3 Ways to Teach Your Kids About Investing

investingWhen I was growing up, my parents didn’t spend any time teaching me about investing. They talked about saving, minimizing debt, and making wise spending choices, but investing didn’t come up in conversation.

I didn’t realize that investing was something I could actually get involved in until I was in college. I’m determined to make sure that my son has some experience with investing before he leaves the house.

If you want to teach your kids about investing, here are a few things you can do to help get them started:

1. Buy them stock in a company.

This is actually something that works well for children that are young. You can choose a publicly traded company that your child might be interested in, like a department store chain, toymaker, or food company. Then you buy a couple shares of stock in the company. In some cases, you can get a paper certificate (Disney makes some attractive ones) printed out, so that you can frame it.

Explain to your child that they now have some ownership in that company. You can occasionally check to see how the company is doing, and encourage your child to read up on the company. My 10-year-old son is always paying attention for news about his favorite companies.

2. Let older children play investing games.

There are games out there, geared for tweens and teens, that can teach your children about money – including investing. There are stock-trading games that you can get your children involved with. You can sign up for free, and your kids can get a solid idea of how the stock market works. Games like How The Market Works can help you and your kids practice making trades, as well as learn about how investing works in the stock market.

Encourage your child to play these types of educational games. They can help your child learn more about how money works, and improve their understanding about what is happening.

3. Open an account.

Don’t forget to actually open an account and encourage your child to invest. I have a 529 plan for my son, and I occasionally show him the results of my regular contributions. He contributes, too, with some of his long-term savings money.

There are other ways to help your child start an investing account. If your kids are earning income, they can have IRAs opened in their names. Get your child started investing in a Roth IRA when they get a first job, and the chances of a successful retirement increase by quite a bit. You will have to be in control of the account until your child reaches the age of majority, but it is still in their name, and contributions can be made.

You can also open a custodial account at an online brokerage. When your child reaches the age of majority, they get control of the account, but until then you have to make the actual trades and manage the account. Encourage your child to make regular contributions, and watch the account together. Talk about long-term investing, and talk about the importance of not letting short-term problems with the market lead to panicked trading decisions.

Bottom Line

Make sure that your child is ready to understand investing to some degree before you begin teaching them. Most children can start grasping the basics of owning a stock while in fourth or fifth grade. Many kids are ready to start understanding more about trading and investing on a better level by the time they are 12 or 13.

Don’t be afraid to talk about investing in your home, and let your child see some of the positive results. You’ll have savvier kids who are more likely to succeed financially later on.

Have you taught your children about investing? What are you teaching them and at what age? Leave a comment and let us know!

This article was originally published December 11, 2012.


Credit Score Improvements: What You Should Know

credit scoreAs technology advances, and as credit score algorithms become more sophisticated, efforts are being made to measure more consumer behaviors, and to include the more subtle shadings of consumer credit use.

Changes being made to scoring models, as well as inclusions of non-credit data in your credit report, might help financial service providers get a more accurate picture of what sort of credit risk you really are.

Experian to Start Tracking Rent Payments

One of the major credit bureaus, Experian, has announced that it will start tracking rent payments. Those who make regular rent payments are not being recognized for their financially responsible behaviors.

Even though landlords can report them to credit bureaus when they are late paying, or skip a payment, there has not been a system in place to report on-time payments. This is changing with Experian’s RentBureau. Positive rent data could be a help to a consumer who is responsible, but who doesn’t have mortgage payment to help boost their credit profile.

FICO Expansion Score

In addition to being the foremost in credit scoring, FICO is also trying to widen its range offerings when it comes to consumer credit behavior. The company now offers the Expansion Score. The FICO Expansion Score factors in such items as rent payments, utility payments and other regular bills. This product also manages your checking account, so a bounced check can reflect on your consumer credit profile.

PRBC Reporting Agency

If you are interested in a credit reporting agency that focuses on non-traditional indicators of fiscal responsibility, you can consider the PRBC reporting agency. This agency collects information on bill payments, rent payments and more, and uses it to put together consumer credit reports.

PRBC makes use of the FICO Expansion score as well. However, you will have to request that the companies you work with report your good payment habits to PRBC; it doesn’t just happen.

