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3 Big Reasons To Think Twice About Investing In A Roth IRA




If there’s one tool that financial experts seem to unanimously love, it’s the Roth IRA. It’s often touted as the hands-down best way to save for retirement, even inspiring a full-blown movement to encourage more people to contribute.

Is this retirement account really the slam-dunk experts make it out to be? Not exactly.

But first, what is a Roth IRA?

An individual retirement account, or IRA, is a tax-advantaged savings account for retirement funds. When you contribute to a traditional IRA, your contributions are made pre-tax, meaning your money goes straight into your account without having any income taxes taken out. Then, once you’re ready to use the funds in retirement, you pay taxes on the withdrawals.

A Roth IRA, on the other hand, taxes your contributions up front. Then you can withdraw the principal and earnings tax-free. The biggest benefit to this is that you can pay fewer taxes on your retirement savings now if you expect your income to increase over time (and thus, put you in a higher tax bracket at retirement).

There are some other pretty great benefits to the Roth IRA, such as the ability to withdraw funds before retirement penalty-free and to make contributions past age 70½. And we’re certainly not here to discount those benefits. But if you examine some of the less-discussed downsides, you might think twice before putting your retirement savings in one.

In fact, Miguel Gomez, a certified financial planner at Lauterbach Financial Advisors in El Paso, recently advised one of his clients against making Roth contributions after running the numbers. Though every person’s situation is different, here are the major reasons he said it might not make sense for someone to contribute to a Roth IRA rather than another type of retirement account.

1. You have to contribute more income upfront.

Since your Roth IRA contributions are made with after-tax money, you actually have to contribute more income than what ends up in your account.

Take this example: In order to max out your contribution for the year in a traditional IRA ― which is currently $5,500 for individuals under the age of 50 ― you need to save $5,500. But let’s say you contribute to a Roth IRA instead and your effective tax rate is 15 percent. You’d actually have to contribute $6,325 to save that same amount.

Obviously, the trade-off is that your withdrawals are going to be tax-free. But not everyone has a ton of extra money lying around to save for retirement. In fact, new data from Northwestern Mutual found that a third of Americans have less than $5,000 saved for retirement, while one in five hasn’t saved a dime.

Instead of paying those taxes upfront, you could have an extra $825 every month to spend on other priorities. For example, if you have student loan or credit card debt with interest rates that are higher than what you’re earning in your IRA, you’re effectively losing money at the end of the day. But by paying taxes at retirement rather than right now, you could pay off that high-interest debt, save for a home or contribute to your child’s college savings in the meantime.

And if you do have the financial bandwidth to take that extra savings and invest it somewhere else, “you’re able to invest money that otherwise would’ve gone to Uncle Sam. And I think that’s a very sweet deal,” Gomez said.

2. The tax savings probably won’t be that big.

As mentioned, one of the biggest reasons to contribute to a Roth IRA is to save on taxes in retirement. The assumption is that you will earn a lot more income by the end of your career than you do right now.

But how large will those savings be? Maybe not as much as you think. That’s because we follow what is known as a progressive tax system.

Rather than having all your income taxed at a certain rate, it’s taxed in tiers according to our tax brackets. Here are the 2018 brackets for a single filer:

  • $0 – $9,525: 10 percent

  • $9,526 – $38,700: 12 percent

  • $38,701 – $82,500: 22 percent

  • $82,501 – $157,500: 24 percent

  • $157,501 – $200,000: 32 percent

  • $200,001 – $500,000: 35 percent

  • $500,001 or more: 37 percent

Let’s say you earn $40,000 per year. Though you fall into the 22 percent bracket, most of your income isn’t taxed at that rate. The first $9,525 is taxed at 10 percent, then the next $29,175 is taxed at 12 percent. The remaining $1,300 is what’s taxed at 22 percent, giving you an effective tax rate of just under 12 percent.

So you can see, whether you earn $40,000 or $80,000, you’ll fall into that same bracket and your income would be taxed at the same rates. Even if your income jumped to $100,000, only $17,500 would be taxed at the slightly higher rate of 24 percent ― the difference tacking on an extra $350.

