgage could turn out to be the best thing for your family and for your pocketbook. Have a look at the table below for the best mortgage rates.
Have you considered refinancing your mortgage? If so, why did you decide to refinance? If not, why haven’t you?
Financial success can be due to making good decisions or avoiding big mistakes. In many cases, the biggest mistakes happen after good decisions, because the stakes have become higher.
As an example, let’s consider the dilemma of Motley Fool reader Jim, who emailed us this question: “Did I make a substantial error when taking money out of my IRA?”
To help answer that question, Jim sent along some details:
He’s retired.
His IRA was worth $325,000.
He couldn’t get a mortgage.
He used $150,000 of his IRA to buy a house.
He receives $24,000 annually from Social Security.
Now, that’s not all the information we’d need to determine whether he treated his IRA with TLC. But from what he told us, I’m going to make an initial diagnosis: He made a few mistakes.
As a cautionary tale for all us retiree wannabes, let’s take a look at some important lessons from Jim.
Lesson #1: Crunch your numbers before you retire
The good thing that Jim did was save for retirement. In fact, he had a bigger nest egg than most retirees, according to the Employee Benefit Research Institute’s 2012 Retirement Confidence Survey. Only 15 percent of the participating retirees reported having more than $250,000 saved up.
Unfortunately, being significantly above average still may not be good enough, especially since it’s my opinion — based on studies and anecdotal evidence — that too many people retire too early. (NPR’s series about Americans working longer mentioned a woman in her 90s who had to go back to work.) Having more than most retirees may be like being one of the best players on the practice squad.
Determining whether you have enough to retire can be a complicated analysis, perhaps best done by paying a fee-only financial planner who charges by the hour or by the project — such as many of the folks in the Garrett Planning Network — to help with the ‘rithmetic. However, for the purposes of this article, we’ll use the 4 percent withdrawal rate rule: a rule of thumb that says retirees should withdraw no more than 4 percent of their portfolio in the first year of retirement, and then adjust that amount every subsequent year for inflation. (There’s plenty of debate about whether 4 percent is actually best number, but it’s good enough for this discussion.) So, 4 percent of Jim’s $325,000 IRA is $13,000. Add it to Social Security, and he has income of $37,000.
But wait! He no longer has $325,000. That’s because he didn’t know about Lesson #2, which is…
Lesson #2: Get a mortgage before you retire
Ideally, you kill your mortgage (after all, “mort” is “death” in Latin, and the “gage” part means “pledge”) before you quit your job. However, if you’re in the position of needing a mortgage in your 60s, you’ll be more likely to get one while you’re still working because you’re still earning a paycheck and likely have a higher income. Also, it’s against IRS rules to use an IRA as collateral for a loan.
Lesson #3: Avoid large traditional IRA distributions
Unfortunately for Jim, he didn’t get a mortgage, so he made a $150,000 withdrawal from his IRA. Assuming this is a traditional tax-deferred IRA, that withdrawal was taxed as ordinary income — likely vaulting him from the 15 percent tax bracket to the 28 percent tax bracket. Thus, to have $150,000 to spend on a house, he likely would have withdrawn something closer to $180,000 to cover both the price tag and tax tag.
All still may not be lost
Assuming Jim has $145,000 left in his IRA (i.e., he withdrew $180,000 from the $325,000 he had), applying the 4 percent rule of thumb to that amount (resulting in $5,800), and adding that to his Social Security ($24,000) gives Jim an estimated annual income of approximately $29,800. According to the Department of Labor’s 2010 Consumer Expenditure Survey, the average household led by someone age 65 or older has annual expenditures of $36,802. Jim might be OK if he keeps his retirement modest; he doesn’t have a mortgage, so he just needs to worry about maintenance as well as food, utilities, transportation, taxes (which will be low for him going forward), and health care (not so low, and growing). Also, if he needs extra funds, he can get a reverse mortgage, which could add another few thousand dollars of annual income, depending on his age. However, this doesn’t leave much room for unexpected big-ticket home repairs or health repairs.
Even though he’s retired, it’s not too late for Jim to crunch his numbers to determine whether he can be reasonably sure that his portfolio will last the rest of his life. If it looks like that isn’t likely, then he has to change one of the key variables – income (i.e., go back to work), expenses (lower them further), or life (shorten it — the least-attractive option). Even working for a few more years, even part-time, can have a powerful impact on your retirement security. And it’s better to do it now rather than wait until your 90s.