FICO 8

On top of consumer credit profiles including information that isn’t normally considered to be “credit related,” it is worth noting that FICO has been tweaking its formula. FICO 8 is gaining popularity (even though it was released nearly two years ago), and it contains some new items that can help you improve your credit score.

Instead of penalizing you heavily for one-time missed payments, the new FICO score takes into account the fact that isolated late payments happen. If you have a generally good payment history, one missed payment won’t damage your credit score as much (although there will still be some damage done).

Additionally, FICO 8 will no longer take into account small collections. If the original balance was $100 on a bill that goes to collections, the new credit scoring model will disregard it. This should help consumers who might have forgotten about a small bill, or if a payment falls through a crack. FICO 8 is more forgiving in some ways.

Of course, some of the tweaks to FICO 8 will hurt consumer credit scores. The main downside to FICO 8 is that high amounts of debt can be more damaging. If you are close to maxing out your credit cards, it will have more of a negative impact on your credit score.

In the end, the quest is to reduce your financial habits down to an accurate number. In order to do that, credit agencies and credit scoring model developers seek to include more information.

Were you aware that the credit reporting agencies make these types of changes with time? Leave a comment!

This article was originally published March 2nd, 2011.


50 Books for 2014

I’m on a mission to help bloggers create 50 books in 2014.

Why?

When I self-published last spring I had a reason to write (and finish) a book – the launch of the Debt Movement. Without that deadline the Debt Heroes book wouldn’t exist.

During the process I met amazing people, learned a ton, and like to think we helped a lot of readers. Being part of a movement was a great experience so I’m starting another movement, to help bloggers share their experience and stories via self-published books.

I get a kick of out creating things, like books and software, and this mission involves both.  First we’ll talk about the books and then about the software.

Why Self-Publish?

If you’re a blogger you’re already familiar with the power of self-publishing. You exercise it every time you hit the Publish button in WordPress.

The great thing about blogging is you can get ideas, stories, and tips out into the wild a little at a time. You don’t have to wait until it’s all packaged and perfect to publish.

Creating a book helps you look back at what you’ve shared and focus in on your most useful content and lets you delve deeper and share more in your areas of expertise.

I think if you ask bloggers who have already put out books you’d find that putting together a book helps bring clarity for both you and your readers about your message and what you’re trying to accomplish.

It helps you focus and refine your direction and gives you more purpose.  There’s no doubt that self-publishing a book is a project that takes time so you want to do it well and create a quality product.

The end result is worth the time and money you spend because getting it on Amazon and other marketplaces lets you reach people who you wouldn’t have otherwise and it can help open doors for you and your site.

What Kind of Books are we Creating?

That’s up to you.  I’m sure there will be some of these and more:

  • Manifestos
  • Collaborations
  • Ultimate resource (the best of your blog)
  • Workbooks
  • How-to books
  • Lessons learned
  • Tips and hacks

How to Reach 50 Books?

How will we create 50 books?  One book at a time : )  I have a schedule in mind but there’s no question it’s a daunting challenge. That’s the great thing about a challenge; it forces you to find solutions.

I do have an ace up my sleeve though, something I’ve been working on for a while now called the Virtual Book Coach.

After being laid off last spring I took a few weeks and built the prototype of the Virtual Book coach.

Since then I’ve been gathering feedback and building its core pieces and now it’s ready for the first group of users.  It walks you through the steps of self-publishing, connects you with the resources you need to get your book out on Amazon, and helps you spread the word about your book once it’s ready.

So if you want to be one of the first few to get your book started head over and check out the early access offer I’m running for the Virtual Book Coach.

Happy New Year!


5 Ways to Own Your New Year’s Resolutions

new year resolutionAs this year ends and a new one begins, we set out to make our New Year’s resolutions. Two primary themes usually emerge – getting into shape and saving more money.

Unfortunately for us, author and psychologist Richard Wiseman found that 88% of people who make New Year’s resolutions don’t keep them. Here are some ways that can help you become one of the 12% of people that do reach their money goals.

