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Benefits of a Roth IRA

08.26.2019 by admin // 2 Comments

There are several retirement account options available in the United States including Traditional IRAs, Roth IRAs and 401(k) plans. Even if you already contribute to a 401(k) plan at work, there are many benefits unique to a Roth IRA. You should contribute to a Roth IRA as part of your retirement savings strategy.

What Is A Roth IRA

A Roth IRA is a retirement account that offers you a tax benefit when you retire. Unlike traditional IRAs and 401(k) plans Roth IRA contributions are not tax deductible but you also do not pay taxes when you withdraw money at age 59 ½ +. There are certain Roth IRA rules such as income requirements and contribution limits you need to follow.

Broad Variety of Roth IRA Investment Options

In a Roth IRA account you can select what you want to invest in such as stocks, bonds and mutual funds. You can invest in nearly any financial asset but you cannot invest in other assets like artwork for example. Any financial asset offered by the financial institution you have your Roth IRA with can be invested in through your Roth IRA. This is a benefit offered by a Roth IRA that you don’t have in your 401(k) plan. A 401(k) plan offered by your employer typically only has a few options of what you can invest in.

Roth IRA Tax Benefits

Roth IRAs are funded with post tax contributions. This means you pay taxes on your Roth IRA contributions before you put it in the account. This is different from a 401(k) plan where you contribute money that hasn’t been taxed yet. Once the money is in your Roth IRA account the earnings grow tax free.

Borrowing Money from Roth IRA Earnings

It’s not recommended that you borrow money from a Roth IRA. However, if you get in a bind, there are a few benefits to taking out a loan / distribution from a Roth IRA. With a Roth IRA, you may have to pay a 10% penalty for an early withdrawal but there are a few exceptions. You can withdraw all or part of your money penalty free for 60 days as part of a Roth IRA rollover but you must pay back the full amount in that time frame.

You can also request a qualified distribution that you don’t have to pay back for a few reasons including buying or building your first home (up to $10,000 cap), certain education expenses or if you become disabled. Investopedia shares more details here about withdrawing from a Roth IRA. If this is something you are considering, it is best to contact your financial institution first. However, when you withdraw money from your Roth IRA you lose the tax benefits of those contributions earning capital gains and dividends tax free.

With a 401(k) loan, you can only take a loan out for a current 401(k) plan. You also may have to pay taxes on your loan and interest which is typically an interest point or two above the prime rate. Your loan is also limited to $50,000 or 50% of your balance, whichever is lower.

Roth IRA Contribution Withdrawals At Any Time

With a Roth IRA you are always able to withdraw your contributions penalty free (note: contributions, not earnings). You’ve already paid taxes on your Roth IRA contributions. Therefore, you can withdraw your contributions at any time with no restrictions. If you withdraw earnings on those contributions though, you may be taxed or penalized on withdrawing this money.

Once you hit 59 ½, as long as you’ve held the account for at least five years, you can take distributions on all money within the account and do not have to pay taxes on that money. Both 401(k) plans and Traditional IRA plans require you to pay taxes when you withdraw the money.

No Minimum Required Distribution for Roth IRAs

There are no required minimum distributions for Roth IRA accounts. Both 401(k) plans and Traditional IRA plans have required minimum distributions beginning at age 70 ½. If these plans are your only retirement saving strategy this could mean you’re in a high tax bracket depending what your required minimum distribution is. You don’t have the option to withdraw less to end up in a lower tax bracket. Since there is no required minimum distribution beginning at 70 ½ with a Roth IRA you don’t ever have to withdraw from this account. You can opt to pass this money onto your heirs.

Roth IRA Benefits Summary

It is a good retirement strategy to have a Roth IRA along with a 401(k) or traditional IRA to reduce the amount of taxes you’ll have to pay once retired and also to take advantage of the tax benefits offered by a 401(k) plan while you’re working. Having a mix of both will help reduce your taxes both now and in retirement. You’ll also have more flexibility with investment options and flexibility to borrow money from the account if you’re ever in a desperate situation.

