Editor’s note: This story was originally published in October 2018.
Patrice Banks used to be the type of woman who felt like she needed a man with her when she took her car to a mechanic or bought a new car.
“[It] wasn’t a very empowering position, considering I’m an engineer,” she says. “I’m in a male-dominated field, I’m smart, but yet I was an auto airhead.”
After reaching out to other women, Banks realized she wasn’t alone. All too many found themselves in similar situations. She decided she was going to do something about it — for herself and for other women.
So Banks went back to school to learn how to become an automotive technician. She quit her engineering job at a Fortune 500 company and opened an auto repair shop in Upper Darby, Pennsylvania — just outside of Philadelphia — in January 2017.
The shop — Girls Auto Clinic — is run by women and caters to a female clientele. Banks owns a salon — Clutch Beauty Bar — adjacent to the shop, where customers can get their nails or hair done while waiting for their cars to be serviced.
Banks is dedicated to changing the face of the automotive industry and empowering women with auto education. She hosts free car care workshops at her shop once a month from April through November and is the author of the “Girls Auto Clinic Glove Box Guide,” which teaches women about car maintenance, car buying and finding the right mechanic.
Banks recognizes not every woman will want to get dirty and fix her own car but says women should know the basics of how to take care of their cars. After all, your car is an investment that can cost tens of thousands of dollars. You want it reliably getting you from point A to point B — not inching its way toward the scrap-metal yard.
Forget the Old Oil Change Rules
Banks says the most important thing car owners can do is to make sure to get their oil changed on schedule.
“Do you want to spend $40 for an oil change or $3,000 for a new engine?” she asks.
Following conventional wisdom, many people think they’ll need to spring for an oil change every 3,000 miles or three months. But that may not be the case, Banks points out.
“A lot of cars can go 5,000 [or] 10,000 miles between oil changes,” she says. “It is based on your owner’s manual.”
For those of us who haven’t cracked open the owner’s manual in a while — or ever — Banks says that’s where you’ll find a maintenance schedule that’ll outline when your vehicle needs routine care, like getting tune-ups, your filters replaced, your tires rotated and your oil changed.
An oil change is one of the least expensive auto-related costs you’ll likely encounter, she says.
So How Much Will This Cost?
Prices for auto jobs can vary widely depending on a number of factors, including how your car is made and where you live, Banks says.
However, she says you can generally lump the work done at an auto shop into three categories. The least expensive are tasks like oil changes, getting your tires rotated and replacing your windshield wipers. Banks says these types of maintenance jobs might cost less than $50, but they are tasks that need to be performed most frequently — at least once every year or two.
Light repairs and more involved maintenance work — like fluid flushes or getting new brakes and tires — fall in the middle tier, Banks says. You can expect to spend between $100 and $300 per job, and you’ll probably need these types of jobs completed every two to five years, she says.
Major repairs will be your highest expenses. And the older your car is, the more likely it’ll need some major repair work. A 2018 Ally Financial survey of over 2,000 Americans found that 80% of those who needed a major auto repair in the past five years paid $500 or more for it.
“When a car gets to be what I call in its second life, like 100,000 miles or over — what I call over the hill — that’s when it’s all fair game; anything and everything that could break will break,” Banks says. “I tell women everything on a car will fail. It will fail eventually. You have to expect it.”
If you’ve financed your car, Banks recommends you pay off your car note before your vehicle hits 100,000 miles. Then start saving up for repairs. You should expect to have repair costs on top of the regular maintenance work you’ll still need, she says.
Build Your Savings and Find a Good Mechanic
Women get advice about car buying, basic maintenance, realistic repair costs and finding the right mechanic in Banks’ free monthly workshops. Photos courtesy of Girls Auto Clinic
Planning ahead is the best way to not get caught unprepared when you’re hit with a high auto-related expense. Banks says to expect to pay about $1,000 a year in car repairs if your car has over 100,000 miles on it. She recommends socking away about $100 a month.
Pro Tip
Set up a sinking fund to save regularly for future repairs. Deposit savings in that account monthly and only withdraw when you need to pay an auto bill.
Another important aspect of being a smart car owner is to have a mechanic you trust. Open communication between technicians and customers is one thing Banks prioritizes at Girls Auto Clinic.
“Mechanics … diagnose things by hearing, feeling, seeing and smelling,” she says. “So if we can hear, feel, see and smell it, so can you.
“One of the things that I suggest that [customers] do, whether they come to us or any other mechanic, is to say, ‘Show me.’ We take people out into the shop and we show them what we’re seeing,” she says. “We have them listen to what we hear… We have them try to smell what we smell. We have them feel what we feel.”
Communication is key to helping clients not feel like they’re being taken advantage of, Banks says.
She acknowledges that car owners are sometimes hesitant to visit a mechanic because they fear they’ll feel pressured with recommendations for products and services that’ll add to their bills. Chain repair shops and dealerships are notorious for upselling, Banks says.
She says she combats this by being transparent with clients about what work they need right away and what they can wait a few months to have done. If your budget is tight, don’t be afraid to speak up, explain what you can afford now and ask what work can wait for a future visit.
Banks says she used to be a “get-in-the-car, turn-the-ignition-and-go type of girl,” but with knowledge and confidence, she’s no longer clueless about cars.
And when her car needs work done, she doesn’t have to call a man to help.
Nicole Dow is a senior writer at The Penny Hoarder.
If you’re buying a home, one question you might wonder is this: Is home insurance required when you own a house?
In many cases, homeowners insurance is indeed mandatory—and even in cases where it isn’t absolutely necessary, it’s still a good idea. To help you understand why, we’ve put together this Home Buyer’s Guide to Home Insurance, which will help walk you through what you need to know from beginning to end.
In this first article, we’ll introduce you to what homeowners insurance is, why it’s often essential, and what can go wrong if you don’t have it.
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What is homeowners insurance?
With home insurance, as with other types of coverage (including health insurance), you pay a relatively small amount of money either monthly or annually in exchange for the promise that your provider will help you pay for unexpected costs you might incur as a homeowner.
What can go wrong? So much, including natural disasters, fires, crimes, accidents, and other emergencies, many of which can be expensive to fix. Without home insurance, you run the risk of getting stuck with a bill that could be in the tens of thousands of dollars. Home insurance offers protection and peace of mind that you won’t get hit with expenses that might be hard to pay on your own.
Why you need home insurance with a mortgage
If you need a mortgage on your home, most lenders will require you to get home insurance before they approve your loan and close the deal.
The reason: By loaning you money for the house, lenders are also investing in your property. If this investment suddenly plummets in value—since, say, a tornado turned it into a pile of rubble—it’s in your lender’s interests for you to have a home insurance plan that will rebuild and restore what you (and your lender) have lost.
“Homeowners insurance is typically required by a mortgage company,” says Brian Rubenstein, senior director for Ally Home. “A lender wants to protect the financial investment they made in your home.”
When to get homeowners insurance
At closing, most mortgage lenders will need you to show proof that you have an insurance policy already in place—even though you don’t officially own the home yet! This proof is known as an insurance binder, and serves as a temporary agreement between you and the insurance company that becomes permanent once you officially close on the home.
In fact, most lenders will want to see an insurance binder at least a few days before closing. As such, you’ll want to start shopping for insurance a few weeks before your closing date, so you have time to compare policies and find the right insurance company for you.
