Personal Finance Hacks

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My employer recently added a new option to our 401(k) plan: a Roth 401(k).  While I had heard about these plans, I had to do some research to determine if the Roth 401(k) was a good idea for me.  Here’s what I found out.

What is a Roth 401(k)?
As the name suggests, a Roth 401(k) combines features of the traditional 401(k) with those of the Roth IRA. It’s offered by employers like a regular 401(k) plan, but as with a Roth IRA, contributions are made with after-tax dollars. While you don’t get an upfront tax-deduction, the account grows tax-free, and withdrawals taken during retirement aren’t subject to income tax, provided you’re at least 59 1/2 and you’ve held the account for five years or more.

The Roth 401(k) concept was introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001, which stipulated that employers could start offering these plans on Jan. 1, 2006. So far, 12% of employers offer a Roth 401(k), according to the 2007 “Hot Topics” survey by Hewitt Associates, an employee benefits consulting firm, and 32% have indicated that they’re likely do so this year.   

Who is eligible to contribute to a Roth 401(k)?
Anyone whose employer offers it.

What about the employer match?
Employer matches are made with pretax dollars, so the match will accumulate in a separate account that will be taxed as ordinary income when it is withdrawn at retirement.

What are the early withdrawal rules?
They’re exactly the same as the traditional 401(k) rules.

Is the Roth 401(k) here to stay?
Yes.  It was originally set to expire after 2010, but 2006 legislation made it permanent.

Should I invest in a Roth 401(k)?
It depends.  If you expect your tax rate to be the same or higher in retirement than it is now, you might be better off with a Roth 401(k). This is likely to be the case with young people who are just starting their careers and expect their income to increase in the future. For people who are in the 15% or 25% tax bracket, it may not be a bad idea to pay those taxes now and never have to worry about what tax brackets might become in the future. However, if you’re in your peak earning years and you think your tax bracket will be lower in retirement, you’ll benefit from continuing with traditional 401(k) contributions.

A simple calculation
I never recommend specific investments, or even specific types of investments.  Your situation is different than mine, so you need to do the research yourself to see what makes sense for you.  But I’d like to show you the math that led me to switch from a traditional to a Roth 401(k).

There are a lot of Roth 401(k) vs Traditional 401(k) calculators on the web.  I used this one.

My situation is this: I’m 32 years old, I earn $50,000/yr, and I save 15% of my salary (or $7500) towards retirement.  I plan to be wealthy when I retire, so I’m going to assume that I’ll still be in the 25% tax bracket in retirement.  (I never understood why people plan to be in a lower tax bracket when they retire.  I want to get RICH.  I’d be THRILLED to be in the 35% tax bracket at retirement!  But I digress…)  I’m also assuming an 8% rate of return for the next 33 years, and assuming I’ll live 20 years in retirement.

Traditional and Roth accounts: Equal value at retirement

After 33 years of contributions and growth, the traditional and Roth accounts would both be worth $1,216,585 at retirement. Without accounting for taxes, each account could provide annual withdrawals of $101,271 in retirement.

Traditional 401(k): Withdrawals are taxed

With traditional 401(k) accounts, taxes are paid on withdrawals. So annual withdrawals from a traditional 401(k) account would be reduced to $75,953 after taxes of $25,318 are paid.

Contributions to Roth 401(k) accounts are made with money that’s already been taxed, so qualified withdrawals are not taxed again. Therefore, the Roth account could provide the full $101,271 each year.

 Traditional account: Tax savings can be invested

With a traditional account, the tax benefit comes at the time money is invested — contributions are not taxed.

To allow for a fair comparison, the potential value of these tax savings with a traditional account needs to be measured.

If the annual tax savings of $1,875 were invested in a taxable account with the same returns as for the retirement plans, the investment of your tax savings could provide additional annual income of $14,480.2

The additional income would not make up for the taxes paid on withdrawals. 

Conclusion: For me, the Roth 401(k) is the better option. 

Still confused?  Take a look at the following video:

Getting sick can cost you missed days of work and doctor’s bills, both of which can put a dent in your finances.  Recent studies have shown that your computer keyboard is probably harboring more germs and bacteria than your toilet seat.

This actually makes a lot of sense if you think about it. Most of us probably do everything from eating to blowing our nose without ever washing our hands before we start typing away.

