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Why make 2015 the year of the IRA: 4 reasons to use an IRA

June 29, 2015

By Dan Rafter | Money Rates Columnist

Lee Frush knows that it's not always easy to think about retirement: You still have kids to send to college, mortgage payments to make and credit card debt to trim.

But Frush, a certified financial planner with Atlanta's Cornerstone Financial Management, also knows how important it is to start saving for retirement as early as possible. The sooner you begin saving, the faster you'll build up a nest egg that allows you to live your retirement years in comfort.

And one of the best ways to save that money? By investing it in an Individual Retirement Account, better known as an IRA.

"People do often have a problem seeing the long-term picture," Frush says. "It's much easier to spend that money today than it is to save it. When you're talking to 25-year-olds about opening an IRA, they can't project their lives out to 65. But then it is 40 years down the road and they haven't saved nearly enough."

Why 2015 is the year of the IRA

Frush and other certified financial planners say that this should be your year of the IRA. There's no excuse not to start socking away some money in a retirement account, even if you are already contributing dollars to your company-provided 401(k) plan. The federal government lets you to contribute to both an IRA and a 401(k) plan. If you can afford to do both, that's ideal.

And if you don't have a 401(k) plan? Then you definitely need to invest in an IRA this year. The IRS says that you can contribute a total of $5,500 to an IRA in 2015, or $6,500 if you're 50 or older.

"The most difficult decision all of us face during our earning years is how much do we live in the present and how much do we prepare for the future?" says Bruce Vandegrift, a wealth adviser at Rockford Bank and Trust Company in Rockford, Illinois. "Investing in an IRA is one of the best ways to prepare for our future."

Here are four reasons why investing in an IRA today makes sense for your financial future:

1. There's a right IRA for you

You have your choice of two main IRA types: the traditional IRA and Roth IRA. The main difference between the two? It's mostly about when you take your tax hit.

With a traditional IRA, you'll pay taxes after you begin withdrawing money. With a Roth IRA, you won't pay any taxes when you withdraw money from your account. You will, though, pay taxes on your money when you first deposit it into your account.

There are other differences. You can keep your dollars in a Roth IRA for as long as you'd like. With a traditional IRA, you must begin making yearly withdrawals from your account once you reach 70-and-a-half.

One thing isn't different, though: If you withdraw funds from an IRA -- traditional or Roth -- before you reach age 59-and-a-half, you'll face a 10 percent penalty from the federal government, in addition to any taxes you'll have to pay. So avoid doing that.

The best way to determine whether a Roth or traditional IRA is best for you is to decide whether a tax deduction today is more important than being able to withdraw money tax-free in retirement. A traditional IRA gives you an immediate tax deduction, though it's not a direct dollar-for-dollar write-off. A Roth IRA does not. But when you retire, you will have to pay taxes on the money you withdraw from a traditional IRA. That won't happen with a Roth.

2. You can reduce your taxable income

No one likes paying income taxes. A traditional IRA, at least, can help lower the amount you have to pay.

When you contribute to a traditional IRA, you reduce your taxable income by whatever amount you deposit in your account that year. If you deposit $4,000 in your traditional IRA this year, your taxable income will drop by $4,000.

Tommy Lee, a partner with the Atlanta office of Habif, Arogeti & Wynne, LLP, a tax, audit and business advisory firm, says that this benefit is too good to pass up.

"I consider an IRA the most efficient way to save for retirement," Lee says. "We encourage our clients to put as much money as they can in their IRAs, whether traditional or Roth. And if you can reduce your taxable income while doing this, why would you pass up that opportunity?"

3. You'll get a big tax break

Lee points out another huge benefit of investing in an IRA: Your money will grow on a tax-deferred basis. You won't pay any taxes on the capital gains you earn on your investments in an IRA until you begin withdrawing that money, sometime after you turn 59-and-a-half.

