Tag: IRA

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Retirement, Strategies to Save

Why You Should Open Up a Roth IRA for Your Kids

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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A Roth IRA is probably one of the most powerful retirement vehicles available on the market. Unlike a traditional IRA, the contributions made to a Roth IRA are pre-tax, which allows you to withdraw your money tax-free after age 59½ .

When it comes to a Roth IRA, it’s important to think of how you can use it in other ways too, namely, how your kids can use one to become financially successful one day. There are two ways unique ways you can use a Roth IRA to help your children.

The first way is to open one in their name that they can use to save for their eventual retirement. The second is to use a Roth IRA in your name as a college savings account.

Both of these options come with pros and cons, and it’s important to know them before deciding if either of them is right for you.

Opening an IRA in Your Child’s Name for Their Retirement

The challenge of opening an IRA in your child’s name is that in order to open an IRA in your child’s name, the child has to have a paycheck. You can see exactly what qualifies as earned income here. It might seem like this is impossible, but it’s not. Entrepreneurial parents all over the country who see the value in early retirement savings are taking advantage of this.

For example, if you run a business, you can employ your children to stamp your mail, be models for your brochures, and even manage your social media. As long as you issue them a 1099 or a W2 for their work, they are eligible to open a Roth IRA.

Another negative is that you can’t supplement your child’s income to reach the $5,500 cap on Roth IRA contributions. They can only put in what they earn up to $5,500. So if your child only earns $1,500 from working part-time at an ice cream shop one summer, they can only invest $1,500. However, if they earn $6,000 from that same ice cream shop, they can only invest $5,500.

When children have a Roth IRA in their names, the money is officially theirs. This is different from earmarking a savings account for them in your name. Instead, this is money that they earned going into an account that can benefit them in retirement. The biggest pro is that this is an awesome teaching tool for them. You can really show them how their money can compound and grow over the years.

Even if you start the Roth with a small amount and never touch it again, a one-time $5,500 investment (the current Roth IRA contribution limit) can grow to over $100,000 at a 6% return if your child lets it grow from age 12 to age 62. Fifty years of compounding interest will do that!

What an awesome gift that would be if your child never touched this until they were at their retirement age and got a bonus six-figure payout from work they did when they were a kid. That’s a good memory to leave with them.

Opening a Roth IRA in Your Name as a College Savings Account

Many people don’t realize that another great benefit of a Roth IRA is that you can use it as a college savings account. You could use a Roth IRA in your child’s name for their college savings, but let’s say your child doesn’t work, or if they do, you’d rather they kept the IRA for their own retirement one day.

If that’s the case, you could use your own Roth IRA for their college savings, and here’s why. According to Certified Financial Planner, Matt Becker, “If the money is used for higher education expenses for you, your spouse, your child, or your grandchild, there is no 10% penalty.” (Usually, if you withdraw earnings from a Roth before age 59 ½ there would be a penalty, but not if the money is used for college.)

The downside to all this is that if you use this money for your child’s college education, then you’re not saving it in your Roth for your own retirement someday, and that’s pretty important! The pro is that your money isn’t locked into a 529 plan where you have to use the money for qualified higher education expenses. Another interesting pro is that 529 assets are counted toward your Estimated Family Contributions on the FAFSA, but investment accounts, like Roth IRAs are not.

That said, it’s important to look very closely at the differences between 529 plans and Roth IRA plans if you want to use your Roth as a college savings vehicle. Additionally, if you are a high-income earner, you might not be able to contribute to your own Roth IRA unless you do what’s called a backdoor IRA. The current 2017 income limit for Roth IRA contributions is a $186,000 annual income for those who are married and filing jointly or $118,000 for those who are single.

As you can see, Roth IRAs are great accounts for a variety of different savings purposes, and you should try to think outside the box when it comes to using them to help your children create a bright financial future.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Cat Alford
Cat Alford |

Cat Alford is a writer at MagnifyMoney. You can email Catherine at cat@magnifymoney.com

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Investing, Life Events, Strategies to Save

Retirement Accounts: What You Need to Understand

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Finances

With mounting concerns over Social Security, and a languishing number pensions, it’s more important than ever to start investing for retirement. Tax advantaged retirement accounts offer investors the best opportunities to see their investments grow, but the accounts come with fine print. These are the things you need to know before you start investing.

