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Investing, Life Events, Strategies to Save

Guide to Choosing the Right IRA: Traditional or Roth?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Guide to Choosing the Right IRA: Traditional or Roth?

The Roth IRA versus traditional IRA debate has raged on for years.

What many retirement savers may not know is that most of the debate about whether it’s better to contribute to a traditional IRA or a Roth IRA is flawed.

You’ve probably heard that young investors are better off contributing to a Roth IRA because they’ll likely be in a higher tax bracket when they’re older. You’ve probably also heard that if you’re in the same tax bracket now and in retirement, a traditional IRA and Roth IRA will produce the same result.

These arguments are part of the conventional wisdom upon which many people make their decisions, and yet each misses some important nuance and, in some cases, is downright incorrect.

The Biggest Difference Between Traditional and Roth IRAs

There are several differences between traditional and Roth IRAs, and we’ll get into many of them below.

The key difference is in the tax breaks they offer.

Contributions to a traditional IRA are not taxed up front. They are tax-deductible, meaning they decrease your taxable income for the year in which you make the contribution. The money grows tax-free inside the account. However, your withdrawals in retirement are treated as taxable income.

Contributions to a Roth IRA are taxed up front at your current income tax rate. The money grows tax-free while inside the account. And when you make withdrawals in retirement, those withdrawals are not taxed.

Whether it’s better to get the tax break when you make the contribution or when you withdraw it in retirement is the centerpiece of the traditional vs. Roth IRA debate, and it’s also where a lot of people use some faulty logic.

We’ll debunk the conventional wisdom in just a bit, but first we need to take a very quick detour to understand a couple of key tax concepts.

The Important Difference Between Marginal and Effective Tax Rates

Don’t worry. We’re not going too far into the tax weeds here. But there’s a key point that’s important to understand if you’re going to make a true comparison between traditional and Roth IRAs, and that’s the difference between your marginal tax rate and your effective tax rate.

When people talk about tax rates, they’re typically referring to your marginal tax rate. This is the tax rate you pay on your last dollar of income, and it’s the same as your current tax bracket. For example, if you’re in the 15% tax bracket, you have a 15% marginal tax rate, and you’ll owe 15 cents in taxes on the next dollar you earn.

Your effective tax rate, however, divides your total tax bill by your total income to calculate your average tax rate across every dollar you earned.

And these tax rates are different because of our progressive federal income tax, which taxes different dollars at different rates. For example, someone in the 15% tax bracket actually pays 0% on some of their income, 10% on some of their income, and 15% on the rest of their income. Which means that their total tax bill is actually less than 15% of their total income.

For a simple example, a 32-year-old couple making $65,000 per year with one child will likely fall in the 15% tax bracket. That’s their marginal tax rate.

But after factoring in our progressive tax code and various tax breaks like the standard deduction and personal exemptions, they will only actually pay a total of $4,114 in taxes, making their effective tax rate just 6.33% (calculated using TurboTax’s TaxCaster).

As you can see, the couple’s effective tax rate is much lower than their marginal tax rate. And that’s almost always the case, no matter what your situation.

Keep that in mind as we move forward.

Why the Conventional Traditional vs. Roth IRA Wisdom Is Wrong

Most of the discussion around traditional and Roth IRAs focuses on your marginal tax rate. The logic says that if your marginal tax rate is higher now than it will be in retirement, the traditional IRA is the way to go. If it will be higher in retirement, the Roth IRA is the way to go. If your marginal tax rate will be the same in retirement as it is now, you’ll get the same result whether you contribute to a traditional IRA or a Roth IRA.

By this conventional wisdom, the Roth IRA typically comes out ahead for younger investors who plan on increasing their income over time and therefore moving into a higher tax bracket or at least staying in the same tax bracket.

But that conventional wisdom is flawed.

When you’re torn between contributing to a traditional or Roth IRA, it’s almost always better to compare your marginal tax rate today to your effective rate in retirement, for two reasons:

  1. Your traditional IRA contributions will likely provide a tax break at or near your marginal tax rate. This is because federal tax brackets typically span tens of thousands of dollars, while your IRA contributions max out at $5,500 for an individual or $11,000 for a couple. So it’s unlikely that your traditional IRA contribution will move you into a lower tax bracket, and even if it does, it will likely be only a small part of your contribution.
  2. Your traditional IRA withdrawals, on the other hand, are very likely to span multiple tax brackets given that you will likely be withdrawing tens of thousands of dollars per year. Given that reality, your effective tax rate is a more accurate representation of the tax cost of those withdrawals in retirement.

And when you look at it this way, comparing your marginal tax rate today to your effective tax rate in the future, the traditional IRA starts to look a lot more attractive.

Let’s run the numbers with a case study.

A Case Study: Should Mark and Jane Contribute to a Traditional IRA or a Roth IRA?

Mark and Jane are 32, married, and have a 2-year-old child. They currently make $65,000 per year combined, putting them squarely in the 15% tax bracket.

They’re ready to save for retirement, and they’re trying to decide between a traditional IRA and a Roth IRA. They’ve figured out that they can afford to make either of the following annual contributions:

  • $11,000 to a traditional IRA, which is the annual maximum.
  • $9,350 to a Roth IRA, which is that same $11,000 contribution after the 15% tax cost is taken out. (Since Roth IRA contributions are nondeductible, factoring taxes into the contribution is the right way to properly compare equivalent after-tax contributions to each account.)

So the big question is this: Which account, the traditional IRA or Roth IRA, will give them more income in retirement?

Using conventional wisdom, they would probably contribute to the Roth IRA. After all, they’re young and in a relatively low tax bracket.

But Mark and Jane are curious people, so they decided to run the numbers themselves. Here are the assumptions they made in order to do that:

  • They will continue working until age 67 (full Social Security retirement age).
  • They will continue making $65,000 per year, adjusted for inflation.
  • They will receive $26,964 per year in Social Security income starting at age 67 (estimated here).
  • They will receive an inflation-adjusted investment return of 5% per year (7% return minus 2% inflation).
  • At retirement, they will withdraw 4% of their final IRA balance per year to supplement their Social Security income (based on the 4% safe withdrawal rate).
  • They will file taxes jointly every year, both now and in retirement.

You can see all the details laid out in a spreadsheet here, but here’s the bottom line:

  • The Roth IRA will provide Mark and Jane with $35,469 in annual tax-free income on top of their Social Security income.
  • The traditional IRA will provide $37,544 in annual after-tax income on top of their Social Security income. That’s after paying $4,184 in taxes on their $41,728 withdrawal, calculating using TurboTax’s TaxCaster.

In other words, the traditional IRA will provide an extra $2,075 in annual income for Mark and Jane in retirement.

That’s a nice vacation, a whole bunch of date nights, gifts for the grandkids, or simply extra money that might be needed to cover necessary expenses.

It’s worth noting that using the assumptions above, Mark and Jane are in the 15% tax bracket both now and in retirement. According to the conventional wisdom, a traditional IRA and Roth IRA should provide the same result.

But they don’t, and the reason has everything to do with the difference between marginal tax rates and effective tax rates.

Right now, their contributions to the traditional IRA get them a 15% tax break, meaning they can contribute 15% more to a traditional IRA than they can to a Roth IRA without affecting their budget in any way.

But in retirement, the effective tax rate on their traditional IRA withdrawals is only 10%. Due again to a combination of our progressive tax code and tax breaks like the standard deduction and personal exemptions, some of it isn’t taxed, some of it is taxed at 10%, and only a portion of it is taxed at 15%.

That 5% difference between now and later is why they end up with more money from a traditional IRA than a Roth IRA.

And it’s that same unconventional wisdom that can give you more retirement income as well if you plan smartly.

5 Good Reasons to Use a Roth IRA

The main takeaway from everything above is that the conventional traditional versus Roth IRA wisdom is wrong. Comparing marginal tax rates typically underestimates the value of a traditional IRA.