Some people buy things because they think it will make them happier. They may buy a new pair of shoes to feel better about themselves or a new car to impress someone.
Well, I want to tell you something: Buying things won’t make you a happier person. Instead, you should focus on what makes YOU happy.
However, that doesn’t stop some people from spending much more than they have, especially because it’s easy to think that buying things will make them a happier person.
Considering that 68% of people live paycheck to paycheck, 26% have no savings whatsoever, the median amount saved for retirement is less than $60,000, and the average household has $7,283 in credit card debt- I’m going to assume that the average person is feeling more stress than happiness due to the things that they buy.
Sure, you may get a little bit of excitement as you purchase that new pair of shoes or new car (occasionally), but for the most part, you won’t still have that same feeling years later.
You probably won’t even be happy with that purchase just a month later!
Usually, you’ll regret it or feel some other negative feeling, and in today’s post we’ll talk about why that spending won’t make you happy.
Now, I’m not saying that all spending is bad. Spending is fine, as long as it’s budgeted for, you can afford it, and it actually makes you happy! In this blog post, I’m referring to the opposite type of spending- the type where you’re trying to impress someone, emotional spending, and so on.
Related:
Buying things won’t make you happy for many reasons. Continue reading below to learn more.
Your stuff doesn’t define who you are.
Having more stuff doesn’t make you happier and your stuff doesn’t define who you are.
You’re not that pair of pants…
You’re not your car…
You should only purchase things that you want and/or need, and not if you are trying to pretend to be someone else. You should only own something if you truly want it. Who cares about what everyone else has!
Your emotions can lead to spending disasters.
Some people spend money and buy things because they believe that it will make them happy. This is known as emotional spending.
According to NerdWallet, the average U.S. household (who has debt) has an average credit card debt of $15,611, and I’m sure some of that is due to emotional spending.
Emotional spending occurs for many different reasons. You may have had a bad day at work, a fight with your loved one, and so on. You might even be spending because you are stressed out about the amount of spending you have done.
However, emotional spending usually just leads to more problems and most often, never cures anything.
To end your emotional spending habit, I recommend:
Figuring out how much debt you have. You’ll most likely be shocked, and hopefully this will persuade you to change your spending habits and the way you deal with stress.
Understanding why you spend when you’re stressed. In order to stop stress spending, you need to really think about why you have this problem. Without understanding your problem, you may continue to fall into the same cycle over and over again.
Thinking about your financial goals, so that you can stay motivated.
Finding different ways to deal with stress.
Sticking to a budget.
Buying things can prevent you from reaching your goal.
You may be preventing yourself from reaching a financial goal by purchasing more and more. This can lead to additional stress, sadness, a feeling of defeat, and more.
The next time you are going to purchase something that is just a “want,” you may want to think about whether or not it will hold you back from your goal.
More stuff means more to maintain.
With every item you add to your life, there will be more and more that you’ll have to spend extra time and money to maintain. Things may get broken, lost, stolen, dirty, etc. They may need to be repaired or even replaced.
Who wants all of that stress?
That purchase may cost you more in the long run.
To build on the previous point, the initial cost of purchasing an item may not be the only cost. You may also need to pay to store the item, organize it, interest charges, and so on.
This can lead to more stress, more time spent on the item, and so on.
There’s always something else to buy.
I know people who are always buying the latest and greatest items. Every year they will buy the newest iPhone, they’ll upgrade their laptop, and more. Most of these people are in debt and live a paycheck to paycheck lifestyle.
Are these people happy?
I don’t know, but I don’t see how upgrading every single year could make you a happier person if you can’t afford it.
The thing is, there will always be something newer to buy. If you want the latest and greatest thing, you may be disappointed because there will always be something else.
What makes one person happy won’t necessarily be the same for you.
I’m sure almost everyone, at one point in their life, has felt the need to keep up with someone else.
You may want the same car, the same house, the same designer clothing, and so on.
The problem with this is that it can make you broke.
When trying to keep up with someone else, you might spend money you do not have. You might put expenses on credit cards to (in a pretend world) “afford” things. You might buy things that you do not care about. The problems can go on and on.
This can lead to a significant amount of debt.
Trying to the same things as someone else is not worth it because:
You will never be happy, no matter how much money you spend.
