Thursday’s need-to-know money news

Today’s top story: How to manage your investments during the Trump presidency. Also in the news: How to dig out from December’s debt, why ‘Buy Online, Pick Up in Store’ is a double-edged sword, and the first thing you should do after paying off a big debt.

How to Manage Your Investments During the Trump Presidency
Practical suggestions to help stay the course.

How to Dig Out From December’s Debt

‘Buy Online, Pick Up in Store’ Is a Double-Edged Deal
The pros and cons of convenience.

The First Things You Should Do After Paying Off a Big Debt
Don’t dive back into the debt hole.

Q&A: What to consider when investing in target date retirement funds

Dear Liz: I have 100% of my 401(k) in a fund called “Target Retirement 2030.” This fund is made of several other funds, so does that qualify as “diversified”?

Answer: It does. Target date funds have become increasingly popular in 401(k) plans because they do the heavy lifting for investors. The funds select asset allocations and grow more conservative in their mix as the retirement date approaches.

Target date funds aren’t perfect, of course. Some are too expensive. The typical target date fund charges about 1%, but Vanguard and Fidelity charge as little as 0.15%.

Another issue is the “glide path” — how quickly the funds get more conservative. There’s no consensus about what the right glide path should be, and investment companies offer a lot of different mixes. Any given glide path may be too steep for some people and too shallow for others, depending on their circumstances. As an investor, you can compensate for that by choosing funds dated later or earlier than your targeted retirement date. If the 2030 fund gets too conservative too fast for your taste, for example, you could choose the 2040 fund instead.

Despite the downsides, you’re likely to be much better off in a target date fund than you are in some of the other options. Too often novice investors take too much or too little risk without realizing it. They may have all of their money in “safe” low-return options, which means they’re losing ground to inflation. Or they may have all their money in stocks, including their own company’s stock, and would be unprepared for a downturn wiping out a good chunk of their portfolio’s value.

Even those who know they should diversify often do it wrong by randomly distributing their contributions across their investment options. If you don’t know what you’re doing, or you simply prefer investing professionals to take charge, target date funds are a good way to go.

Q&A: Tips for divvying up your retirement investments

Dear Liz: With all the investment options offered in 401(k) plans, how as a contributor do I know where to place my money?

Answer: Too many investment options can confuse contributors and lower participation rates, according to a study by social psychologist Sheena Iyengar of Columbia University in cooperation with the Vanguard Center for Retirement Research. The more options, the more likely participants are to simply divide their money evenly among the choices, according to another study published in the Journal of Marketing Research. That’s a pretty random method of asset allocation and one that may not get people to their retirement goals.

As a participant, you want a low-cost, properly diversified portfolio of investments. For most people, that means a heavy weighting toward stock funds, including at least a dab of international stocks. Your human resources department or the investment company running the plan may be able to help with asset allocation.

Some plans offer free access to sophisticated software from Financial Engines or Morningstar that can help you pick among your available options. Once you have your target asset allocation, you’ll need to rebalance your portfolio, or return it to its original allocation, at least once a year. A good year for stocks could mean your portfolio is too heavily weighted with them, while a bad year means you need to stock up.

If that feels like too much work, you may have simpler options. Many plans provide a balanced fund, typically invested 60% in stocks and 40% in bonds, that provides automatic reallocation. The same is true for target-date funds, which are an increasingly popular choice. Pick the one with the date closest to your expected retirement year. If you’re 35, for example, you might opt for the Retirement 2045 fund.

It’s important, though, that you minimize costs because funds with high fees can leave you with significantly less money at retirement. The average target-date fund charged 0.73% last year. If you’re paying much more than that, and have access in your plan to lower-cost stock and bond funds, choose those instead.

Monday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: What you can learn from your 2015 tax returns. Also in the news: Getting the most from mobile banking, using the 50/20/30 rule for your budget, and the number one thing Americans plan to do with their tax refunds.

What You Can Learn From Your 2015 Tax Return
Revealing info on your investments.

Mobile Check Deposits: Pro Tips to Ensure They Go Smoothly
Getting the most from a convenient way of banking.

This Is the No. 1 Thing Americans Do With Their Tax Refund
The answer may surprise you.

Use the 50/20/30 Rule to Outline Your Budget For Every Need
Proportioning your expenses.

Friday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Steps you should take when you’re 20 years away from retirement. Also in the news: Collecting on a business debt, how to improve your budget, and how to give your investment portfolio a stress test.

8 Steps to Take When You’re 20 Years From Retirement
Time is critical.

Can a Debt Collector Come After Me for a Business Debt?
Assessing your personal risk.