Of course, the Roth IRA is still a great account, and there are plenty of situations in which it makes sense to use it. I have a Roth IRA myself, and I’m very happy with it.

So here are five good reasons to use a Roth IRA.

1. You Might Contribute More to a Roth IRA

Our case study above assumes that you would make equivalent after-tax contributions to each account. That is, if you’re in the 15% tax bracket, you would contribute 15% less to a Roth IRA than to a traditional IRA because of the tax cost.

That’s technically the right way to make the comparison, but it’s not the way most people think.

There’s a good chance that you have a certain amount of money you want to contribute and that you would make that same contribution to either a traditional IRA or a Roth IRA. Maybe you want to max out your contribution and the only question is which account to use.

If that’s the case, a Roth IRA will come out ahead every time simply because that money will never be taxed again.

2. Backdoor Roth IRA

If you make too much to either contribute to a Roth IRA or deduct contributions to a traditional IRA, you still might be eligible to do what’s called a backdoor Roth IRA.

If so, it’s a great way to give yourself some extra tax-free income in retirement, and you can only do it with a Roth IRA.

3. You Might Have Other Income

Social Security income was already factored into the example above. But any additional income, such as pension income, would increase the cost of those traditional IRA withdrawals in retirement by increasing both the marginal and effective tax rate.

Depending on your other income sources, the tax-free nature of a Roth IRA may be helpful.

4. Tax Diversification

You can make the most reasonable assumptions in the world, but the reality is that there’s no way to know what your situation will look like 30-plus years down the road.

We encourage people to diversify their investments because it reduces the risk that any one bad company could bring down your entire portfolio. Similarly, diversifying your retirement accounts can reduce the risk that a change in circumstances would result in you drastically overpaying in taxes.

Having some money in a Roth IRA and some money in a traditional IRA or 401(k) could give you room to adapt to changing tax circumstances in retirement by giving you some taxable money and some tax-free money.

5. Financial Flexibility

Roth IRAs are extremely flexible accounts that can be used for a variety of financial goals throughout your lifetime.

One reason for this is that your contributions are available at any time and for any reason, without tax or penalty. Ideally you would be able to keep the money in your account to grow for retirement, but it could be used to buy a house, start a business, or simply in case of emergency.

Roth IRAs also have some special characteristics that can make them effective college savings accounts, and as of now Roth IRAs are not subject to required minimum distributions in retirement, though that could certainly change.

All in all, Roth IRAs are more flexible than traditional IRAs in terms of using the money for nonretirement purposes.

3 Good Reasons to Use a Traditional IRA

People love the Roth IRA because it gives you tax-free money in retirement, but, as we saw in the case study above, that doesn’t always result in more retirement income. Even factoring in taxes, and even in situations where you might not expect it, the traditional IRA often comes out ahead.

And the truth is that there are even MORE tax advantages to the traditional IRA than what we discussed earlier. Here are three of the biggest.

1. You Can Convert to a Roth IRA at Any Time

One of the downsides of contributing to a Roth IRA is that you lock in the tax cost at the point of contribution. There’s no getting that money back.

On the other hand, contributing to a traditional IRA gives you the tax break now while also preserving your ability to convert some or all of that money to a Roth IRA at your convenience, giving you more control over when and how you take the tax hit.

For example, let’s say that you contribute to a traditional IRA this year, and then a few years down the line either you or your spouse decides to stay home with the kids, or start a business, or change careers. Any of those decisions could lead to a significant reduction in income, which might be a perfect opportunity to convert some or all of your traditional IRA money to a Roth IRA.

The amount you convert will count as taxable income, but because you’re temporarily in a lower tax bracket you’ll receive a smaller tax bill.

You can get pretty fancy with this if you want. Brandon from the Mad Fientist, has explained how to build a Roth IRA Conversion Ladder to fund early retirement. Financial planner Michael Kitces has demonstrated how to use partial conversions and recharacterizations to optimize your tax cost.

Of course, there are downsides to this strategy as well. Primarily there’s the fact that taxes are complicated, and you could unknowingly cost yourself a lot of money if you’re not careful. And unlike direct contributions to a Roth IRA, you have to wait five years before you’re able to withdraw the money you’ve converted without penalty. It’s typically best to speak to a tax professional or financial planner before converting to a Roth IRA.

But the overall point is that contributing to a traditional IRA now gives you greater ability to control your tax spending both now and in the future. You may be able to save yourself a lot of money by converting to a Roth IRA sometime in the future rather than contributing to it directly today.

2. You Could Avoid or Reduce State Income Tax

Traditional IRA contributions are deductible for state income tax purposes as well as federal income tax purposes. That wasn’t factored into the case study above, but there are situations in which this can significantly increase the benefit of a traditional IRA.

First, if you live in a state with a progressive income tax code, you may get a boost from the difference in marginal and effective tax rates just like with federal income taxes. While your contributions today may be deductible at the margin, your future withdrawals may at least partially be taxed at lower rates.

Second, it’s possible that you could eventually move to a state with either lower state income tax rates or no income tax at all. If so, you could save money on the difference between your current and future tax rates, and possibly avoid state income taxes altogether. Of course, if you move to a state with higher income taxes, you may end up losing money on the difference.

3. It Helps You Gain Eligibility for Tax Breaks

Contributing to a traditional IRA lowers what’s called your adjusted gross income (AGI), which is why you end up paying less income tax.

But there are a number of other tax breaks that rely on your AGI to determine eligibility, and by contributing to a traditional IRA you lower your AGI you make it more likely to qualify for those tax breaks.

Here’s a sample of common tax breaks that rely on AGI:

  • Saver’s credit – Provides a tax credit for people who make contributions to a qualified retirement plan and make under a certain level of AGI. For 2017, the maximum credit is $2,000 for individuals and $4,000 for couples.
  • Child and dependent care credit – Provides a credit of up to $2,100 for expenses related to the care of children and other dependents, though the amount decreases as your AGI increases. Parents with young children in child care are the most common recipients of this credit.
  • Medical expense deduction – Medical expenses that exceed 10% of your AGI are deductible. The lower your AGI, the more likely you are to qualify for this deduction.
  • 0% dividend and capital gains tax rate – If you’re in the 15% income tax bracket or below, any dividends and long-term capital gains you earn during the year are not taxed. Lowering your AGI could move you into this lower tax bracket.

Making a Smarter Decision

There’s a lot more to the traditional vs. Roth IRA debate than the conventional wisdom would have you believe. And the truth is that the more you dive in, the more you realize just how powerful the traditional IRA is.

That’s not to say that you should never use a Roth IRA. It’s a fantastic account, and it certainly has its place. It’s just that the tax breaks a traditional IRA offers are often understated.

It’s also important to recognize that every situation is different and that it’s impossible to know ahead of time which account will come out ahead. There are too many variables and too many unknowns to say for sure.

But with the information above, you should be able to make a smarter choice that makes it a little bit easier to reach retirement sooner and with more money.

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt here

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Tie the Knot With These 5 Wedding Loans

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

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Updated – November 28, 2018

Your wedding day is bound to be one of the most important days of your life, and because of this, you may be tempted to go all out.

According to WeddingWire, the average cost of a wedding ceremony in the United States runs around $27,000, with another $4,000 for the honeymoon. Further, 80% of engaged couples are millennials who pay approximately 40% of the wedding costs themselves — that’s a big chunk of change.

If you’re tying the knot, you may be looking to use a personal loan to help cover wedding costs. Here’s what to consider before you commit to a loan and five lenders you should consider.

Cut costs before considering a loan

Kicking off your marriage with fresh debt may not be the best idea. That’s why, before taking out debt, you should review your wedding’s costs to see where you can save.

Consider these average costs from The Knot’s 2017 Real Weddings Study and ways you could cut costs:

Wedding planner

Skip out on a wedding planner and take advantage of free wedding planner apps, such as The Knot and Zola. These apps can keep you focused and organized from the day of engagement to the day of the ceremony.

