Money Smart Life » Investing

New Roth IRA Rules

Kristie — Mon, 01 Feb 2010 14:33:09 +0000

The Roth IRA was introduced as a retirement investment option back in 2007. The New Year, 2010, has brought changes to the Roth IRA rules that are making this retirement investment vehicle better for some investors than ever before. In order to fully understand how a Roth IRA can be more beneficial than a traditional IRA you first have to understand the logistics of each retirement account option.

Traditional IRAs

Traditional IRAs allow account holders to deposit up to $6,000 per year if you’re over 50 years old and up to $5,000 per year for those younger than 50. Whether or not the contributions you make to a traditional IRA are tax deductible depends on the amount of your income and if you have another retirement account such as a 401(k) through an employer.

If you withdraw money from a traditional IRA account before you turn 59½ you are typically charged a 10% early withdrawal fee. Otherwise, you can begin taking distributions from the account when you turn 70½ and pay income tax on the amount of the withdrawal at your current tax rate.

The good news for retirement account holders that are 70 or older is the federal government is offering a temporary reprieve. Minimum distributions from tax-deferred retirement accounts (IRAs, employer sponsored retirement plans, inherited IRAs and inherited Roth IRAs) are not required this year, which helps to offset some of the major losses these accounts saw because of the floundering economy.

Roth IRAs

A Roth IRA works a little differently than a traditional IRA. The first difference is that you pay income taxes at your current income tax rate when you make your contributions to the account. The other difference is that you are not taxed again when you make your withdrawals. You are also not required to start making your withdrawals at the age of 70½ as you are with a traditional IRA. If you make early withdrawals, as long as you are at least 59½, you do not pay a tax penalty for early withdrawals.

The downside of a Roth IRA was that if you have a 401(k) or IRA Rollover and your annual income exceeds $100,000 per year, then you are not eligible for a Roth IRA.

As of January 1st 2010 this changes. Households converting an existing traditional IRA to a Roth IRA account can do so because there is no longer an income restriction. The minor setback of the conversion is that you pay income taxes on the amount of money you convert at your current income tax rate.

Roth IRA conversions that take place in 2010 allows you to deduct half of the income when you file your 2011 tax returns and the other half of the income when you file your 2012 tax returns.

Questions to Answer to See if a Roth IRA is Right for You

Will my tax rate change in the future? If you expect your tax rate to decrease then paying to convert to a Roth IRA may not make sense when you can pay less money on your income later in life. This is especially true as you near retirement and withdrawal age.

On the other hand, if you have significant assets, it may be worth paying for the conversion because financial experts predict tax rates will increase in the future.

Do I have the money to pay for the tax conversion? If you do not have the cash to pay for the Roth conversion, then it doesn’t make sense to do so. If you have to use the money in your retirement account to pay for the conversion, you will be penalized the 10% early withdrawal fee and lose the tax-free growth status on the money in the account.

You can convert a portion of the money into a Roth IRA, which should be the portion you can afford to pay the taxes on, and convert the rest into a Roth IRA in the future when you can afford to pay the taxes on this amount.

According to the results of a recent survey conducted by USAA, only nine percent of those surveyed with household incomes of more than $100,000 and 27 percent of all those surveyed (who own an IRA) plan on turning their tax-deferred savings into tax-free retirement income. This means for the most part that the new Roth conversion rules may go to waste for investors that would benefit most.

9 Mistakes People Make with their IRA

Ben — Fri, 29 Jan 2010 14:35:52 +0000

People make a lot of mistakes when it comes to IRA and 401(k)-related decisions. And I can’t blame them. The tax code is obscenely complex. That said, there’s no need for you to make these mistakes.

1. Converting to a Roth when it makes no sense Just because you can convert your traditional IRA to a Roth IRA doesn’t necessarily mean you should do it. Generally speaking, if you expect your tax bracket in retirement to be lower than your current tax bracket, converting isn’t a good idea.

2. Thinking tax rates won’t change between now and 2040 Of course, if you won’t be retiring any time in the next few decades, it’s nothing short of impossible to say what your retirement tax bracket will be. Tax brackets change as a function of both economic and political circumstances. Since we cannot easily predict what tax rates will look like 20 or 30 years in the future, it may be a good idea to tax diversify. That is, put some of your retirement savings in tax-free accounts (like a Roth IRA) and some in tax-deferred accounts (like a 401(k) or traditional IRA).

