Is It Time To Switch To Roth IRA Contributions

Currently, I contribute all of my retirement contributions via my employer’s 401(k) plan.  I don’t quite max it out yet, though I’m working toward that goal.  However, I’m giving serious consideration to ceasing contributions, and instead contributing to my Roth IRA instead.  Here are a few considerations:

No Match

Right now, my employer doesn’t match anything, so there’s no discernable benefit to contributing even a penny to that plan as far as that goes.  They did a nice match for awhile, but cut it at the height of the recession, and all signs point to a continuation of the ‘no match’ policy.

Tax Considerations

One of the big reasons I’m thinking of switching is because of the eventual tax considerations involved between the two.  According to today’s rules, I’ll eventually have to pay income tax on my 401(k) withdrawls, but not so on the Roth IRA contributions.  Assuming that this policy holds true for the monies in the accounts, I think it would be good to have a balance between the two.

Contribution Amount

mb-money201308Because the 401(k) is pre-tax, whereas the Roth IRA would be post-tax, the up front effect would be that I’d be contributing less.  If I suspended contributions to the 401(k), I would take the resulting difference in my paycheck and contribute that toward the Roth IRA, so the net effect would be zero in terms of my ‘net pay’, though a $400 contribution today could be a $300 contribution tomorrow.

Market Effects

The market has performed so well that the difference has probably worked in my favor.  By contributing more, I’ve been able to take advantage of the gains with the extra money involved.  If I were to switch to a Roth IRA, I’d be betting that the massive gains would be tapering off, at least in the short term.  I’m starting to think that the market is ready for a breather, so this would be a good time in my mind.

Automatic Allocations

One thing that I like about the 401(k) is that my money is divided up between funds that I choose which give me a good allocation.  I’d have to discover how to make these allocations on a regular basis.

Transaction Fees

There are currently no up front transaction fees with the 401(k), but depending on what my investment preferences are, I could pay $10 per transaction, as my Roth is currently through Ameritrade.  They do have no-fee funds, but I’d have to do some research to see if they are comparable.  If I were to purchase anything with a transaction fee, I’d have to determine the threshold on when to make transactions.  I wouldn’t want to make a $300 investment every pay period, for example, and pay a $10 fee each time.  That would be a 3.3% investment fee right off the top.  Instead, I’d have to accumulate the cash to a point where it made sense.

Maintenance Fees

I do a regular check to make sure that I’m not involved with funds that charge over a 1% annual maintenance fee as I believe anything above that is too high. I’d have to carefully look at whether the fees and results are comparable with the options available.

More Options

Should I choose, I could invest in individual stocks with my IRA contributions.  Some argue that you should never do that with retirement investments.  I’d have to do research and give some serious weight of the pros and cons.  Right now, it’s an ‘out of sight, out of mind’ thought process.


Right now, my retirement allocation never hits my paycheck.  With the option of having it deposited and more ‘available’, would the temptation exist to defer some of the retirement contributions?  Regularly or even occasionally would be detrimental to the long term goal of a fully funded retirement.  Knowing myself and my financial personality, I believe the risk to be extremely low, but it’s still a factor worth considering.

There It Is

So, there’s the long and short of what I’ve taken into consideration.  I’m curious what you think, readers, and if any of you are in this boat, what you’ve done and how you go there.  Are there any factors I haven’t thought of or mentioned?


Tips for Getting a Personal Loan When You Are Retired

Living on a fixed income is not always easy. Unfortunately, retirees often encounter unexpected situations that they do not have enough money in their savings account to cover. It might be something simple like an appliance breaking, or it could be a medical emergency. While older people tend to have good credit scores, they also have a limited monthly income, which may worry lenders. If you need to apply for a personal loan, here are some tips to increase your chances of being approved.

Figure Out What You Can Afford

If you do not already have one, create a budget that shows your income and your expenses. For one thing, it will help you figure out how much of a loan payment you can afford. Secondly, it will also give you something to present to the lender that shows that you will be able to repay the loan. Even if you find out you can afford to borrow more money than you thought, only borrow as much as you need. Do not go any further into debt than you have to.