Venue

Opt for a cheaper venue. For example, a church or firehouse that has a reception hall attached might not cost as much as a hotel ballroom.

Catering

The more guests you have, the more expensive catering becomes. To bring down this cost, opt for a buffet rather than a sit-down dinner. Keeping your food options simple and trimming your guest list will also help minimize the catering fee.

Flowers

Almost every wedding incorporates flowers, so you may not want to do away with this tradition. But instead of hiring a florist, you could save by having your bridesmaids help you arrange the flowers yourself (keep in mind that flowers that are in season in your area will have a cheaper price tag).

Gown

When shopping for a wedding gown, keep an eye out for bridal shows and sales. You’ll also want to consider second-hand shops, as wedding dresses have only been worn once and are typically in excellent shape.

Photographer and videographer

Check your contacts to see if you know any photographers or videographers who’d be willing to capture your wedding at a discount. If not, contact local studios to see if they have an associate or intern you could book for less.

Music

Do you really need a DJ or live band at your wedding? Consider creating your own wedding playlist and plugging into your venue’s sound system instead.

Wedding cake

A large number of cake tiers drives up the cost of a wedding cake. Stick with one or two tiers using less expensive fillings for a smaller price tag. You can then order a sheet cake on the side to have enough cakes to serve all of your guests.

Decor

Your decor is probably the easiest category to save on — using sites like Pinterest can help you come up with ideas of centerpieces and decorations you can make yourself.

Still need a loan? What to look for in a wedding loan

A personal loan is likely your best option for covering wedding expenses you can’t cover out of pocket. Unless your credit card has a promotional 0% APR, it likely has a higher interest rate than you’ll find on a personal loan. Furthermore, you may not want to tie up your assets by opting for a secured loan.

With a personal loan, you’ll make payments over a set period of time. In the MagnifyMoney personal loan marketplace, you’ll find loan terms from one to 12 years. The rate you receive will depend on your credit score and the lender.

When choosing a loan, there are a few things you’ll need to consider:

  • Credit score: Applicants with higher credit scores will receive better offers than those who don’t have the best credit. Equifax considers a score of 725 to 759 as good, and 760 to 850 as excellent.
  • Loan amount: The more money you borrow, the harder it will be to pay back. Never take out more than you need — so make sure to review your wedding expenses first to see where you can cut back, so you know exactly how much to take out.
  • Term: The shorter the term you select, the larger your monthly payment obligation will be. On the other hand, you’ll have the debt paid off much faster. Check your monthly budget to determine the shortest term you can afford.
  • Interest rate: Higher interest rates mean larger monthly payments. Always shop around and select the loan with lower rates.
  • Fees: Some personal loans come with fees. Check to see if there are any application, origination or prepayment fees, as some lenders charge these.

5 personal loans to pay for a wedding

You have many different lenders you can choose from to apply for a personal loan for your wedding. While you can shop among local banks and credit unions, you should also consider online lenders to ensure you’re getting the best deal.

LendingTree, which owns MagnifyMoney, offers a tool you can use to see loan offers. Using the tool, you’ll input basic information about yourself and what you’re looking for out of a loan. Afterwards, you can review loan offers from up to five different lenders.

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

To help kickstart your search, consider these five lenders:

Company
Loan terms
APR range
Origination fees
Minimum credit score required
Earnest

36 to 60

months

6.99% - 18.24%

Origination fee

No origination fee

680

SEE OFFERS Secured

on LendingTree’s secure website

Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

12 to 60

months

7.42% - 12.44%

Origination fee

$100

680

SEE OFFERS Secured

on LendingTree’s secure website

24 to 144

months

3.34% - 16.99%

Origination fee

No origination fee

660

SEE OFFERS Secured

on LendingTree’s secure website

Advertiser Disclosure.

Your APR may differ based on loan purpose, amount, term, and your credit profile. Rate is quoted with AutoPay discount, which is only available when you select AutoPay prior to loan funding. Rates under the invoicing option are 0.50% higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice. Payment example: Monthly payments for a $10,000 loan at 3.34% APR with a term of 3 years would result in 36 monthly payments of $292.31.
Peerform

36 or 60

months

5.99% - 29.99%

Origination fee

1.00% - 5.00%

600

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PenFed Credit Union

60

months

Starting at 6.49%

Origination fee

No origination fee

700

Apply Now Secured

on PenFed Credit Union’s secure website

Earnest

Earnest is an excellent choice: their personal loans have no origination fee or early prepayment fees and their interest rates are on the lower side. While they do list a minimum credit score of 680 in their eligibility requirements, they also state that they consider other things, such as:

  • How much money you have in savings
  • Your educational background
  • Your earning potential

Applicants must be 18 years of age, U.S. citizens or long-term permanent aliens with residence in either the District of Columbia or one of 45 partner states (excluding Alabama, Delaware, Kentucky, Nevada, and Rhode Island).

Loans of $5,000 to $75,000 are available in terms of 36 to 60 months at APRs from 6.99% to 18.24%. Once you receive an offer from Earnest, you have seven days to accept it.

First Midwest Bank

First Midwest Bank offers low APRs of 7.42% to 12.44% for loans between $5,000 and $25,000. In addition, they allow you to repay the loan in as little as 12 months or as long as 60 months.

The downside to First Midwest Bank is the $100 loan documentation fee, and the 680 minimum credit score with five years of good credit history requirement, which may not be attainable for all couples.

Applicants must be at least 18 years of age and live in one of the following 26 states to qualify: Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Minnesota, Missouri, Nebraska, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia and Wisconsin.

LightStream

You won’t have to worry about any origination, prepayment or hidden fees with LightStream’s personal loan. However, for the best rates on offer, applicants will need to have excellent credit (a minimum 660 credit score will be considered), five years of good credit history and proof of their ability to save.

Couples can take out between $5,000 and $100,000 with terms between 24 to 144 months. If you’re willing to sign up for AutoPay, you’ll enjoy 0.50% off your APR, making the range 3.34% to 16.99%.

LightStream also has two additional perks that set them above other lenders. First, if you have a better offer from a competitor, LightStream will not only match it, but give you a rate that’s 0.10 percentage points below the competitor. Second, if you are unhappy with any part of the loan process, LightStream will refund you $100.

Loans can be approved and funded the same day you apply if you’ve completed all of the steps by 2:30 pm EST.

Peerform

Peerform is a peer-to-peer lender with a lower 600 minimum credit score requirement. The company will even allow you to check your eligibility with a soft pull that won’t affect your credit score.

Applicants can borrow between $4,000 and $25,000 at APRs between 5.99% and 29.99% with a 36-month term. However, it is important that couples are aware of the many fees involved with using Peerform.

All personal loans are subject to origination fees of 1.00% - 5.00% and check processing fees of $15 per check. If you send your payment in late, or your payment is rejected due to insufficient funds, you’ll have to pay additional fees. When you submit an application with Peerform, you may receive multiple loan offers. You’ll be able to review each offer and choose the best one.

PenFed Credit Union

In order to apply for a personal loan with PenFed Credit Union to cover your wedding expenses, you’ll need to first become a member. Eligibility depends on where you’re employed, where you volunteer, whether you are in the military and which associations you belong to.

If you qualify, you can borrow between $500 and $25,000 at a starting APR of 6.49%. Terms range up to 60 months, and the loan does not have any origination or other fees attached to it. This credit union has a minimum credit score requirement of 700. They do state that all loans are subject to a minimum $50 monthly payment.

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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Building Credit, Life Events

How Do Student Loans Affect Your Credit Score?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Many college students, graduates and parents (or grandparents) of students have taken out student loans to help pay for educational expenses. These loans are generally reported to the three national consumer credit reporting agencies — Equifax, Experian and TransUnion — and could impact the borrower’s credit score.

