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Best Cryptocurrency Exchanges of 2021
If you’re looking to invest in cryptocurrency, you’ll generally need to buy it from an exchange. It’s similar to how stock exchanges work, although there are a few more factors to consider. In our analysis, we found several great options for people looking to get into cryptocurrency depending on your goals and how comfortable you […]
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5 Key Roth Retirement Account Rules You Should Know
Roth retirement account rules can be confusing, which may be why I get many questions about them from Money Girl readers and podcast listeners. While there's a sea of regulations to navigate, it's worth learning them so you can reap the benefits, such as paying lower taxes having withdrawal flexibility.
Today, I'll answer four questions and review five critical rules for using a Roth account at work or on your own successfully.
Before we get into the details on crucial Roth rules you should know, let's answer a voicemail I received from Chris, who didn't want to be on the air. She says:
I just recently started listening to your podcast, and I really enjoy it. What are the benefits of an IRA versus saving your money in a savings account or CD?
Thanks, Chris! That's a terrific question about an important topic.
What are the benefits of using a retirement account?
There are several reasons why using a retirement account for long-term savings is critical. First, retirement plans, such as a traditional IRA, traditional 401(k), and SEP-IR, allow owners to make tax-deductible contributions if they meet specific requirements. That cuts your taxes in the current year, saving you money.
For example, if you earn $60,000 and contribute $5,000 to a traditional IRA or workplace 401(k), you pay income tax on just $55,0000, not $60,000. When you retire and take distributions, Uncle Sam catches up with you by imposing income tax on amounts you withdraw.
Roth retirement accounts, such as a Roth IRA, Roth 401(k), or Roth solo 401(k), have the opposite taxation as traditional accounts. Contributions to any Roth get taxed the year you make them. However, your future withdrawals of contributions and earnings are entirely tax-free if you meet specific rules, which we'll cover.
If you invest for decades and your Roth account mushrooms in value, it's nice to know that you'll never have to pay income tax on your earnings. And if income tax rates increase down the road, that could make having a Roth especially sweet.
If you invest for decades and your Roth account mushrooms in value, it's nice to know that you'll never have to pay income tax on your earnings. And if income tax rates increase down the road, that could make having a Roth especially sweet.
Additionally, retirement accounts allow you to select investments for your contributions, such as mutual funds and exchange-traded funds. They bundle hundreds or thousands of underlying securities, such as stocks, bonds, currencies, and real estate, which gives you diversification and reduced risk.
The growth you achieve within a retirement account depends on the investments you choose but could easily blow the doors off a high-yield savings account or certificate of deposit (CD). It's not difficult to get an average annual return of 5% to 8% through investment funds. You'd be hard-pressed right now to find a CD or bank account paying more than 1%.
If you saved $200 a month for 40 years in bank savings account paying an average of 0.5%, you'd have slightly more than $106,000. But if you invested $200 a month for 40 years in a retirement account with funds paying an average of 7%, you'd have $528,000.
With savings, you're not even keeping up with inflation, which was historically low in 2021 at 1.25%. You need investment growth to reach big financial goals like retirement. Otherwise, you aren't likely to end up with enough to have a comfortable lifestyle down the road.
Five rules to know about Roth retirement accounts
Now that you understand why retirement accounts are critical for building long-term wealth let's cover five rules you should know about Roth accounts, including the answers to more listener questions.
1. You can withdraw original Roth contributions without penalty
Besides tax-free income in retirement, one of the best parts about having a Roth is the ability to tap it before retirement without paying an early withdrawal penalty. With other types of retirement accounts, you must reach age 59½ before withdrawals are penalty-free. But note that this only applies to your original Roth contributions. That's because you pay tax upfront on that portion of funds in your account.
Having the flexibility to tap contributions is why a Roth is an excellent choice for non-retirement goals such as paying for college, buying a home, or starting a business.
Having the flexibility to tap contributions is why a Roth is an excellent choice for non-retirement goals such as paying for college, buying a home, or starting a business. That's important to Diane K., who says:
I just discovered your podcast and love it! I'm a recent college graduate and plan to work and save money before returning to graduate school. What's the best account to use if I don't have a ton of time and need flexibility if I change my mind?
Thanks for your question, Diane. Using a 529 college savings plan is a tax-advantaged account that allows you to save high amounts and offer additional benefits. However, you can only spend the funds on qualified education expenses. So, if you're not 100% sure that you'd use the money for graduate school, consider using a Roth IRA instead.
One unique rule of using a Roth IRA is that your income can't exceed an annual threshold. Keep reading to learn more.