You will constantly compare yourself to everyone.
You will go into debt because that’s the only way you feel like you can keep up.
You will have a loan payment for everything because that’s the only way you can “afford” things.
You won’t have any money leftover for retirement, an emergency fund, etc. because you’re spending it all on things you do not need.
Instead, you should figure out why you want to keep up with someone else, think about your own life and your own goals, realize that jealousy won’t get you anywhere, and try your best to live within your means.
You’re not impressing anyone.
If you’re purchasing things just to impress others, well- you will be disappointed. For the most part, no one cares or will even know that you bought something new.
You should do what makes you happy and only buy things for yourself- not to impress anyone else.
Money problems may lead to stress and other problems.
If you buy things that you cannot afford, this can lead to significant amounts of stress and other financial problems.
You may find yourself with more credit card debt than you can handle, personal loans, high interest charges, stuck in a paycheck to paycheck lifestyle, and more.
Who wants all of that?
Do you think that buying things makes you happy? Why or why not?
You might be asking yourself what the Jackson Five has to do with the Roth IRA five year rule for qualified withdrawals? I’m sad to say, “Absolutely nothing”. Other than then number “five”, of course. I just thought it was fitting with all the recent tributes to the King of Pop to have my own. Now that I have your attention…..
The basics of the Roth IRA include the phrase “Tax Free Money”. That phrase makes the Roth IRA the most attractive retirement planning tool of our time. When it comes to the intricacies of the Roth IRA, in regards to how it works, some confusion can set in. One provision of the Roth IRA that can leave many scratching their heads is the Roth IRA Distributions Rules For Withdrawals: 5 year rule.
The Five Year Rule pertains to when you can take qualified distributions from your Roth IRA tax and penalty free. Nobody wants to pay tax and penalties, right? That’s why it’s important to know how the Roth IRA withdraw rule works. Just to add more fun to the mix, you need to first know that there are two sets of Five Year rules. One pertains to Roth IRA contributions and the other pertains to Roth IRA conversions. We’ll begin with Roth IRA contributions.
Withdrawal Rules on Roth IRA Contributions
In order for you to take money from the Roth IRA tax and penalty free, it has to be considered a “qualified distribution”. We’ll get to what the rules on qualified distribution are in one moment. First thing I need to remind you is that all contributions can be taken at any time, tax and penalty free. That means what you put into the Roth IRA (contribution) can be taken out the following day without consequence (not factoring sales charges and market risk).Let me illustrate:
Example 1
You open a Roth IRA at your bank and decide to put $5000 into a money market account inside the Roth. A month goes by and something happens where you need to withdraw your money. You can withdraw the original $5000 tax and penalty free. What has to stay is the earnings or, in this case, the interest that you made off the $5000 (which should be minimal considering you didn’t have it that long). Now keep in mind, the bank may charge you some cancellation fee of some kind, so read the fine print. But as far as the IRS is concerned, you are in the clear.
Example 2
Just to illustrate another side of the first example, let’s say this time you decide to invest at a brokerage firm and choose an investment more tied to the stock market. After a month goes by, your original $5000 investment now plummets to $3000. (I think a lot of people can relate to that). All you are allowed to withdraw is the $3000. That’s it! Sometimes that gets overlooked. Also, if you paid a sales charge or commission on that investment, that’s not being refunded to you either.
What is the Rule For Qualified Distributions on a Roth IRA?
What’s so important about a qualified distribution? If it’s deemed qualified, you then avoid taxes and the 10% early withdraw penalty. Taken directly from IRS pub 590 this defines what qualified distribution is:
A qualified distribution is any payment or distribution from your Roth IRA that meets the following rules. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and the payment or distribution is:
Made on or after the date you reach age 59½
Made because you are disabled
Made to a beneficiary or to your estate after your death, or
One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).
Remember that you have until April 15 of the following calendar year to make a Roth IRA contribution for any tax year. But the five year window begins January 1st of the actual tax year. Also, the five year window is based on when you made your first deposit. Meaning that a new five year window does not begin with each additional deposit. Is your head spinning? Let’s look at another example:
Example 3
You open a Roth IRA but don’t actually make your first contribution until April 10th, 2006. Your five year window would then begin on January 1st, 2005. If you didn’t make another deposit until 2008, your five year window is still based on the January 1st, 2005 date. Don’t forget that it’s Five Year rule plus one of the other factors (most likely 59 1/2) to get the money tax and penalty free.