What are employer sponsored retirement accounts?

Employee sponsored retirement accounts often allows you to invest pre-tax dollars in an account that grows tax-free until a person takes a distribution. In some cases, you may have access to a Roth retirement account which allows you to contribute post-tax dollars. Contributions to employer sponsored retirement accounts come directly from your paycheck.

The most common employee sponsored retirement accounts are defined contribution plans including a 401(k), 403(b), 457, and Government Thrift Savings Plan (TSP). Private sector companies operate 401(k)s, public schools and certain non-profit organizations offer 403(b)s, state and local governments offer 457 plans, and the Federal government offers a TSP. Despite the variety of names, these plans operate the same way.

According to the Bureau of Labor Statistics, 61% of people employed in the private sector had access to a retirement plan, but just 71% of eligible employees participated.

How much can I contribute? 

If you’re enrolled in a 401(k), 403(b), 457, or TSP, then you can invest up to $18,000 dollars to your employer sponsored retirement accounts per year in 2016. If you qualify for multiple employer sponsored plans, then you may invest a maximum of $18,000 across all your defined contribution plans. People over age 50 may contribute an additional $6,000 in “catch-up” contributions or $3,000 to a SIMPLE 401(k).

In addition to your contributions, some employers match contributions up to a certain percentage of an employee’s salary. Visit your human resources department to learn about your company’s plan details including whether or not they offer a match.

What are the benefits of investing in an employer sponsored retirement plan?

For employees that receive a matching contribution, investing enough to receive the full match offers unparalleled wealth building power, but even without a match, employer sponsored plans make it easy to build wealth through investing. The funds to invest come directly out of your paycheck, and the plan invests them right away.

However, there are fees associated with these accounts. Specific fees vary from plan to plan, so check your company’s fee structure to understand the details, especially if you aren’t receiving a match. If you don’t have an employer match, then it may make more sense to contribute to your own IRA in lieu of the employer-sponsored plan.

Investing in an employer sponsored means getting to defer taxes until you withdraw your investment. Selling investments in a retirement plan does not trigger a taxable event, nor does receiving dividends. These tax benefits provide an important boost for you to maximize your net worth.

In addition to tax deferred growth, low income investors qualify for a tax credit when they contribute to a retirement plan. Single filers who earn less than $41,625 or married couples who earn less than $61,500 qualify for a Saver’s Tax Credit worth 10-50% of elective contributions up to $2000 ($4000 for married filers).

What are the drawbacks to investing in an employer sponsored retirement plan?

Investing in an employer sponsored retirement plan reduces the accessibility of the invested money. The IRS punishes distributions before the age of 59 ½ with a 10% early withdrawal penalty. These penalties come on top of the income taxes that you must pay the year you take a distribution. In most cases, if you withdraw money early pay so much in penalties and increased income tax rates (during the year you take the distribution) that you would have been better off not investing in the first place.

Additionally, investing in an employee sponsored retirement plan reduces investment choices. You may not be able to find investment options that fit your investing style through their company’s plan.

Should I take a loan against my 401(k) balance?

Since money in 401(k) plans isn’t liquid, some companies allow you  to take a loan against your 401(k). These loans tend to be low interest and convenient to obtain, but the loans come with risks that traditional loans do not have. If your job is terminated, most plans offer just 60-90 days to pay off the loan balance, or the loan becomes a taxable distribution that is subject to the 10% early withdrawal penalty and income tax.

It is best to only consider a 401(k) loan for a short term liquidity need or to avoid them altogether.

What if I don’t qualify for an employer sponsored retirement plan?

If you’re an employee, and you don’t have access to an employer sponsored retirement plan you have to forgo the tax savings and other benefits associated with the accounts, but you may still qualify for an Individual Retirement Account (IRA).

However, if you pay self-employment taxes then you can create your own retirement plan. Self-employed people (including people who are both self-employed and traditionally employed) can start either a Solo 401(k) or a SEP-IRA.