 Try Alternative Lenders

Going into a traditional bank may not be your best option. Online loan referral websites allow you to fill out one application and then they match you up with potential lenders. You can easily evaluate the different offers to find the one that best suits your needs. Make sure that you get a fixed interest rate loan no matter which lender’s offer you accept. The last thing you want is for your loan payments to go up unexpectedly.

 Check Your Credit Report

Because they often do have good credit, senior citizens present a very attractive target for identity thieves. Pull your credit reports from Trans Union, Experian and Equifax and make sure there are no accounts on there that do not belong to you. Sometimes accounts between family members, such as fathers and sons with the same name, can get mixed up as well. Examine all three reports and dispute any errors if you find them.

 Secure Your Loan

Another way to help alleviate lenders’ concerns about your income is to use assets to secure your loan. Many people use their home as collateral. If you have a 401k plan or a ROTH IRA that you do not want to tap into, you may still be able to use that as collateral for your personal loan. Cars, watercraft, and even some investments are all things you may be able to use to secure your loan. Secured personal loans often come with better interest rates as well.

Getting a personal loan is difficult for most people, but it can be even more difficult to do after you are retired. However, do not let lenders intimidate you or try to talk you into loans that do not make good financial sense. If you have all your paperwork together and you carefully research your options, you will eventually be able to find a lender who will offer you a loan with reasonable terms.

Editor’s View: I agree that it is likely difficult to obtain such a loan for those who are retired, simply because income streams are usually not such to where a lender would consider you a good risk.  If you are not too far along into retirement and finding yourself in this situation, you may well want to re-consider whether you’re truly ready for retirement.  Obtaining loans will get increasingly difficult, and will have more ramifications on your overall retirement strategy the further into your retirement you get.

About the Author: Dona Collins is a personal finance specialist and writer with a passion for helping other succeed financially.

Was The Payroll Tax Holiday A Good Idea?

By now, most people have probably received their first paycheck of the year and have seen the effect of the expiration of the payroll tax holiday.  As part of the economic stimulus packages during the throes of the Great Recession, the powers that be decided that giving a temporary break would help the economy.  Most Americans contribute 6.2% of their paycheck toward the Social Security Fund, and this was cut to 4.2% throughout 2011.

For someone making $52,000 per year, this resulted in additional take home pay of roughly $1,000 per year, with the hope being that Americans would spend that money, injecting spending into the economy.  Spending which, at that point, had been dramatically slowed.

At the end of 2011, the payroll tax holiday was extended for an additional 12 months, so Americans now had two years of extra spending money.

This is good and bad.

The pros

Here’s a couple of reasons that the tax holiday was a good idea:

  • It gave Americans more spending money – For many people (myself included), the 2% holiday was the only raise that they saw in their paycheck for multiple years.  At the time, many companies were cutting people, and if you were lucky enough to keep your job, many salaries were cut.  This squeezed paychecks, and an extra $40 or so per paycheck would certainly help many families pay the bills or pay off some additional debt.
  • It may have helped us out of the recession faster – This is up for debate, but the fact is that we did eventually work our way out of the worst of the recession, and the spending power given by this 2% cut is largely believed to have contributed, at least in part.

The cons

Here are a few reasons why it could be argued that the payroll tax may not have been such a great idea:

  • It didn’t help people who had already lost their jobs – The tax gave people a break from paying some of the taxes on their paycheck.  That’s all fine for people who have a paycheck, but if you were one of the millions of people that lost their jobs, you weren’t getting a paycheck, and the tax holiday didn’t benefit you at all.  Granted, they had other ‘measures’ which were supposed to address this, such as countless extensions to unemployment benefits, but regardless, there were a good percentage of Americans who didn’t see benefit from this at all.
  • The cut was temporary, but people didn’t see it that way – I can’t tell you the number of people I’ve seen complain on Facebook about how their paychecks went down (even though it technically was not a tax hike).  The fact is that everybody should have seen it coming, but two years is a long time to forget about the fact that the holiday wasn’t going to last forever.  Many people got used to the 2% additional income and baked it right into their budget.  If they budgeted their paycheck, if they did their household budget, over a two year period, that money was included.  To cut it out became a big shock.
  • Our economy is still fragile – I find it laughable that a huge piece of the negotiations that centered around ‘going over the fiscal cliff’ was to make sure that taxes didn’t go up for middle class Americans, with the logic being that the economy couldn’t afford that.  Yet, every middle class American who collects a paycheck just saw their income go down.  In fact, extending the payroll tax holiday for additional time was a non-starter on both sides of the political aisle (probably the one thing both parties agreed on, go figure).  It’s interesting that the same politicians who argued about the effects of tax rates going up and the impact that would have on the economy addressed the fact that by letting this expire, surely spending will be effected, leading to probable economic impact.  In six months when growth slows or certain sectors start seeing a slowdown, will anybody acknowledge the fact that diminished spending power might have a direct relation?
  • It added to the budget deficit – There were no spending cuts to match the decrease in revenue that resulted from this ‘holiday’, so the long and short is that this added to budget deficits.  Budget deficits that stand today at over $16 trillion dollars and are growing at over a trillion dollars per year.  Yikes.

My verdict

I personally never liked the idea of the tax holiday, not because I didn’t like the idea of getting more money, but because I knew that it was simply another method of kicking the can down the road, and that we would eventually have to let the ‘holiday’ run out, at which point it would be painful.

Once it was re-upped for a second year, I felt that the prudent way to act should have been with a clear and gradual exit strategy.  Rather than extend it and let it simply expire at some point (which is what happened), they should have set an end date, and also phased it out.  Maybe half a percent every six months, which would have given people a little more opportunity to get used to the reduction versus an all in one approach.  I knew that this was never going to happen, because people would have seen it as getting hit three times instead of one.

So, my verdict is that I feel they messed up twice.  They messed up by enacting it in the first place, then they messed up by letting it expire all at once after such a long time of having it in place.

How we handled it

I haven’t gotten a raise for several years, so I’m not going to lie, the extra money came in handy.  For us, we handled it such a way that we never actually saw a bump in take home pay.

The first year.  In 2011, our health care premiums were going up by an amount that would have impacted my take home pay by about 1%, so half of the 2% was accounted for right off the bat.  We also increased my 401(k) contribution by 1%, going from 10% to 11%.  With that, my take-home-pay was about the same.

In 2012 they kept our health care costs the same, so when they extended the holiday, doing nothing kept our pay the same (since once again, we did not get a raise).

Now that it’s going back up, our paycheck is definitely affected.  We actually made the switch to a High Deductible health plan with a Health Savings account.  The cost of this is actually less prior to making any HSA contributions.  However, the net difference for us after the premium decrease and the 2% Social Security increase is only about $40 per paycheck.  This means that, assuming we keep everything the same, we would only be contributing $960 toward our HSA plan, a number that would fall very short of my hoped for amount.

Had the 2% holiday not expired, we would have been able to contribute quite a bit more.

The obvious answer is to decrease our retirement contributions, since we used part of that as funded by the tax holiday.

But, I don’t want to do that.  If we do it will be a method of last resort.

For now, we’ll tough it out.  It’s been hard not getting a raise for as long as it’s been.  Every y ear, costs of goods have gone up.  Costs of health care premiums have gone up.  We’ve had two kids in that time frame, so costs there are way up.  In other words, the same paycheck four years ago went a lot further than it does today.

But, we still find a way.  And, it’s worth it.

For now, we’ll keep the retirement contributions the same, and as far as making sure our HSA is funded, there are several options.

I’d written in the past indicating that we had some flexibility in our emergency fund.  Bleeding off 10% of that could provide a comfortable padding in our HSA account and at least help ensure that we are keeping it well funded.  In the past, we’ve also contributed a portion of our tax refund toward paying down debt, with one of my goals being to pay the mortgage off before our kids started college.  Since re-financing in 2011, that’s already built in, so while it would be nice to advance pay some debt, extra payments are something I could postpone and still be comfortable with.

