Want to know more about Roths? Check out these links

Nearly 150 bloggers so far have contributed posts to the Roth IRA Movement, which financial planner Jeff Rose organized after speaking to a group of college seniors and discovering none of them knew what a Roth was, or how important it was to their financial futures. (It’s “the best thing since sliced bread,” and really, really important, as you can read in my post “Young and broke? Open a Roth.”)

You can read Jeff’s post here, which is also where you’ll find links to the other 146 (so far) posts. That’s probably more about Roths than anyone can absorb, so here are a few good ones to start with:

Studenomics: “Read This if You Want to Retire Before 70.” An excellent, clear guide to why it’s so important to contribute to a Roth while you’re young.

House of Rose: “I Opened My First IRA Account. Age 22.” The blogger’s personal story of early enlightenment.

Parenting Family Money: “Opening a Roth IRA for a Child.” An early start is good; an even earlier start is better.

Bible Money Matters: “10 Reasons Why I Love The Roth IRA (And Why You Should Too).” If this doesn’t convert you to the wisdom of a Roth, what will?

Amateur Asset Allocator: “Roth IRA: How Do I Love Thee? Let Me Count the Ways.” This blogger wrote a sonnet. Seriously. You must read this.

Lauren Lyons Cole: “How To Pay Taxes Like the Rich.” Why has no one given financial planner Lauren Lyons Cole her own TV show yet? She’s delightful, and hits the highlights of the Roth in a two-minute video.

Please share these links with your friends and anyone you know who isn’t already contributing to a Roth. Help us get the word out about this wonderful vehicle for future financial independence.

Save money. Don’t multi-task.

The barista had to ask three times for her order before the woman finally responded. She’d been so busy nattering away to her friend in line that she didn’t notice she was now at the front.

And the fun wasn’t over. When it was time to pay, the woman pulled out her wallet and dug fruitlessly inside, opening the same compartments over and over, all the while keeping up the nonstop chatter.

As the seconds ticked passed and the line grew, what started out as vaguely annoying became absolutely absurd. The barista looked at me, the next person in line, and widened her eyes in exasperation.

I shrugged. I was just grateful I’d encountered this person in a coffee shop rather than on the road, where she probably thinks she can drive while talking on the phone just fine.

Obviously, she can’t. None of us can. Multi-tasking is a myth, and only works when both the things you’re trying to do are brain-dead simple–like folding laundry and watching TV. Anything more complicated, and you’re likely to do one or both things far worse than if you’d concentrated on a single task.

But multi-tasking isn’t just stupid. It can be expensive. Consider:

  • Talking on a cell phone while driving is as dangerous as driving drunk. You’re four times as likely to be in an accident.
  • Texting while driving raises your chances of an accident by 20 times.
  • Not only are you risking injury and death–and the injury and death of others–but you’re just begging for a nice juicy lawsuit. As Nolo Press puts it, “plaintiffs have argued (and some courts have agreed) that a driver was legally at fault for the accident (“negligent,” in legalese) because the driver used a cell phone immediately before or during the collision.”
  • If a plaintiff’s attorney can successfully argue that a phone call is distracting, think how much easier his or her case will be if you were texting–which any idiot knows you shouldn’t do in a car.
  • Even if everybody walks away without stunning medical bills, you can bet your life your auto insurance rates will skyrocket.

It’s not that hard to turn off the phone and put it away when you drive. You’ll drive better, and you could save yourself a fortune.

Young and broke? Open a Roth

You young’uns, listen up. Roth IRAs are the best thing since sliced bread. And the best time to contribute is when you’re young and broke, since you won’t always be that way.

Here’s the deal: contributions to a Roth don’t give you a tax break up front. But when you aren’t making much money, you aren’t paying much in taxes, so that’s an easy sacrifice to make.

The beauty of the Roth is when you take the money out. You can always withdraw your contributions without paying income taxes or penalty on the cash. But I recommend you don’t, because if you leave your Roth alone, those contributions—and all the lovely gains they’ll earn over the years—can be withdrawn entirely tax free.

Chances are, your tax rate will be higher in the future than it is now. The future you will be blessing the current you for tucking aside all that tax-free wealth. Every $1,000 you contribute in your 20s could grow to $20,000 or more by the time you’re ready to retire. If you’re so rich by then that you don’t need the money, you can pass the account on to your kids, and THEY can pull out money tax free.

That doesn’t mean you should ignore your workplace retirement plan—your 401(k) or 403(b)—especially if it has a match. But if you can possibly tuck some money away in a Roth, you probably should.

Starting one is easy—just about any bank, brokerage firm or mutual fund company under the sun will be happy to take your money. I like Vanguard’s target date retirement funds, since they do all the asset allocation and rebalancing for you, their expenses are dead cheap and you only have to have a $1,000 minimum investment to start a Roth there. (Don’t have $1,000 yet? Start a Roth at a credit union, save up and then transfer the account to Vanguard.)