A Solo 401(k) allows an elective contribution limit of 100% of self-employment income up to $18,000 (plus an additional $6000 in catch up contributions for people over age 50) plus if your self-employed, then you can contribute 20% of your operating income after deducting your elective contributions and half of your self-employment tax deductions (up to an additional $35,000).

If you qualify for both a Solo 401(k) and other employer sponsored retirement plan, then you cannot contribute more than $18,000 in elective contributions among your various plans.

A SEP-IRA allows you to contribute 25% of your self-employed operating income into a pre-tax account up to $53,000.

What are Individual Retirement Accounts?

Individual Retirement Accounts (IRAs) allow you to invest in tax advantaged accounts. Traditional IRAs allows you to deduct your investments from your income, and your investments grow tax free until they are withdrawn (at which point they are subject to income tax). You can contribute after-tax money to Roth IRAs, but investments grow tax free, and the investments are not subject to income tax when they are withdrawn in retirement. There are income restrictions on being eligible for deductions and these vary based on household income and if an employer-sponsored retirement plan is available to you (and/or your spouse).

What are the rules for contributing to an IRA?

In order to contribute to an individual retirement account, you must meet income thresholds in a given year, and you may not contribute more than you earn in a given year. The maximum contribution to an IRA is $5500 ($6500 for people over age 50).

A traditional IRA allows you to defer income taxes until you take a distribution. Single filers who earn less than $61,000 are eligible deduct one hundred percent of deductions, and single filers who earn between $61,000 and $71,00 may partially deduct the contributions. Couples who are married filing jointly may make contribute the maximum if they earn less than $98,000, and they may make partial contributions if they earn between $98,000 and $118,000.

Roth IRAs allow participants to invest after tax dollars that are not subject to taxes again. The tax free growth and distributions can be especially beneficial for those who expect to earn a high income (from investments, pensions or work) during retirement. Single filers who earn less than $117,000 can contribute the full $5,500, and those who earn between $117,000 and $132,000 can make partial contributions. Couples who are married filing jointly who earn less than $184,000 may contribute up to $5500 each to Roth IRAs, and couples who earn between $184,000 and $194,000 are eligible for partial contributions.

What are the benefits to investing in an IRA?

The primary benefits to investing in an IRA are tax related. Traditional IRAs allow you to avoid paying income taxes on your investments until you are retired. Most people fall into a lower income tax bracket in retirement than during their working years, so the tax savings can be significant.  Roth IRA contributions are subject to taxes the year they are contributed, but the IRS never taxes them again. Investments within an IRA grow tax free, and buying and selling investments within an IRA does not trigger a taxable event.

Additionally, low income investors also qualify for a tax credit when they contribute to a retirement plan. Single filers who earn less than $41,625 or married couples who earn less than $61,500 qualify for a Saver’s Tax Credit worth 10-50% of elective contributions up to $2000 ($4000 for married filers).

IRAs also allow individuals to choose any investments that fit their strategy.

What are the drawbacks to investing in an IRA? 

Investing in an IRA reduces the accessibility of money. Though it is possible to withdraw contribution money for some qualified expenses, many distributions are to be subject to a 10% early withdrawal tax penalty when a person takes a distribution before the age of 59 ½. In addition to the penalty, the IRS levies income tax on distributions the year that you take a distribution from a Traditional IRA.

Should I withdraw money from my IRA?

Taking a distribution from an IRA means less money growing for retirement, but many people use distributions from IRAs to meet medium term goals or to resolve short term financial crises. The IRS publishes a complete list of qualified exceptions to the early withdrawal penalty.

If you have to pay the penalty, withdrawing from an IRA is not likely to be the right choice. Once the money is withdrawn from an IRA it can’t be contributed again. For short term needs, taking out a loan usually comes out ahead.

What’s the smartest way to invest?

Investing between 15-20% of your gross income for 30 years often yields a reasonable retirement nest egg, but even if you can’t invest that much right now, it’s important to get started. The smartest place to invest for retirement is within a tax advantaged retirement account.