"I hammer the message home to my own staff: You need to maximize your contributions," Lee says. "The deferral you get from an IRA account is huge. One of the biggest tax breaks you can get is a deferral on the money you earn in a 401(k) plan or an IRA. That is much more valuable than any other itemized deduction you might read about in the paper."

4. You'll be crafting a happier retirement

Company pensions have all but disappeared, meaning that it's being left up to individuals to save for their retirement on their own. People are living longer, too. You might live 25, 30 years or longer after you leave the working world.

To secure your retirement savings in the meanwhile, consider putting your money toward options like an IRA money market account.

By contributing to a retirement account, you'll be providing yourself with one more financial cushion for those retirement years. And if you can do this while contributing to your company's 401(k) plan? You'll be steadily building a nest egg that can help make your retirement years happier ones.

"Make sure that you at least contribute enough to your company's 401(k) plan that you qualify for the matching contribution from your employer," Vandegrift says. "That's free money. And if you can then also contribute to an IRA? You should do it. The more money you can save now, the better off you'll be in retirement. Retirement isn't as far away as you might think."

7 wise financial habits to learn from our grandparents

June 23, 2015

By Dan Rafter | Money Rates Columnist

How many times have your grandparents rushed out to spend $800 on the latest and greatest laptop only to do the same thing six months later when the new, must-have model comes out?

If you laughed at the idea, you're not alone.

Not all of our grandparents are frugal, but many of the seniors who lived through the days of the Great Depression spend more time saving their dollars than spending them. This is one of the most important financial lessons today's younger consumers can learn from their own grandparents.

"After what they saw in the Great Depression, [our grandparents], really swung toward protecting everything they earned," says Melinda Kibler, client service manager with Palisades Hudson Financial Group. "The younger generation is not as concerned about saving for the future. They live for today. They could learn a lot about the importance of saving from their grandparents."

Here are seven key financial truths that older generations can teach the younger ones:

1. Saving is not a sprint

The older generation understands that slow and steady makes the most sense when it comes to building wealth, said John Lindsey of Lindsey & Lindsey Wealth Management. The secret to becoming wealthy is to save money from every paycheck. Even if you can only save a small amount. Given enough time, even small savings can grow into large nest eggs.

"Everything you ever wanted to know about investing is in Aesop's 'The Tortoise and the Hare,'" Lindsey says.

2. Saving beats speculating

The Great Depression had a huge impact on those who lived through it. Those who remember those tough days tend to place more value on saving money than they do on risking it, said Kyle Winkfield, founder of The Winkfield Group, a retirement-planning firm in Rockville, Maryland.

"Our grandparents might have seen their own parents lose money in the Great Depression," Winkfield says. "They saw the stress that came with that. So they have the mentality that it's better to save money than it is to speculate on 'get rich quick' schemes. That's a good lesson to learn."

3. The future is just as important as the present

Matthew Tuttle, CEO and chief information officer of Tuttle Tactical Management, said that his financially savvy grandparents -- whom he wrote "Financial Secrets of My Wealthy Grandparents" about -- never focused only on their present needs. They looked to the future, too, and saved money for their retirement years from an early age.

This is a lesson that many younger consumers need to learn, Tuttle said.

"Too many of us think only of the here and now," Tuttle says. "We don't think of the future at all. We buy what we want now without thinking about how these decisions will hurt us in the future."

4. Cash is king

When was the last time you built up enough cash in a savings account to buy a flat-screen TV? If you're like many consumers, it's been a long time. But your grandparents? The financially smart ones save their dollars so that they can pay cash (not credit) for big purchases such as TVs.

"The Great Depression generation doesn't borrow much at all," Kibler says. "That isn't to say that credit cards are a bad thing. But sometimes going on an all cash budget -- even for just a short period of time -- can be a real wake-up call for how you are spending your money. If you go on a cash budget and you're out of cash by Wednesday, that's a good indication that you are not being careful enough with what you're spending."