1. Break down your goal.

When you sit down to commit to your New Year’s resolution do you know where to begin? Or you are just swirling it around in your head, overwhelmed by the task? Avoid setting your goal at an unattainable level. We have a tendency to set savings goals that are too high to meet right away.

Instead, break the total goal amount down into reasonable chunks. For example, if you need to save $12,000 for a house down payment, set your savings goal for $1,000 per month instead.

Psychologically, $1,000 a month seems much more achievable and you are more apt to go about doing what you have to do to save that $1,000. In the end, it adds up to your overall goal of $12,000, but seems less daunting than the full amount.

2. Get a savings partner.

Saving with a partner gives you a cheering squad and someone to make you accountable for reaching your savings goal. If you are married, your spouse can be your savings partner. You can also enlist a friend or family member.

Each of you can set your own savings goal or the mutual savings goal. Schedule check-in appointments to meet or talk on the phone to provide an update to each other. When you have to “answer” to someone, it helps to propel you toward keeping your goal as well.

3. Write down your goal.

Write it down. A Harvard study reveals that written goals are accomplished 80% more of the time than goals that are not in writing. Write down your goal and hang it in prominent location where you see it on a regular basis.

4. Play a savings game.

Learn how to cut spending and reallocate the money to your savings without sacrificing. If you see a new pair of designer shoes you want, wait for the shoes to go on sale before you purchase them. When you buy the shoes, deposit the difference between the original price and the price you paid for the shoes.

If you approach all of your purchases in this manner, it can give you more motivation to save. Another example would be to review your phone bill and cable bill. Determine if there are features you are not using or packages that cost less money and still fit your needs. Then change the package and deposit the monthly savings into your savings account. It’s like playing a game with yourself to see where and how much you can save.

5. Go one step at a time.

Take it one step at a time, rather than trying to implement it all at once or totally changing your lifestyle overnight. Ease into implementing the saving system with one item at a time.

When you take each of these five steps, one at a time, you can look back at the end of next year and realize you have accomplished your goal. Similar to tackling a big work or school project, plan ahead and break your goal down into manageable sections. Planning and implementing your money-saving New Year’s resolution with these steps makes it much more likely that you’ll achieve success.

Bonus Tip: Here’s a sixth way, a New Year’s resolution secret.

So, what are your resolutions for the upcoming year? Leave a comment!

This article was originally published December 22, 2010.


How to Negotiate to Keep Your Cable Promo Rate

Cable TVOne of life’s “sure things” is that, at some point, your cable promo rate is going to expire, and you are going to be stuck with a higher rate for the remainder of your contract.

While some experts recommend that you call and threaten to cancel (and eat the termination fee that comes with quitting your contract early), or mention the possibility of switching to a competitor, Linsey Knerl from 1099Mom.com has a different idea. “I have experienced the dreaded rate like, like all other cable subscribers, and found that the ‘vacation threat’ can sometimes get them to drop the price to the promotional price – or at least closer to it,” she says.

“Most cable contracts allow you to suspend service no more than six months out of every twelve,” says Knerl. “This means that you can call your cable company and ask for the service to be suspended for a time when you don’t want service, and don’t pay.”

Unfortunately, there is a catch with this method. If the cable company takes you up on the offer, you could end up extending your service contract. Even so, if you are in a bind and you need a break from paying, and you don’t want to deal with the early termination fees that come with canceling your service altogether, this can be a viable option.

Knerl says that, in many cases, the cable company will give you a discount, since they want you watching and paying. “Just the threat can sometimes be enough for them to lower the rate for a term,” she says. “You could say something like, ‘I’m considering putting my service on hold for a few months during the time that all my favorite shows are on a break,’ or ‘I only really watch during football season and so the price doesn’t seem worth it.’”

These statements often cue the representative to take steps to extend the amount of time that you receive the promo rate, or at least offer you a discount that can take some of the pressure off your budget.

It’s important to note that some customers are likely to have better results than others. “This works better for long-term customers, or customers that have larger packages,” says Knerl. “Also, I can’t say what this would do to a customer who is in a bundling situation, with more than just cable attached for one price.”