If you don’t have access to an employer sponsored plan the best place to start is by investing in an IRA. On the other hand, if you have access to both an employer sponsored plan and an IRA, the answer is not as clear. Anyone who has an employer with a matching policy should aim to invest enough to take full advantage of any matching plan that your company has in place.

After taking advantage of a match, the next best option depends on your personal situation.

Employer sponsored plans and Traditional IRAs offer immediate tax benefits that can be advantageous for high income earners. However, investing in a Roth IRA keeps money more liquid than either an employer sponsored plan or a traditional IRA.

Of course, the best possible scenario for your retirement is to maximize contributions to both an employer sponsored account and an individual retirement account, but you should carefully weigh how investing in these accounts affects your whole financial picture and not just your retirement goals.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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Life Events, Strategies to Save

5 Questions to Ask Before Choosing the Right IRA Provider

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Choosing the right IRA provider can be challenging, especially when you don’t know what you should be looking for when choosing one. Let’s help you cut through the confusing financial jargon and focus on what you should be aware of when making this important decision.

You’ve finally determined that an IRA is the right move for you… now what?

The internet can be a great place to find information, products and services, however, there is no good way to separate the helpful advice from the misinformation. And, that’s why it’s so important to know what questions to ask. Here are the key areas to focus on when choosing your IRA provider.

1. What investment options are available on the platform?

If you already have or are looking to open an IRA, you probably understand the value of saving for retirement. The goal is to save (and hopefully grow) your money for the future. In order to set yourself up for success, it’s important to choose the appropriate investments for you.

We aren’t going to get into the details about determining which investments to choose, but we will look at what options are available on various platforms. Depending on which provider you choose, you may have access to a number of investment options including money market accounts, CDs, mutual funds, exchange traded funds, stocks, and bonds (this list could go on, but these are the most common options).

Each of these choices will expose you to varying degrees of risk and it is important to choose a platform that suits your needs. Some banks might allow you to open an IRA, but they may not have options outside of a basic interest bearing account, like a money market or a CD. These types of accounts are fine if your goal is to not lose money. The problem is that the interest rates are so low that you will have a difficult time beating inflation over time. The end result is that you will be losing buying power, which is a fancy way of saying that prices on products and services will rise faster than your money.

Other platforms like Fidelity, Vanguard or TD Ameritrade, will provide basic interest bearing options as well as investments that provide exposure to the stock market in the form of stocks, bonds, mutual funds and exchange traded funds (ETFs). These investments can allow you to design a diversified investment portfolio that can potentially grow your money for the long term.

Overall, you want to find a platform with a variety of investment options, ranging from the basic money market account, to index funds, target date funds (funds with a retirement year in the name that automatically move from aggressive to conservative based on your projected year of retirement) and maybe additional mutual funds that focus on specific sectors. This last group is not necessary unless you enjoy choosing your own specific asset allocations.

CFP opinion: Investments (other than stocks and bonds) will come with internal fees called “expense ratios”, the average of which is about 1.2%. These fees are common, so there is no need to avoid them completely. However, there are plenty of investments that charge well below 0.50%, so unless you have a compelling reason to choose a more expensive option, I would stick with the ones with lower expense ratios.

2. What platform fees should I be aware of?

Many providers will gladly accept your money because they know that they will earn revenue from the fees they charge. These fees include account maintenance fees, transactions fees (commissions), low balance fees, account transfer/termination fees, among others.

The size of these fees will range by type; some of them will be free, while others will cost as much as $200 dollars or more.

For example, when you open an IRA with Vanguard and invest in Vanguard mutual funds or ETFs, you will not pay sales loads, 12b-1 fees or commissions. You may also avoid paying annual account service fees by setting up online account access. However, you may be paying all of these transaction fees on other platforms. These fees can range from $8 to $60 or more per trade (buying or selling an investment). Others show up in the form of a percentage of your assets (12b-1 fees). I would suggest avoiding 12b-1 fees all together, as they are hidden fees that can really eat up returns.