Do you need homeowners insurance without a mortgage?
Now, what if you don’t have a mortgage? Technically speaking, no, you’re not required to have homeowners insurance. But then the question becomes “Should you pay for home insurance?” The answer is still a resounding yes.
“Even if you don’t have a mortgage, home insurance protects the investment you’ve made in your house,” says Amy Danise, chief insurance analyst at Forbes Advisor.
“Think of the worst-case scenario, because that’s really what insurance is for: If your house burned down or was destroyed by a tornado, would you suffer financially?”
Reasons to get home insurance: What home insurance covers
If you don’t have homeowners insurance, you could be in for a rude awakening if disaster strikes and you need to pay engineers, contractors, electricians, masons, painters, roofers, and other highly specialized (read: expensive) professionals to repair the damage to your house.
According to the Insurance Information Institute, about 1 in 20 insured homes will file a claim each year. Meanwhile, data from the Insurance Research Council finds that, on average, insurance companies pay out about $8,787 per claim to help defray homeowners’ costs. Below are some of the most common and expensive insurance claims homeowners experience.
Wind and hail: Wind and hail damage is the most frequent reason why homeowners file insurance claims. Every year, 1 in 40 insured homeowners files claims related to wind and hail, with claims paying out an average of $11,200.
House fire or lightning strikes: Every year, about 1 in 350 insured homeowners files claims due to fire or lightning. These accidents are also among the most costly to repair, with claim payments averaging $11,971. Furthermore, lightning strikes are becoming more expensive. Why? Because our homes are rigged with an increasing number of electronic systems like smart home technologies, which can go haywire when struck by lightning.
Water damage or freezing water: About 1 in 50 insured homeowners files a property damage claim caused by water damage (like a leaky roof) or freezing water (burst pipes) each year. The claim payments average $10,849.
Theft: About 1 in 400 insured homeowners files claims due to theft every year, with claims paying an average of $4,391.
Personal injuries damage: In addition to covering your home and belongings, home insurance often includes liability coverage. This means that if a visitor gets hurt on your property, her medical bills should be covered by your home insurance company. About 1 in 900 insured homeowners files claims related to bodily injury every year. This injury could happen inside your home or, in some cases, elsewhere. For instance, if your dog bites someone on your property or even on the street or down the block, that is typically covered by your home insurance. The reason: Although we all know that dogs are members of our family, pets are considered property in legal terms. As such, any damage they inflict on others is often covered by insurance, wherever the incident happens. And good thing, too, since the average claim to cover the injured party’s medical bills hovers around $45,000.
All that said, what exactly is covered under a home insurance policy—and what you’ll pay for it—varies by provider. As such, it’s important to shop around and understand your options.
So how much does home insurance cost, and how much do you need? We’ll cover that in future installments of this guide. Stay tuned!
begin investing now, even if you don’t fully understand the process.
We’ll break it down, starting with showing you how to prepare your finances for investing.
Then we’ll give you some solid strategies that will help you up your game as you go along.
You may never be a complete expert, but you’ll know enough to get started after reading this article.
Expert status – if it’s even possible – will come with time.
Step 1: Have a Fully Stocked Emergency Fund
Probably the scariest scenario in the investment universe is watching your investments fall in value, at a time when you need the money for other purposes. But like everything else when it comes to investing, there’s a fix.
It’s called an emergency fund. An emergency fund is a completely safe, completely liquid financial account, that enables you to access the funds anytime you need them, and on very short notice.
There are two major purposes for an emergency fund:
To have ready cash to cover an unexpected expense, and
to prevent you from needing to liquidate investment assets to cover that expense.
Put another way, an emergency fund serves as a protective buffer between your budget and your investments. It prevents you from having to liquidate investments at prices that might lock in a permanent loss.
An emergency fund accomplishes something else that’s very important. It gives you sleeping money.
What’s sleeping money? The financial markets don’t always behave the way we expect them to. Sometimes they languish for what seems like forever. Other times there’s a lot of volatility, with the market swinging back and forth in unpredictable patterns.
And sometimes there’s a bear market, causing stocks to drop for several years. If you’ve got money sitting in a safe emergency fund, you won’t be as concerned about the ups and downs of the market. You’ll be able to sleep at night. Where should you hold your emergency fund?
We like online banks that pay high rates on savings, money markets, and certificates of deposit (CDs). Examples include:
Any of these banks keep your money safe, completely liquid, and pay interest rates well above local banks.
Step 2: Make Sure Your Debt is Under Control
There are some who will say you should start investing no matter what your financial situation is, even if you have a lot of debt. This is not a completely ridiculous concept.
It has to do with the time value of money – the sooner you begin investing, the more time your money will have to grow.
Simply put, you’ll have more money accumulated if you begin investing at 25 than if you start at 40. That’s the argument to begin investing no matter what your financial situation is. But while that strategy makes sense in a lot of situations, you also have to look at the math. Consider the following:
Interest: The average interest rate on credit cards is 17.14%.
Returns: The historic return on the S&P 500 is about 10% since 1928.
Reality: Even with 100% of your investments in the stock market, earning 10%, you’ll be losing 7% each year with an equivalent amount of credit card debt.
If you have a lot of credit card debt, you can see how this will work against you. That’s an arrangement you’re doomed to lose.
Now that doesn’t mean you need to be absolutely credit card free. If you have relatively small balances, there’s no reason to wait until you pay off the last dollar.
But if you have several thousand dollars in credit card debt, you must consider what a losing proposition that is. The better strategy will be to pay off the bulk of your credit cards before investing.
When it comes to investing, credit card debt is like a backdoor margin loan, but at rates so high as to defeat the purpose.
What About Other Types of Debt?
Other types of debt, like student loans and auto loans, are trickier. Student loans can run for 10, 15, or 20 years. That’s too long to wait to begin investing.
And car loans makes sense because they are secured by an asset that’s used to help you earn an income – your car.
And no, you shouldn’t wait to pay off your mortgage completely before you begin investing.
It’s long-term debt, like student loans, and it’s secured by an asset that provides a direct benefit, similar to a car loan. If you wait for these loans to be paid off, you may never begin investing.
Step 3: Start Small
Probably the biggest reason people don’t begin investing sooner is a lack of money.
But in today’s investment universe, a lack of money isn’t a serious problem. There are any number of investment platforms that will enable you to begin investing with very little money, or even none at all.
Betterment
For example, probably the best known of all robo-advisors is Betterment. You can sign up for an account with them, and you don’t need any money at all.
You can fund your account gradually, through regular monthly deposits. If you can contribute at least $100 per month, you’ll be surprised how quickly the account will build up.
Sign up with Betterment today >>
And as investment earnings increase your account value, you’ll begin to see the power of that time value of money concept in action.
Acorns
Another investment app that’s become increasingly popular – and will also enable you to begin investing with no money – is Acorns. It’s a smartphone app you attach to your bank account or credit card.
As you spend money the way you regularly do, Acorns will make small contributions toward an investment account.
For example, let’s say you purchase a latte at Starbucks for $4.50. The app will charge your bank account or credit card $5 even. $4.50 will pay Starbucks, and 50 cents will go into your investment account.