Improve Your Budget By Focusing On How Much Satisfaction Your Money Buys
How much fulfillment will your purchase bring you?

Give Your Investment Portfolio a Stress Test
Hypothetical scenarios can display your portfolio’s strengths and weaknesses.

Friday’s need-to-know money news

halloween-moneyToday’s top story: Understanding your free credit scores. Also in the news: What spooks us most about money, overcoming our 401(k) fears, and why it’s more about what you keep, instead of what you make.

How to Make Sense of Your Free Credit Scores
Deciphering the information.

What Spooks Us Most About Money
Getting over the goosebumps.

5 Ways to Overcome Your Fear of a 401(k)
No need to fear the future.

It’s Not What You Make, It’s What You Keep
The total return on investments.

Thursday’s need-to-know money news

009fbf535e76a5f4c22dfae6c5168d0bToday’s top story: How to declare your financial independence. Also in the news: What you need to know before becoming a landlord, how the financial crisis in Greece could effect your portfolio, and a little known Texas law that could save you from medical debt.

3 Ways to Declare Your Financial Independence This July 4th
Let financial freedom ring!

Things to Know Before Becoming a Landlord
Proceed with caution.

Does Greece Matter? The Bigger Picture For You And Your Portfolio
The ripple effect.

The Little-Known Texas Law that Can Save You From Medical Debt
Even if you don’t live in the Lone Star state.

Monday’s need-to-know money news

1403399192000-retire-workToday’s top story: Tips on cutting your tax bill. Also in the news: How to get a retirement match from the IRS, money-management tips for the self-employed, and what you need to consider before making a risky investment.

7 Ways to Cut Your Tax Bill
Keep more of your hard-earned money.

Get a $1,000 Retirement Match From the IRS
Introducing the Saver’s Credit.

9 money-managing steps every self-employed person should take
Tips for the 1099ers.

The Factors to Consider Before Making a Risky Investment
Look before you leap.

Q&A: Balancing savings vehicles and tax benefits

Dear Liz: I’m 26 and make $45,000 per year. I currently have about $60,000 saved with no debt. Roughly half of my assets are in retirement accounts, and the other half are in non-retirement accounts. I strive to save 30% of my income (about 15% in pre-tax retirement accounts and 15% in taxable accounts). I hope that my savings habits will provide me the option to retire early. But I am concerned that I am locking up too much of my money in retirement accounts and that a couple decades down the road, I will not be able to access my money when I would like to. How should I balance various savings vehicles and tax benefits, so that I have most options down the road?

Answer: Your savings habits are admirable, but you shouldn’t worry too much about “locking up” your money. There are a number of ways to tap retirement funds if you really need the cash. Ideally, you’d leave the money alone to grow tax-deferred until you’re ready to retire, but you’re not required to do so.

One way to save for retirement with plenty of flexibility is to fund a Roth IRA each year. You don’t get a tax deduction upfront, but you can withdraw your contributions at any time without penalty. If you don’t tap the money until you’re 59 1/2 or older, your contributions and your earnings are tax free if you’ve had the account at least five years. Another advantage of a Roth is that you’re not required to start distributions after age 70 1/2, as you are with other retirement accounts.

Q&A: Tax credit for Roth IRA contributions

Dear Liz: You told a reader that “contributions to a Roth are never deductible.” This statement is a common misconception and is not correct. You can get a tax credit for Roth IRA contributions as long as you fall under the income limits and itemize on your taxes. The credit phases out at $30,000 for singles and $60,000 for married couples.

Answer: A credit is different from a deduction, but thank you for pointing out a tax benefit that many people don’t know exists.

This non-refundable credit, sometimes called a Saver’s Credit, can slice up to $1,000 per person off the tax bill of eligible taxpayers. The credit is available to people 18 and older who aren’t students or claimed as a dependent on someone else’s return. The lowest income taxpayers — those with adjusted gross incomes under $36,000 for marrieds filing jointly or $18,000 for singles in 2014 — can get a tax credit of 50% of up to $2,000 per person ($4,000 for married couples) contributed to retirement plans. Those plans can include traditional or Roth IRAs, 401(k)s or 403(b)s, 457(b)s and SIMPLE IRAs, among others. The credit drops to 20% and then 10% before phasing out. The average amount saved isn’t spectacular: The IRS said credits averaged $205 for joint filers in 2012 and $127 for single filers, but every bit helps.

One of the problems with this tax break, besides so few people knowing about it, is that many low-income people don’t owe income taxes, so they have nothing to offset with this credit. Another issue is that taxpayers need to file a 1040 or 1040A and use Form 8880 to claim it. Low-income taxpayers often use the 1040EZ form, which doesn’t allow them to claim the credit or alert them that it exists.