Building credit can be important for your financial and personal life. A high score can make qualifying for new loans or credit cards easier, may save you money with lower interest rates or insurance premiums and could even help you rent an apartment or home.

Because so many people have student loans — and for many new college students, the loans may be the first time they use credit — understanding how student loans can affect your credit is important.

So, how exactly do student loans affect your credit score?

Student loans can hurt or help your credit score

As with other types of installment loans, such as a personal loan or auto loan, your student debt can help or hurt your credit score depending on how you manage your loans and your overall credit profile.

But student loans have a few features, such as deferment or forbearance, that may not be as common with other types of installment loans. Understanding these features, how they work and the impact they could have on your credit can help you manage your student loans with confidence.

If you want to see where you stand with your credit, you may be able to check your credit reports and scores for free through a variety of financial institutions and online tools. For example, LendingTree, the parent company of MagnifyMoney, gives you free access to your TransUnion VantageScore 3.0.

How student loans can hurt your credit

Opening new accounts can lower your score

Whether you take out a student loan or something else, a new credit account can lead to a dip in your credit score for several reasons.

For one thing, the new account could decrease the average age of accounts on your credit reports — a higher average age is generally better for your score. Additionally, if you applied for a private student loan, the application could lead to the lender reviewing your credit history. A record of this, known as a “hard inquiry” or “hard credit check,” remains on your report and may hurt your score a little.

Your student loans will also increase your current debt load. While the amount you owe on installment loans may not be as important as outstanding credit card debt, it could still negatively impact your score.

Credit scores aside, lenders may consider your debt-to-income ratio when you apply for a new credit account. Having a large amount of student loan debt could make it more difficult to qualify for a loan or credit line later, even if you have a good credit score.

You might wind up opening many student loan accounts

Often, students who take out student loans will have their new loan or part of the loan disbursed near the start of each term. Each disbursement could count as its own loan on your credit reports. So even if you only send one payment to your servicer every month, the servicer allocates the payments among each individual loan.

Each of these student loans could impact your age of accounts and overall debt balance. Also, if you’re repeatedly applying for private student loans, each application could lead to a hard inquiry.

You might fall behind on your payments

Your payment history is one of the most important factors in determining a credit score. Being 30 or more days past due could lead to a negative mark on your credit reports that can hurt your credit score.

And even before the 30-day point, your loan servicer may charge you a late fee if you don’t pay your bill by the due date, although some servicers give borrowers a grace period, often for 15 days.

If you’re repaying multiple student loans, missing a single payment to your loan servicer could lead to a late payment on each of your student loan accounts. Falling further behind could lead to a larger negative impact on your score, as your loan servicer reports your payments 60-, 90-, 120-, 150- and then 180-days past due.

Unless you bring your accounts current, they could be sent to collections, which could be indicated on your credit reports and hurt your score more.

Getting too far behind on student loan payments could also end up putting you in default, and you’ll immediately owe the entire outstanding balance rather than being able to use a repayment plan. The lender may also be able to sue you to take money directly from your paycheck or, in some cases, your tax return or bank account.

Federal Direct and Federal Family Education Loans go into default after 270 days of nonpayment. Other student loans may default sooner.

It can be more difficult to pay other bills

Even if you can stay on track with your student loans, having to make the monthly payment could cause trouble keeping up with other bills.

Missing a credit card, auto loan or mortgage payment could hurt your credit, as could rolling over a large amount of credit card debt, even if you’re consistently making minimum payments on time.

How student loans can help your credit

Student loans can establish credit

A student loan may be some borrowers’ first foray into the world of credit, and it could help them establish a credit history.

Credit-scoring models require a minimum amount of data to generate a score, and having a student loan on your credit reports could help make you scorable rather than “credit invisible.”

A student loan can diversify your credit mix

Showing that you can manage different types of accounts, such as installment loans and revolving accounts (credit cards, lines of credit, etc.), could help your credit score.

If the only debt you’ve had is a credit card, adding an installment loan in the form of a student loan can increase your mix of accounts and help your score. Likewise, if your only credit account is a student loan, opening a credit card might help your score.

Making on-time payments can help your score

Since your credit history is one of the most important credit-scoring factors, try to always make on-time payments as you repay your student loans. Doing so could help you build a solid credit history, which can lead to a higher score.

If you’re having trouble affording your student loan payments, consider your options (discussed below), and look for a way to lower or temporarily stop your payments before you miss one.

The loans can help build a lengthy credit history

Although it’s not one of the most important credit-scoring factors, the length of your credit history and the average age of your accounts can impact your credit score.

If you take out a student loan during your first term at school, you may wind up with years’ worth of credit history before graduating.

Continuing to take out new student loans each term could lower your average age of accounts. But your average age of accounts will still increase as you repay your loans.

One common point of confusion is whether closed accounts can still impact your credit history.

They can.

For example, if you take out a student loan as a freshman, then defer the payments for four years and repay the loan using the 10-year standard repayment plan, the account will be closed once it’s repaid.

But the account will still stay on your credit reports for up to 10 years from when it was closed, and it could impact your credit history and average age of accounts during that period.

Protecting your credit while repaying student loans

Once you take out student loans, you may be able to defer making full (or any) payments until after you leave school. But once you start repaying the loans, a misstep could lower your credit score. Here are a few ways you could keep your student loans from hurting your credit.

Don’t miss your first payment

Many student loans offer an in-school deferment period, which lets you put off loan payments until six months after you leave school. In-school deferment lets you focus on your schoolwork and makes student loans affordable, as many students might not have enough income to afford monthly payments.

But don’t forget about your loans and miss your first payment. Doing so could hurt your credit score.

To avoid missing the first — and subsequent — payments, you may want to enroll in an auto payment program with your student loan servicer. Many lenders and loan servicers will even offer you an interest rate discount as long as you’re enrolled in autopay.

Compare repayment plans

You may be able to choose from several federal student loan repayment options. The main options include the standard, extended, graduated and income-driven plans.

 

Federal student loan repayment plans
Federal student loan repayment plans

Choosing an extended, graduated or income-driven plan, rather than the standard plan, could lower your monthly payments.

If you choose an income-driven plan, be sure to renew your repayment plan every year and send your loan servicer updated documentation to remain eligible.

Although the nonstandard plans could wind up costing you more in interest overall, the lower payments could make managing all your bills easier, which can be important for maintaining and building credit.

Contact your lender if you’re struggling to afford your payments

If you do find yourself struggling to make payments, be sure to reach out to your loan servicer. With federal student loans, you may be able to switch repayment plans, or temporarily place your loans into deferment or forbearance to stop making payments.

Private student loans aren’t eligible for the federal repayment plans, but private student loan lenders may offer similar deferment or forbearance options. Some may also have other hardship options, such as temporarily reduced payment amounts or interest rates.

Your credit score won’t be affected by placing your loans into deferment, forbearance or using a hardship option, as long as you make at least the required monthly payment on time. But interest may still accrue on your loans if you’re not making payments, and the accumulated interest could be added to your loan principal once you resume your full monthly payments.

Learn about federal student loan default rehabilitation

If one or more of your federal student loans has gone into default, there are two ways that you could potentially “rehabilitate” the loan and get back on a repayment plan:

  • You could consolidation the loans with a federal Direct Consolidation Loan. The Department of Education will issue you a new loan and use the money to pay off your existing loans. If you include your defaulted loan, that loan will be paid off, and your new consolidation loan will be current. To be eligible, you must agree to either repay the consolidation loan with an income-driven repayment plan or to make three monthly payments on your defaulted loan before applying for consolidation.
  • Alternatively, you could contact your loan servicer and agree to make nine monthly payments within 10 consecutive months. The servicer will determine your monthly payment amount, which should be “reasonable and affordable” based on your discretionary income. Once you complete the payments, your loan will be taken out of default.

If you use the second method — and this if the first time you rehabilitated the student loan — the default associated with the loan will also be removed from your credit reports. Although the late payments associated with the loan will remain for up to seven years from the date of your first late payment, having the default removed could help your score.