What’s more, the investment account is a robo-advisor. As money goes into the account, it will automatically be invested in a diversified portfolio.
From there, it will be fully managed, including periodic rebalancing to maintain the asset allocation, as well as reinvestment of dividends.
This is also how Betterment works, so you really can’t go wrong with either account. With each, you’re starting very small, then building up over time. Perfect!
Start investing with Acorns here >>
Step 4: Diversify Your Investments
A common mistake many new investors make is putting all their money into a very small number of stocks, or maybe even one. The theory is if that one stock takes off, you’ll become an instant millionaire. Sorry to burst your bubble, but that only works on TV.
In the real world of investing, you need to build a diversified portfolio. That means owning many different stocks, spread across different industries.
You’ll also want to counter your stock holdings with fixed-income investments. These will typically consist of bonds, but it could also be CDs held at an online bank.
The basic idea is that if the stock market starts misbehaving, your fixed income allocation will remain safe.
For a small investor, it can be very difficult to diversify. After all, it takes a lot of money to buy a lot of different stocks. But that’s another problem the investment industry has overcome.
We’ve already discussed robo-advisors like Betterment and Acorns. They’ll automatically create a balanced portfolio of stocks and bonds for you. This will spare you the trouble of having to create a portfolio yourself.
And since you’re investing flat dollar amounts, even a small investment can be spread across literally hundreds of different investments.
Step 5: Consider a Robo-advisor that Let’s You Choose the Investments
Eventually, you may get the confidence and knowledge, so you feel comfortable selecting at least some of your own investments. If you do, there’s an investment app for you. M1 Finance is a robo-advisor, but one that will give you a choice as to what you will hold in your portfolio.
Here’s a quick breakdown of what M1 has to offer:
Minimum: With as little as $500, M1 creates you a theme-oriented portfolio
Portfolio: Referred to as “pies,” they are comprised of stocks and exchange-traded funds (ETFs).
Advantage: You can choose the type of pie you want to invest in from 60 pie templates, or create your own.
Pies: Can be based on a specific investment sector or even a certain group of stocks.
Automated management: M1 then takes over and manages your portfolio for you. You choose your investments, but they handle the day-to-day management.
M1 Finance is an excellent platform to begin self-directed investing with. As you find yourself becoming more successful and confident in your investing activities, you can begin building your own pies from the ground up.
And just as important, M1 Finance has no fees. You may not start out with this platform, but you may want to get there eventually.
Start investing with M1 Finance>>
Step 6: Understand What You’re Investing In
Once again, it has to be emphasized that you should use robo-advisors if you’re a new investor. The advantage with robo-advisors is that you don’t need any investment knowledge whatsoever to participate.
As a new investor, you should never invest in anything you don’t understand. The advantage with robo-advisors is that they will both design and manage your portfolio for you. That’s especially important when you’re just starting out and don’t have much capital to invest.
But eventually, you may want to begin do-it-yourself investing. If you do, be sure to ease into it slowly.
It may be best to start with a base of investments in robo-advisors. Or you can even consider holding one or two mutual funds or exchange traded funds.
Each represents a portfolio of dozens or hundreds of stocks, so you don’t have to get involved in either the selection or the managing of those securities. Beyond a robo-advisor, or a fund or two, you can open up a self-directed account with a diversified brokerage firm.
Ally Invest
Let’s take a look at one of our top brokerages, Ally Invest. Here are a few quick facts:
Investment options: individual stocks, bonds, options, and even mutual funds or ETFs.
Flexibility: You can use the investment platform for your do-it-yourself investing, while holding your managed money with robos and funds.
Diversity: A platform like Ally Invest will give you the tools to learn more about investing, as well as individual securities. But it also provides tools to help you be a better investor.
But once again, move slowly with this process. You can lose a lot of money jumping in too quickly.
Step 7: Get Help If You Need It!
If you want to get into self-directed investing, but you don’t feel you’re quite ready, there are plenty of places where you can get help.
Some are free, but others charge a fee.
But if you plan to be a successful investor, you’re eventually going to have to start paying some fees for more advanced services.
You should think of investing like running a business. You’re running the business to earn money, but sometimes you have to re-invest in the business so you can earn more money. The concept is similar with investing.
Here are few resources that can help you along the way:
Bloomberg and MarketWatch: You should become a regular reader of sites like Bloomberg and MarketWatch. They’ll keep you up-to-date with what’s going on in the financial markets and offer a wealth of information on the companies you’ll want to invest in. Investing is largely a process of building a knowledge base, and you’ll need to do that gradually and consistently.
Morningstar: If you want more information about individual securities, particularly funds, you can look into services like Morningstar. You’ll pay for the service, but the information is virtually a standard in the investment world. If you’re serious about becoming a do-it-yourself investor, you’ll need this kind of resource.
Personal Capital: There’s also a way you can get hands-on investment assistance at a relatively low rate. A platform known as Personal Capital offers a wealth management service. The service functions like a robo-adviser, but also provides you with big picture financial advice, to help you manage your entire financial life.
Step 8: Make Investing a Habit
Investing isn’t something you do once, or even occasionally. Your success is directly tied to how consistently you do it. That means not only making regular contributions to your investments, but also making sure you’re invested in all types of markets.
Let’s look at the impact regular contributions have on investing… If you invest $10,000 into a portfolio that averages 7% per year, for the next 30 years, it will grow to about $76,125.
But let’s say instead of making a one-time investment of $10,000, you contribute $5,000 each year, for 30 years – also earning an average annual rate of return of 7%.
After 30 years you’ll have over $490,000! There’s another benefit to regular periodic investment, and that’s dollar cost averaging. It’s one of the most time-honored concepts in investing.
When you make a one-time investment, you’re buying into the market at whatever prices are at that time.
If you make a $10,000 investment, and the market falls 50% in the next year, you’ll be down to $5,000. But by making regular contributions, into all types of markets, you’re never worried about where the market is at. In some years you’ll be investing at what’s considered to be a bad time.
In others you’ll be investing in what’s considered a good time. But by making regular contributions, you remove the guesswork. You’re investing in all types of markets, and your focus is completely on the long-term performance of your portfolio, and not in any attempts to time the market.
That’s important, because no successful market timing strategy has ever been developed. And by making regular contributions, you won’t need one anyway. When it comes to investing, consistency is more important than timing.
Step 9: Get Started!
None of this information matters if you don’t put it into action. The critical first step with investing is always to begin. You don’t need much money to do that, or even any money at all.
You can either open an investment account with just a few dollars, or open one with zero and set up regular contributions.
Those contributions will help you gradually build a growing investment portfolio through dollar-cost-averaging. In that way you won’t have to worry about what the market is doing at the time you invest.
Since you’ll be investing regularly, you’ll be investing in all types of markets, at all price levels.
Don’t Let Lack of Knowledge Stop You
There are plenty of investment apps and investment information services to will help you become a successful investor, even though you’re just starting out–hey, maybe you can call yourself an apprentice now, at a minimum!
Some will even fully manage your investments for you, and at a surprisingly low cost.
And once you’re ready to begin trying your hand at self-directed investing, go slowly.
Make sure you have a solid base of emergency savings and managed investment accounts.
Then gradually move into self-directed investing on a diversified investment platform, one with all the tools you’ll need to be a successful investor.
At some point you may even decide self-directed investing isn’t your thing, and that’s fine.