5. Rainy days happen

Do you have a rainy day fund to pay for those surprise expenses that pop up? Many of our grandparents do, and have maintained an emergency savings fund for most of their adult lives.

Kibler stresses the importance of one, especially for big-ticket unexpected purchases. A water heater that suddenly leaks can add thousands of dollars to your high interest rate credit card debt if you don't have an emergency fund saved up to cover the costs of a replacement.

6. Live within your means

Winkfield said that the older clients who come to his office aren't afraid to drive smaller, less expensive cars. They don't mind living in a two-bedroom home instead of one with five.

They understand that living within their means is not a sign of failure. Instead, they recognize it as a virtue. And younger consumers should do the same, Winkfield says.

"[Older clients] are very focused on reality," Winkfield says. "They want me to tell it to them straight. And if that means telling them that something they want is really out of their price range, they accept it and they don't buy it."

They have a distaste for debt

Winkfield said that many of his older clients absolutely hate taking on debt. And that, Winkfield says, can be a smart financial mindset.

Some debt might be unavoidable. Most of us will need to take on mortgage debt if we want to buy a home, for instance. But other forms of debt, such as credit card debt, are more dangerous because of the high interest associated with it. Younger consumers can learn a lot about the positives of avoiding debt by following the examples of their grandparents, Winkfield said.

Younger consumers can find out more about the best savings accounts at MoneyRates.com's savings page.

What did your grandparents teach you about money? Leave a comment below!

How to rebuild your financial health after divorce

June 16, 2015

By Dan Rafter | Money Rates Columnist

The divorce process is expensive. There are plenty of lawyers' fees to pay and new financial burdens like alimony and child support may arise following a divorce -- which can eat away at people's savings.

Michael Brady, president of Generosity Wealth Management, offers a piece of advice, "Once your divorce is finalized you have to take control of your finances. You have to be proactive. You can't just assume that things will work out."

If you're going through (or have recently closed) a divorce, you'll need to recover emotionally, but don't neglect your financial health. If you do, you might face serious consequences.

Here are four steps you need to take after a divorce to rebuild your savings.

1. Get going

You might want a break from big decisions following a divorce. But Pam Friedman, a certified financial planner and founding partner of Divorce Planning of Austin, recommends that her clients skip that mental break and make financial plans quickly once a divorce is finalized.

But she doesn't recommend that her clients make big money decisions on their own. Many of her recently divorced clients are exhausted from the mental strain of the process, and might struggle to make the right decisions to rebuild their savings.

Friedman advises them to meet with their attorney and a certified financial planner to create a plan for rebuilding their wealth and to make sure they don't miss any important deadlines when it comes to signing up for insurance or changing the beneficiaries in their wills.

"There are deadlines out there that you don't even know existed," Friedman says. "You don't want to miss them. I hate it when clients come to me and say they just finished their divorce and they actually closed it six months ago. That's too much time."

2. Rebuild your credit

Brady also says that people should immediately check their credit scores -- they can buy them for $15 from the three national credit bureaus (Experian, Equifax and TransUnion). If their scores have taken a hit, they need to start rebuilding them by paying their bills on time and eliminating big chunks of their credit card debt.

Consumers with low scores will struggle to qualify for credit cards and loans, which can have a negative impact on a persons' ability save money or build an emergency fund.

Some of Brady's clients have low credit scores because shared loans and credit cards were under their spouse's names, not theirs. Because of this, these clients never had a chance to build a real credit history. These clients might need to apply for their own credit cards, make purchases with them and pay these purchases off in full each month to steadily rebuild their credit, Brady said.

3. Build an emergency fund

An emergency fund is a financial necessity for every adult. But it's especially important for those who have recently gone through a divorce, said Allison Alexander, a financial advisor with Savant Capital Management.

People who have gone through a divorce might have extra expenses such as alimony payments, rent and child support that they didn't have before their marriages ended. Alexander recommends that her clients have at least six months of normal living expenses saved in an emergency fund. If their car needs a new transmission, instead of putting the repairs on a credit card they can pay for them from their emergency fund.