2. You must own a Roth for five years to withdraw earnings tax-free
If you want to withdraw the earnings portion from a Roth, there are some fundamental rules to know. If you're younger than 59½, you must pay income tax plus an additional 10% early withdrawal penalty on them. Also, even if you're older than 59½, you must have owned your Roth for at least five years for an earnings withdrawal to be penalty-free
3. Roth rollovers don't change the five-year rule
Debra H. asks a question about doing a rollover from a workplace plan to an IRA. She says:
I really enjoy learning about retirement topics on your podcasts. Would you please explain how the 5-year rule applies to transferring a Roth 401(k) to a Roth IRA in an upcoming podcast? Thanks for the valuable information you provide.
Thank you for being a podcast listener, Debra! Doing a rollover is an excellent option after you leave an employer for any reason. Once you're no longer employed, you can transfer funds from a Roth 401(k) into a Roth IRA without triggering any tax consequences.
But what can trip you up is not understanding that the five-year rule applies to the account receiving the rollover funds, not the old account. In other words, if you open a brand-new Roth IRA to accommodate your rollover, you're at day one of the five-year holding period—even if you made contributions to the old Roth 401(k) for decades.
However, if you already have a Roth IRA and use it for a rollover from a Roth account at work, its age counts toward the holding period. So, if it's three years old, you'd have to wait two more years to pass the ownership test for taking penalty-free withdrawals. And if you've already owned a Roth IRA for five years and use it for a rollover, you pass the ownership test.
So, if you have a Roth 401(k) or Roth 403(b) and don't already have a Roth IRA, go ahead and open one. That will start the clock ticking and reduce the likelihood that you'd ever get held up by a waiting period.
So, if you have a Roth 401(k) or Roth 403(b) and don't already have a Roth IRA, go ahead and open one. That will start the clock ticking and reduce the likelihood that you'd ever get held up by a waiting period. Otherwise, you could be over 59½ and still not qualify to withdraw the earnings portion of your Roth IRA without paying an additional 10% penalty.
When you're ready to open a Roth IRA, it's as easy as opening a bank account. You complete an application and transfer funds to activate the account. Look for a company that offers the kinds of retirement investments you want to make, offers free investment advice, and gives you simple options, such as Betterment.
The minimum amount you need to open an IRA is typically small, such as $50 or $100. Once it's open and funded, you don't have to put in another penny. Simply having a Roth IRA in your name counts toward the five-year requirement. Now, if you lose your job or decide to leave your employer, you can roll over Roth funds into an already-established Roth IRA.
For a summary of rules for using different retirement accounts, download the free Retirement Account Comparison Chart. This handy resource spells out everything you need to know on a one-page PDF.
4. Roth accounts at work don't have income limits
A workplace Roth and a Roth IRA are very similar; however, there are some significant differences to know. First, anyone with income can use a Roth IRA. But you can only have a Roth 401(k) or a Roth 403(b) if your employer offers it.
David R. is also interested in learning more about Roth accounts. He says:
My employer offers a Roth 401(k) option, but I don't think I qualify due to my income. I like the idea of paying tax for my contributions now. Can you explain if there's a way for me to participate?
Thanks for your question, David! An often-overlooked benefit of having a Roth workplace plan or a Roth solo 401(k) is that there are no annual income limits to qualify. If you're eligible for a Roth 401(k) at work or have a Roth for the self-employed, you can contribute no matter how much money you make.
An often-overlooked benefit of having a Roth workplace plan or a Roth solo 401(k) is that there are no annual income limits to qualify.
So, the answer to David's question is that he qualifies for his Roth 401(k). He could contribute solely to the Roth 401(k) or split contributions between the Roth and his traditional 401(k).
For 2020, here are the income limits to qualify for a Roth IRA:
- If you file taxes as a single and your modified adjusted gross income is $139,000 or higher, you cannot contribute to a Roth IRA.
- If you're married and file taxes jointly, you cannot contribute to a Roth IRA when your household's joint modified adjusted gross income is $206,000 or higher.
For 2021, the income limits are slightly higher:
- If you file taxes as a single and your modified adjusted gross income is $140,000 or higher, you cannot contribute to a Roth IRA.
- If you're married and file taxes jointly, you cannot contribute to a Roth IRA when your household's joint modified adjusted gross income is $208,000 or higher.
If you're married and file taxes separately for either year, you're unable to contribute to a Roth IRA when your modified adjusted gross income is $10,000 or higher.