3. Not understanding how a Roth IRA works Sometimes, people neglect to make an IRA contribution because they don’t want to tie up the money until they’re 59½. What many investors don’t know is that contributions to a Roth IRA can be withdrawn at any time–free from tax and free from penalty. It’s only for distributions of earnings (and amounts converted from a tax-deferred account) that the various Roth IRA withdrawal rules have to be met.

4. Missing out on the Retirement Savings Contribution Credit It doesn’t get much press, but the Retirement Savings Contribution Credit can be a real boon for middle-class investors. In short, if your Adjusted Gross Income is below a certain level ($55,500 for married couples in 2009), you may qualify for a tax credit equal to a percentage of contributions you made to a retirement account. Tip: Investors who are just barely ineligible for the credit may be able to contribute to a traditional IRA, thereby reducing their income to the point where they’d qualify.

5. Funding your IRA just before the deadline every year You have until April 15, 2011 to make your 2010 IRA contribution. Of course, if you make your contribution as early as possible rather than as late as possible, you give your money more time to grow. Giving each of your contributions an extra 15.5 months of growth can make a startlingly large difference in your account balance when you finally retire.

6. Missing out on your catch-up contribution Once you reach age 50, you’re allowed to make an additional “catch-up contribution” to your IRA. It’s all too easy to forget about this for the first year or two that you’re eligible–especially if you make your IRA contributions via automatic monthly deposits.

7. Thinking you can’t contribute because only your spouse is employed Many one-income families think that they can only contribute to an IRA for the working spouse. That’s not true. In most cases, as long as one spouse is working and earns more than double the current IRA contribution limit, each spouse can contribute to an IRA. (Note: Reductions in contribution limits for high-income taxpayers still apply.)

8. Forgetting to take advantage of your self-employment income Between the popularity of blogging and other online businesses, it seems like everybody has a “side hustle” these days. What many people overlook is that their self-employment income qualifies them for additional types of retirement accounts. By opening a SEP IRA, SIMPLE IRA, or solo 401(k), you may be able to significantly increase the maximum amount you can contribute to retirement accounts this year.

9. Having your previous significant other listed as your IRA beneficiary No explanation needed–though you’d be surprised how often this happens.

What mistakes have you made (or avoided)? It’s always good to learn from mistakes. Especially when they’re somebody else’s. Have you made any IRA or 401(k) mistakes that you’d be kind enough to warn the rest of us about?

About the Author: Mike Piper is the author of Investing Made Simple. He also blogs at The Oblivious Investor.

Starting an Investment Club

Ben — Wed, 23 Dec 2009 16:28:39 +0000

Starting an investment club is an option if you rule out joining an investment club based on clubs whose investment strategies or investing goals are incompatible with your own. Of course starting an investment club is no small task, there are a whole checklist of things necessary to start one up.

Here are some of the things you’ll have to figure out or do if you can’t find a club you like and want to start your own.

Meeting times. All members should agree on (1) the days and time that you’re going to meet (most investment clubs meet once each month), (2) the place that you’re going to meet, (3) the length of the meetings (most meetings last about two to three hours), (4) the organizational format that each meeting is going to take.

Number of members. Agree on the size of the investment club. Studies show that a good size for an investment club is approximately 12 to 15 members. When you limit the size of the club to this many members you’re still small enough to hold meetings in member’s homes.

Investing education program. There is a lot of good information available for members of the National Association of Investors Corp, NAIC, on investing education. The education program is typically headed up by some combination of the vice and education officer.

Meeting place. You might want to come up with alternative meeting places, such as local library or café, to use as an alternative meeting choice.

Investment club software. If your investment club is going to use software to keep track of stocks, profits, expenses, and other administrative information the secretary can purchase this software and have it installed. Remember to keep in mind that if more than one member of your club is going to use the software program on their computer that you’ll have to purchase multiple copies of the software or buy multiple licenses for more than one user.

Investment club name. You’ll want to come up with a name for your investment club. You don’t need to make this decision on your first meeting but members should come to the second meeting ready with several ideas to share for a club name.

Registering your investment club. Once you have a name you can register your club’s business entity with the state. When the paperwork returns, the Secretary of your investment club should make sure that the paperwork is filed and that members of the club have access to the information.

Investment club accounting. The newly elected treasurer should head up selecting and setting up the accounting system. You’ll want to have this set up at least by your second meeting. One of the most popular club accounting systems is probably Bivio, some clubs prefer Club Accounting Online.