Very few people could remotely qualify as investment experts, so you’re in good company if you’re not one of them.
But you can still take advantage of managed accounts, like Betterment, to handle the work of investing for you.
The only requirements are a willingness to get started, and a decision to commit to the long-term, and you’ll have everything you need to be a successful investor.
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Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.
Cash-out refinances and home equity lines of credit are two borrowing options that allow homeowners to tap into the equity they have built in their home.
A HELOC is a line of credit secured by the borrower’s home. The line of credit can be accessed on an as-needed basis, up to the borrowing limit. The borrower is only charged interest and responsible for repaying the amount they actually borrowed.
For a cash-out refinance, the borrower takes out an entirely new mortgage while borrowing a portion of their existing home equity. The total borrowed amount of the cash out refinance will be greater than the borrower’s original mortgage, and the borrower will receive the difference in a lump sum payment from the lender.
Borrowers should keep in mind that a cash-out refinance replaces their current mortgage and even though they receive additional cash they only have to make one monthly payment. Unlike a home equity line of credit, a cash-out refinance may have a fixed interest rate, meaning that the interest rate remains unchanged for the life of the loan so the monthly payments remain the same. Additionally, interest rates are typically lower than with a HELOC.
The approval process for a cash-out refinance is similar to the initial approval process when buying a home. It can be somewhat cumbersome, but the payoff is a lower interest rate, a fixed payment, and access to additional cash.
Which is better: Cash-Out Refinance vs Home Equity Line of Credit?
Like most things in the world of finance, the answer to which option is better will vary by person based on their individual financial circumstances and unique needs. In some situations, a HELOC may make more sense than a cash-out refinance and vice versa.
HELOCs can be useful for shorter-term needs or situations where a borrower may want access to funds over a certain period of time, for example when completing a home renovation. Because HELOCs generally have a variable interest.
Cash-out refinances can make sense if there is a need for a large sum of money or if they can be used as a tool to improve your financial situation on the whole.
Both a home equity line of credit and a cash-out refinance have fees associated with them. With a cash-out refinance, fees are paid upfront in the form of loan closing costs. With a HELOC, several types of fees can be charged periodically such as an annual fee or inactivity fee for non-usage. One way for a borrower to reduce these fees is to shop around and compare lenders.
Over the past decade, mortgage refinancing has grown in popularity. Not that big of a surprise, considering we’ve seen a sizable drop in mortgage rates during this time. At the height of the housing crisis in 2008, rates averaged about 6% for a 30-year fixed-rate mortgage .
Currently, the average rate for a 30-year fixed mortgage is about 3.26% , which gives some folks the opportunity to save some serious moola by lowering their interest payments. If you signed on for a higher rate years ago or your financial situation has improved, refinancing is worth considering.
Refinancing a mortgage might not be right for every homeowner, but starting to look at rates and terms could be the first step to being able to save for other financial goals. Here’s everything you need to know about refinancing a mortgage from how to start the process, to figuring out if it’s right for you.
How much does it cost to refinance a mortgage?
Since you’re essentially applying for a new loan, there will most likely be fees if you choose to refinance. Because of this, it’s important to consider those costs compared to the potential savings. A good rule of thumb is to be certain you can recoup the cost of the refinance in two to three years—which means you shouldn’t have immediate plans to move.
Refinancing will generally cost from 3% to 6% of your loan’s principal value, though you should be sure to shop around to make sure you’re getting the best deal.
There are helpful online calculators for determining approximate costs for a mortgage refinance. Of course, this is only an estimate and all lenders are different. The lender will provide final closing cost information alongside a quote for your new mortgage rate. When you refinance, you also have to consider closing costs. Some lenders may not have origination fees, but instead charge the borrower a higher interest rate.
If you have a great borrowing history and a strong financial position, there are some lenders, like SoFi, that reward such borrowers by offering competitive rates and no hidden fees.
What are the steps in the mortgage refinancing process?
The first (and arguably most important) step is to determine what you want to get out of your mortgage loan refinance. There are several mortgage loan types, but “rate and term” and “cash out” are the two most common.
Just as the name implies, a “rate and term” refinance updates the interest rate, the term (or duration) of the loan, or both. You can also switch from an adjustable rate to a fixed rate and vice versa.
It is important to understand that not every refinance will save you money on interest. For example, if you extend the loan terms, you may end up paying more money over the course of your loan.
to boost your credit score. 1 2. Research your home’s approximate value. Check comparable sale prices—not just listing prices—in your neighborhood to get an idea of what your house is worth. If the value of your home has gone up significantly and improves your loan-to-value ratio (LTV), this will be helpful in securing the best refinancing rate. 3. Compare refinance rates online. Don’t forget to ask about all costs involved. Most financial institutions should be able to give you an estimate, but the accuracy can depend on how well you know your credit score and LTV ratio. 4. Get your paperwork together. The process will move faster if you have your pay stubs, bank statements, tax filings, and other pertinent financial information ready to go. 5. Have cash on hand. You may have to pay some up-front costs, like property taxes and insurance. 6. The lender will (mostly) take it from here. They will send an appraiser for a home inspection. After the loan documentation and appraisal are submitted, loan officers determine the interest rate and create the loan closing documents. The closing is then scheduled with the refinancing company, mortgage broker, and real estate attorney.
How long does a mortgage refinance take?
The process can take anywhere from 30 to 90 days, depending on your diligence, the complexity of the loan, and the efficiency of the lender or broker.
If you want the process to move fast, look for mortgage lenders who are looking to disrupt the traditional mortgage process by offering a more streamlined service and a better customer experience.
If you’re like most people, you’ve got a life to live and don’t want your mortgage refinance to drag on for months. Keep this in mind while looking for a lender to refinance with.
Ready to check out your mortgage refinance rates with a competitive lender that values your time? SoFi can give you a quote (that won’t affect your credit score! 2) in as little as two minutes.
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Investors were put through the information wringer on Wednesday, and the major blue-chip indices finished the day with pretty disparate results.
The January retail sales report was, in the words of Barclays strategists, “significantly stronger than expected,” showing overall sales up 5.3% month-over-month following three straight months of declines.
“We had expected an overall improvement in January sales, after three months of declines,” says Pooja Sriram, vice president, US Economist at Barclays Investment Bank. “In particular, we expected the additional support to households from government pandemic-relief programs to support spending.
“Households started receiving the $600 per individual rebate check in January, as well as the federal unemployment assistance of $300 per week, under the COVID relief bill signed into law in late December.”
Another sign of economic resilience was rising U.S. wholesale inflation, which rose 1.3% month over month in January, reflecting strong domestic and export demand alike.
Interestingly, minutes from the January Fed meeting, released today, demonstrated worry about America’s path, with participants noting that “economic conditions were currently far from the Committee’s longer-run goals.”
“The minutes from the latest Fed meeting didn’t stray too far from the message Fed Chair Powell has been sending to market participants in his recent speeches where he indicated it’s not the right time to change policy,” says Charlie Ripley, senior investment strategist for Allianz Investment Management.
However, Bob Miller, BlackRock’s head of Americas Fundamental Fixed Income, says even the past few weeks since that meeting have “left that meeting’s minutes looking somewhat stale.”