There is no need to become a ‘germaphobe’ over this, just take regular precautions such as wiping down your keyboard with a wet wipe (the alcohol variety such as baby wipes should be fine) and washing your hands before eating (if you don’t do this already).

This study isn’t to scare you, just make you more aware of what you are literally touching right now.

I recently picked up a copy of Success Magazine and was very pleasantly surprised.  In case you haven’t discovered this magazine yet, it covers topics such as wealth, personal development, relationship building, setting goals, entrepreneurship, etc. 

I was about to subscribe to the magazine when, while poking around on the website, I found a link to the digital edition.  The entire magazine is available online for free!  Check out out at http://www.success-digital.com.  I’m confident you’ll find some useful info there.

This is a guest post by Denise Bergeron of Single Mom Financial Help.com

As a single mom, you face unique financial challenges that women with supportive husbands do not face. As such, you need to be aware of programs that you can use to help your family financially. The government and many private organizations have options available to help single moms with their financial needs.

One common need that single moms face is health insurance. Your employer may not offer health insurance, or the premiums may be too high for you to afford. The government has programs that you can use to get insurance for your children. The most common government program is Medicaid. While Medicaid is for those on limited incomes, the income guidelines are determined based on family size, so you should see if you qualify. If you do not qualify for Medicaid, consider the State Children’s Health Insurance Program (SCHIP). The income guidelines for SCHIP will be set by your state, and they are higher than Medicaid. You may be able to get health insurance for yourself through this program, depending on your state.

If you are looking for utility assistance, child care assistance, food banks, and other types of assistance programs and don’t know where to look, try dialing 2-1-1 on your phone. You can use this free service to find the programs you need. With one phone call, you can find out about assistance programs you qualify for in your area. Not all areas have the 2-1-1 program, but you can find out if yours does by simply trying the number.

If you are ready to buy a home, there are programs for single moms to help with the home buying process. To start, talk to your local housing authority. This organization may be able to point you towards assistants programs in your area. You can also talk to a Housing and Urban Development (HUD) counselor. You may be able to buy a house through HUD, and HUD has several mortgage assistance programs for you to consider. The organization will also help you find a house that qualifies for the assistance program. Your counselor will be able to help you work through the process.

Single moms may face a rough road, but the good news is that there is help available. Take advantage of the programs you qualify for, because you are, after all, doing the job of two people. With financial assistance programs like these, you can ease up some of the strain on your monthly household budget or get some of the things you need for your family but simply cannot afford on your own.

I ran across this calculator recently which showed me a very cool concept that I had never considered before.  By making relatively small increases in my monthly mortgage payment, I should be able to pay off my mortgage in about 14 years instead of 30 years. 

Here’s how it works.  For the rest of this year, I’ll pay an additional $50 each month.  This should be pretty painless.  Starting next year, I’ll increase my monthly payment by 5%.  I chose 5% because I want it to be a little bit of a stretch, but not impossible.  You can increase by more or less, depending on your situation.  I feel I can easily build 5% into my budget each year.  I’ll continue to increase my monthly payment by 5% per year, and by doing so, I’ll have my mortgage completely paid off by 2022 (instead of 2037).

The cool thing about this plan is that from year to year, the increase is pretty small.  Using my situation as an example, a 5% increase from 2008 to 2009 is just an additional $46.88 per month.  The 5% increase from 2012 to 2013 will be an additional $54.27. 

I encourage you to check out the calculator and come up with a plan to pay off your mortgage early!

Money is mentioned in the Bible more than 800 times.  Below are some of my favorite passages:

Matthew 6:24
“No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and money.”

Luke 8:14
“…but as they go on their way they are choked by life’s worries, riches and pleasures…”

Proverbs 6:6-8
“Go to the ant, o sluggard, observe her ways and be wise, which, having no chief, officer or ruler, prepares her food in the summer, and gathers her provision in the harvest.”

Proverbs 22:7
“The rich rules over the poor, and the borrower is servant to the lender.”

Romans 13:8
“Owe no one anything except to love one another, for he who loves another has fulfilled the law.”

Proverbs 21:20
“In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.”

Proverbs 21:5
“The plan of the diligent lead surely to plenty, but those of everyone who is hasty, surely to poverty.”

[Read the rest of this entry...]

Just when the wife and I got our budgeting process down to a science, a new opportunity has arisen.  She has been offered a new position that will pay her significantly more per hour, but she’ll be working fewer hours (with two kids, this is huge for us).  The downside is that her income will vary from month to month.  My first thought was, “How will we budget for that?”. 