What do you think of the payroll tax holiday now that you had two years of living with it and the band-aid ripped off all at once?  Would you have handled anything different on a macro level (agreeing with it from the standpoint of the economy) or on a micro level (how you handled it within your household)?  What do you think the impact of the expiration will be on the economy?

How Balanced is Your Retirement Portfolio?

This post contains guest content.

There is nothing more important than planning for retirement. Whether you are in your 20s or in your 40s, it is always the right time to start thinking about how you will support yourself in the retirement years. It is essential for you to think about the way in which you will distribute funds in a Roth IRA or 401(k) account. As you devise your portfolio strategy, here are some tips to consider.

1. If you’re young, choose high-growth stocks.

If you are young, then you have time on your side. Think about choosing some stocks that are considered a riskier investment. This does not mean that you should not look into the actual value of the company as well as its debt-ratio. You should still make sure that you are investing in companies that have high value. Just know that you can afford to invest in pharmaceutical, “green” or tech companies. These types of companies are set for high growth in the upcoming decades.

2. If you’re older, choose conservative stocks.

If you are in your mid 40s or older, then you should choose conservative stocks for your portfolio. Stay away from stocks that have a high risk. You need to have access to funds during your retirement years, so this should be your main goal. You do not have time to waste in losing funds from your portfolio.

3. Give mutual funds a chance.

Mutual funds can provide you with a great opportunity for growing your portfolio in a safe way. Try to find a mutual fund that has consistently performed in the past five or ten years.

4. Stay away from penny stocks.

Penny stocks are a great trap for people of all ages. Older individuals get lured into the idea of making “fast cash” with penny stocks. Younger people believe that they can keep their money in penny stocks for years and experience growth. The truth is that a majority of companies with penny stocks are going through bankruptcy. You should try to avoid investing in these companies.

5. Research the debt-ratio of a company before investing.

Lastly, always make sure to research the debt-ratio of a company before you put your money into the company. If a company has many outstanding debts, then it may be at risk for filing for bankruptcy.

When you invest, it is essential to keep these tips in mind. You will be able to create a solid portfolio by just remembering to consider your own circumstances. Another tip would be to meet with an investment service. You don’t necessarily need to pay someone to advise you on everything, but getting some professional advice might be wise decision.

About the Author: Jenna Smith is an online blogger who normally writes on the topics of personal finance and business. Jenna often writes on family finance and investment. You can read more writing by Jenna at

From A Bloody Sock To A Bloody Mess

Curt Schilling was one of my favorite baseball players in the 2000’s.  Whether you love or hate the Red Sox, anybody who follows baseball surely remembers the Red Sox ending their 900 year title drought partly because Curt Schilling wanted it so bad that he pitched throughout the playoffs with a tendon so bad that his foot bled and turned his sock blood red.  Regardless of the pain and the blood, his performance helped the Red Sox win the 2004 World Series.

He was a dominant force before and after that and the ‘Bloody Sock’ is one of the icons that shows his talent and his heart of a champion.

Unfortunately, that didn’t carry through for very long in his post-baseball career.

After retiring from baseball, Curt decided to form a video game company.  He invested just about every penny he had saved from his baseball earnings into this company.

It went belly up.  Recent reports indicate that all of the money that he made from baseball is gone.

Imagine that.  Being one of the best pitchers in the game.  Having one of the most iconic pieces of clothing enshrined in the Hall of Fame (that’s where one of the bloody socks ended up).  Representing the force behind ending a decades long curse.

Only to lose every dollar that’s associated with it.

What a mess.

Here are the three things that I think Curt Schilling did wrong with the whole video game fiasco.