It is possible to save on taxes by contributing to a Roth IRA. However, the tax savings will be minimal unless you earn significantly less today than you will at retirement age ― and you have a lot of time between now and then.

3. It’s impossible to predict the future.

Many of the benefits of a Roth IRA depend on your ability to predict what life will be like in the future. If you’re fairly young, it can be especially difficult to guess what your priorities and goals will be in 20, 30, even 40 years.

For instance, what if you decide you want to move from a high-income tax state like California or New York and spend your golden years sitting along the banks of the Rio Grande or swimming in the Florida Gulf? Your fellow retirees in these income tax-free states will only have to worry about paying federal taxes on their retirement withdrawals. You, on the other hand? Well, you already paid the state taxes decades ago.

Then there’s the bigger picture. Just look at Social Security ― when the program was established, no one predicted that a wave of retiring baby boomers would use up the funds faster than younger generations could replenish them. Many predict that the Social Security trust fund will run dry by 2034, after which retirees would receive diminished benefits that would rely largely on payroll and income taxes.

Finally, there’s the question of what our tax system will look like as a nation by the time you retire. Are you certain the rules won’t change by then? Even the most recent tax reform that went into effect this year ended up lowering taxable income for many Americans. Those who previously contributed after-tax dollars to a Roth locked in the higher rates.

“We know today’s tax rules,” said Gomez. “Who knows if/when the government decides to, for example, make Roth accounts taxable in some way. Personally, I’d rather take the certainty of the deduction today over hoping I’m able to make tax-free withdrawals in 30-plus years.” He noted that this isn’t necessarily the case for all his clients; so much depends on when a person plans to retire.

Hedge your bets.

Like all things in personal finance, there’s never a cookie-cutter solution that works for everyone. So if you’re told there is, it’s worth poking around and questioning whether that’s really true.

For the saver who opts for a Roth IRA due to the potential tax benefits, there’s really only one scenario in which it works in their favor. “It could be a good idea for someone who is not making a lot of money right now … but when they get older and make more money, they could end up in a higher tax bracket,” Gomez said. For example, a young person who is just starting out but ends up hitting it big as a successful attorney or engineer.

However, he noted that unless the income gap is significant, the tax benefit is really not that big. “So you’re giving up that little tax difference for the hope or promise that you will not have to pay taxes on those funds in the future,” Gomez said.

There’s so much uncertainty about what our economy will be like in the future, it’s hard to say for sure what the best option is. That’s why Gomez recommends that you hedge your bets and divide your retirement savings among different types of contributions. “We call it tax diversification. You want to have money in pre-tax accounts, in after-tax accounts and you want to have money in traditional brokerage accounts.”

The only thing that is certain? You need to save, period.

“The most important thing is to do it,” Gomez said.


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4 things kids need to know about money




(NC) Responsible spending includes knowing the difference between wants and needs. Back-to-school season, with added expenses and expectations around spending, is the perfect time to not only build your own budget for the year ahead, but also to introduce your own children to the concept of budgeting.

The experts at Capital One break down four basic things that every child should know about money, along with tips for bringing real-life examples into the conversation.

What money is. There’s no need for a full economic lesson,but knowing that money can be exchanged for goods and services, and that the government backs its value, is a great start.
How to earn money. Once your child understands what money is, use this foundational knowledge to connect the concepts of money and work. Start with the simple concept that people go to work in exchange for an income, and explain how it may take time (and work) to save for that new pair of sneakers or backpack. This can help kids develop patience and alleviate the pressure to purchase new items right away that might not be in your budget.
The many ways to pay. While there is a myriad of methods to pay for something in today’s digital age, you can start by explaining the difference between cash, debit and credit. When teaching your kids about credit, real examples help. For instance, if your child insists on a grocery store treat, offer to buy it for them as long as they pay you back from their allowance in a timely manner. If you need a refresher, tools like Capital One’s Credit Keeper can help you better understand your own credit score and the importance of that score to overall financial health.
How to build and follow a budget. This is where earning, spending, saving and sharing all come together. Build a budget that is realistic based on your income and spending needs and take advantage of banking apps to keep tabs on your spending in real-time. Have your kids think about how they might split their allowance into saving, spending and giving back to help them better understand money management.