With the first method, the default won’t be removed.

Private student loan companies may also offer you a way to rehabilitate a private student loan that’s in default. If you use the program, you may be able to request the removal of the default from your credit reports by contacting the lender, but the late payments on the account could remain.

Can shopping for student loans impact your credit?

Comparing student loan lenders and loan types won’t impact your credit score unless you submit an application for a private student loan. When you submit a private student loan application, the resulting hard inquiry could have a minor negative impact on your score.

Shopping for a private student loan, comparing the pros and cons of different lenders, and submitting multiple applications so you can accept the loan with the best terms is generally a good idea. Hard inquiries usually only have a small impact on credit scores, and scores often return to their pre-inquiry level within a few months, as long as no new negative information winds up on your credit reports.

While multiple hard inquiries can increase score drops, particularly for those who are new to credit, credit-scoring agencies recognize the importance of rate shopping. As a result, multiple inquiries for student loans that occur with a 14- to 45-day window (depending on the type of credit score) only count as a single inquiry when your score is being calculated.

Can refinancing student loans help or hurt your credit?

If you already have a good-to-excellent credit score and a low debt-to-income ratio, you may want to consider refinancing your student loans. When you refinance your loans, you take out a new credit-based private student loan and use the money to pay off some or all of your current loans. (The lender will generally send the money directly to your loan servicers.)

Refinancing can save you money if you qualify for a lower interest rate than your loans currently have, and combining multiple loans into one could make managing your debt easier.

When it comes to credit scores, refinancing student loans is a bit like taking out a new loan. You’ll need to apply for the loan, which could lead to a hard inquiry. Shopping around and submitting applications during a short period could help you get the best rate while limiting the negative impact of the inquiries.

After getting approved for refinancing, the new loan may be reported to the credit bureaus, which could lower your average age of accounts. Your other loans will be paid off, but they could stay on your credit reports for up to 10 more years. Your overall installment-loan debt will stay the same, and as long as you continue to make on-time payments, your score may improve over time.

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Louis DeNicola
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Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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How to Find the Right 529 Savings Plan for You

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

It is never too early to think about saving for college, and a 529 savings plan can help you do just that.

No other savings or investment account offers the tax breaks that a 529 college savings plan offers, which means that every dollar you contribute can cover a greater share of college costs. That’s especially helpful considering the average net price of a private nonprofit university came in at $26,740 for the 2017-18 school year, and the cost of college is on the rise.

But with almost every state offering a 529 savings plan, and with many offering more than one, it can be challenging to figure out which plan is right for you.

If you’re already well-versed in this savings tool, you can see our roundup of the best options here:

The truth is that contributing to a 529 savings plan isn’t always the right move. You may be better off using a different college savings account or even focusing on other financial responsibilities first.

This guide will help you sort through all of that. You’ll learn what a 529 college savings plan is, how it works, how to choose the right plan for you and alternatives you should consider.

What is a 529 college savings plan and how does it work?

A 529 college savings plan is an investment account that offers a number of tax breaks when the money is used for qualified education expenses:

  • Contributions are made after taxes, though there are a number of states that allow either a deduction or a credit for state income tax purposes.
  • Your money grows tax-free while it is in the account.
  • Money can be withdrawn tax-free for qualified education expenses, which typically includes tuition at any eligible school from elementary onward, as well as fees, books and room and board at an eligible higher education institution. If you withdraw the money for any other type of expense, the earnings will be taxed and subject to a 10% penalty.

529 savings plans offer a preselected set of mutual funds and your account balance will rise and fall based on your contributions and the performance of your chosen investments. Most 529 savings plans also offer age-based investments that provide an all-in-one portfolio and automatically become more conservative as your child approaches college.

529 savings plans are administered by states, with every state except for Wyoming offering at least one plan. However, you do not have to use your home state’s plan, and in some cases, you may be better off going elsewhere.

Regardless of which 529 savings plan you choose, you can withdraw the money tax-free for expenses incurred at any eligible school in any state, and even for certain international schools.

Anyone can open a 529 savings plan and name anyone else, including himself, as the beneficiary. You can also change the beneficiary later on, as long as the new beneficiary is related to the old beneficiary.

In short, 529 savings plans allow you to save and invest for future education expenses in a tax-advantaged way.

Prepaid tuition plans vs. savings plans

In addition to 529 savings plans, some states also offer prepaid tuition plans that may be advantageous in certain situations.

Prepaid tuition plans allow you to buy units that each typically cover 1% of one year’s worth of college tuition at a public, in-state university. This essentially allows you to lock in the current cost of college, protecting you against the risk that tuition costs will continue to rise.

“The huge part of a prepaid tuition plan is that it’s guaranteed,” said Angie Furubotten-LaRosee, fee-only CFP and founder of Avea Financial Planning. “With a traditional 529 plan you have to worry about market fluctuations, and with these you don’t.”

There are downsides, though. The biggest of which is that while you can usually get your money back if your child wants to go to a private college or go out of state, the return is typically much smaller than what you would get from attending an in-state public school.

This is in contrast to a 529 savings plan, which allows you to use the money you’ve earned at any eligible institution.

“Prepaid plans are ideal for parents who have a good idea of where their child will attend college and who are willing to give up investment flexibility to lock in those costs,” said Kathleen Boyd, CFP and wealth adviser at Navigoe. “However, if you’re uncertain about your child’s future college plans, then a 529 savings plan may be the ideal option.”

Benefits of a 529 savings plan

1. Tax breaks

The tax breaks are the main advantage of 529 savings plans over other savings and investments accounts.

The growth and the ability to withdraw the money all tax-free for qualified education expenses mean that every dollar you contribute can multiply faster and cover a greater portion of your education expenses.

And if you live in one of the states that offers a state income tax break for contributions, you can potentially afford to make a bigger contribution without affecting your monthly budget, allowing you to get an even bigger head start.

“If you are in a state that offers good benefits, and some states even offer matching funds, it really is the right choice at that point because you aren’t going to get those benefits from any other option,” said Nannette Kamien, CFP and principal of Inspiration Financial Planning, a fee-only financial planning firm with expertise in helping families prepare for college financially.

2. High contribution limits

If you’d like to save a lot of money for education, a 529 savings plan will allow you to do it.

There is no annual contribution limit, though contributions are subject to gift tax rules, which means that you can effectively contribute $15,000 per year, per child, without exceeding the 2018 gift tax exemption. That limit is applied per donor, meaning that parents can combine their limits to contribute up to $30,000 per year, per child.

The tax code also allows you spread excess contributions over a 5-year period, meaning that as a couple, you could potentially contribute up to $150,000 in a single year without any gift tax consequences.

Most 529 savings plans do have lifetime contribution limits, but those limits are very high. For example, New York allows you to contribute up to $520,000 to any single beneficiary, and Utah allows up to $446,000 per beneficiary.

Additionally, there are no income restrictions on contributions, so anyone can take advantage of a 529 savings plan no matter how much money you make.

3. Mindset and accountability

One of the biggest benefits of contributing to a 529 plan is that it establishes saving for college as a real goal with progress that can be tracked along the way.

“Just having the 529 plan in and of itself solidifies that it’s an important priority for you and your family,” said Furubotten-LaRosee. “It’s now a budget item, it’s identified as money that’s earmarked for college, and I think that setting that habit is half the battle for a lot of people.”

4. Potential for long-term returns

By offering mutual funds that are invested in the stock and bond markets, 529 savings plans allow you to participate in the long-term, compounding returns that those investments offer. This can be especially powerful if you start when your child is young.

“Families who can invest over the long term are prime candidates for 529s,” said Boyd. “The earlier you start, the more time you have to take advantage of compound returns the markets provide over time.”

5. Low impact on financial aid

Many people are hesitant to save for college because of the potential impact on financial aid, but 529 savings plans have a relatively low impact.