If you're newly divorced, you might consider moonlighting with a second job to earn the extra money you need to build an emergency fund, Alexander said.

"After a divorce, you might have more alone time," Alexander says. "If you choose to moonlight with a job that you truly enjoy, not only will you start making extra money, you'll have an outlet to fill that alone time. That can help with your emotional recovery from a divorce."

4. Make careful investments

Brock Mosely, founder and managing director of Miracle Mile Advisors, says that adults who've gone through a divorce need to make sure that the money they do have left is always earning more dollars.

This means that they have to make wise investments. It's the best way to grow their existing savings.

But Mosely cautions clients not to make these investments too quickly. They need to research the best investment vehicles for them, especially now that their living and financial arrangements have changed after a divorce. A parent who has the financial responsibility to provide child support payments might not want to invest in an investment vehicle that comes with too much risk. They need a steady, guaranteed flow of money to help them cover these new regular payments.

"My biggest challenge is to stop [clients] from making investments because they want something to do," Mosely says. "Following a divorce, they often need things to do. They need to keep themselves busy. My goal is to make sure they don't invest in some big project that is going to potentially hinder their financial goals."

Why the dividend yield on stocks is surprisingly attractive

June 15, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Compared to growth stocks, dividend-paying stocks are often viewed as the investment equivalent of a minivan or sensible shoes - they serve a practical purpose, but they aren't flashy or exciting. However, an extended period of low interest rates has added a little sizzle to the notion of dividend investing.

To understand what role dividend-paying stocks might play in your portfolio, it is helpful to look at what you might expect from those stocks, and what some of the pros and cons are of having a stock pay a dividend. The following are some answers to fundamental questions about dividends:

  1. What is a dividend? A dividend is a cash payment made by a company to its shareholders, usually on a quarterly basis. This payment comes out of the company's earnings and is one way that the owners of a company get to share in those earnings. A company with an established dividend might continue to pay that dividend even during a temporary period of low or negative earnings, though a sustained drop in earnings is likely to result in the dividend being cut or even eliminated. Think about this as if you were running a business. You might want to reinvest most of the proceeds from the company into expanding its business, but you would also take a portion of the earnings out to live on. That portion taken out of the company is akin to a dividend.
  2. How much is a typical dividend? Currently, the average dividends paid by stocks in the S&P 500 total about 2 percent of the stock's value on an annual basis. That means if a stock cost $100, it would probably pay about $2 a year in dividends. The dollar amount of dividends changes over time, and the percentage yield varies as the market of companies changes.
  3. Do most stocks pay a dividend? Over 80 percent of companies in the S&P 500 pay dividends, but that index is made up of large, well-established companies. Among newer and smaller stocks you would see a lower percentage of dividend-paying stocks.
  4. Why don't some stocks have dividends? As an alternative to paying dividends, a company could reinvest all its earnings into the business in an effort to grow. This could include adding staff, physically expanding offices, or research and development. This is why fast-growing companies or those that are heavily focused on new product development may not pay a dividend. Also, not having the commitment of regular dividends gives a company some financial flexibility to help it weather erratic earnings patterns.
  5. What types of stocks are most likely to pay dividends? Among the industry sectors in the S&P 500, telecommunications stocks and utilities have the highest dividend yields. Telecom stocks pay an average of 5.35 percent in dividends, and utilities pay an average of 4.27 percent. These tend to be businesses with a steady, predictable stream of earnings, which enables those companies to make the commitment of paying a dividend. On the other end of the spectrum are information technology stocks, which pay an average dividend of just 1.42 percent. Tech companies are highly dependent on continually developing and upgrading products, which is why they prefer to reinvest their earnings in the business rather than pay them out in dividends.
  6. What roles should dividend-paying stocks play in a portfolio? Dividends can provide a fairly steady source of income in a portfolio, and this role has become more important with the steep drop in interest rates in recent years. Ten years ago, the S&P 500 had a dividend yield of 1.86 percent, which was less than half the 5 percent yield available on long-term Treasury bonds. Nowadays, the dividend yield on stocks is up to 2 percent while the long-term Treasury yield has dropped to 3 percent, making stocks far more competitive with bonds as a source of income. Compared with other stocks, dividend payers tend to be larger and more stable, so they could represent a relatively conservative segment of a portfolio, as opposed to the high risk and reward of growth stocks.