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20 Percent Of Americans In Relationships Are Committing Financial Infidelity




Nearly 30 million Americans are hiding a checking, savings, or credit card account from their spouse or live in partner, according to a new survey from That’s roughly 1 in 5 that currently have a live in partner or a spouse.

Around 5 million people — or 3 percent — used to commit “financial infidelity,” but no longer do.

Of all the respondents, millennials were more likely than other age groups to hide financial information from their partner. While 15 percent of older generations hid accounts from their partner, 28 percent of millennials were financially dishonest.

Regionally, Americans living in the South and the West were more likely to financially “cheat” than those living in the Northeast and Midwest.

Insecurity about earning and spending could drive some of this infidelity, according to industry analyst Ted Rossman.

When it comes to millennials, witnessing divorce could have caused those aged 18-37 to try and squirrel away from Rossman calls a “freedom fund”.

“They’ve got this safety net,” Rossman said. They’re asking: “What if this relationship doesn’t work out?”

As bad as physical infidelity

More than half (55 percent) of those surveyed believed that financial infidelity was just as bad as physically cheating. That’s including some 20 percent who believed that financially cheating was worse.

But despite this, most didn’t find this to be a deal breaker.

Over 80 percent surveyed said they would be upset, but wouldn’t end the relationship. Only 2 percent of those asked would end the relationship if they discovered their spouse or partner was hiding $5,000 or more in credit card debt. That number however is highest among those lower middle class households ($30,000-$49,999 income bracket): Nearly 10 percent would break things off as a result.

Roughly 15 percent said they wouldn’t care at all. Studies do show however that money troubles is the leading cause of stress in a relationship.

That’s why, Rossman says, it’s important to share that information with your partner.

“Talking about money with your spouse isn’t always easy, but it has to be done,” he said. “You can still maintain some privacy over your finances, and even keep separate accounts if you and your spouse agree, but you need to get on the same page regarding your general direction, otherwise your financial union is doomed to fail.”

With credit card rates hovering at an average of 19.24 percent APR, hiding financial information from a partner could be financially devastating.

But, Rossman adds, it’s not just about the economic impact but also the erosion of trust.

“More than the dollars and cents is that trust factor,” he said. “I think losing that trust is so hard to regain. That could be a long lasting wedge.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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7 Examples Of Terrible Financial Advice We’ve Heard




Between television, radio, the internet and well-meaning but presumptuous friends and family, we’re inundated with unsolicited advice on a daily basis. And when it comes to money, there’s a ton of terrible advice out there. Even so-called experts can lead us astray sometimes.

Have you been duped? Here are a few examples of the worst money advice advisers, bloggers and other personal finance pros have heard.

1. Carry a balance to increase your credit score.

Ben Luthi, a money and travel writer, said that a friend once told him that his mortgage loan officer advised him to carry a balance on his credit card in order to improve his credit score. In fact, the loan officer recommended keeping the balance at around 50 percent of his credit limit.

“This is the absolute worst financial advice I’ve ever heard for several reasons,” Luthi said. For one, carrying a credit card balance doesn’t have any effect on your credit at all. “What it does do is ensure that you pay a high interest rate on your balance every month, neutralizing any other benefits you might get from the card,” Luthi explained. “Also, keeping a 50 percent credit utilization is a surefire way to hurt your credit score, not help it.”

Some credit experts recommend keeping your balance below 30 percent of the card limit, but even that’s not a hard-and-fast rule. Keeping your balance as low as possible and paying the bill on time each month is how you improve your score.

2. Avoid credit cards ― period.

Credit cards can be a slippery slope for some people; overspending can lead to a cycle of debt that’s tough to escape.

But avoiding credit cards on principle, something personal finance gurus like Dave Ramsey push hard, robs you of all their potential benefits.