As long as the account is held in a parent’s name, only up to 5.64% of the money in a 529 savings plan will be counted on the FAFSA. For example, if you have $100,000 in your 529 savings plan, only $5,640 will be considered for financial aid purposes.

In other words, there’s very little penalty for having money in a 529 savings plan. And the benefits of saving the money ahead of time will almost always outweigh any small decrease in financial aid.

6. Ability to change beneficiaries

529 savings plans allow a reasonable amount of flexibility when it comes to changing the beneficiary of the funds.

You are allowed to change the beneficiary as often as you like, and the only restriction is that the new beneficiary must be a family member of the old beneficiary. For the purposes of 529 plans, “family members” include siblings and stepsiblings, children, stepchildren, and grandchildren, parents, grandparents, nieces, nephews, first cousins and even in-laws.

All of which means that if the money isn’t needed for the original beneficiary, you can simply use it for another family member.

Pitfalls of 529 savings plans

1. Taxes and penalties if not used for education

The biggest downside to using a 529 savings plan is that if you withdraw money for anything other than qualified education expenses, the earnings will be subject to taxes and a 10% penalty.

This is one reason to be careful about over-contributing, and also to not contribute money that may be needed for other financial goals.

“That’s where that overarching financial plan comes into play,” said Furubotten-LaRosee. “You can always use other vehicles, like a Roth IRA, that come with more flexibility.”

2. Investment options can be narrow and confusing

Each 529 plan offers its own preselected set of investment options, and those options vary widely in terms of what they invest in and how much they cost. Sorting through all of those options and making the best choices for your needs can be difficult.

“Sometimes I see that parents are afraid to really invest the money and they don’t understand what the different investment options mean,” said Kamien. “Sometimes they get stuck in investments that are higher cost, and that really eats into the earnings that they could have gotten.”

Kamien said that she encourages people to look for “age-based index” options. These funds provide an all-in-one portfolio that automatically gets more conservative as your child approaches college, and they build the portfolio with index funds, which are generally low cost and have been shown to outperform actively managed funds the majority of the time.

3. Other financial responsibilities may be more important

While saving for college is a great goal, it’s often a good idea to handle other financial responsibilities first. This is especially important to consider before contributing money to a 529 savings plan because of the taxes and penalties on nonqualified withdrawals.

“I certainly would caution a parent or grandparent against sacrificing their own financial goals like saving for an emergency fund, paying off debt or retirement plans to contribute to a 529 plan,” said Boyd. “Saving for education is very important, but it’s also a luxury and a privilege for your children, and it shouldn’t come above your own financial security.”

How to compare 529 savings plans

When it comes to choosing a 529 savings plan, start by looking at the potential tax breaks offered by your home state’s plan, said Fred Amrein, a college funding expert and the founder of EFC Plus.

“You need to understand your in-state plan first, and if the beneficiary is in another state you need to understand their state’s plan next,” Amrein said. “In some cases, it may be more beneficial to gift the money to the beneficiary or the beneficiary’s parents and let them contribute the money.”

Even if your state does offer tax breaks, it’s not a given that your home state’s plan is the best option. There are a few more major variables you should consider as you compare 529 savings plans.

Here are the criteria we used to construct our list of best 529 plans.

Out of state

We evaluated each 529 savings plan from the perspective of an out-of-state resident. That means that state income tax breaks were not considered and that any 529 plans that are unavailable to out-of-state residents were ruled out.

Fees

Research has shown that cost is the best predictor of future investment performance, with lower costs leading to better returns. For that reason, we preferred 529 plans that minimized both investment and administrative fees.

We also filtered out adviser-selling 529 plans, which are specifically designed to be sold and managed by financial advisers and have higher fees in the form of commissions and management fees. Given that financial advisers can also advise on 529 plans that are sold directly to the consumer, and therefore cost less, we limited our search to those direct-sold plans.

Investment options

Investment portfolios built with index funds have been shown to outperform actively managed portfolios 80%-90% of the time, and we therefore only included 529 savings plans that offer index funds.

We also limited our list to 529 savings plans that offer age-based portfolios constructed with index funds, since these all-in-one portfolios simplify the investment process and automatically decrease your investment risk as your child nears college age.

Finally, we preferred 529 savings plans that offered access to individual index funds that allow investors to build custom portfolios if they so choose.

Minimum investment

Finding room in your budget for college savings can be difficult, so we did not consider any 529 savings plan that required a significant minimum investment.

None of the plans listed below require more than a $50 initial investment.

Other features

While most 529 savings plans offer most of the same basic features, we did consider additional features offered by certain plans that may be helpful for some investors.

The nine best 529 savings plans

Fidelity Arizona College Savings Plan

Arizona’s College Savings
Arizona’s College Savings Plan is managed by Fidelity, just like Delaware, Massachusetts and New Hampshire, which also appear on this list. Each of these states offers essentially the same plan.The index funds are high quality and low cost, and there are no other significant fees, though the presence of higher-cost actively managed funds could lead some people to pay more than they have to.

  • Investment options: Age-based portfolios constructed with Fidelity index funds, as well as access to individual Fidelity index funds if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.13%-0.16% per year. Individual index funds range from 0.13%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $50 otherwise.
  • Other features: None of note.
  • Website: https://www.fidelity.com/go/529-arizona/overview

California ScholarShare 529

ScholarShare 529
Managed by TIAA-CREF, California offers a selection of both index funds and actively managed funds. The lineup of passive age-based funds and individual index funds is strong.
  • Investment options: Age-based portfolios constructed with TIAA-CREF index funds, as well as access to individual TIAA-CREF index funds, if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.11%-0.17% per year. Individual index funds range from 0.08%-0.20% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $25 otherwise.
  • Other features: None of note.
  • Website: https://www.scholarshare529.com

Delaware College Investment Plan

Delaware College Investment Plan

Delaware’s College Investment Plan is managed by Fidelity, just like Arizona, Massachusetts and New Hampshire. These states offer essentially the same plan.

The index funds are high-quality and low-cost and there are no other significant fees. The plan does offer higher cost actively managed funds, which could lead some people to pay more than they have to.

  • Investment options: Age-based portfolios constructed with Fidelity index funds, as well as access to individual Fidelity index funds if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.13%-0.16% per year. Individual index funds range from 0.13%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $50 otherwise.
  • Other features: None of note.
  • Website: https://www.fidelity.com/go/529-delaware/overview

Illinois Bright Start Direct-Sold College Savings Program

Illinois Bright Start Direct-Sold College Savings Program
The index age-based funds use Vanguard mutual funds with some of the lowest fees offered by any 529 savings plan. Even the higher-cost “multi-firm” age-based funds cost less than most actively managed funds offered by other plans.

  • Investment options: Age-based portfolios constructed with Vanguard index funds, as well as access to individual Vanguard index funds and DFA funds — a highly respected group of mutual funds that are typically only available through financial advisers — if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.12%-0.15% per year. Individual Vanguard index funds range from 0.10%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: None
  • Other features: None of note.
  • Website: https://www.brightstartsavings.com

College Savings Iowa

College Savings Iowa
Every investment offered within Iowa’s 529 savings plan is managed by Vanguard and costs just 0.20% per year. And with a strong lineup of both age-based portfolios and individual mutual funds, you have plenty of room to personalize your investment plan.

  • Investment options: Age-based portfolios constructed with Vanguard index funds, as well as access to individual Vanguard index funds if you’d like to customize your portfolio.
  • Fees: Every investment option costs 0.20% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $25 otherwise.
  • Other features: None of note.
  • Website: https://www.collegesavingsiowa.com

Massachusetts U.Fund College Investing Plan

Massachusetts U.Fund College Investing Plan
Massachusetts U.Fund College Investing Plan is managed by Fidelity. The plan is essentially the same as Arizona’s, Delaware’s and New Hampshire’s.