Even though they are not guaranteed, dividends do add an element of predictability to a portfolio. One way to think of dividend-paying stocks is that they give up some growth potential in exchange for that predictability. Given how low interest rates are today and how volatile the stock market can be, exchanging growth for predictability might seem a very worthwhile trade to many investors.

How to find the best checking account

June 11, 2015

| MoneyRates.com Senior Financial Analyst, CFA

There are thousands of banks in the United States, many of which offer multiple checking accounts. With all those choices, how do you narrow it down to one?

Picking a checking account can be a very important decision. Not only can the right choice save you hundreds of dollars a year, it can also make banking more convenient, and possibly keep your money more secure.

Here are some things you should look for in a checking account:

  1. FDIC Insurance This may sound pretty basic, but with all the digital payment systems and  banking alternatives entering the market these days, you would be wise to check the FDIC web site to make sure you are putting your money in an institution backed by FDIC deposit insurance. This covers up to $250,000 per depositor, per bank, against loss.
  2. Branch locations Do you still like to do your banking in person? If so, you will want to make sure that any bank you are considering has a branch that is easy for you to get to. Check the hours the branch is open to make sure they coincide with your schedule.
  3. Digital presence and features For many people these days, the digital presence of the bank matters more than the physical presence. Start by noting how user-friendly the web site is, and then move on to check whether the bank has the mobile apps you need. Banks are adopting digital tools at vastly different rates, so you want to find a bank that embraces new technology as enthusiastically as you do.
  4. Monthly maintenance fees Most banks charge a monthly fee just for maintaining a checking account with them, on average this costs about $150 a year. Though they are in the minority, there are banks that offer checking accounts without a monthly fee, so make it a priority to look for one of these money-saving options. In general, online banks are more likely to offer free checking than traditional, branch-based banks.
  5. Balance requirements Banks not only have minimum requirements to open accounts, but also minimum ongoing balances. Sometimes staying above a certain balance can get the monthly maintenance fee waived. In other cases, falling below may result in additional fees. Check to see if the bank you are considering has balance requirements that are in line with how much you are likely to keep in your account.
  6. ATM locations Banks typically don't charge you for using their own ATMs, or those in a network to which they belong. However, if you use an out-of-network ATM, it will probably cost you twice - one fee to the bank that owns the network, and another to your bank. Avoid this by making sure your bank has ATM locations that are convenient to where you live, work, and regularly travel.
  7. Overdraft fees You can opt out of overdraft protection, but if don't, you better compare the size of overdraft fees and policies for imposing them before you choose a bank.
  8. Interest rate The interest rate on most checking accounts is negligible, but there are exceptions. Still, in a low-interest rate environment, keep in mind that the checking account interest you earn is likely to be far less than the typical fees checking accounts charge. So, even for relatively high-interest checking accounts, make sure you consider the interest in context of how much it will be offset by fees.
  9. Special offers that apply to you Some banks have special accounts for students, and some have special accounts for people over age 50. If you belong to one of those groups, looking for special offers that apply to you can be a great way of avoiding checking account fees.
  10. Additional services What else does the bank have to offer? You don't have to do all your banking in one place, but doing so can often be convenient and qualify you for special rates or lower fees. If you think you might be in the market for a car loan, mortgage, or investment advice, take a look at what else the bank you are considering can offer.

Some account features will be more important to you than others, but you should be aware of them all before you buy so that there are no unpleasant surprises.

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