“If we see vaccinations continuing apace, delivery of pending massive fiscal policy support and the arrival of warmer weather, we expect the resumption in spring of more ‘normal looking’ levels of previously shuttered economic activity. If accurate, the economy will be making ‘substantial further progress’ toward the FOMC’s goals – to use the Committee’s guidance for when they might no longer want to maintain the current pace of asset purchases.”
U.S. crude oil futures continued to climb amid supply disruptions in Texas, by 1.8% to $61.14 per barrel, pushing up the likes of Dow Jones Industrial Average component Chevron (CVX, +3.0%). The Dow managed to notch another record high, finishing up 0.3% to 31,613. However, a technology-sector slump sent the Nasdaq Composite 0.6% lower to 13,965.
Other action in the stock market today:
The S&P 500 slipped marginally to 3,931.
The small-cap Russell 2000 lost another 0.7% to 2,256.
Gold futures declined for a fifth consecutive session, falling 1.5% to $1,772.80.
Bitcoin prices, at $48,783 on Tuesday, shot 7% higher to 52,266. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)
Out Now: Buffett’s Latest Picks
Yes, Chevron did have swelling energy prices on its side, but it also had a new ally: Warren Buffett.
The legendary value investor and CEO of Berkshire Hathaway (BRK.B) unveiled his latest transactions in a Tuesday evening 13F filing to the SEC, revealing that his holding company had taken a stake in the integrated energy giant during the final quarter of 2020.
And that was far from Uncle Warren’s only move.
Buffett, just like many retail investors, spent much of 2020 making wholesale changes to the Berkshire Hathaway equity portfolio. He was every bit as active during Q4, entering four new stakes, exiting five stocks outright, and tinkering with another dozen positions.
If you’re curious as to what the Oracle of Omaha is bullish on, or what has fallen out of his favor, read on as we examine each of Warren Buffett’s 21 latest portfolio moves over the most recent quarter:
The stock market was less escalator, more airport people-mover for much of the week, but the major indices managed to end the week on a (modestly) positive note, and at fresh highs.
President Joe Biden said Thursday that “we’re now on track to have enough [vaccine] supply for 300 million Americans by the end of July,” and The Associated Press reports that his administration is “on pace to exceed Biden’s goal of administering 100 million vaccine doses in his first 100 days in office.”
However, on Friday, the preliminary February estimate for the University of Michigan’s consumer sentiment index slipped to 76.2, from 79.0 in January.
“The loss was entirely driven by a drop in the expectations index as households turned less optimistic about their income prospects,” says Pooja Sriram, Vice President, U.S. Economist, at Barclays. “The press release notes that the lower optimism was seen mainly among households with incomes below $75,000 and more so for those in the bottom one-third of the income scale.”
The S&P 500 (+0.5% to 3,934) and Nasdaq Composite (+0.5% to 14,095) managed yet again to eke out new record closes. The Dow Jones Industrial Average did, too, though its 0.1% uptick to 31,458 was hampered by a 1.7% decline in Disney (DIS), which beat earnings expectations but had analysts questioning its valuation.
Also, take note: Monday is Presidents’ Day, which is a stock market holiday.
Other action in the stock market today:
The small-cap Russell 2000 scratched out a 0.2% gain to 2,289.
U.S. crude oil futures recovered from yesterday’s losses, gaining 2.1% to hit $59.47 per barrel.
Gold futures slid again, off 0.2% to $1,823.30 per ounce.
Bitcoin prices, at $48,379 on Thursday, slipped 1.5% to $47,662 on Friday. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)
Don’t Fear a Dip; Get Ready to Buy It
While many observers have warned of a potential market downturn, Ally Invest chief investment strategist Lindsey Bell reminds investors that selloffs aren’t always something to fear.
“If there is a pullback, have your wish list ready,” she suggests, noting that consumer staples stocks are perhaps being overlooked despite their strong earnings performance.
She also reminds investors to have cash ready.
“When the drop happens, you’ll need some cash,” Bell says. “Even though low-yielding cash gets a bad rap, it is an important part of any portfolio because without it you could miss the chance to take action when opportunity arises.”
You can learn more about raising cash here, but typically this means selling off various stocks. In some cases, that means trimming losers, but in other cases it means taking profits on stocks that have run fast and far, but might be running out of gas.
This list of 10 widely held S&P 500 stocks is an interesting blend of both ideas here. They currently trade at nosebleed prices, making them a prime starting point for locking in profits. But they’re also attractive long-term plays that might make for better buys amid a broader-market downturn.
Read on as we examine each of these extravagantly priced plays, and why they’re possibly flying a little too close to the sun (for now).
Saving for retirement is an important financial goal and there are different options when it comes to where to invest. A qualified retirement plan can make it easier to build wealth for the long term, while enjoying some significant tax benefits.
Qualified retirement plans must meet Internal Revenue Code standards for form and operation under Section 401(a). If you have a retirement plan at work, it’s most likely qualified. But not every retirement account falls under this umbrella and those that don’t are deemed “non-qualified.”
So just what is a qualified retirement plan and how is it different from a non-qualified retirement plan? Understanding the nuances of these terms can help you better shape your retirement plan for growing wealth.
What Is a Qualified Retirement Plan?
Qualified retirement plans allow you to save money for retirement from your income on a tax-deferred basis. These plans are managed according to Employment Retirement Income Security Act (ERISA) standards.
The IRS has specific rules for what constitutes a qualified retirement plan and what doesn’t. Public employers can set up a qualified retirement plan as long as these conditions are met:
• Employer contributions are deferred from income tax until they’re distributed and are exempt from social security and Medicare tax • Employer contributions are subject to FICA tax • Employee contributions are subject to both income and FICA tax
Following those guidelines, qualified retirement plans can include:
• Defined benefit plans (such as traditional pension plans) • Defined contribution plans (such as 401(k) plans) • Employee stock ownership plans (ESOP) • Keogh plans
Section 403(b) plans, which you might have access to if you’re a public school or tax-exempt organization employee, mimic some of the characteristics of qualified retirement plans. But because of the way employer contributions to these plans are taxed the IRS doesn’t count them as qualified plans. The same is true for section 457(b) plans, which are available to public employees.
Defined Benefit vs. Defined Contribution Plans
When talking about qualified retirement plans and how to use them to invest for the future, it’s important to understand the distinction between defined benefit and defined contribution plans.
ERISA recognizes both types of plans, though they work very differently. A defined benefit plan pays out a specific benefit at retirement. This can either be a set dollar amount or payments based on a percentage of what you earned during your working career.
This type of defined benefit plan is most commonly known as a pension. If you have a pension from a current (or former) employer, you may be able to receive monthly payments from it once you retire, or withdraw the benefits you’ve accumulated in one lump sum. Pension plans can be protected by federal insurance coverage through the Pension Benefit Guaranty Corporation (PBGC).
Defined contribution plans, on the other hand, pay out benefits based on how much you (and your employer, if you’re eligible for a company match) contribute to the plan during your working years. The amount of money you can defer from your salary depends on the plan itself, as does the percentage of those contributions your employer will match.
Defined contribution plans include 401(k) plans, 403(b) plans, ESOPs and profit-sharing plans. With 401(k)s, that includes options like SIMPLE and solo 401(k) plans. But it’s important to note that while these are all defined contribution plans, they’re not all qualified retirement plans. Of those examples, 403(b) plans wouldn’t enjoy qualified retirement plan tax benefits.