Tax ID Number. This is the time to file the information that is required to obtain a Tax ID Number. The Treasurer will now be able to open up a banking checking account for your club as well open a brokerage account. If your investment club hasn’t decided on what brokerage to use this task will have to be delayed until a later date.

Research Items:

partnership agreement forms
preparing a mission statement
banking information
legal forms, such as tax information
broker information
member management software

This post on starting an investment club is part of an investment club series that also covers joining an investment club , investment club mentors , and other investment club tips .

Investment Club Mentors

Ben — Wed, 23 Dec 2009 05:33:00 +0000

One of the investment club benefits we covered last time was learning from other people in your club. Some investment clubs will assign newcomers a mentor to help them get comfortable with general investing concepts and how the club works.

The leadership of the investment club are typically the ones who are most involved and active in making it a successful experience for everyone. Often times one of these people will take on a mentor role to new members. Here are some of the standard officer roles of an investment club, people you can turn to with questions if you’re just getting started.

Investing Club President

The president is the one who decides when the next meeting is going to take place (usually done with a mutual vote but made official by the president), presides over the meetings, and plans activities (usually done with a mutual decision by other members).

Investing Club Vice President

The vice president is the member that stands in when the president is absent or needs help with presidential duties. The vice president is often the one who plans some of the educational information that is provided to the club at meetings.

Investing Club Treasurer

The treasurer, also known as the financial partner, is the one who deals with the brokerage firm and does the buying and the selling of stock. The treasurer also is responsible for keeping accurate records of the financial holdings of the club, the financial contributions of each of the members, and any other records that concern themselves with money and financial matters.

Investing Club Secretary

The secretary, also known as the recording partner, is responsible for keeping the minutes of each meeting. The secretary also lets other members know of any upcoming meetings. If a member misses a meeting the secretary is the one who passes the minutes of the last meeting to the absent member so that everyone is kept up to date of all meeting decisions.

Investing Club Education Officer

Many clubs have what is known as an education officer. This member of the club is responsible for organizing educational activities such as guest speakers, reading materials, field trips, and presentations that have to do with investing.

This post on investing mentors is part of an investment club series that also covers joining an investment club, investment club benefits, and other investment club tips.

Investment Club Benefits

Ben — Tue, 22 Dec 2009 05:11:04 +0000

Investment clubs, like anything in the world of investing, require due diligence before deciding whether they’re right for you. We’ve taken a look at some investment club tips for your personal situation and covered things to consider when joining an investment club.

Although there are things to watch out for with investment clubs, there are certainly benefits to belonging to one, especially for people just getting started investing. Here are some of the benefits of investment clubs:

Boost Investing Confidence

You may feel safer and more secure learning about the concepts and jargon of the investing world with a small group of people. If you’re with people you know you probably won’t feel embarrassed asking questions and your confidence will grow as you learn more.

Get Started Investing

If you’ve always wanted to invest in the stock market but have put it off because you’ve been worried about losing money due to inexperience, an investment club might help. The people you discuss stocks with and ask questions of can be your mental safety net and sounding board, making it easier to first getting started.

Low Investment Required

If you only have a small amount of money to invest each month, maybe $25 to $50 dollars, then an investment club could get you into the mode of researching, buying, and selling stocks. Of course you could invest that money on your own through a service like ShareBuilder. However, one of the benefits of belonging to an investing club is that the “buying power” of all the members allows you to participate in and learn from multiple different stock transactions even with a small investment on your part.

Learning from Others

Listening to how other members describe a stock and what ratios they look at when evaluating it can teach you a lot about basic fundamental analysis. Make sure you always ask “why” when people are explaining the reasoning behind an investing decision. Remember the people in your investment club are likely amateurs just like you so don’t take everything they say about investing as the final word on the stock market.

Joining an Investment Club

Ben — Thu, 17 Dec 2009 14:44:15 +0000

Yesterday we looked at some investment club tips that were personal considerations to think about before joining an investment club. Today my former co-worker looks at the importance of evaluating the investment club itself and a few things to look for.

Defined Investment Goals

Each member of the group needs to have the same goal in mind and the same methods of achieving that goal. If some members of the group are only interested in making a profit, instead of learning more about investing and the details involved, there will be a divided set of goals. All members of the club should have the same philosophy about investing.

Long Term Goals

Members of the club should be clear on what the long term goals of the club are all about. There should be an understanding established of what amount of the profits that are realized from investments are going to be held and which amount is going to be reinvested immediately back into the stock market. There should be an equal amount of growth and stability that is agreed upon.