Cable companies are starting to get an idea that more options are available to viewers than ever before. There are plenty of services that offer low-cost streaming, and just having the Internet can mean access to all of your favorite shows. (Of course, if the cable company also offers Internet access it can get you that way.)

As a result, some cable companies are starting to see that they need to be competitive if they want to keep their customers. This can be good for you, rather you threaten to cancel or just threaten to put your account on hold for a short period of time.

Editor’s Note: Looking for more ways to save money? Here are a few more ways to cut your cable bill!

What do you think? Do you have any tricks for keeping a promo rate for your cable TV service? What’s your best tip for saving money on home entertainment? Leave a comment!


Does it Always Make Sense to Pay Off a Mortgage Early?

pay off mortgage earlyOne of the goals of those who long to be debt-free is to pay of the mortgage early. The idea is that once other debts are taken care of, it’s time to focus on paying down the mortgage.

There are a number of strategies you can employ to pay off your mortgage early, from switching to a bi-weekly schedule to aggressively making extra payments when you can. Some homeowners refinance to 15-year mortgages to pay off the mortgage faster and pay less in interest.

But is that really the best course of action?

While the idea of being completely and truly debt-free is one that pulls at the imagination, the reality is that paying off low-interest, tax-deductible debt isn’t always the most prudent course of action – at least from a strictly numbers standpoint.

What Else Could that Money Be Doing for You?

One of the first questions you have to ask yourself, as you begin considering how quickly you can pay off your mortgage, is what else the money can be doing for you.

Right now, you might have a very low mortgage rate. My mortgage rate is below 4 percent. However, in the past year, my annualized investment returns have been right around 11 percent. Averaged out over the last five years, my annualized returns are right around 6 percent. That means that paying down my mortgage debt only gets me – at most, since I’m not even considering the tax deduction – a 3.75 percent return on my “investment.” On the other hand, actually investing that money provides me with the potential for better returns, especially over time.

So, the interest I do pay on my mortgage is tax-deductible, which means that keeping the mortgage reduces my tax liability to some degree. And, at the same time, I have the potential to earn better returns by investing the money. Paying off credit cards as quickly as possible makes sense, since there are no tax benefits and you aren’t likely to earn investment returns that beat a credit card interest rate.

However, mortgage debt is a little bit different.

Choosing to Be Debt-Free

Of course, the financial possibility of better overall returns isn’t as important to someone who is more interested in being debt free. It comes down to priorities. For some, the principle of the true debt freedom and true home ownership (although there are arguments that it’s not true “ownership” as long as the government can nail you for property taxes) is more important than the potential for investment returns that might not actually materialize.

Before you decide which path you will take, it’s important for you to carefully consider your situation and your own priorities. I would rather invest the money than worry too much about paying down my mortgage early (the same is true of my student loans – interest rate below 2 percent).

However, if something happens to my income, I run the risk of foreclosure if I don’t have my mortgage paid off. There’s a certain amount of security in feeling as though you truly own your home.

What do you think? Would you rather pay off your mortgage early or invest the money? Leave a comment!


How to Pay Down Holiday Debt as Quickly as Possible

Holiday DebtEven with the best intentions, it’s too common: People rack up debt during the holidays. If you have some holiday debt, chances are that you want to get rid of that debt as soon as possible.

Here are some tips from Kevin Gallegos, the vice president of Phoenix operations for Freedom Financial Network:

1. Stop charging.

The first thing you need to do is stop using your credit card. “Don’t close any long-standing accounts with a positive payment history, as that can hurt your credit scores,” says Gallegos. But you do need to stop charging. He suggests the time-honored tradition of freezing the credit cards so you can’t make impulse purchases with them while you pay off your holiday debt.

2. Keep paying for your needs.

“Make sure to pay for necessities like food, clothing, and shelter,” says Gallegos. “However, keep in mind that things like fine dining and a new wardrobe are not necessities.” You don’t want to put other areas of your finances at risk, so keep paying on secured debt (car, home) and student loans.

3. Start with credit card debt.

Now that you have stopped charging and identified your true needs, it’s time to make a plan for paying off that holiday debt. Gallegos suggests starting with credit card debt. “Begin by figuring out a fixed monthly amount you can pay toward your debt until all debts have been paid off,” he says. “This amount should be more than the combined minimum payments on all of your cards.”

