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Tuesday’s need-to-know money news

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Zemanta Related Posts ThumbnailToday’s top story: What to do when your 401(k) and IRA are maxed out. Also in the news: Comparing medical loans and credit cards, three essentials that could be missing from your retirement plan, and thirteen factors to consider when picking a place to retire.

What to Do After Your 401(k) and IRA Are Maxed Out
Where to invest your money next.

How to Compare Medical Credit Cards, Loans
Prepare for high interest rates.

3 Essentials Missing From Many Retirement Plans
Don’t forget these essentials.

13 Factors to Consider When Choosing a Place to Retire
It’s time to make a list.

10 tips for buying your next car for less
Don’t be afraid to haggle.

5 LAST-MINUTE MONEY MOVES BEFORE 2014

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Tax return checkOkay, you’re on overload with all the last-minute shopping, cooking, preparing for guests and/or traveling. But try to squeeze in a few money tasks before year-end. Including:

Contribute to an IRA. You can put money into an IRA even if you have a retirement plan through work, but you may not be able to deduct the contribution if your income is over certain limits. If, on the other hand, your income is low, you could score a valuable tax credit for your retirement contributions. The problem of course is that it can be tough to come up with the maximum contribution of $5,500 ($6,500 for those 50 and over) at year end. Luckily, you have until tax day, April 15, 2014, to make your contribution for 2013. And consider setting up regular contributions to your IRA so you don’t have to scramble for the cash next year.

Make a (back door) Roth contribution. If you can’t deduct an IRA contribution, a better option is to contribute to a Roth IRA. Roth contributions aren’t deductible but withdrawals from the accounts are tax-free in retirement (unlike regular IRA withdrawals, which incur income taxes). If your income is too high to contribute to a Roth directly, you can contribute to a regular IRA and then convert it to a Roth. This works best if you don’t already have a fat IRA account, since your tax bill for the conversion will be based on the total you have saved in regular IRAs.

Use it or lose (most) of it. If you have money set aside in a flexible spending account at work for medical or child care expenses, you typically need to use it up by year end. There are some exceptions: the Treasury Department recently said plan participants can roll up to $500 of unused funds into the next year’s plans, and some employers extend the deadline from Dec. 31 to mid-March.

Accelerate and delay. If you don’t expect a big change in your tax circumstances, it can make sense to delay income into 2014 (by asking your boss to pay a bonus next year instead of this, for example) and to accelerate deductions by paying mortgage, property tax or medical bills for January in December.

Get generous. If you itemize your deductions, you can get a tax break for your charitable contributions. Again, rushing to get those in at the last minute isn’t ideal, so consider setting up regular contributions such as paycheck deductions or monthly payments to your favorite nonprofits. No extra cash? “Noncash” donations—such as clothes or household items—can earn you a deduction as well. They just have to be in good condition and given to a recognized charity.

 

How to start Roth IRAs for your kids

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Dear Liz: I would like to start a Roth account for each of my kids. (They’re in their 30s.) Is it better to start an account in my name with them as beneficiaries or to start the accounts in their names?

Answer: Roth IRAs can be a wonderful way to save, but they’re not custodial accounts. You won’t be able to control the accounts or prevent your adult children from spending any money you deposit.

If you still want to help, though, let your kids know you’ll contribute to any Roths they set up. They can open a Roth if they have earned income at least equal to the annual contribution and their incomes are below the Roth limits. The ability to contribute to a Roth phases out between $178,000 to $188,000 for married couples in 2013 and from $112,000 to $127,000 for singles.

Ideally, you’ll contribute to your own Roth first. The limit on contributions is $5,500 this year.

Beware the hidden risks of self-directed IRAs

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Dear Liz: My 401(k) plan has grown exceptionally well this year. I think we all know that it can’t last. I just recently heard about self-directed IRAs. I was intrigued at the possibility of opening one by rolling over a portion of my 401(k) money directly. The problem is, my company’s 401(k) provider will not allow the direct rollover of funds. Is there an alternative means of withdrawing 401(k) funds without penalty and still get them into a self-directed IRA?

Answer: You can quit your job. Otherwise, withdrawals while you’re still employed with your company will trigger taxes and probably penalties.

Your premise for wanting to open a self-directed IRA is a bit misguided, in any case. Your 401(k) balance may occasionally drop because of fluctuations in your stock and bond markets, but over the long term you should see growth.

You may have been sold on the idea that self-directed IRAs would somehow be less risky. Some companies promote self-directed IRAs as a way to invest in real estate, precious metals or other investments not commonly available in 401(k) plans. The fees these companies charge as custodians for such accounts are usually much higher than what they could charge as traditional IRA custodians, so they have a pretty powerful incentive for talking you into transferring your money to them.

The problem is that you could wind up less diversified, and therefore in a riskier position, if you dump a lot of your retirement money into any alternative investment. It’s one thing for a wealthy investor to have a self-directed IRA that invests in mortgages or gold, assuming that he or she has plenty of money in more traditional investments. It’s quite another if all you have is your 401(k) and you’re putting much more than 10% into a single investment.

Also, there’s a lot less regulation and scrutiny with self-directed IRAs than with 401(k)s, which increases the possibility of fraud. (Southern California investors may remember First Pension Corp. of Irvine, a self-directed IRA administrator that turned out to be a Ponzi scheme.) So you’d need to pick your custodian, and your investments, carefully. You also would need to understand the IRS rules for such accounts, because certain investments — such as buying real estate or other property for your own use — aren’t allowed.

If you’re determined to diversify your investments in ways your current 401(k) doesn’t allow, you can open a regular IRA at any brokerage and select from a wider variety of investment options. Or you can look for a self-directed IRA option with low minimum investment requirements to start.

Monday’s need-to-know money news

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Today’s top story: Mistakes to avoid while holiday shopping. Also in the news: Maximizing your retirement goals, conversations to avoid during the holidays, and five store credit cards that are worth applying for.

5 Holiday Money Mistakes
Don’t let your purchases be driven by guilt.

Three must-dos to maximize retirement goals
Getting the most from your retirement planning.

5 Money Conversations You Should Never Have During the Holidays
AKA How to avoid a food fight.

5 Store Credit Cards That Are Worth It
Finding the cards with the most benefits.

Roth or Regular: Which IRA Should You Choose
Solving the IRA puzzle.