The downside of going with a platform like Vanguard is that you won’t gain access to more sophisticated investment options (i.e. options, futures, margin accounts). I wouldn’t recommend using these types of investments anyway unless you consider yourself an investment expert and have the time to do the ongoing research necessary to maintain such a portfolio. So, in the end, this isn’t really a negative for most people.

Many platforms will also charge an account transfer and/or account termination fee. So, if you decide that you want to move your account elsewhere, you may be hit with a $25, $50, or even a $200 charge. I don’t recommend moving your IRA account often, however, you should be aware of what to expect if you decide to make a change.

The good news is that any platform you speak with should be able to provide you with a fee schedule that will list all possible fees. This is an important step before making the decision to open an account with a specific provider. Once you know the fees, you can make an intelligent decision on whether they are worth paying for. Most fees are not worth the cost, as every dollar that goes to fees is one more dollar that can’t be invested. Over time, this can add up to a lot of wasted money.

CFP opinion: I suggest finding a platform that charges very few fees. Choose one that will not charge transaction fees, low balance fees or other commissions. Ideally, you will also find one that does not charge IRA custodian fees. The one acceptable fee is an account termination fee, as the goal is to minimize the amount of times you move your account anyway. I would keep this fee under $100 just in case you do need to move it.

3. What about advisory fees?

Depending on where and how you open your account, you may also pay a financial advisor a fee to manage the account. This often comes into play when you are working directly with an advisor to manage your investments. This fee should be disclosed by your adviser at the onset of the relationship, however, don’t assume that it will be clear. The fee can range from 0.10% to as high as 2%+ depending on the advisor’s company and the way they charge (fee or commission).

Make it a point to ask how much you are being charged and what the fee covers. There are many reasons to pay a financial advisor to manage your investments, but you must be clear on the value you receive for the fee. If it’s not clear to you, don’t pay the fee.

CFP opinion: If you would like to work with an advisor, find a fee-only fiduciary who has your best interests in mind. Don’t pay more than a 1% advisory fee for your investments. There are plenty of excellent advisors out there who will charge this rate or less.

4. Are cash bonus offerings worth it?

Some platforms might offer special cash bonuses for opening an IRA and investing a certain amount of money within a period of time. Getting free money might sound great, but make sure to read the fine print and be aware of the above questions before moving forward.

Other platforms might offer a bonus but require you to invest in an annuity or keep your money in the account for a certain amount of years. If the rules aren’t followed, you can be hit with some pretty harsh penalties of up to 10% of your account balance.

CFP opinion: Don’t choose the platform based on the bonus. If you would select the platform with or without the bonus, then it might be a good option. It shouldn’t be one of the major determining factors.

5. Is the platform easy to use?

You should also ask to take a test drive on the platform. Many providers will (virtually) walk you through the online experience or point you to a video that will show you what to expect. Pay attention to how easy (or difficult) it is to access and make changes to your account. If you find that the platform is clunky, this may be a good reason to go elsewhere. With so many technological advances in the past 10 years, you should be able to see your account activity and investment allocations online from anywhere in the world.

As with all financial choices you make, it’s important to understand your specific goals and intentions for your IRA money. The best option for you will vary depending on your goals, age, wealth level, time horizon and risk tolerance. In general, you should look for an easy to use platform with online access, low fees, a variety of investment options and great customer service. It’s important to feel comfortable with all aspects, as you don’t want any excuse for ignoring your retirement money. Consistently contributing to and managing your money is paramount to a successful retirement.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Eric Roberge |

Eric Roberge is a writer at MagnifyMoney. You can email Eric at ericroberge@magnifymoney.com

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Life Events

3 Best Low-Fee IRA Providers

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Best Low-Fee IRA Providers

The best investors get a few key things right. They:

  1. Save enough money
  2. Contribute to the right accounts
  3. Choose solid investments
  4. Minimize costs

That last point may seem counterintuitive – after all, we’re used to paying more for quality – but it’s one of the most important parts of your plan. The less you pay for your investments, the more likely you are to get positive returns. That’s just the way it is.

So when you’re making a decision like where to open your IRA, cost is one of the first things you should consider.

Here are a number of low-fee IRA providers that will maximize your odds of success.