Then, choose a method of debt pay down. There’s the debt avalanche, which focuses on starting on the card with the highest interest rate so you pay off debt at a faster rate, or the debt snowball which has you start with the lowest balance. The snowball takes longer and costs more in interest, but it can be more motivating, since you start off with a quick victory.

4. Negotiate.

Gallegos points out that you can negotiate with your creditors. “If you have experienced a temporary hardship, you might try calling creditors and asking for ‘temporary hardship status,’” he says. “Some creditors may work out payment plans.” This can be a way to get a little breathing room while you tackle your holiday debt.

Don’t forget that if you are a customer in good standing, you might also be able to negotiate your interest rate. If you can get a lower interest rate, you’ll be able to pay off your holiday debt quicker.

5. Get help if you need it.

Chances are that you can handle your holiday debt on your own. However, if you are overwhelmed and don’t know where to start, it can make sense to get a little help. “Individuals who have credit card debt of $10,000 or more, and are struggling to make required minimum payments, may find help,” says Gallegos.

Your holiday debt might have put you over the edge, acting as the last straw in your situation. If this is the case, you might need help. Make sure you work with a reputable credit counselor or debt company so that you don’t end up in worse trouble overall.

How are you planning on paying down your holiday debt? Leave a comment!


Money Musings Overheard While Christmas Shopping

ChristmasWhat do people in the malls think of Christmas consumerism? Here are some things I’ve heard people say:

Checkout Man at Best Buy:

Man, they brainwash everybody at Christmas. They flood you with ads and make you think you need this stuff.

Guy 1 and Guy 2 in Line at Kohl’s:

Guy 1 - Can you believe we live in a country where there is so much stuff to choose from?

Guy 2 - I know, there are some stores that have a whole aisle for just water!

Older Checkout Lady at Bath & Body Works:

When I was a kid, we bought things when we needed them, not when we wanted them.

Woman in Line at Toys”R”Us:

Kids used to get toys for presents for their birthday and Christmas. Now they get them all year long and are always wanting bigger and more expensive things!

Women on Cell Phone in JCPenney:

I just spent $80 bucks on her outfit! I know, I know it was way more than we’d planned but it was just sooo cute!

Two Ladies in Mall in Front of Clearance Table:

60% off! I just bought that for $50 two weeks ago!

Man looking into Wife’s Cart in Old Navy:

Do you really need all that stuff?

Flustered Woman Walking Out of the Shopping Mall:

I love to shop but this isn’t shopping! This is madness! I didn’t buy a single thing; I just can’t wait in lines that long. No one in my family would want me to waste my whole day in line just to buy presents.

Checkout Lady at Gap talking to Customer:

My husband just called, saying my Gap account bill had arrived. I almost had it paid off before Christmas but now the balance is way back up. Oh well, I guess that’s what you get when you work in a clothing store!

There is definitely a common thread of buying too much and spending too much money. Since when was that what Christmas is about?

Of course, I’m as guilty as the next guy; I’ve spent all day shopping before. I want to buy presents for those I care about so unfortunately I contribute to the shopping madness. In my defense, I get the best deal I can and am polite to everyone in the mall. That’s more than I can say for some people I ran into in the past!

What do you think about Christmas consumerism? What does Christmas mean to you? Leave a comment!

This article was originally published on December 16th, 2006.


Buyer’s Title Insurance and Why You Should Have It

For Sale By Owner Real Estate Home Open House SignVery few people are familiar with title insurance, and even fewer with its optional component – buyer’s title insurance. There are all kinds of insurance policies, but this one never rears its head until you are either buying or refinancing a home or another type of real estate.

Title insurance is one of those quiet types of insurance coverage, that no one pays much attention to until something goes wrong. If it does, and you have coverage, everything will be fine. If you don’t, you could be stepping into a financial disaster with catastrophic financial consequences.

What is Title Insurance?

Title insurance is a type of insurance that will protect the financial interests of either a property owner or a lender in a piece of real estate. It is meant to protect against title defects, liens and other liabilities. It can also protect against lawsuits by paying off liens or various challenges to the property ownership, or title.