  1. Got involved with something that he wasn’t an expert at – I’ve heard that Schilling was a gamer.  He loved playing video games.  Cool.  Maybe he loved playing them and beat all the other players in the clubhouse and on the team planes.  I don’t know.  Even if he was the master at playing video games, I can’t really imagine that Curt Schilling was a seasoned video game developer.  Chances are he had people pitching him ideas and decided to act on it, but did so without the expertise and knowledge that someone forming this type of company and making this type of investment should have.
  2. The investment itself – Speaking of making an investment, what was he thinking investing everything into this company?  You often hear success stories of people starting a company with everything they have and turning it into a roaring success.  That’s all fine and good if you have a few thousand bucks, but he lost fifty million dollars.  Fifty million.  That’s insane.  If he wanted to get involved in the video game industry, fine.  Let him have his fun.  But, under no circumstance should he have invested any more than $10 million dollars.  He should have found investors to make up the rest, and if he couldn’t, maybe that would have clued him in that the idea he was working on wasn’t a winner anyways.
  3. The blame game – The story of the investment goes that Rhode Island made an investment into his company with the promise that the company would provide 450 jobs to Rhode Island residents.  When things seemed to be going south, someone in the political system talked about the problems.  This essentially shut the video game company down.  Schilling said that if this information hadn’t been disclosed, he could have found investors to keep things going.  In other words, he was putting his own mistakes on others.  I don’t buy it.  If he was playing the blame game at the end, chances are he was delusional the entire time that things were headed south and his money was going out the window.

Where will Curt Schilling go from here?  I have no idea.  Will he be penniless?  Somehow I doubt that.  But, maybe his retirement will be going around and charging for autographs.  I know many former stars can make a living doing that, but nowhere near the lifestyle and security that $50,000,000 (or even $40,000,000 had he followed my second point above) would have offered.

From bloody sock to a bloody mess.

And it really could have been avoided.

Figuring Out the “Where” Of Retirement

Planning for retirement involves asking – and answering – a number of important questions. When are you going to retire? How are you going to save money for your post-career life? What investment vehicles (IRAs, 401Ks, money markets) will you use to insure the optimal amount of savings? Certainly, there are plenty of questions to ask and factors to consider whenever retirement comes to mind.

But while you’re busy answering the whens, hows, and whats of retirement planning, make sure not to forget an important but oft-overlooked question: the “where.” Specifically, where do you envision retiring when the time comes? You don’t need to have concrete and detailed plans, but it’s important to have a good conception of your retirement location when planning savings and spending during your work life.

The first step in addressing the “where” is to determine whether you plan to stay in your current home, move elsewhere (i.e. to a condo or smaller residence) in your local area, or move to another region of the country or the world altogether. Most people choose to stay in their local area out of contentment, familiarity, and family ties. If this sounds like a situation that you may find yourself in, you then want to determine whether you stay in your home or try to downsize your residence. My wife and I could never imagine leaving our home once our mortgage is finally paid off. Others, however, want to seek out a smaller living space or a more vibrant neighborhood once their careers are over and their children are grown. And still others, of course, will choose to move across the country in search of warmer weather and a more retiree-friendly lifestyle.

So what’s the value of figuring this all out now? While it’s always good to plan ahead from a logistical perspective, the real benefit of location planning is much more real: it allows you to answer the “how” question and determine exactly how much money you’ll need for retirement. The general consensus is that a retiree will need 70 to 80 percent of their annual income in order to retire comfortably. Use this number as your starting point. Then, factor in the “where.” If you plan to stay in your current home, expenses will generally be lower and you can bump down your estimate to as low as 60 percent. You may also be able to save less if you plan to move to a college town or to a rural area where the cost of living is lower. On the other hand, a move to a condo downtown or to a highrise in San Diego will likely push you to the 80 percent level and beyond. This isn’t simply the result of housing costs; it also reflects higher entertainment and meal expenses, two areas where retiree spending falls on all parts of the spectrum.

All this is to say that location matters when retirement is concerned, and that you can best plan and prepare by considering location sooner rather than later. You may find that your location allows you to save less than you originally thought. Or you may need to save more or retire later in order to live comfortably in your desired location. Either way, it’s good to ask the “where” of saving now so that you can enjoy the “where” of retirement later.

This is a guest post.