Investment Companies

Many of the companies that create the mutual funds and ETFs you might select on other platforms also allow you to open IRAs and other investment accounts with them directly. This is a great way to minimize your costs, especially if you’re willing to invest primarily or exclusively in that company’s funds.

For example, your 401(k) through work may offer Vanguard funds. But you don’t need to be working through a third-party provider to get access to Vanguard funds. You can invest directly with Vanguard and cut out the fees of the middleman. That isn’t to say we discourage you from investing in your company’s 401(k), especially if there is an employer match.

These companies also typically have platforms that allow you to invest in other funds as well, and in many cases the fees to do so are highly competitive.

Here are some of your best options.

1. Vanguard

Vanguard is the industry’s leading provider of mutual funds and ETFs, primarily because its products are both high-quality and low-cost.

And if you open an IRA directly with Vanguard you get access to their world-class funds without any trading fees. There is a $20 annual account maintenance fee, but that’s waived if you agree to electronic delivery of account statements.

Vanguard also have a robust platform for trading other mutual funds and ETFs, with the cost per trade typically ranging from $0 for certain mutual funds to $35 at the high end. You can see a full list of fees here.

2. Schwab

Similar to Vanguard, Schwab is free if you stick to their funds. There is a $1,000 account minimum, but that’s waived if you set up a monthly automatic investment of at least $100.

It also has a large selection of non-Schwab ETFs that you can trade commission-free as well.

The cost to trade other ETFs ranges from $8.95-$33.95, and for mutual funds ranges from $0-$76. You can see a full outline of the fees here.

3. Fidelity

Fidelity is another good option here. Like the others there is no cost to trade its own funds and no account maintenance fee. There is a $50 fee if you choose to close your IRA though.

One downside is that many of Fidelity’s mutual funds have a $2,500 minimum initial investment, and in many cases the funds themselves are more expensive than Vanguard’s and Schwab’s.

It does, however, have an ETF platform that allows you to trade iShares ETFs at no cost. Other non-Fidelity ETF trades are $7.95 and mutual funds range from $0-$49.95 per trade.

A full outline of fees can be found here.

Automated Investing Platforms

Automated investing platforms, or “robo-advisors”, have made it even easier to quickly get up and running with a solid investment portfolio at a low cost.

We recently did a thorough review of these platforms, which you can find here: Which Robo-Advisor Has the Lowest Fees?

But here’s a quick summary of your options:

  • Betterment – Portfolio fees of about 0.10% and management fees of 0.15%-0.35%. There is a minimum $3 per month fee if your account balance is less than $10,000 and you do not set up automatic contributions of at least $100 per month.
  • WiseBanyan – Portfolio fees of about 0.09% with no management fees. There is an extra cost for features like tax loss harvesting.
  • WealthFront – Portfolio fees of about 0.16% and management fees of 0.25%. The management fee is waived for balances under $10,000, but there is a $500 minimum investment.
  • Schwab – Portfolios fees of 0.18%-0.26% with no management fee. Schwab is able to do this because they are primarily recommending its proprietary funds, from which it already receives a management fee.

Discount Brokerages

The options above are likely the easiest way to get started quickly at a low cost. But if you’re looking for something else, there are a number of discount brokerages to choose from. The downside of these brokerages is that there are fewer free investment options and it’s a little more complicated to get up and running. But they may offer specific features that appeal to your needs.

  • TD Ameritrade – No account maintenance fee, though it costs $75 to close your account. It offers many commission-free ETFs and mutual funds. Otherwise ETFs are $9.99 per trade and mutual funds are $49 per trade. Full fees detailed here.
  • E-Trade – No account maintenance fee. A number of commission-free ETFs and mutual funds. Other options are $9.99 per trade for ETFs and $19.99 for mutual funds. Full fees detailed here.
  • TradeKing – No account maintenance fee, though there is a $50 fee to close your account. ETF trades starting at $4.95 and mutual fund trades at $9.95. Full fees detailed here.
  • Interactive Brokers – Requires a $5,000 minimum deposit, but its unique fee structure can save you significant money. Full fees detailed here.