Even if you aren’t so young anymore, the tax benefits of a Roth make sense if you’re likely to be in the same or higher tax bracket in retirement.

The ability to contribute to a Roth starts to phase out once your modified adjusted gross income exceeds $110,000 if you’re single and $173,000 if you’re married filing jointly.

Making money is a good thing. But I’ll admit to some sadness when hubby and I stopped being able to contribute to our Roths. These accounts really are a great deal.

 

How to find the right rewards card

Dear Liz: Should we get a rewards card? We have excellent credit scores. I’m a stay-at-home mom and my husband has a good, steady job. We spend about $6,000 a month with our debit card or automatic drafts from our checking account. I think our family should have a rewards card. My husband disagrees and says that for the amount we spend each month, we wouldn’t rack up any points. Is he right? If we should get a card, how do we pick the right one?

Answer: If you’re positive you’ll pay your credit card bill in full every month, you would be great candidates for a rewards card.

Right now, you’re passing up at least $720 in rewards annually. That assumes you’d be getting a card that rebates 1% of your purchases. With excellent credit scores, you could qualify for even richer rewards cards, since those are reserved for people with the best credit.

The simplest rewards cards are the cash-back cards, which rebate a portion of the purchases you make. Card comparison site NerdWallet recently named the Chase Freedom card as the best cash-back card with no annual fee. The card gives you a $200 sign-up bonus if you spend $500 in the first three months. All your purchases earn 1%, and you can earn a 5% rebate on certain categories of spending that change every three months.

NerdWallet also recommends American Express Blue Cash Preferred, which offers a $100 bonus if you spend $500 in the first two months. Supermarket purchases earn 6% cash back, and spending at gas stations and department stores earn 3%. Everything else earns 1%. “There is an annual fee of $75,” NerdWallet.com notes, “but your rewards easily offset the cost. In fact, $25 in groceries every week is enough to make up the difference.”

There are other types of rewards cards that earn points or miles for travel, or discounts on gas. You can learn more about these cards and shop for offers at NerdWallet or one of the other card comparison sites, including CardRatings.com, CreditCards.com and LowCards.com.

It’s important, once you get the card, to keep track of your spending so you never accumulate a balance you can’t pay in full. Always pay your account on time, since a single skipped payment can knock up to 110 points off those excellent scores.

Windfall in your 50s? Don’t blow it

Dear Liz: I am 56 and will be receiving $175,000 from the sale of a home I inherited. I do not know what to do with this money. I have been underemployed or unemployed for six years, have no retirement savings and am terrified this money will get chipped away for day-to-day expenses so that I’ll have nothing to show for it. Should I invest? If so, what is relatively safe? Should I try to buy another house as an investment?

Answer: You’re right to worry about wasting this windfall, because that’s what often happens. A few thousand dollars here, a few thousand dollars there, and suddenly what once seemed like a vast amount of money is gone.

First, you need to talk to a tax pro to make sure there won’t be a tax bill from your home sale. Then you need to use a small portion of your inheritance to hire a fee-only financial planner who can review your situation and suggest some options. You can get referrals for fee-only planners who charge by the hour from the Garrett Planning Network at http://www.garrettplanningnetwork.com.

You’re closing in quickly on retirement age, and you should know that typically Social Security doesn’t pay much. The average check is around $1,000 a month. This windfall can’t make up for all the years you didn’t save, but it could help you live a little better in retirement if properly invested.

You should read a good book on investing, such as Kathy Kristof’s “Investing 101,” so you can better understand the relationship between risk and reward. It’s understandable that you want to keep your money safe, but investments that promise no loss of principal don’t yield very much. In other words, keeping your money safe means it won’t be able to grow, which in turn means your buying power will be eroded over time.

Spreading the wealth: the number of millionaires grows

More people have achieved a net worth of at least $1 million, not including their primary residences. The Spectrum Group, which keeps track of these things, said the number of millionaires climbed for the third straight year to 8.6 million in 2011 (or 7.5% of all U.S. households). The growth in millionaires follows a 27% decline in 2008. But we’re still not back to the 2007 peak of 9.2 million.

Spectrum said the ranks of all affluent investors increased in 2011:

  • Those with $100,000 or more in net worth sans primary residence reached 36.7 million from 36.2 million in 2010 (about 32% of U.S. households)
  • Those with $500,000 or more in net worth climbed to 13.8 million from 13.5 million in 2010 (about 12% of U.S. households)
  • Those with $5 million or more in net worth rose to 1.078 million from 1.061 million in 2010 (slightly less than 1% of U.S. households)
  • Those with $25 million or more in net worth grew to 107,000 from 105,000 in 2010 (slightly less than .1% of households)

Retire in style: What you need to know

Reuters has a nice package of retirement stories that are worth checking out:

Ecuador seen as new retirement hot spot
I mentioned Ecuador in my column “Retire overseas on $1,200 a month,” and now it’s been named a top spot for bargain-seeking retirees, according to International Living magazine’s 2012 Global Retirement Index.