Title insurance is required by a lender any time you finance a real estate transaction. This can mean either a purchase-money mortgage or a refinance. The basic title insurance policy is a lender requirement, and it will protect primarily the lender’s interest in the title. It will also protect your interest as the property owner but only on a secondary basis. That’s where things can get complicated, but we’ll dive deeper into that problem in a minute.

Whenever you engage in any real estate transaction, the lender will require that a title search be performed on the property. The search will investigate the chain of property ownership going back many years, as well as search for the existence of any recorded liens on the property. But as thorough as title searches are, they can miss something here or there.

That’s where title insurance enters the picture. Title insurance insures against the possibility that certain liens or ownership claims may have been missed by the title search. Even if they have, title insurance will insure that the property carries a clear title to ownership of the property, so that it can’t be interfered with as a result of an undiscovered claim.

What is Buyer’s Title Insurance?

As the owner of the property, title insurance has one basic limitation: it primarily protects the lender from undiscovered liens or claims. This is referred to as lender’s title insurance because it specifically names the lender as the primary beneficiary of the policy. Ultimately, you will be protected by the policy as well – at least eventually.

And that’s the basic problem. While the lender’s policy will protect the lender’s interests, your ability to sell, transfer or refinance the property could be delayed until the insurance company and the challenger of the title reach a settlement. How long can that take? It’s an open question and depends largely on laws in your state.

That’s where buyer’s title insurance enters the picture. Buyer’s title insurance will name you as the specific beneficiary of the policy. In the event there is an undiscovered lien or title challenge, your buyer’s title policy will free you to sell, transfer or refinance the property despite the existence of the cloud on title.

Buyer’s title insurance generally costs several hundred dollars, and is payable on a one time basis, but for each loan you take on the property. There are no recurring premium charges.

Why You Should Have It

Since most homebuyers try to minimize the amount of money they have to pay to buy a property, and most people who refinance want to maximize the amount of money they take out of the deal, they typically refuse buyer’s title insurance. It’s a buyer’s option, but not a lender requirement.

At the closing table, the closing attorney or escrow agent will recommend the coverage to the borrower, and it is entirely up to the borrower to take it or waive it.

If you’re given the choice, you should always take it. Dollar for dollar, buyer’s title insurance is one of the most cost-effective types of insurance policies you can buy. Spending just a few hundred dollars at closing could save you – literally – tens of thousands of dollars later.

The Potential Nightmare Without It

Let’s assume that you buy or refinance a house, but refuse the buyer’s title insurance option at closing. Five years later, you decide to sell the property, but a claim against the title comes up. Your lender will be covered because they are the primary beneficiary of the title policy on the property.

You however will not be covered, at least not directly. Because of this, you may be unable to sell the property. The title claim will mean that you will be unable to deliver clear title on the property which will block a legal transfer.

Had you taken buyer’s title insurance, you’d be able to sell the property even if the lien wasn’t immediately satisfied. Your coverage will be your ‘out,’ and enable you to move on without further delay. The insurance company can battle the title challenge through the legal system for however long that might take, but it will no longer be your problem.

Next time you’re sitting at the closing table for a home mortgage, and the closing attorney or escrow agent offers buyer’s title insurance, take it. The few hundred dollars you will pay for it will be some of the best money you ever spent.

Do you have buyer’s title insurance? Did you know about it? Leave your thoughts in the comments section!


How to Build Tax Diversification into Your Retirement Investments

tax diversificationYou probably understand the importance of investment diversification – spreading your portfolio across various mutually exclusive asset classes.

But when you are investing for your retirement, it’s also important that you build tax diversification into your portfolio as well. This balance is much more important than most retirement investors realize.

You can build tax diversification into your retirement investments by accumulating some money in non-tax sheltered plans and assets.

Tax-Free vs. Tax-Deferred

When you invest money in typical retirement plans, such as 401(k), 403B, and IRA plans, your money grows within your account on a tax-deferred basis. But tax-deferred is not to be confused with tax-free.

When your investments grow on a tax-deferred basis, you are merely putting off – or deferring – the tax liability on the investment gains.