How To Check Your 401(k) Account

07.21.2019 by admin // 2 Comments

No matter how much your investments are on auto-pilot, it is always beneficial to check your 401(k) account once or twice a year online. In your online account you can check your 401(k) balance, how your investments are performing, yearly rate of return and more. With this information, decide if any changes need to be made such as contribution amounts and investment choices. Summertime is the perfect time to check your 401(k) and see how you’re doing against your retirement and 401(k) contribution goals.

If you’re still new to retirement savings, check out John Oliver’s segment on retirement savings. He does the best job at making 401(k) plans entertaining.

How To Check Your 401(k)

First things first, how do you even check your 401(k) account online? Start by going to the website of your 401(k) provider. If you’re not sure who your 401(k) provider is, go onto your employer intranet and it should be listed under a HR resources section. Once you’re on their website, if you get stuck hit forgot username. If you’ve never set up an online profile this process will alert you to that pretty quickly. It’ll take a couple of steps to get your username and password retrieved / set up. Once you have this bookmark the page and save your username / password either through a password manager or somewhere you can reference later.

Check If Your Yearly 401(k) Contribution Goals Are On Track

In the summary tab online there should be a contribution box that tells you the percentage of you’re salary you’re contributing, your contributions this year and your employer contributions this year.

At minimum, always make sure you contribute enough to get your 401(k) employee match. This is free money that requires no additional effort. Additionally, consider contributing the maximum amount for tax benefits. Confirm if you are on track to get your company match. Are you halfway to your yearly contribution goals? If you want to contribute the maximum for tax benefits ($19,000 in 2019), have you contributed at least $9,500 this year?

If your 401(k) contribution goals aren’t on track identify what the gap is between where you are now and your yearly goal, how long it takes contribution changes to go through for your plan and how many paychecks will the new amount be withdrawn from. Then, figure out how much you need to increase your contribution per paycheck.

Check Your 401(k) Fees

When you originally picked your investments, how much attention did you pay to the fees charged? 401(k) fees can vary widely, anywhere from .5% to 5%. And, though the numbers may seem small it can add up to hundreds of thousands of dollars by the time you retire. While you may not have control of all fees in your 401(k) plan, understand which ones are in your control.

Look at the return of each fund option and the fees associated with each fund. Determine if the returns of those funds justify the higher fees. If not, switch funds. For example, if you are in a large cap equity mutual fund you can switch to a large cap equity index fund which will have lower fees. Mutual funds are actively managed funds which is why they have higher fees. Index funds are passively managed funds which follow as closely as possible the performance of its benchmark index.

To find the fees of each fund in a 401(k) plan with Fidelity, go to the Investments tab under your account and scroll down. Click each fund and each fund page will have the fees listed in the table.

Don’t think 401(k) fees are a big deal? NerdWallet shared findings that 401(k) fees could cost millennials $590,000 in retirement savings.

Check Your 401(k) Investments

For 401(k) plans with Fidelity, go to your account and look at your rate of return (both 1 year and year to date). Underneath the rate of return click on investment performance and research. Here, there are more details about the performance of each fund.

Some 401(k) plans offer target date funds which are funds aligned to the assumed year you will retire. If you’re enrolled in one of these plans, they tend to come with higher fees but require the least amount of effort from you to maintain. That way, the mix in your portfolio will shift automatically for you as the person who is managing it will change the investments over time. If you’d prefer to set it and forget it, you may decide this is worth the higher fees.

If you’re not invested in the target date funds, determine how the investments within your 401(k) plan are performing. While your 401(k) investments are in it for the long haul, it is always good to look at your investments once or twice or year. Should you be overweight or overweight in certain segments like international, large cap or small cap? Should you change only your future elections or current investments?

Lastly, how many years has it been since you’ve changed the mix in your portfolio? If you set your portfolio mix 10 years ago, you may be overweight on stocks and need to rebalance your portfolio to include more fixed income.

Check Your 401(k) Beneficiary

While you’re in your online account don’t forget to check that you’ve named a beneficiary for your 401(k) account. Typically, a spouse must be the beneficiary unless they sign a waiver. If you’re not married it’s important to name a beneficiary in your account. The Motley Fool shares additional tips on when someone inherits a 401(k).