RELATED: 10 Simple Reasons to Invest in a Roth IRA or Roth 401(k)
5. You can have multiple retirement accounts
Having a Roth IRA or a Roth at work is terrific—but don't stop there. You can easily pair them with other Roth or traditional accounts if you don't exceed the total annual contribution limits.
For 2021, you can contribute up to $19,500, or $26,000 if you're over age 50, to a workplace retirement plan. The annual contribution limit is lower for a traditional or Roth IRA: $6,000 or $7,000 if you're over 50.
For example, you can max out a Roth 401(k) at work and contribute the maximum amount to a Roth IRA or a traditional IRA. You can also split your contributions between traditional and Roth accounts in any proportion you like.
For instance, you could contribute $10,000 to a traditional 401(k) and $9,500 to a Roth 401(k). Or you could contribute $3,000 to a traditional IRA and $3,000 to a Roth IRA if you're under age 50 and don't earn too much for a Roth IRA.
Depending on your income, your tax deduction for a traditional IRA may get reduced or eliminated when you or a spouse also have a traditional workplace retirement plan. But no matter your income, you can still contribute to a traditional IRA.
With a Roth IRA, there's no conflict because your contributions are not tax-deductible. So, as long as you don't earn too much to contribute to a Roth IRA in the first place, you can max out both a Roth IRA and a workplace retirement plan every year and get 100% of the tax benefit.
Alissa B. has an interesting question about using multiple retirement accounts. She says:
I've been enjoying your podcast for several weeks. Thank you, it's a great resource. I have three retirement accounts, an annuity from a previous job, a Roth IRA, and a traditional IRA. To maximize compounding, does it make sense to contribute only to the highest-value account?
Thanks, so much Alisa–I'm happy you found the Money Girl podcast! When choosing which account to use, the best strategy is to fund the one that will give you the best tax benefit. If you need a tax break in the current year, the traditional IRA will help. Otherwise, I recommend maxing out your Roth IRA first unless you become a high earner and don't qualify.
With a Roth, you get the most potential future tax savings. As I mentioned, when you take Roth withdrawals in retirement, they're entirely tax-free, which could save you much more in the long run compared to your traditional IRA.
Investorâs Guide to Marketable Securities
Most investors build their investment portfolios with a diversified array of stocks, bonds and other assets. These highly liquid investments are known as marketable securities and make up the majority of the assets that investors buy. In this article, we’ll … Continue reading →
The post Investor’s Guide to Marketable Securities appeared first on SmartAsset Blog.
Types of Municipal Bonds and Their Risks
Municipal bonds allow investors to lend money to local governments so that they can fund daily operations as well as public works projects, such as road construction, improvements to schools and hospitals, and more. The primary benefit of municipal bonds,…
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The post Types of Municipal Bonds and Their Risks appeared first on MintLife Blog.
15 Retailers With the Best Return Policies
That $50 pair of gold wedge espadrilles from Zappos that you never wore but also never managed to return drives you crazy. But donât think youâre stuck. Zappos allows returns for up to 12 months after the original purchase date. And itâs not the only retailer that will accept returns up to a year or [â¦]
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Hippo Home Insurance Review – Good Financial Cents®
10 Top Car Insurance Companies for Young Adults in 2021
When youâre a teenager or a young adult, buying car insurance is rarely fun or affordable. This is true for anyone trying to add coverage to a parent’s existing policy, but it’s even more true for young adults who need to find cheap car insurance on their own. If you’re looking for the best cheap […]
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Big Money-Saving Benefits of Travel Insurance
If you love the idea of traveling but are worried that your plans could backfire due to a pandemic-related issues or other unforeseen mishaps, it's time to learn more about travel insurance. Having the protection of a travel policy can be just the ticket to help you feel confident about chasing adventure this year.
While you might be thinking that travel insurance is an unnecessary expense, I've found it to be surprisingly affordable. This episode will explain the benefits of travel insurance, tips to buy the best policy, where to shop, and when purchasing travel insurance makes financial sense. Once you understand its significant benefits, you'll never skip travel insurance again!
What is travel insurance?
A travel policy is an often-overlooked coverage that you can customize based on where you're going, the risks you face along the journey, and your personal circumstances. Similar to different types of car insurance, travel insurance is a bundle of individual coverages.
Travel insurance can protect you from various situations ranging from an inconvenience (such as losing your luggage or getting stranded due to bad weather) to having a life-threatening medical emergency requiring an airlift to the nearest hospital.
Keep reading to find out five primary coverages you get from a travel policy.
What does travel insurance cover?