What Is a Non-Qualified Retirement Plan?
Non-qualified retirement plans are retirement plans that aren’t governed by ERISA rules or IRC Section 401(a) standards. These are plans that you can use to invest for retirement outside of your workplace.
Examples of non-qualified retirement plans include:
While these plans can still offer tax benefits, they don’t meet the guidelines to be considered qualified. But they can be useful in saving for retirement, in addition to a qualified plan.
Traditional and Roth Individual Retirement Accounts
Traditional and Roth IRAs allow you to invest for retirement, with annual contribution limits. For 2020 and 2021, the maximum amount you can contribute to either IRA is $6,000, or $7,000 if you’re over 50.
Traditional IRAs allow for tax-deductible contributions. These accounts are funded using pre-tax dollars. When you make qualified withdrawals in retirement, they’re taxed at your ordinary income tax rate. IRAs do have required minimum distributions (RMD) starting at age 72.
Roth IRAs don’t offer the benefit of a tax deduction on contributions. But they do allow you to withdraw money tax-free in retirement. Unlike traditional IRAs, Roth IRAs do not have RMDs, meaning you don’t have to withdraw money until you want to.
A self-directed IRA is another type of IRA you might consider if you want to invest in stock or mutual fund alternatives, such as real estate. These IRAs require you to follow specific rules for how the money is used to invest, and engaging in any prohibited transactions could result in the loss of IRA tax benefits.
Advantages of Qualified Retirement Plans
Qualified retirement plans can benefit both employers and employees who are interested in saving for retirement. On the employer side, the benefits include:
• Being able to claim a tax deduction for matching contributions made on behalf of employees • Tax credits and other tax incentives for starting and maintaining a qualified retirement plan • Tax-free growth of assets in the plan
Additionally, offering a qualified retirement plan, such as a 401(k), can also be a useful tool for attracting and retaining talent. Employees may be more motivated to accept a position and stay with the company if their benefits package includes a generous 401(k) match.
Employees also enjoy some important benefits by saving money in a qualified plan. Specifically, those benefits include:
• Tax-deferred growth of contributions • Ability to build a diversified portfolio • Automatic contributions through payroll deductions • Contributions made from taxable income each year • Matching contributions from your employer (aka “free money”) • ERISA protections against creditor lawsuits
Qualified retirement plans can also feature higher contribution limits than non-qualified plans, such as an IRA. If you have a 401(k), for example, you can contribute up to $19,500 for the 2020 and 2021 tax years, with an additional catch-up contribution of $6,500 for individuals 50 and older.
If you’re able to max out your annual contribution each year, that could allow you to save a substantial amount of money on a tax-deferred basis for retirement. Depending on your income and filing status, you may also be able to make additional contributions to a traditional or Roth IRA.
Making Other Investments Besides a Qualified or Non-Qualified Retirement Plan
Saving money in a qualified retirement plan or a non-qualified retirement plan doesn’t prevent you from investing money in a taxable account. With a brokerage account, you can continue to build your portfolio with no annual contribution limits. The trade-off is that selling assets in your brokerage account could trigger capital gains tax at the time of the sale, whereas qualified accounts allow you to defer paying income tax until retirement.
But an online brokerage account could help with increasing diversification in your portfolio. Qualified plans offered through an employer may limit you to mutual funds, index funds, or target-date funds as investment options. With a brokerage account, on the other hand, you may be able to trade individual stocks or fractional shares, exchange-traded funds, futures, options, or even cryptocurrency. Increasing diversification can help you better manage investment risk during periods of market volatility.
The Takeaway
While a qualified retirement plan allows investors to put away pre-tax money for retirement, a non-qualified plan doesn’t offer tax-deferred benefits. But both can be important parts of a retirement saving strategy.
Regardless of whether you use a qualified retirement plan or a non-qualified plan to grow wealth, the most important thing is getting started. Your workplace plan might be an obvious choice, but if your employer doesn’t offer a qualified plan, you do have other options.
Opening a traditional or Roth IRA online with SoFi Invest®, for example, can help you get a jump on retirement saving. Members can choose from a wide range of investment options or take advantage of a custom-build portfolio to invest.
Find out how an online IRA with SoFi might fit in to your financial plan.
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances. Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market. External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement. Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. SOIN20257
Thinking about converting your retirement account to a Roth IRA? It’s easy to see why the Roth IRA is so incredibly popular. Contributions to a Roth IRA are made with income that has already been taxed, meaning there’s no initial tax benefit, but the money you have in a Roth grows tax-free over time.
Roth IRAs don’t come with Required Minimum Distributions (RMDs) at age 72 like a traditional IRA either, so you can continue letting your money grow until you’re ready to access it. When you do decide to take distributions from a Roth IRA, you won’t have to pay income taxes on that money. You already paid income taxes before you contributed, remember?
These are the main benefits of a Roth IRA that set this account apart from a traditional IRA, but there are plenty of others. With all of this in mind, it’s no wonder so many people try to convert their traditional IRA into a Roth IRA at some point during their lives.
But, is a Roth IRA conversion really a good idea? This kind of conversion can certainly be lucrative over time, but you should definitely weigh all the pros and cons before you decide.
Table of Contents
When Would You Want to Convert to a Roth IRA?
Converting an existing traditional IRA or another retirement account to a Roth IRA can make sense in many different situations, but not all the time. At the end of the day, the value of this investing strategy depends on your unique situation, your income, your tax bracket, and the financial goal you’re trying to accomplish in the first place.
The most important detail to understand is that, when you convert another retirement account to a Roth IRA, you will have to pay income taxes on the converted amounts. It can make sense to pay these taxes now to avoid more taxes later on, but that depends a lot on your tax situation now and what your tax situation may be like later in life.
The main scenarios where converting to a Roth IRA can make sense include:
You will likely be in a higher tax bracket than you are now. If you are finding yourself in an especially low tax bracket this year or simply expect to be in a much higher tax bracket in retirement, then converting a traditional IRA to a Roth IRA can make sense. By paying taxes on the converted funds now — while you’re in a lower tax bracket — you can avoid having to pay income taxes at a higher tax rate once you reach retirement and begin taking distributions from your Roth IRA.
You have financial losses that can offset tax liability from the conversion. Converting another retirement account into a Roth IRA will require you to pay income taxes on the converted amounts. With that in mind, it can make sense to work on a Roth IRA conversion in a year when you have specific losses that can be used to offset your new tax liability.
You don’t want to begin taking distributions at age 72. If you don’t want to be forced to take RMDs from your account at age 72, converting to a Roth IRA can also make sense. This type of account doesn’t require RMDs at any age.
You’re moving to a state with higher income taxes. Imagine for a moment you’re gearing up to move from Tennessee — a state with no income taxes — to California — a state with income taxes as high as 12.3% In that case, it could make sense to convert other retirement accounts to a Roth IRA before you make the move and begin taking distributions.
You want to leave a tax-free inheritance to your heirs. If you have extra retirement funds and worry about your heirs facing tax liability on an inheritance, converting to a Roth IRA can make sense. According to Vanguard, “the people who inherit your Roth IRA will have to take annual RMDs, but they won’t have to pay any federal income tax on their withdrawals as long as the account’s been open for at least 5 years.”