What retirees wish they’d done differently
Reuters asked several retirees what they would tell their 40-year-old selves if they could go back in time. Interestingly, the answers aren’t all about money–they’re about quality of life. (A great book on this topic is Ralph Warner’s “Get a Life: You Don’t Need $1 Million to Retire Well.”)

How low must retirement withdrawals go?
Linda Stern tackles the tricky math of how much you can afford to take from your retirement savings to have a reasonable chance of making your money last as long as you do.

Growing numbers work into retirement
I’ve written about “When only one of you can retire” and the huge numbers of people forced into early retirement by layoffs, but this article picks up the flip side: people who keep working because they want to. If that’s you, you might also want to read “Retire without quitting your job.”

Is an annuity in your future?
One solution to the risk of outliving your money is the income annuity (also known as the fixed annuity). Learn more about it here.

When to start tapping Social Security
Some people have little choice but to take Social Security benefits early. But if you can wait, you probably should.

Moonjar winners: check your email!

All 12 winners of the Moonjar Money Boxes have been notified, but I’ve only heard back from 8 of you. If I don’t hear back from the other four, the prizes will be awarded to other entrants. So: SUZY, JENNIFER S., EMILY B. and KATHY L., check your email (and your spam filter) and get back to me soonest!

Could son’s unpaid bills harm parents’ credit? Maybe

Dear Liz: Our 24-year-old son lives with us. He failed out of college, has been fired from two restaurant jobs and is working part time at a grocery warehouse. He has neglected to pay his credit card for several months. He also waits until his cellphone carrier threatens to turn off his phone before he pays half of that bill. We are concerned that his poor payment history may start to reflect on our good credit histories. We are retired and may want to build a new house. His bills are sent to our address, and creditors call our home phone number looking for him.

Answer: His debts shouldn’t affect your credit reports and scores unless you cosigned loans or other credit accounts or added him as a joint user to your credit cards.

Note the word “shouldn’t.” It’s possible that an unethical collection agency would try to get you to pay these bills by posting the overdue accounts on your credit reports. That could negatively affect your scores. Check your credit reports at least once a year at http://www.annualcreditreport.com. You also may want to consider ongoing credit monitoring, which can alert you if any collections or other suspicious activity shows up on your reports.

Speaking of unethical actions, you need to consider the possibility that your son could steal your financial identity. He probably has access to the information he would need to open new accounts in your name, including your Social Security numbers. His failure to pay his bills, even though it appears he can, indicates some moral shortcomings. He may not be low enough to rip off his parents, but if you have any suspicions about his trustworthiness, consider putting a credit freeze (also known as a security freeze) on your credit reports. This freeze should prevent anyone from opening credit accounts in your name.

Finally, you can write letters to creditors telling them to stop contacting you. You run the risk that such a letter could lead a creditor to sue your son. But his creditors may sue him anyway if he doesn’t respond to their requests for payment.

Stepdaughter wants “everything”: what does she deserve?

Dear Liz: Your column from the person who wanted “heirlooms” from her stepfather is applicable to my situation. My husband’s daughter wants literally everything in my house, even though he and I commingled our assets 23 years ago and have been married more than 10 years. How do I access public records to see if her mother did have a will?

Answer: It’s interesting that your husband can’t clear up this mystery. Presumably he would know whether his late wife had a will and what it said.

You can check with probate court of the county where she died to determine if a will was filed. If she had a living trust, that would be private and probably not filed with the court, but your husband should know what it said.

If she had no will or living trust, then your husband was supposed to follow state law in dividing up her possessions. In community property states, without a will or trust he typically would inherit stuff acquired during their marriage, plus a share of any separately held assets — possessions she brought to the marriage, said Burton Mitchell, an estate planning attorney with Jeffer Mangels Butler & Mitchell in Los Angeles. In other states, your husband might inherit half of her assets, with the other half divided among her children, Burton said.

State laws vary widely and there are all kinds of exceptions to the general rules, so you may need a lawyer’s help in sorting out what belongs to whom.

In any case, you’d be smart to hire an estate-planning attorney at this point. Your stepdaughter may not be able to pursue a legal case after all this time, but she could cause trouble when you or your husband dies. Any time a relative creates a real fuss about an estate division, it’s good to get a qualified attorney’s advice as you craft your own wills or living trusts that spell out who gets what.

As you make your plans, try to be guided by kindness and compassion. Your stepdaughter may not have a legal right to lay claim to every item in your home, but letting her have items of strong sentimental value may be the right thing to do. Just think how you would feel if your father’s second wife gave your mother’s special jewelry or your grandmother’s treasured antiques to your step-siblings. Lifelong rifts and family feuds have started over less.

Then again, all parties need to remember that stuff is just stuff. What’s a precious heirloom to one generation may wind up in the next generation’s garage sale. Resolving to put relationships first, instead of possessions, can really help all sides avoid painful battles.