Investment Club Meetings

It’s important that members of the group are able to attend all meetings. When there are decisions that need to be made about ongoing investments and future investments it’s important that all members are part of the decision process. If the group decision is held up because some members don’t attend regularly the endeavors of the investment group are jeopardized.

Investing Accountability Checkpoints

It will be very important that the investment club have checkpoints in place that account for all investments, profits, losses, and other money issues. These checkpoints should be readily available for all members of the club to read at point in time. For example decisions on buying and selling stock. Before any stock is purchased or sold it will be required that all members of the investment club are part of the study of these stocks and part of the final decision.

Investment Club Tips

Ben — Tue, 15 Dec 2009 11:29:09 +0000

Investment clubs startup all over the US each year and help thousands of potential investors learn the basics of the stock market. I’ve never joined an investment club but I have a family member and a former co-worker who are investment club members so I asked them to offer a few tips on starting or joining a club.

Before you decide to invest your money with other people, here are a few things you should consider.

Have Realistic Expectations

If you’re joining an investment club to make a killing in the stock market, you’ll most likely be very disappointed. The goal of an investment club is to learn more about the stock market and if you have dreams of becoming rich you’ll be starting the club for the wrong reasons. Joining an investment club means joining for a long period of time.

You’re Not a Professional Trader

Starting an investment club doesn’t mean that you have to be an expert on the stock market. In fact, an investment club is ideal for a group of amateurs who want to learn about how the stock market works and what it can do for them. An investment club should be a safe environment in which you can invest a little bit of money and not worry about losing a large amount of your hard earned dollars when something unexpected happens.

Minimum Investments

You shouldn’t need a lot of money to start or join an investment club. There will be a minimal fee for each month’s contribution, just make sure that it fits into your budget. If it’s a new investment club, you’ll have the chance to determine what the minimum monthly contribution should be each month when you have your first meeting.

Willingness to Debate & Compromise

One thing that you should keep in mind is that your voice will be part of the larger group and you may not always have a say in which stocks you want to invest in. If you’re unable to sit back and let another decision take the place of something that you would rather see, then an investment club might not be for you. You’ll need to have the ability to let the majority rule whenever a decision is made.

You Might Lose Money

Be aware that you may never realize a profit from the stock market through your club. One of the important goals and features of an investment club is that you benefit from the learning experience of being with other people with the same interests in the stock market. No one likes to lose money but if you do make sure you learn from the loss. Analyze what went wrong with the stock picking process and figure out what you’ll do differently next time.

ShareBuilder Promotion on Kids Investment Accounts

Ben — Sun, 13 Dec 2009 10:46:19 +0000

ShareBuilder Promotion – $25 Stock Gift Offer

ShareBuilder is running a promotion for anyone who wants to open a custodial account. If you open an investment account for your kid, ShareBuilder will match the first $25 you deposit into the custodial account.

Right after I read about the account bonus offer I saw an interview on Fox Business news with Dan Greenshields, the President of ShareBuilder, that talked about giving stock as a gift and ShareBuilder’s custodial accounts. He estimated that about 10% of their business are custodial accounts and the average balance of those accounts is around $1,000.

Buying Stock for Kids with ShareBuilder

With balances in the $1000 range, it sounds as though many parents see the ShareBuilder account as more of a way to teach their kids about the stock market and investing than as a way to pay for their college education. Greenshields mentioned that many parents will buy their kids stock in the ShareBuilder once or twice a year, at Christmas and maybe on their birthday. Since ShareBuilder allows you to buy partial shares of a stock or fund, parents can buy on events like these without having to worry if they’e putting in enough money to buy a whole share.

Although parents can buy 8,000 different stocks or funds through Sharebuilder, a lot of moms and dads buy stocks of companies that their kids might be familiar with like Disney, Apple, or Marvel (comics). Some of the other popular stocks held in custodial accounts are Google, GE, and an S&P 500 ETF. According to Greenshields you can also use a Coverdell ESA to save for college instead of a custodial account.

Do Kids Want Stock for a Gift?

The lady interviewing Greenshields commented that not many kids are probably very excited to get stock as a gift. My guess would be that it’s probably true when kids are younger and that they won’t really start to appreciate it until they get older.

However, I think it’s still a good idea and it even makes sense to buy it when they’re young. That way when they’re teenagers they can look back at how you’ve been steadily investing in the account for a number of years and how it’s value has increased. Of course over a shorter time period, especially the last 5 years, they won’t have as much to show for their money. But if it’s a longer timeframe, say 10 years, then the money you’ve been investing might make an impact on their teenage brain.