Roth IRA Conversions
The Five Year Rule works a bit differently when it pertains to Roth IRA Conversions. The major difference is starting of a new five year window with each new conversion. Once you reach the age of 59 1/2 this isn’t much of an issue, but you still need to aware of this. Especially, if you haven’t had a Roth IRA open for at least five years. If so, the conversion amount will come out tax free, but the earnings are still subject to a five year holding period. Let’s look at another example:
Example 4
If you started a Roth IRA at age 50 with a contribution and then decide to convert at ages of 58, 59, and 60 respectively, you are immediately eligible to take all funds out tax and penalty free (even earnings) since you satisfied age and “any or “a” five year holding period in a Roth.
The above example is one what I wrestled with trying to find the answer and as it stands right now, that is the best interpretation of the rule that I’ve found.
Similar to Roth IRA contributions, the five year clock begins on January 1st of the year that you convert. The key difference is that the you must convert in the calendar year and not the tax year: before December 31st.
Converting has been difficult to qualify for a conversion since your adjusted gross income has to be less than $100,000. But as I’ve written about on more than one occasion, Roth conversion rules change slightly and the income limit is removed in 2010. Expect many to take advantage of this next year.
Keep it in Order: Rules For Taking out of Roth IRA
You have made it thus far- congratulations! We’re almost there. The last step that we have to address is the ordering rules for taking out withdrawals from your Roth IRA. This is important because of, once again, the taxes and penalties that might occur. According to the IRS, the order of a distribution from a Roth IRA is:
Regular Contributions – by considering the first money withdrawn from the account “regular contributions,” and not earnings, the IRS allows account holders to remove a portion of their accounts before the five-year rule applies.
Conversions – this is on a first-in, first-out basis. So the money placed into an account because of a conversion that occurred in 2008 would be removed before a conversion that occurred in 2009.
Taxable – the taxable portion of the conversion is removed first. This is the amount claimed as income because of the conversion.
Non-Taxable – this is the portion of the conversion not included in gross income.
Earnings – finally, the last money to be removed from an account are the earnings on the assets placed in the account.
Logically, it makes sense. The monies that you have paid taxes on will come out first tax and penalty free. After the contributions are taken out, just work down the list to see what you can or cannot take. Still confused? This is where a CPA or a Certified Financial Planner can assist you computing the numbers for you.
Required Minimum Distributions and Roth IRA
One last note when doing conversions and you are over the age of 70 1/2. Since you are the IRS magic age to begin required minimum distributions, those distributions can’t be converted to a Roth IRA. In the year you wish to convert, you must first withdraw your required distribution, and then you can convert any or all remaining funds to a Roth. This is only if you do a full conversion. If you are looking to do a Roth IRA conversion at the beginning of the year, but postpone your RMD; then you’ll want to do a partial conversion and leave at least the amount of the RMD in the IRA. Be sure to double check with your IRA custodian to see what their policy is on the matter of RMD’s and converting. Keep in mind that in 2009 RMD’s are suspended, so that would not apply. It will continue as scheduled in 2010.
There has probably been at least one point in everyone’s life when they have engaged in a bad money habit. However, it’s best to realize your bad money habit now rather than later!
I believe it’s much better to realize your problem as soon as you can so that you can take action towards changing for the better. Doing so can help you improve your financial situation for years to come.
Understanding your bad money habits and making a change can help you stop living paycheck to paycheck, eliminate debt, pursue your passion, save for your goals, reach retirement, and more.
Here are several bad money habits that may be making you broke.
Keeping up with the Joneses – what a bad money habit!
I’m sure almost everyone, at one point in their life, has felt the need to keep up with the Joneses.
Whether you are five years old and want that new toy everyone is playing with, or if you are 40 years old and are feeling the need to upgrade your house, car, etc., everyone has experienced it.
The problem with this is that keeping up with the Joneses can make you broke.
VERY broke.
When trying to keep up with the Joneses, you might spend money you do not have. You might put expenses on credit cards to (in a pretend world) “afford” things. You might buy things that you do not care about. The problems can go on and on.
This can lead to a significant amount of debt.
Keeping up with the Joneses is not worth it because:
You will never be happy, no matter how much money you spend.