Getting travel insurance is all about having peace of mind and saving money when unexpected expenses pop up during a trip. Here are five coverages that can make travel insurance a wise purchase that enhances your vacation:
1. Luggage
Missing, delayed, or damaged baggage could put a real damper on your vacation. This coverage reimburses you for lost items and pays a daily amount for purchasing essentials.
If you have homeowners or renters insurance, it gives you a certain amount of off-premises coverage for damaged or stolen items. But travel insurance pays for the inconvenience and what is not covered by your home policy.
2. Trip cancellation
When you book a vacation requiring prepayment, having trip cancellation protects you from not getting a refund or being charged additional fees. It allows you to cancel for covered reasons, such as poor health, changes in your work schedule, a death in your family, or bad weather at your destination.
3. Trip interruption
If you begin a vacation but find that you have to return home for covered reasons, you'll get reimbursed for the unused portion of your trip. Covered reasons usually include changes in your work schedule, the death of a family member, or medical issues.
Interruption coverage also includes any additional travel expenses for getting home at the last minute. It may cover meals and hotel stays if your trip gets delayed or you miss critical transportation connections for any reason.
If you want to make sure that you could pull the plug on a trip before you go or once you're on it, most travel insurers offer a "cancel for any reason" policy. It may cost more but is worthwhile if you suspect that you or anyone in your family could need to return home in the middle of a prepaid vacation.
4. Medical coverage
If you've never gotten sick on a trip, consider yourself lucky! When traveling, particularly if you're going abroad, make sure you know what would happen if you got into an accident or came down with an illness.
Unfortunately, most health insurance plans, including Medicare, offer minimal coverage when you're outside the U.S. So, check your health plan and make sure you understand the costs you'd have to pay.
Unfortunately, most health insurance plans, including Medicare, offer zero to minimal coverage when you're outside the U.S. So, check your health plan and make sure you understand the costs you'd have to pay if something goes wrong during your travels.
The medical coverage you get with travel insurance is a wise way to fill your health insurance gaps when you leave the country or travel outside your existing insurance network. It covers new illnesses, emergencies, and routine care. If you purchase it far enough in advance of your trip, a policy may cover any pre-existing health conditions.
If you travel to at-risk countries or plan to do any extreme sports, medical travel coverage may cost more; however, it's a must. Never hide any potential dangers from an insurer. If they find out you were dishonest, they could deny your claims.
Related: 6 Tips to Find Affordable Health Insurance When You Become Self-Employed
5. Emergency evacuation
If you have a severe medical illness or injury, you may need emergency transportation to the nearest hospital. It could cost tens of thousands of dollars and typically isn't covered by health insurance or Medicare.
An evacuation may be part of travel medical coverage, or you may need to select it as a separate option. Be sure to read the terms carefully and choose policies with the most inclusions for the lowest price.
Where can I shop for travel insurance?
When you're ready to plan your next trip, do your homework by checking out travel insurance reviews. As I previously mentioned, many policies require you to purchase a plan at least two weeks in advance, so don't wait until the last minute.
Not all travel insurers offer the same protections, so it's wise to get quotes from at least two or three companies. You might consider shopping these top travel insurers:
- Allianz Travel
- Travel Guard
- Travelex Insurance
- Travel Insured International
- TravelSafe
- CSAA Travel
- April Travel Insurance
5 tips for purchasing the best travel insurance
- Plan your trip early. While you might score a last-minute deal on a flight or cruise, you shouldn't delay shopping and purchasing travel insurance. Getting a policy more than 21 days from your departure may make you eligible for specific options, such as a "cancel for any reason" provision or a waiver of pre-existing health conditions.
- Compare multiple policies. Travel insurance comparison sites, such as TravelInsurance.com, give you an easy way to search, compare, and purchase a policy from a top insurer. That allows you to make apples-to-apples comparisons and find the best price.
- Check out a group travel policy. If you are traveling with a group of ten or more, buying group travel insurance can be cost-effective. In general, they don't factor a traveler's age, allowing an 80-year-old to pay the same rate as a 30-year-old. That makes a group policy more affordable for seniors.
- Evaluate annual travel insurance. If you travel frequently, consider that a single-trip plan can cost about half the cost of a yearly package. Therefore, if you plan to take over two major trips a year, you'll get more value from annual travel insurance.
- Consider your upfront costs. The more you must prepay for a vacation, the more you could lose if a trip doesn’t go as planned or you have to cut it short for work or family obligations.
Best Grocery Delivery Services for 2021
Wondering what the best grocery delivery service is for you? Here are the details on nine options that could help you save time (and your sanity).
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.