It offers high-quality, low-cost index funds with no other significant fees, though the presence of higher cost actively-managed funds could lead some people to pay more than they have to.

  • Investment options: Age-based portfolios constructed with Fidelity index funds, as well as access to individual Fidelity index funds if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.13%-0.16% per year. Individual index funds range from 0.13%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $50 otherwise.
  • Other features: None of note.
  • Website: https://www.fidelity.com/529-plans/massachusetts

New Hampshire UNIQUE College Investing Plan

New Hampshire UNIQUE College Investing Plan
New Hampshire’s UNIQUE College Investing Plan is managed by Fidelity, just like Arizona, Delaware and Massachusetts. Each of these states’ plans are on this list and are basically the same.

New Hampshire’s plan offers high-quality, low-cost index funds with no other significant fees. However, the plan offers higher cost actively-managed funds, which could lead some people to pay more than they have to.

  • Investment options: Age-based portfolios constructed with Fidelity index funds, as well as access to individual Fidelity index funds if you’d like to customize your portfolio.
  • Fees: Age-based index funds range from 0.13%-0.16% per year. Individual index funds range from 0.13%-0.18% per year. There are no account maintenance fees.
  • Minimum initial investment: $15 with enrollment in automatic contributions. $50 otherwise.
  • Other features: None of note.
  • Website: https://www.fidelity.com/529-plans/new-hampshire

New York’s 529 College Savings Program

New York’s 529 College Savings Program
Like Iowa, New York’s 529 College Savings Program offers only Vanguard index funds and index age-based funds, and in this case, the cost of each fund is even lower at 0.15% per year.

If your priority is minimizing fees and accessing Vanguard funds, this is likely the plan for you.

  • Investment options: Age-based portfolios constructed with Vanguard index funds, as well as access to individual Vanguard index funds if you’d like to customize your portfolio.
  • Fees: Every investment option costs 0.15% per year. There are no account maintenance fees.
  • Minimum initial investment: $0.
  • Other features: None of note.
  • Website: https://www.nysaves.org

Utah my529

Utah my529

Utah’s my529 offers possibly the most noteworthy set of features of any 529 savings plan:

  1. You can create your own age-based portfolio from the underlying funds offered by the plan, which include Vanguard index funds as well as DFA funds that are typically only offered by financial advisers.
  2. If you are working with a financial adviser, you can give him or her access to your 529 plan in order to manage your investments.

The fees are slightly higher than the other 529 savings plans listed here — though they are still very low — but the investment capabilities are second to none.

  • Investment options: A wide variety of age-based portfolios, Vanguard index funds and DFA funds.
  • Fees: Age-based index funds range from 0.169%-0.202% per year. Vanguard individual index funds range from 0.22%-0.40% per year and DFA funds range from 0.37%-0.72% per year. There are no account maintenance fees.
  • Minimum initial investment: $0.
  • Other features: Customized age-based portfolios and financial adviser access.
  • Website: https://my529.org

How to enroll in a 529 savings plan

Once you know which 529 savings plan you want to use, it’s time to open an account and make your first contribution. And while every plan will have a slightly different process, there are a few steps that are likely to be similar across the board:

  1. Have the necessary information ready for the account owner:
    1. Social Security number
    2. Birth date
    3. Mailing address
    4. Physical address
    5. Bank account number and routing number for making contributions
  2. Have the necessary information ready for the beneficiary
    1. Social Security number
    2. Birth date
    3. Mailing address
    4. Physical address
  3. Read the program description, which can be found on the 529 plan’s website
  4. Choose an investment strategy. You can review the options on the 529 plan’s website and in the program description.
  5. Start the application process online or submit the appropriate paperwork.

How to use 529 plans to pay for K-12 private education

The recently passed Tax Cuts and Jobs Act expanded the flexibility of 529 savings plans by allowing investors to withdraw up to $10,000 per year, per child tax-free and penalty-free for tuition for elementary or secondary school.

This opens up more opportunities for parents to use 529 funds for their child’s education. But given how new the law is, it’s a good idea to proceed carefully.

According to Amrein, the tax implications of withdrawing 529 money for K-12 tuition are straightforward on the federal side but are yet to be determined on the state side.

“What a lot of states are dealing with is a lot of them had incentive programs for college contributions,” said Amrein. “What I’m hearing is some of the states are either going to withdraw that incentive or, if you use it for K-12 expenses, there may be a clawback provision that they can rescind that tax break you received for previous contributions.”

If you live in a state that offers tax breaks for 529 plan contributions, and if you’ve taken advantage of those tax breaks, you may want to speak to an accountant before using your 529 funds for K-12 tuition.

Alternatives to 529 savings plans

While the tax breaks offered by a 529 savings plan are hard to beat if you’re saving money specifically for education, there are a number of other savings and investment accounts that can be more advantageous, depending on the specifics of your situation.

Here are some of the major alternatives to consider.

Roth IRA

While Roth IRAs are technically retirement accounts, they have a few characteristics that make them attractive college savings accounts:

  • They offer tax-deferred growth while the money is inside the account.
  • You can withdraw up to the amount you’ve contributed at any time and for any reason without tax or penalty.
  • Early withdrawals of Roth IRA earnings used for higher education are taxed but are not subject to the typical 10% penalty.
  • If you don’t need the money for college, you can keep it in the Roth IRA and use it tax-free for retirement.

“I’m a big proponent of incorporating a Roth into college planning, especially when you have a teenager who is hopefully earning money,” said Furubotten-LaRosee. “Starting the savings habit is a biggie, and if you don’t use it for college it’s available for retirement or any other goal.”

The big downsides are that Roth IRAs are not as tax-efficient as 529 savings plans when used for college and that by dedicating your Roth IRA for college savings, you’re using up valuable retirement space.

Still, the flexibility is often worth it.

Taxable investment account

A regular, taxable investment account doesn’t offer any tax advantages, but it does provide maximum flexibility to invest in whatever you’d like and to use the money at any time and for any reason.

“As a parent, sometimes you need flexibility with your money,” said Furubotten-LaRosee. “You need the ability to control things as life progresses, and not having it tied into a 529 plan means you can access it when you need to.”

Coverdell ESA

The primary benefit of a Coverdell Education Savings Account (ESA) used to be the ability to allocate the money for K-12 expenses, but that benefit is much less relevant now that 529 savings plans can also be used for the same purpose.

Coverdell ESAs also come with stricter contribution limits than 529 savings plans. Contributions are limited to $2,000 per year, per child across all contributors. Once your Modified AGI (adjusted gross income with certain deductions like student loan interest added back) exceeds $110,000 for individuals or $220,000 for married couples filing jointly, you can no longer contribute.

According to Amrein, the main benefit of a Coverdell ESA at this point is the ability to choose from a much wider range of investment options than you can get from a 529 plan.

“It’s kind of like comparing a 401(k) to an IRA,” said Amrein. “Most 529 plans are very restrictive, with maybe five to 10 investment options to choose from. On the Coverdell side, you can invest in anything you want, but you’re limited to $2,000 per year.”

Savings account

While a savings account can’t offer the long-term returns that you might get from a 529 savings plan, Roth IRA or Coverdell ESA, it is a simple and safe choice that can make sense either as a starting point or if your child will be starting college soon.

And Furubotten-LaRosee argues that no matter which account you choose, the main priority should simply be to separate your college savings from your regular checking and savings accounts.

“Even if it’s just in a separate savings account, the main thing is having it really separate and earmarked for college,” said Furubotten-LaRosee. “That gives it a little protection from your day-to-day spending.”

Choosing the right 529 savings plan for you

529 savings plans allow you to save a lot of money while being tax-efficient for your child’s education, which can help defray the rising costs of college.

The first step is always understanding your home state’s plan to see what kind of tax breaks are available. Then, you can compare it with other states to determine which 529 savings plan will allow you to minimize costs and access the best investment options.