When they see you’ve been putting money away for a decade and now it can help them buy a car or contribute toward some other big purchase, hopefully they’ll see the value of investing over time.

My Experience with Stock Gifts

I started asking for shares of Wal Mart stock for birthdays and Christmas when I was in elementary school. Of course ShareBuilder didn’t exist back then so my grandparents would just give me IOU’s for the stock. Here’s something I shared as part of my grandfather’s memorial on this site:

My wife’s engagement ring will always remind me of my grandfather because he was the reason that I, as broke college student, was able to afford it. Ever since I was a little kid, he would excitedly tell stories of speeches given by Sam Walton at the Wal-Mart shareholder meetings.

All the enthusiastic talk of splitting stock and doubling shares convinced me to ask for Wal-Mart stock on every gift giving occasion as I grew up. The constant growth and splitting of the stock over the 80’s and 90’s left me with more than enough shares to fund the purchase of a diamond engagement ring when I met the love of my life in college.

I can still remember sitting at the bus stop one morning in 5^th grade and figuring out how much all that Wal-Mart stock was worth. Of course, not every kid will be as much of a money dork as I was (am) but getting gifts of stock definitely made an impression on me.

I do think watching the balance grow is kind of infectious. During the interview, Greenfield noted how his son actually puts part of his allowance into his Sharebuilder account. Of course, his dad’s the president of the company so I wouldn’t expect that as a typical result. However, I think once a kid starts seeing some growth in their account (due to contributions and/or appreciation) they’re more likely to be excited about investing.

ShareBuilder Promotion

If you think that your kids will respond the same way to having their own shares of stock that I did then the ShareBuilder promotion they’re holding would be a good way to get started. As I mentioned earlier, ShareBuilder announced it will match the first $25 deposited into a new custodial account.

One of the reasons that ShareBuilder can be a good way for investors to get started in the market is that they let you buy stocks for only a $4 fee. Since there are no account minimums and no inactivity fees, they are pretty good for custodial accounts that only have a little money invested just a few times a year.

You can open a ShareBuilder Custodial account by clicking here.

TradeKing New Account Overview

Ben — Wed, 25 Nov 2009 05:27:56 +0000

The Tradeking promotion that runs through the end of the month reminded me of a conversation I had with a co-worker last Spring about online brokerage accounts. She’s from a different generation and doesn’t feel comfortable opening a stock trading account on the Internet.

Her son suggested she open her own account but she had the whole process built up in her mind to be too complex for her to ever understand. I told her I’d put together an overview of the account opening process to show her that’s it’s really not that complicated.

I went through in the Spring and took screen captures of opening a TradeKing account but then we had a baby so I’ve been a little distracted since then. Anyhow, here is a visual walkthrough of opening an account and the 10 main questions you have to answer to complete to an application for their online brokerage account.

What’s Your Basic Info?

What Will Be Your Secure Code?

Which Type of Account?

Who Are You?

Where Do You Work?

How Much Money Do You Have & What is Your Trading Experience?

Do You Have a TradeKing Promotional Code & What Are Your Affiliations?

What Are Your Investment Goals?

Do You Agree To Follow the Rules?

Give Your Electronic Signature

TradeKing Application Complete!

Of course, opening an account’s not so bad; it’s actually the easy part. Setting your investing strategy & buying and selling stocks is where the uncertainty comes in. To open a TradeKing account, click here.

TradeKing Promotion Extended

Ben — Mon, 02 Nov 2009 14:14:57 +0000

The TradeKing promotion has been extended through the end of this month. For some reason, TradeKing likes to run thier promotions in the fall of each year. Last October Tradeking ran a $50 bonus promotion and despite the turmoil of the stock market had a lot of people sign up to try out their online brokerage.

This year the market has a lot more positive momentum than it did last fall and some of the people that were sitting on the sidelines are getting back in. TradeKing is offering a $50 bonus if you open a new account and try out their stock trading platform. You can read more about pros and cons of the online brokerage in this TradeKing review.

I had forgotten that they extended the promotion by a month last year until I recently got an email from TradeKing announcing they were pushing the deadline out a month. They didn’t push it any further last year so if that’s any indication then this month will likely be the last chance for the bonus in 2009.

There is no TradeKing promo code necessary simply signup here and you get your $50 bonus after you fund your account with at least $2,500 and make your first trade.