Check Your 401(k) Balances From Former Employers

Did you switch jobs this year or in the past? While you’re doing a status check on your current 401(k) plan don’t forget about any previous 401(k) plans you have. If you don’t want to manage multiple 401(k) accounts, Fidelity outlines four options on what to do with an old 401(k) plan here.

How to Invest in Startups

04.15.2019 by admin // 5 Comments

Invest in startups: Room full of people with a whiteboard that says startup day

Recently Lyft went public and Uber filed their IPO. There is finally an opportunity for the average investor to start investing in some of the tech unicorns. With this comes the news about the original investors and how much money they stand to make in the IPO. You begin to think wow, I wish I invested then. When Snap went public, one high school invested $15,000 and made millions. There are also stories about startup investors that lost it all. The most public recent example of course is the investors that lost money in Theranos. Whether or not this type of alternative investment will appeal to you will depend on your risk level. Wondering how to invest in startups? Before you make you make your first investment, start by doing your research and learn how to find your first investment opportunity.

Why Invest In Startups?

According to Fortune, while the number of U.S companies continues to grow, the number of U.S. companies that are traded on stock exchanges has plunged 45% since peaking 20 years ago. Additionally, new companies have been completely disrupting traditional business models but many of these companies aren’t yet public. If you only invest in public companies, you are limiting your investment options more so than previous generations.

What Startups Can You Invest In and How Much

First, understand what startups you can invest in and how much are you willing to invest. Certain investments are only open to accredited investors and you’ll want to understand if you qualify before doing research on companies you’re unable to invest in. If you’re not an accredited investor, you’ll want to look further into crowdfunding.

You’ll also have limits based on how much you want to invest. Startups will have different requirements but in general, the later the stage the easier it is to get priced out. Additionally, you need to be comfortable with a lack of liquidity and that you may lose your entire investment. When you invest in the stock market, you can sell any time you want. When you invest in a private company though, you can only sell when the startup provides you the option to do so.

Startup Stages of Financing

Seed funding is the first official round of financing. There are many potential investors at this stage and can range from the founders, friends, family to accredited investors. Typically, this is the easiest time to invest in a startup but it’s also the riskiest. Companies are typically just starting out and they’ll have no proven track record. After raising capital at this stage, a company may decide to pursue a Series A.

For more details on each stage here are two helpful articles:

How to Value a Startup

Investopedia talks here about methodology to use to value a private company. There is a lack of strict reporting requirements for private companies, making it harder to value. If you’re investing in a seed round though, there may be no historical numbers to even look at yet. When you’re meeting with the founder, review their pro forma. Ask a lot of questions about their business plan, about the market and what their exit strategy is. If the business doesn’t have a track record yet, does one of the founders have a history with building businesses from the ground up?

Investing in Startups Negotiation: What Should You Get For Your Investment

When I’ve invested in startups, I’ve yet to encounter a “Shark Tank” like scenario and have always been told this is what they are offering. One company decided not to bootstrap and instead raise initial funding from friends and family. In that case they offered the same deal to everyone – a certain amount of money (say $5,000) equaled a certain percentage of the company. In other cases, the company bootstrapped for a little and then offered a SAFE (simple agreement for future equity) by Y Combinator. With this, founders are able to calculate how much ownership has been sold and investors know how much ownership of the company they have purchased. Understand that if / when the company raises more money your ownership will be diluted.

Where to Find Opportunities to Invest in Startups

The easiest way to find opportunities to invest in startups is to look to your own network. If you know friends that have invested in startups before, ask for introductions. Check your LinkedIn and other social media to see if anyone recently started their own business. Do you have connections that are more likely to know entrepreneurs? For example, everyone has that friend that seems to know everyone. Doctors are known to have high salaries and may have been asked to invest in startups. Do you have any connections that started a Kickstarter to raise money for a business idea – perhaps they will entertain the idea of having an equity partner if you reach out.

There are limitations to advertising that a startup is raising money, so it’s likely you already know people who are raising money, they just haven’t publicly mentioned it. It’s up to you to reach out and let people know you’re interested in investing.

Have you invested in a startup? How did you get started?