These are just some of the instances where it can make sense to convert another retirement account into a Roth IRA, but there may be others. Also note that, before you do anything drastic or begin a conversion, it can be smart to speak with a tax advisor or financial planner with tax expertise.
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When Would You Not Want to Convert?
Considering a Roth IRA conversion comes with immediate tax consequences, there are plenty of scenarios where doing one doesn’t make any sense. There are also plenty of personal situations where a Roth IRA conversion would likely go against a person’s long-term goals. Here are some of the scenarios where a Roth IRA conversion could be a costly waste of time:
You’re going to have an extremely low income in retirement. If you have reason to believe you’ll be in a much lower income tax bracket in retirement, then a Roth IRA conversion may not leave you better off. By not converting another retirement account to a Roth IRA, you can avoid paying taxes now at a higher rate for the conversion, and instead pay income taxes on your distributions at a lower rate in retirement.
You don’t have extra money for the conversion. Because converting another retirement account to a Roth IRA requires you to pay income taxes on those converted funds now, this move is a poor choice in years when you are short on extra money laying around to pay more taxes.
You may need the money sooner rather than later. Withdrawals on money that was part of a Roth IRA conversion are subject to a five-year holding period. This means you would have to pay a penalty on that money if you chose to take distributions within a five-year period after the conversion.
Again, these are just some of the scenarios where you would want to think long and hard before converting another retirement account to a Roth IRA. There are plenty of other situations where this move wouldn’t make any sense, and you should speak with a tax professional before you move forward either way.
Conversion Rules You Need to Know
Though there are income limits that apply to contributing to a Roth IRA, these income limits do not apply to Roth IRA conversions. With that in mind, here are some important Roth IRA conversion rules you need to learn and understand:
Which accounts can you convert?
While the most common Roth IRA conversion is one from a traditional IRA, you can convert other accounts to a Roth IRA. Any funds in a QRP that are eligible to be rolled over can be converted to a Roth IRA.
60-day Rollover Rule
You can take direct delivery of the funds from your traditional IRA (check made payable to you personally), and then roll them over into a Roth IRA account, but you must do so within 60 days of the distribution. If you don’t, the amount of the distribution (less non-deductible contributions) will be taxable in the year received, the conversion will not take place, and the IRS 10% early distribution tax penalty will apply.
Trustee-to-Trustee Transfer Rule
This is not only the easiest way to work the transfer but it also virtually eliminates the possibility that the funds from your traditional IRA account will become taxable. You simply tell your traditional IRA trustee to direct the money to the trustee of your Roth IRA account, and the whole transaction should proceed smoothly.
Same Trustee Transfer
This is even easier than a trustee-to-trustee transfer because the money stays within the same institution. You simply set up a Roth IRA account with the trustee who is holding your traditional IRA, and direct them to move the money from the traditional IRA into your Roth IRA account.
Additional Details to Be Aware Of
Note that, if you don’t follow the rules outlined above and your money doesn’t get deposited into a Roth IRA account within 60 days, you could be subject to a 10% penalty on early distributions as well as income taxes on the converted amounts if you’re under the age of 59 ½.
And, as we already mentioned, you’ll have to pay income taxes on converted amounts regardless of which rule you choose to follow above. You’ll report the conversion to the IRA on Form 8606 when you file your income taxes for the year of the conversion.
What is the Backdoor Roth IRA and How Does It Work?
If your income is too high to contribute to a Roth IRA outright, the Backdoor Roth IRA offers a potential workaround. This strategy has consumers invest in a traditional IRA first since these accounts don’t come with income limitations in terms of who can contribute. From there, a Roth IRA conversion takes place, letting those high-income investors take advantage of tax-free growth and future distributions without having to pay income taxes later on.
A Backdoor Roth IRA can make sense in the same scenarios any Roth IRA conversion makes sense. This type of investment strategy intends to help you save money on taxes later at the cost of higher taxes now, in the year you make the conversion.
The big disadvantage of a Backdoor Roth IRA is a whopping tax bill, you’re hoping to lower your tax liability in the future. That’s a noble goal but, once again, the Backdoor Roth IRA only makes sense in situations where tax savings can truly be realized.
Steps to Convert an IRA to a Roth IRA
If you think a Roth IRA conversion would be a good move on your part, here are the steps you’ll want to take.
1. Open a Roth IRA
First, make sure you open a Roth IRA with one of the top brokerage firms. We think TD Ameritrade is one of the best Roth IRA providers out there due to the fact you pay $0 per trade and $0 per year. However, you should also check out top Roth IRA providers like Betterment, Ally, LendingClub, and Vanguard.
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2. Transfer Existing IRA Assets to the Roth IRA
Next, you’ll want to initiate a Roth IRA conversion with your traditional IRA or QPR provider. Remember that, if you choose to accept the funds with a check, you have 60 days to move the money into your Roth IRA account. You can also have the funds moved via a trustee to trustee transfer or even using the same brokerage account, and this is often easier since the move should theoretically be taken care of on your behalf.
3. Pay Income Taxes On the Conversion
The major downside of a Roth conversion is that you will be paying taxes on the amount converted in the current year, and depending on your income tax bracket and the amount you’re converting, the tax bite could be substantial. With that being said, you will hopefully plan your conversion in a year when you’re in a lower tax bracket, or when you have other losses you can use to offset additional taxes caused by the conversion.
Roth IRA Conversion Examples
Whenever you’re dealing with numbers, it’s always helpful to demonstrate the concept with examples. Here are two real live examples that I hope will illustrate how the Roth IRA conversion works in the real world.
Example 1 Parker has a SEP IRA, a Traditional IRA, and a Roth IRA totaling $310,000. Let’s breakdown the pre- and post-tax contributions of each:
SEP IRA: Consists entirely of pre-tax contributions. Total value is $80,000 with pre-tax contributions of $12,000.
Traditional IRA: Consists entirely of after-tax contributions. Total value is $200,000 with after-tax contributions of $40,000.
Roth IRA: Obviously all after tax contributions. Total value is $30,000 with total contributions of $7,000.
Parker is wanting to only convert half of the amount in his SEP and Traditional IRA’s to the Roth IRA. What amount will be added to his taxable income in 2014?
Here’s where the IRS pro-rata rule applies. Based on the numbers above, we have $40,000 total after-tax contributions to non-Roth IRA’s. The total non-Roth IRA balance is $280,000. The total amount that is desired to be converted is $140,000.
The amount of the conversion that won’t be subject to income tax is 14.29%; the rest will be. Here’s how that is calculated:
Step 1: Calculate non-taxable portion of total Non-Roth IRA’s: Total after-tax contributions / Total Non-Roth IRA Balance = Non-Taxable %:
$40,000 / $280,000 = 14.29%
Step 2: Calculate the non-taxable amount by converting the result to Step 1 into dollars: 14.29% x $140,000 = $20,000
Step 3: Calculate the amount that will be added to your taxable income: $140,000 – $20,000 = $120,000
In this scenario, Parker will owe ordinary income tax on $120,000. If he is in the 22% income tax bracket, he will owe $26,400 in income taxes, or $120,000 x .22.
Example 2 Bentley is over the age of 50 and in the process of changing jobs. Because his employer had been bought out a few times, he has rolled over previous 401k’s into two different IRA’s.