Here’s what we’ve decided to do.  We’ll open a separate account of some kind - either a checking account or an ING Direct savings account, and move $5000 into it.  All of her paychecks will be deposited into that account.  Once a month, we’ll withdraw whatever amount we budgeted as her income for that month.  The $5000 will serve as a “buffer” during the months where her income is lower than expected, but we’ll always seek to maintain a minimum of $5000 in the account.

So lets say the first month we expect her income to be $2500, but she only earns $2200.  Normally, this would be a budget buster, but with the $5000 buffer in the account, all is well.  We’ll deposit her $2200 earnings, and withdraw the $2500 we’d anticipated her earning.  This leaves us with a balance in the account of $4700.  This also tells us that next month, we either need to budget less for her income, she needs to earn more, or both.  The goal is to maintain a balance of $5000. 

Lets say the next month we again budgeted $2500 for her income, but this time she kicked butt and earned $4000 (way to go honey!).  First, we’d replace the $300 we lost last month to bring our “buffer” back up to $5000.  Then we’d withdraw the planned amount of $2500.  This would leave us with a balance of $5900.  What do we do with the extra $900?  We could withdraw it as extra income (adjusting the budget for that month accordingly), leave it in the account to increase the buffer, or some combination of both.

This is the best idea we’ve come up with for budgeting on an irregular income.  What potential problems you see with our plan?  What other ideas do you have?  Let us know in the comments. 

I’m planning to host a backyard BBQ this Memorial Day weekend.  My wife does most of the grocery shopping, but being the good husband that I am, I decided to do the shopping for this weekend’s party.  I was shocked when I saw the prices at the grocery store!  When did milk hit $4.89 a gallon? 

Compared to a year ago, we may spend as much as 20% more for our picnic favorites. 

Here’s the rundown from this article:

• A pack of 8 hotdogs - up $0.27
• A pack of 8 buns - up $0.24
• Potato chips - up $0.41
• Paper plates - up $0.22

While the rapidly rising prices are pretty scary, I actually consider myself lucky for getting to host the party this year.  Why?  We don’t have to drive anywhere!  With gas at $4.00 a gallon, I’ll gladly host the party!  Some of our friends will be driving over 100 miles to get to our house, so they’ll spend $30-$40 just in gasoline costs.

If you have grill-outs, BBQs, or patio parties, what do you do to save money? Which meat is the best bargain?  Do you have a budget-friendly recipe you’d like to share?  Leave a comment, and have a great weekend!

This is a guest post by Mila Sidman Alice Seba

As a teen, your child will want more and more things to enhance their lives.  In most states, when they turn fourteen, teenagers can hold a job.  Help your teen find that perfect summer job with a few simple tips.

The easiest way to find a job is through connections.  If parents know someone who has their own business or they own a business, the teen can work for them.  But, if this is not your situation, your teen will have to find a summer job the old-fashioned way—look for one.

The first line of inquiry is the newspaper job ads.  Schools usually subscribe to the daily local papers.  Have them make a list of all of the jobs that they are interested in.

Review the list with your teen.  You are looking to answer a few questions:  Is the job within a reasonable distance from the house?  How late will they be working?  What is the pay?  What are the job requirements?

If your teen can’t drive yet, distance is important.  The parents will have to drop off and pick them up from the job.  If the job is within a safe distance from your home, but their shift ends at 11 p.m., it is not safe, especially for a teenage girl, to come home alone after dark.

Your teen will have to fill out an application for any job that they like.  Help your teen to fill out the first application so that they will know how to fill out future ones.  If this is not your teen’s first job, they can attach a resume with the application.  A resume is a brief history of work and educational experience.  There are resume templates that will guide them through the process.

Once an interview is granted, go over the process with your teen.  Ask them some of the same questions that potential employers will ask during the actual interview.  Help them to keep their answers as simple as possible.

The dress for the interview is important.  Any piercing that could be offensive should be removed.  A nice suit for a teenage boy or a blouse and skirt for a teenage girl is appropriate.  Trendy dress should be avoided.  Hairstyles need to be neat and clean.  Outrageous colors and spiky unkempt hairstyles are sure to raise a few eyebrows at the interview.  This is not a good thing.