You will constantly compare yourself to EVERYONE.
You will go into debt because that’s the only way you feel like you can keep up.
You will have a loan payment for everything because that’s the only way you can “afford” everything.
You won’t have any money leftover for retirement, an emergency fund, etc. because you’re spending it all on things you do not need.
Instead, you should figure out why you want to keep up with the Joneses, think about your own life and your own goals, realize that jealousy won’t get you anywhere, and try your best to live within your means.
Related:
Letting your emotions take control of your spending.
Emotional spending is a bad money habit that many people take part in. It’s one you should stop, because it doesn’t cure any problems.
According to NerdWallet, the average US household (who has debt) has an average credit card debt of $15,611, and I’m sure some of that is due to emotional spending.
Emotional spending occurs for many different reasons. You may have had a bad day at work, a fight with your loved one, and so on. You might even be spending because you are so stressed out about the amount of spending you have done.
To end your emotion spending habit, I recommend:
Figuring out the amount of debt you have. You’ll most likely be shocked, and hopefully this will persuade you to change your spending habits and the way you deal with stress.
Understanding why you spend when you’re stressed. In order to stop stress spending, you need to really think about why you have this problem. Without understanding your problem, you might just keep falling into the same cycle over and over again.
Thinking about your financial goals, so that you can stay motivated.
Finding different ways to deal with stress.
Sticking to a budget.
Not facing your debt.
Too many people never face their debt and don’t even know how much debt they have.
By not thinking about your total debt figure, it may seem less real and a way to run away from it. However, that will catch up to you in many ways, such as high interest charges, a bad credit score, numerous phone calls from debt collectors, possible paycheck garnishments, and more.
The first step to paying off your debt is to face it. You should add up your total debt, learn more about the debt you have, and create a plan to eliminate it.
Ignoring the importance of financial education.
Many people do not fully understand how credit cards work, how to improve their credit score, and more. However, if more people were educated on financial issues, this could lead to less debt, better managed budgets, and more.
I recommend diving into a good personal finance book, bookmarking your favorite financial blogs, staying up-to-date on the latest things going on in personal finance, and more.
Thinking you don’t need a budget.
Too many people go without a budget, because they believe they don’t need one. Sadly, many people believe that budgets are only for “poor” people, people who are horrible with money, and so on.
But, that just isn’t the case, at all. Nearly everyone needs some form of budget, even if that means just comparing your income and your expenses each month.
Budgets are great, because they keep you mindful of your income and expenses. With a budget, you will know exactly how much you can spend in a category each month, how much you have to work with, what spending areas need to be evaluated, among other things.
Budgets have helped people reach their goals, pay off debt, make more money, retire, and more.
Believing you’re invincible.
While I always try to stay positive and am a firm believer in the power of positive thinking, I do believe that everyone should have an emergency fund. However, many people have no emergency fund whatsoever, and this is a bad money habit.
There are many reasons to have an emergency fund:
An emergency fund can help you if you lose your job. No matter how stable you think your job is, there is always a chance that something could happen.
An emergency fund is wise if you do not have great health insurance or have a large annual deductible.
An emergency fund is a good idea if you have a car and need repairs.
An emergency fund is a need if you own a home. One of the lucky things that homeowners often get to deal with is an unexpected home repair. Having an emergency fund can help you if your basement floods, if a hole forms in your roof, and more.
Emergency funds are always good to have, because they give you peace of mind when something costly happens in your life. Instead of building onto your stress, you will know you can still afford to pay your bills and worry about more important things.
Being afraid of investing.
One of the biggest bad money habits is that far too many people are afraid of investing and never start.
Here are some reason to invest:
You can retire one day.
You never know what may happen in the future, so preparing now is important.
You can allow your money to grow over time.
I always say, the first thing you need to do if you want to start investing is to just jump in. You’ll never learn unless you make an attempt.
Read more at The 6 Steps To Take To Invest Your First Dollar – Yes, It’s Really This Easy!
If you are new to my blog, I am all about finding ways to make and save more money. Here are some of my favorite sites and products that may help you out:
Start a blog. Blogging is how I make a living and just a few years ago I never thought it would be possible. I earn over $70,000 a month online through my blog and you can read more about this in my monthly online income reports. You can create your own blog here with my easy-to-use tutorial. You can start your blog for as low as $3.49 per month plus you get a free domain if you sign-up through my tutorial.