One IRA totals $115,000 and the other consists of $225,000. Since he’s never had a Roth IRA, he’s considering contributing to a nondeductible IRA for a total of $7,000 then immediately converting in 2020.
Rollover IRA’s: Consists entirely of pre-tax contributions. Total value is $340,000 with pre-tax contributions of $150,000.
Old 401k: Also consists entirely of pre-tax contributions. Total value is $140,000 with $80,000 pre-tax contributions.
Current 401k: Plans out maxing it out for the rest of his working years.
Non-deductible IRA: Consists entirely of after-tax contributions. Total value will be $7,000 of after-tax contributions and we will assume no growth.
Based on the above information, what will be Bentley’s tax consequence in 2020?
Did you notice the curveball I threw in there? Sorry – I didn’t mean to trick anybody – I just wanted to see if you caught it. When it comes to converting, old 401(k)s and current 401(k)s do not factor into the equation. Remember this if you are planning on converting large IRA balances and have an old 401(k). By leaving it in the 401(k), it will minimize your tax burden.
Using the steps from above, let’s see what Bentley’s taxable consequence will be in 2020:
Step 1: $7,000/ $346,000 = 2.02%
Step 2: 2.02 X $7,000 = $141
Step 3: $7,000 – $141 = $6,859
For 2020, Bentley will have a taxable income of $6,859 of his $7,000 Traditional IRA contribution/Roth IRA conversion, and that’s assuming no investment earnings. As you can see, you have to be careful when initiating conversion.
If Bentley had gone through with this conversion and didn’t realize the tax liability, he would need to check out the rules on recharacterizing his Roth IRA to get out of those taxes.
Summary
If you meet certain criteria and don’t mind facing a larger than average tax bill during the conversion year, a Roth IRA conversion could absolutely make sense. However, you should absolutely weigh the pros and cons of this move before you pull the trigger, and you should definitely set aside the time to speak with a professional who can help you walk through the tax implications.
A Roth IRA conversion can help you avoid taxes later in life when you would really benefit from some tax-free income, but don’t jump in blindly. Research everything you can about Roth IRA conversions and alternative ways to save more for retirement, and make sure any decision you make is an informed one.
About the Author
Jeff Rose, CFP® is a Certified Financial Planner™, founder of Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.
A checking account is a must-have tool, but these accounts can come with monthly maintenance fees that can quickly add up. Many banks also require that you make a minimum initial deposit when you open a new account.
The following six checking accounts are free to open and don’t require an initial deposit, so they’re ideal if you’re just getting started and don’t have much money to put down. They also come with other benefits, like higher than average interest rates and early direct deposit options.
Chime Spending Account
Chime, a mobile bank, offers a Chime Spending Account that you can open in less than two minutes. This account is completely free and available to U.S. citizens ages 18 and up.
With the Chime app, you’ll be able to manage your banking and can sign up for this Spending Account (and a Chime Savings Account, if you’d like). Your Spending Account will come with a free Visa debit card. You can even set up direct deposit to further streamline your banking.
Benefits of the Chime Spending Account:
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Access to more than 38,000 fee-free ATMs
Axos Bank Essential Checking
Axos Bank is an FDIC-insured bank that’s been in business for 20 years. NerdWallet recognized Axos as offering the best checking account, and Go Banking Rates awarded Axos the title of the Best Online Bank.
With the Essential Checking account, you’ll be able to bank entirely online. Axos’ innovative banking platform integrates with apps like Mint and Venmo and allows you to aggregate multiple accounts into a single, simplified view. If you invite a friend to join, you and your friend can get $20 for every referral.
Benefits of the Axos Essential Checking Account:
No opening deposit requirement
No minimum balance requirement and no monthly maintenance fees
No overdraft fees
Unlimited ATM reimbursements
Early direct deposit up to 2 days ahead of payday
Free checks and Visa debit card when you open an account
Discover Cashback Debit
While Discover is traditionally known for its credit cards, this online bank also offers a Cashback Debit checking account that’s full of perks. Opening an account is simple and requires no initial deposit.
The real value of this account lies in its debit card rewards, though. You can receive 1% cash back on up to $3,000 in purchases every month. If you open a Discover Online Savings Account, you can elect to have those rewards automatically deposited into the savings account. Or, just opt to get the rewards back as cash.
Benefits of the Discover Cashback Debit Account:
Get 1% cash back on up to $3,000 of debit card purchases every month
No initial deposit
No monthly fee and no minimum balance requirement
No fee for transfers to external banks
No fee online bill pay and no fee check orders
Access over 60,000 no-fee ATMs
Capital One 360 Checking
With its 360 Checking account, Capital One offers many perks and versatile options. It’s possible to open and maintain this account entirely online, but Capital One’s local branches also offer in-person assistance if you should need it. The 0.10% APY on all account balances is above average, and there’s no fee for foreign transfers.
Capital One also offers a network of more than 40,000 ATMs plus mobile check deposit for convenient banking. You can also choose from three overdraft coverage options depending on what’s best for you.
Benefits of the Capital One 360 Checking Account:
No minimum balance or initial deposits
No monthly maintenance fees
0.10% APY on account balance
No fee for foreign transactions
Mobile check deposit with the Capital One app
Multiple overdraft protection options
40,000 fee-free ATMs
Ally Interest Checking Account
Ally’s Interest Checking Account offers some of the highest interest rates in the industry. Balances of less than $15,000 are eligible for 0.10% APY, while balances of $15,000 and up are eligible for a 0.25% APY. With no minimum opening deposit and no monthly maintenance fees, it’s easy to open an account, and
Ally is very transparent about its fees. Be aware that Ally does have an excessive transaction fee. This fee goes into effect if you exceed six transactions with money market accounts (like online and mobile banking transfers) per statement cycle.
Benefits of an Ally Interest Checking Account:
No minimum opening deposit
No monthly maintenance fees
0.10% APY on less than $15,000 minimum daily balance, and 0.25% APY on $15,000 minimum daily balance
Ally eCheck Deposit allows for check deposits from your smartphone
Free use of 43,000 Allpoint ATMs and up to $10 reimbursement for other ATM fees per cycle
Chase College Checking
The Chase College Checking account offers many perks for college students. Designed for students ages 17 to 24, there’s no monthly service fee for up to five years while the student is in college. Alternatively, the account carries a $6 monthly fee, or that fee is waived for a monthly direct deposit or if the account holds an average ending day balance of at least $5,000.
The Chase Mobile app allows for convenient banking, but Chase also has almost 4,900 branches nationwide. Chase also offers many other products that are ideal for college students, like the Chase Freedom Student Card.
Benefits of the Chase College Checking Account:
No initial deposit
Monthly service fee is waived for college students ages 17 to 24
Access to 16,000 ATMs and almost 4,900 branches
Chase Mobile app allows for mobile deposits
Quickly and easily send and receive money to friends and family with Chase QuickPay
Choosing the Right Account
The above checking accounts don’t require initial deposits, and each offers slightly different benefits. When choosing the account that’s right for your needs, consider how you’ll use the account, the type of balance you plan to carry, and what types of features you most value. Be sure to pay attention to details like overdraft protection, fees for excessive transactions, and other potential expenses you could face.