How to Choose

Remember, the most important part of your investment plan is the amount you save. All of the options above are relatively low cost, so there isn’t a bad option. Choose the one that makes it easiest to get started and diligently continue saving.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt at matt@magnifymoney.com

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College Students and Recent Grads, Life Events

What Should I Do With My 401(k) When I Change Jobs?

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Finances

When you leave a job where you previously had an employer retirement plan, you have decide what to do with the money in your account.

Option 1: Leave Your Retirement Account with Your Employer

Reasons to leave your money in the current account

You don’t have to do anything: Leaving your money with your previous employer’s plan means that you take no action, so it’s easy and you can’t mess anything up.

Might have lower price point: Your 401(k) is institutionally priced, meaning it has access to institutional funds, which are usually cheaper (compared to an IRA).

Help from a financial expert: You have access to a money manager with your 401(k), which may help you if you’re inexperienced and want guidance with your investments.

Reasons why it may be best to rollover your 401(k)

Hassle of tracking multiple accounts: If you leave your money in your old plan and open a new plan with your new employer, it may become cumbersome to keep track of all your accounts. It would be easier to have all your accounts in one place.

Keep your goals in mind: If you are rebalancing your overall retirement portfolio for a certain asset allocation, it may become difficult to make sure all of the investments align and are allocated consistently with several accounts.

Risk forgetting an account: You may lose interest and forget about managing this account after you leave the company.

You might not have an option: You have to make sure this is an option because some plans won’t allow you to stay after you leave (it costs them money to administer your account). Typically, you have to have a minimum amount invested in order to remain in the plan.

Option 2: Rollover Your Account to an IRA

The perks of doing a rollover

You can directly transfer money in your old 401(k) to an IRA: This will give you control over your funds in your own personal, individual account. With a direct transfer, the funds move directly from the 401(k) to the IRA, without you touching the money. This is a great way to move your money from an old 401(k) and have control over the account and actively manage your retirement funds.

You may have access to a wider range of investment options: It’s possible your IRA may have more to offer as many 401(k)s have limited investment options compared to an IRA.

You continue to grow your retirement savings: on a tax-deferred basis (just like you were doing in your 401(k)).

IRAs have more flexible withdrawal options: You can access your funds more easily with an IRA compared to 401(k)s (not that you should). For example, you can withdraw up to $10,000 from your IRA for a first-time home purchase.

Reasons a rollover might not be right for you

You need to be proactive: You have to take action to get a rollover completed, which may be a turnoff. You have to know where you want to open an IRA, and you have to be willing to choose your investments. This may feel intimidating and may require more diligence than you’re interested in having.

Consequences of an indirect transfer: If you do an indirect transfer (as opposed to a direct transfer), you will receive a check for 80% of the funds in your account but be required to deposit 100% of the balance. This is because of a 20% withholding requirement for the employer. So, unless you have the additional 20% to make up in cash, you will be in big trouble if you take an indirect transfer.

If bankruptcy is a potential issue: Generally, there is greater protection against creditors for assets in an employer sponsored retirement account than in an IRA (this is not always the case, so read your state law). So, if bankruptcy is an issue, then an employer sponsored plan may be better.

Option 3: Rollover Your Account to a New Employer 401(k)

Reasons to rollover to a new 401(k)

Simplify your life: The benefit to moving your old 401(k) funds to a new employer 401(k) is that it keeps your investments organized and in one place. It will be easier for you to keep track of and manage with one retirement account.

Defer distributions: You may be able to defer taking required minimum distributions if you are still working at your job at age 70 ½. You don’t have the option to defer RMDs with an IRA or old 401(k) (you’re required to take them).

Reasons to keep your old 401(k) separate from your new 401(k)

You might not have a choice: This may not be an option because not all employers accept rollovers from an old plan.

New 401(k) may be limited: You may have more limited investment options with in your new 401(k) than in an IRA. If you want the most flexibility with investment options, then you may want to stick with an IRA.

Limited flexibility: There isn’t much flexibility with respect to withdrawal exceptions, which you have in an IRA.