Sign up for a website like Ebates where you can earn CASH BACK for just spending like how you normally would online. The service is free too! Plus, when you sign up through my link, you also receive a free $10 gift card bonus to Macys, Walmart, Target, or Kohls!
Answer surveys. Survey companies I recommend include Survey Junkie, Swagbucks, Pinecone Research, and Harris Poll Online. They’re free to join and free to use! You get paid to answer surveys and to test products. It’s best to sign up for as many as you can as that way you can receive the most surveys and make the most money.
Save money on food. I recently joined $5 Meal Plan in order to help me eat at home more and cut my food spending. It’s only $5 a month (the first two weeks are free too) and you get meal plans sent straight to you along with the exact shopping list you need in order to create the meals. Each meal costs around $2 per person or less. This allows you to save time because you won’t have to meal plan anymore, and it will save you money as well!
I highly recommend Credible for student loan refinancing. You can lower the interest rate on your student loans significantly by using Credible which may help you shave thousands off your student loan bill over time.
Cut your TV bill. Cut your cable, satellite, etc. Even go as far to go without Netflix or Hulu as well. Buy a digital antenna (this is the one we have) and enjoy free TV for life.
Try InboxDollars. InboxDollars is an online rewards website I recommend. You can earn cash by taking surveys, playing games, shopping online, searching the web, redeeming grocery coupons, and more. Also, by signing up through my link, you will receive $5.00 for free just for signing up!
Find a part-time job. There are many part-time jobs that you may be able to find. You can find a job on sites such as Snagajob, Craigslist (yes, I’ve found a legitimate job through there before), Monster, and so on.
Lower your cell phone bill. Instead of paying the $150 or more that you spend on your cell phone bill, there are companies out there like Republic Wireless that offer cell phone service starting at $10. YES, I SAID $10! If you use my Republic Wireless affiliate link, you can change your life and start saving thousands of dollars a year on your cell phone service. I created a full review on Republic Wireless as well if you are interested in hearing more. I’ve been using them for over a year and they are great.
In recent years, the use of Deferred Compensation Plans has grown considerably. This is largely due to the current job market … employers are looking for new ways to appeal to and retain skilled employees. Looking at new ways to approach employee benefits is one way to work toward accomplishing that. Make sure you read your employee handbook and completely understand the rules of your deferred compensation plan.
What are Deferred Compensation Plans?
In the simplest terms, a Deferred Compensation Plan allows an owner or an employee to set aside a portion of their income to be paid out at a future date. These plans are broken down into two basic categories: Qualified and Non-Qualified plans. Each type of plan holds certain advantages, but the major difference between them is in the way the plans are taxed by the IRS.
Non-Qualified Plans
In a non-qualified plan, the employer does not receive tax deductions until the time when the employee’s benefits have been paid out … and at that time the benefits are taxable to the employee. On the plus side, setting up a non-qualified plan is generally less expensive. Also, employer contributions are not limited and these plans do not have substantial reporting or filing regulations.
Qualified Plans
In a qualified plan, reporting requirements are more significant, highly paid employees may be prohibited from participating, and the amount an employer may contribute is limited. However, qualified plans include benefits that are allowed to mature tax-deferred until they are dispersed. Additional tax deferral may be possible as well, because qualified plans are commonly eligible for rollover to an IRA or other (qualified) plan.
Which Deferred Compensation Plan is Best?
Well, that’s a tricky question. Although tax deferral is generally thought of as a benefit, it could be a disadvantage if an employee’s tax rate has increased before compensation has been paid out. However, if tax rates do not rise (or if they drop), a well-compensated employee is almost always likely to benefit by deferring a portion of their income.
Tax rates are a major factor to consider when contemplating a Deferred Benefit Plan, and there are other aspects to consider as well. The best thing to do is speak with a qualified financial professional who can take a look at your unique situation and help you to determine if setting up a Deferred Benefit Plan will be a good move for you.
Vesting
Most deferred compensation plans will have some sort of vesting schedule. I once had a very attractive deferred comp plan, but the only hitch was that it had a 9 year vesting schedule. This is commonly referred to as “golden handcuffs“. It’s a nice benefit, but makes it a much tougher decision if you are ever faced with a attractive offer elsewhere. Be sure you understand all the rules when it comes to your deferred comp plan.