When your teen wants a summer job, do your best to help them acquire one.  Prepare them by going over interview questions and assisting them when choosing an outfit for the interview.  Make sure that your child stands out as the best candidate for the job.

Find family friendly product reviews, information and support from a variety of different moms from all walks of life at http://www.momstalknetwork.com.

This is the final post in a series looking at the 3 major presidential candidates and their views on taxes.  The information in these posts was gleaned from a variety of sources, and offers great insight into what each candidate has done and said in the past related to taxes, which is the best indication of what the candidate would likely do if elected to office.

Senator Hillary Clinton, Democratic Candidate

I’m in favor of doing something about the AMT. How we do it and how we put the package together everybody knows is extremely complicated. I want to get to a fair & progressive tax system. The AMT has to be part of what we try to change when I’m president There are a lot of moving pieces here. There are kinds of issues we’re going to deal with as the tax cuts expire. I want to freeze the estate tax at the 2009 level of $7 million for a couple. I’m not going to get committed to a specific approach.

Source: 2007 Democratic debate at Drexel University Oct 30, 2007

Q: Do you agree that the rich aren’t paying their fair share of taxes?

A: Middle-class and working families are paying a much higher percentage of their income. [Billionaires like] Warren Buffett pay about 17%, because don’t forget, it’s the payroll tax plus the income tax. And when you cut off the contribution at $95,000, that’s a lot of money between $95,000 and the $46 million that Warren Buffett made last year. We’ve got to get back to having those with the most contribute to this country.

Source: 2007 Democratic Primary Debate at Howard University Jun 28, 2007

I’ll tell you something that we are going to have to deal with, the alternative minimum tax, which falls heavily on a lot of you and your families. You know, for six years I’ve been saying, with all due respect, do the billionaires in America need more tax cuts? Don’t you think we ought to cut the taxes of middle income people, in particular those who are going to be hit by the alternative minimum tax?

Source: 2007 IAFF Presidential Forum in Washington DC Mar 14, 2007

When Hillary spoke at a private San Francisco fundraiser in 2004, an A.P. reporter caught a particularly illuminating comment by Clinton about the 2001 tax cuts. “We’re saying that for America to get back on track, we’re probably going to cut that short not give it to you,” she said. “We’re going to take things away from you on behalf of the common good.”

Her uncharacteristic frankness perhaps reflected the liberal audience [or their wealth], or her possible ignorance of a reporter’s presence there. But it allows for a penetrating view into Clinton’s thinking on economic policy. In Clinton’s eyes, government redistribution–not private entrepreneurship–is the key to economic growth.

Votes against the Bush tax cuts
5/26/2001: NO on Economic Growth and Tax Relief Reconciliation Act
5/23/2003: NO on Jobs and Growth and Tax Relief Reconciliation Act
11/17/2005: YES on raising capital gains taxes on wealthy individuals
2/13/2006: YES on allowing capital gains tax cuts to expire

Source: Vast Right-Wing Conspiracy, by Amanda Carpenter, p. 52-53 Oct 11, 2006

I will be on your side for a fair share for New York. It is wrong that New York sends $15 billion more in taxes each year to Washington than New York gets back. That’s a big reason local property taxes are so high. We can change that working together.

Source: Announcement Speech, SUNY Purchase Feb 6, 2000

The [Republican Congressional tax plan] is a risky, short-sighted tax scheme. I call on the people of New York to let Congress know that what they are doing is just wrong. I want to make it clear that New York will not stand for this kind of irresponsible behavior out of Washington.

Source: Remarks to United Federation of Teachers Headquarters Sep 15, 1999

The [Republican Congressional tax plan] will cut education in New York by more than $1.5 billion. And that will translate into fewer teachers, fewer children in Head Start, and fewer college opportunities for New Yorkers trying to afford college.

Source: Listening event at the School of Arts in Rochester Aug 6, 1999

Hillary Clinton’s Voting Record:

• Voted NO on repealing the Alternative Minimum Tax.
• Voted NO on raising estate tax exemption to $5 million.
• Voted NO on supporting permanence of estate tax cuts.
• Voted NO on permanently repealing the `death tax`.
• Voted YES on $47B for military by repealing capital gains tax cut.
• Voted YES on retaining reduced taxes on capital gains & dividends.
• Voted YES on extending the tax cuts on capital gains and dividends.
• Voted NO on $350 billion in tax breaks over 11 years.
• Voted YES on increasing tax deductions for college tuition.