Strategize before making your decision

Consider your long term investment strategy when making these decisions. If you have many years to save for retirement, you want to do what’s best for you in the long run.

 

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Natalie Bacon
Natalie Bacon |

Natalie Bacon is a writer at MagnifyMoney. You can email Natalie at natalie@magnifymoney.com

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News

The Lesser-known Way to Save Some Money on Taxes

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Way to Save Some Money on Taxes

Right about now is the time you’re probably chomping at the bit to figure out any and every deduction and write-off you possibly can in order to not pay an exorbitant amount of taxes this year. Business expenses, dependents, first-time home purchases … these are all things most people are already aware can help save them some cash when tax time rolls around. One thing some people might not consider, though, is how their retirement account — and specifically their IRA — can help reduce their tax obligations.

When it comes to retirement accounts, the gist with traditional IRAs is that an account holder gets to invest her money now and avoid paying any taxes on that money until the time when she takes that money out later.

More specifically, here’s how a traditional IRA works when it comes to:

  • Returns on your investment: For things like interest, dividends and capital gains, someone with a traditional IRA isn’t required to pay taxes right away, which means they might be able to save more (and earn more in interest) over the long haul than they could have if they had to account for paying taxes on top of their savings efforts.
  • Your current income: Depending on your income, marginal tax bracket and the amount of money you’re able to put into your IRA this year, you might receive a nice little deduction on the amount of earned income you claim for taxes. This is because you aren’t required to pay any income taxes on that amount until you remove the money from your IRA. In most cases, in order to qualify for this type of deduction you must not have access to an employer-sponsored retirement plan. (So someone who is self-employed, for example, would be eligible for this benefit.) The exception would be if you make less than $61,000 in any one year. In that case, you would be able to deduct your IRA contributions regardless of whether or not you have access to another retirement account through work.

All of this is to basically say, if at all possible, it’s always a fiscally responsible idea to put as much as possible (the actual amount you can put away each year changes and varies based on income, check with the IRS site to be sure) away in an IRA. This will not only help you build a more solid financial future for retirement, but it will also help you out when it comes to taxes in the present day. We like to call that a win-win situation, and it’s pretty cool when that happens.

Check out this piece for more on how traditional IRAs can help you save on taxes.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Cheryl Lock
Cheryl Lock |

Cheryl Lock is a writer at MagnifyMoney. You can email Cheryl at cheryl@magnifymoney.com

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Bargains and Deals

Get Up to $500 By Switching Your IRA to Ally

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Deal image

Please note: this article was originally published on January 15, 2015 and this offer is no longer available.

Leaving a job in the next five months? Fed up with your current IRA provider? Or do you just love a bonus offer? Then Ally may have an enticing proposal for you

For the next five months (1/1/15 – 5/31/15), Ally Bank is offering up to $500 in bonus money for making a qualifying rollover or transfer from outside Ally Bank to a new or existing Ally IRA CD or IRA Online Savings Account.

A qualifying deposit includes rollovers, trustee-to-trustee transfers and contributions. Just remember, you can only make a maximum contribution of $5,500 ($6,500 if your 50 or older) into a Traditional or Roth IRA in 2015. You won’t be able to earn the bonus offer if you simply open and contribute to an Ally IRA.

If you have a SEP-IRA through an employee or due to self-employment, you can contribute 25 percent of compensation with a limit of $265,000 or $53,000. This will make you eligible for part the bonus. Although, the contribution does not have to be made all at once, the cut off date to earn the bonus is May 31, 2015.

The bonus offer has a tiered structure:

Screen Shot 2015-01-14 at 4.24.53 PM

Unless you’re able to contribute $53,000 into a SEP-IRA, the only way to take advantage of this bonus will likely be from a rollover. Rollovers can take weeks to complete, so if you want to get this offer, be sure to start making moves by mid-March.

This isn’t quick money. Eligible account holders will receive the bonus on July 31, 2015. Ally states it will be deposited into “into the Ally IRA Online Savings Account or IRA CD that received the last transaction to reach the deposit requirement.”

 Find a deal you think we need to cover? Let us know on Twitter @Magnify_Money or via email (info@magnifymoney.com)

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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