This deferred tax liability is compounded when it comes to most retirement plans. Under a typical plan, not only do your investment gains grow on a tax-deferred basis, but the contributions that you make to the plan are tax-deferred as well. This is to say that the tax benefit you get now from deducting retirement contributions from current income taxes merely transfers the tax liability to a future date.

Both your contributions, and the income and investment gains that they accumulate, will be entirely taxable upon withdrawal. While this is an outstanding strategy for growing your retirement portfolio, it can catch many investors unaware when the time finally does arrive to begin making account withdrawals.

Why You Will Need Non-Taxable Investments

When it comes to retirement planning, the general assumption is that you’ll effectively transfer taxable income from your working years – when your tax bracket is higher – into your retirement years when it will be considerably lower. But that may not necessarily be the case.

1. You may be in a higher tax bracket in your retirement years.

Many people find that both their income and their income tax liability peak when they’re in their 60s and 70s. This can happen if you have investment income, retirement income, Social Security, as well as continued business and employment income.

Your income may be higher than at any other time in your life as result of having multiple income sources.

Complicating this is the fact that tax-deferred retirement plans generally require mandatory distributions beginning at age 70 ½. The law does not allow you to defer income taxes on retirement accounts forever.

2. When you need to make a large withdrawal.

Just as is the case during your working years, there may be times when you’ll need a substantial amount of money for one reason or another, and need to tap your retirement savings for it.

A large withdrawal itself – since it will be 100% taxable – could even put you in a higher tax bracket. You may need the money to cover very large uncovered medical bills or to help your children or other family members. If you do, the withdrawal will also create a tax liability.

3. Income tax rates may be much higher in the future.

Compared to what income tax rates have been in the past, current rates are relatively low. Growing federal budget deficits could result in higher tax rates. It is entirely conceivable that income that was deferred to protect it from a 15% federal income tax liability, could be subject to an even higher rate on withdrawal.

How to Build Tax Diversification into Investments

Any one or even all three of the above scenarios could see you paying more in taxes on withdrawals that you saved on the contributions to tax-deferred plans. But you can diversify around higher tax consequences by using any of the following investment vehicles.

Non-Tax Sheltered Investments

If you have been accumulating money in non-tax sheltered investments, such as a regular investment brokerage account, you will at least have money available in the event that you need to make a large withdrawal to cover a major expense in retirement.

Since these accounts are not tax-deferred, and were not made with tax-deductible contributions, you can withdraw money completely free of income taxes.

Roth IRAs

Roth IRAs offer the best of both worlds – tax deferral of investment earnings and tax-free withdrawals. As long as the withdrawals are taken after age 59 ½, and the plan has been in effect for a minimum of five years, the money can be withdrawn from the account without tax consequences. This makes Roth IRAs a “must have” for retirement tax diversification planning.

Non-Deductible IRAs

These are not quite as tax friendly as the Roth version, but they can also be used to minimize tax consequences upon withdrawal. When you make nondeductible IRA contributions, that portion of the money can be withdrawn later without being subject to income tax. (Since investment earnings within the account will be tax-deferred, that portion will be subject to tax.)

Real Estate

Real estate is also a tax-deferred investment. You buy a property, and there is no income tax liability on the value of the property until it is sold. But when it’s sold, it’s subject to more favorable long-term capital gains tax rates. You’ll still pay income taxes for sure, but often at a lower rate than you will on withdrawals from fully tax-deferred retirement plans.

Municipal Bonds

Not many people are thinking about municipal bonds in terms of retirement planning these days – the interest rates simply don’t justify it. But at some point in the future when interest rates are higher, they may be worth a second look.

Municipal bonds have the advantage of providing you with a steady and stable income that is completely free from federal income taxes. They are also free of income taxes within the state that issued them, which means that you should favor municipals from your own state.

When you are planning for retirement, keeping all of your assets in 100% tax-deferred investment plans isn’t always the best strategy. Keep at least some money in taxable accounts – and bite the tax bullet now – that way you’ll have more flexibility later.

What are your thoughts on tax diversification in retirement investments? Leave a comment and tell us your strategy!



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