“Credit cards are a good tool for building credit and earning rewards,” explained personal finance writer Kim Porter. “Plus, there are lots of ways to avoid debt, like using the card only for monthly bills, paying off the card every month and tracking your spending.”

If you struggle with debt, a credit card is probably not for you. At least not right now. But if you are on top of your finances and want to leverage debt in a strategic way, a credit card can help you do just that.

3. The mortgage you’re approved for is what you can afford.

“The worst financial advice I hear is to buy as much house as you can afford,” said R.J. Weiss, a certified financial planner who founded the blog The Ways to Wealth. He explained that most lenders use the 28/36 rule to determine how much you can afford to borrow: Up to 28 percent of your monthly gross income can go toward your home, as long as the payments don’t exceed 36 percent of your total monthly debt payments. For example, if you had a credit card, student loan and car loan payment that together totaled $640 a month, your mortgage payment should be no more than $360 (36 percent of $1,000 in total debt payments).

“What homeowners don’t realize is this rule was invented by banks to maximize their bottom line ― not the homeowner’s financial well-being,” Weiss said. “Banks have figured out that this is the largest amount of debt one can take on with a reasonable chance of paying it back, even if that means you have to forego saving for retirement, college or short-term goals.”

4. An expensive house is worth it because of the tax write-off.

Scott Vance, owner of, said a real estate agent told him when he was younger that it made sense to buy a more expensive house because he had the advantage of writing off the mortgage interest on his taxes.

But let’s stop and think about that for a moment. A deduction simply decreases your taxable income ― it’s not a dollar-for-dollar reduction of your tax bill. So committing to a larger mortgage payment to take a bigger tax deduction still means paying more in the long run. And if that high mortgage payment compromises your ability to keep up on other bills or save money, it’s definitely not worth it.

“Now, as a financial planner focusing on taxes, I see the folly in such advice,” he said, noting that he always advises his client to consider the source of advice before following it. ”Taking tax advice from a Realtor is … like taking medical procedure advice from your hairdresser.”

5. You need a six-month emergency fund.

One thing is true: You need an emergency fund. But when it comes to how much you should save in that fund, it’s different for each person. There’s no cookie-cutter answer that applies to everyone. And yet many experts claim that six months’ worth of expenses is exactly how much you should have socked away in a savings account.

“I work with a lot of Hollywood actors, and six months won’t cut it for these folks,” said Eric D. Matthews, CEO and wealth adviser at EDM Capital. “I also work with executives in the same industry where six months is overkill. You need to strike a balance for your work, industry and craft.”

If you have too little saved, a major financial blow can leave you in debt regardless. And if you set aside too much, you lose returns by leaving the money in a liquid, low-interest savings account. “The generic six months is a nice catch-all, but nowhere near the specific need of the individual’s unique situation… and aren’t we all unique?”

6. You should accept your entire student loan package.

Aside from a house, a college education is often one of the biggest purchases people make in their lifetimes. Often loans are needed to bridge the gap between college savings and that final tuition bill. But just because you’re offered a certain amount doesn’t mean you need to take it all.

“The worst financial advice I received was that I had to accept my entire student loan package and that I had no other options,” said Gina Zakaria, founder of The Frugal Convert. “It cost me a lot in student loan debt. Now I tell everyone that you never have to accept any part of a college financial package that you don’t want to accept.” There are always other options, she said.

7. Only invest in what you know.

Even the great Warren Buffett, considered by many to be the best investor of all time, gets it wrong sometimes. One of his most famous pieces of advice is to only invest in what you know, but that might not be the right guidance for the average investor.

In theory, it makes sense. After all, you don’t want to tie up your money in overly complicated investments you don’t understand. The problem is, most of us are not business experts, and it’s nearly impossible to have deep knowledge of hundreds of securities. “Diversification is key to a good portfolio, and investing in what you know leads to a very un-diversified portfolio,” said Britton Gregory, a certified financial planner and principal of Seaborn Financial. “Instead, invest in a well-diversified portfolio that includes many companies, even ones you’ve never heard of.”

That might mean enlisting the help of a professional, so make sure it’s one who has your best interests at heart.

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