Finally, you can make your decision within the context of your entire financial plan. Saving for college is a fantastic goal, and 529 savings plans are a powerful way to do it, but it shouldn’t come at the expense of other financial responsibilities.

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Life Events

How to File for Unemployment When You’re Laid Off

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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If you were part of a company-wide set of layoffs, your first instinct might be to head to the local bar to wallow with your co-workers, or log onto LinkedIn or Indeed to start scouring the web for job openings.

But before you focus on lining up your next gig, you might want to secure unemployment benefits first. As soon as you find out you’ve been let go, grab your laptop and a cup of coffee, and settle in to apply for unemployment benefits. The process shouldn’t take more than 30 minutes, and it’ll be time well-spent in the end.

We’ve consulted experts to answer any question you might have regarding applying for unemployment benefits.

How soon should I apply for unemployment benefits after being let go?

Immediately, because the process can take a while. Someone will have to approve your claim, and then contact your company to confirm you worked there.

But don’t worry if you were overwhelmed and forgot to apply the day you were laid off. Your benefits will be paid out from your last day of employment, not the day you filed, according to Daniel Kalish, managing partner of HKM Employment Attorneys LLP based in Seattle. Kalish primarily represents employees during employment litigation. If you got laid off on Jan. 1 for example, but didn’t apply until Jan. 15, you would still collect benefits from Jan. 1 onward, Kalish says.

Even if you have a job lined up with a start date in two weeks, you can and should still apply for unemployment. “Might as well get the extra $500 a week if you can just for those two weeks you’re out,” Kalish said. “You’re definitely legally entitled to it.”

What information will I need?

Each state has a different form, but typically you will need to provide the name and location of your employer, your personal information, dates of employment, hours worked and pay rate.

Be aware that the language in the letter you receive from unemployment after applying is standard for everyone, and includes a line that says “You may have been discharged due to misconduct connected with the work.”

“People call us all of the time and say, ‘I didn’t commit any misconduct,’” said Matthew Schorr, an attorney at Schorr & Associates, an employment law firm in Cherry Hill, N.J. “Everyone gets the same exact thing whether they did or didn’t. Don’t think you did something wrong. That’s just the boilerplate response unemployment sends out.”

How do I know if I qualify?

In order to qualify, you typically must have been laid off after being employed for six months or so, depending on the state. “The idea there is that they don’t want to give unemployment to someone who works for a day, gets fired and then gets unemployment for six months,” Kalish said.

But those six months don’t have to be at the same job. As long as you worked full time continuously for six months — even if you held two jobs at different employers — you can qualify for unemployment.

In addition, you will need to have been an employee (full time or part time) at the company, not a freelance worker. You can collect unemployment benefits if you were a part-time employee, you will just need to have worked a certain number of hours (which is calculated on a state-by-state basis) in the previous year, Kalish says.

Are unemployment benefits administered by the state or the federal government?

In a sense, both. Unemployment benefits are paid by the state, and you apply through your state. But the federal government often determines how much unemployment you can collect, Kalish says.

How much money will I get and how long will I get it for?

The number is calculated based on how much you earned at your job. The maximum amount someone can typically collect is roughly $500 per week, but this depends on the state according to Kalish.

In most states, you can collect unemployment benefits for up to 26 weeks, though a handful of states offer more or less. For example, Montana provides up to 28 weeks, while Florida only provides up to 12 weeks, according to the Center on Budget and Policy Priorities, a research institute.

Can I apply if I’ve been fired or if I quit my job?

If you’ve been fired, you will have to prove you were fired without having engaged in any gross misconduct, which Kalish says is defined as an intentional act against your employer’s interest. If your company can prove this, you will not be able to collect unemployment.

If you quit your job, you typically cannot collect unemployment. But if you quit your job with something called good cause, you might be entitled to it.

Good cause is defined as quitting because of illness or disability, a spouse’s military transfer, reduced pay or hours, workplace safety, illegal activity at the workplace and a handful of other reasons, according to The Unemployment Law Project, a Washington-based firm that provides free and low-cost legal representation to residents.

What if I have multiple sources of income?

Having more than one channel of income is common today. Perhaps you have a handful of freelance gigs in addition to your main job. Maybe you have an Etsy business on the side. Or perhaps you drive for Uber or work for Favor at night.

Regardless of your other sources of income, you are still legally entitled to collect unemployment if you were a full-time employee at a company, so long as your part-time work is less than 32 hours a week. If your part-time gigs total 32 hours or more, you will be considered full time and won’t be able to collect unemployment, according to Adam L. Schorr, an attorney at Schorr & Associates.

So how much will you collect if you have less than 32 hours of part-time work? After inputting your earnings and hours worked when applying for unemployment, you will get a weekly benefit rate and a partial weekly benefit rate.

“If you work part-time, regardless of whether you work one hour or 31 hours, you will get your partial benefit rate,” Adam said. The partial weekly benefit rate is higher than the weekly benefit rate, but part-time earnings are factored in.

“If your weekly benefit rate is $500, your partial benefit rate is $600 and you make $300 in a week, you would get $300 from unemployment,” Adam said. “If you didn’t work at all, you’d get $500 total. It’s generally good to work part time if you can, because you will get more money total.”

Will my company try to fight it?

It’s unlikely. “Typically if you’re legitimately laid off, a company won’t contest it because there’s no need,” Kalish said. “They’re probably going to lose, and that will cost them money.”

However, some large companies will try to fight back against unemployment claims. “One thing everyone always asks me is, ‘Why would any employer give a damn? Why do employers care? They don’t pay unemployment. It’s the state,’” Kalish said.

The reason some companies care is because their unemployment insurance tax rate, which every company pays, can go up. Kalish says, for example, a company might pay a tax rate that is 0.05 percent of their payroll. If too many people collect unemployment in a year, that rate could be raised to 1 percent.

If you were laid off from a small company, there’s nothing to worry about. “It’s often big companies who care,” Kalish says. “If Coca-Cola or Microsoft gets hit with a greater percent, they will be significantly worse off than a small business that really has no incentive to oppose it.”

If an unemployment claim is disputed by the company, Kalish says there will typically be a hearing regarding whether the employee engaged in misconduct, or whether the employee qualifies for unemployment.

Just remember: layoffs are common, and filing for unemployment benefits is nothing to be ashamed of. In fact, 19.9 million people were laid off or discharged in the U.S. in 2016, according to statistics from The U.S. Department of Labor.

If you’re ready to apply for unemployment benefits, you can get started here.

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Life Events

America’s Most ‘Hygge’ Cities

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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In Denmark, the term “hygge” refers to a quality of coziness or sense of comfort. Around the rest of the world, hygge has become a lifestyle trend in the way people approach relaxation and everyday indulgences.

Hygge, pronounced “hoo-guh,” can be a focus on the atmosphere you create at home with candles or a plush throw blanket, the yoga pants you lounge around in when you’re decompressing after a long workweek or even the most comforting dishes or homemade sweet treats you indulge in with friends and family. However you translate it, hygge is certainly not staring at your phone all day or binge-watching Netflix alone all afternoon.

That’s why MagnifyMoney decided to take a look at major cities in the U.S. to find out which ones offer the best chance to build a truly “hygge lifestyle.”

We scraped Instagram for 17 different hygge-themed hashtags (like #cozy, #content and #hygge itself) across a total of 1.7 million posts. Then we surveyed Danish residents to find out how closely they think each of the above terms related to their idea of hygge lifestyle on a scale of 1 to 7. The averages of these ratings were used to weigh each term’s influence.

Our analysis revealed the top 15 cities across the U.S. embracing the hygge lifestyle. With results scattered all across the country, this list proves that cozy, comfortable living isn’t dependent on a particular climate or scenery and can be achieved virtually anywhere.

Key Findings

  1. Santa Monica, Calif., (a generally warm state) was the most hygge city in America.
  2. Overall, states that stood as the most hygge were generally found in colder northern regions lead by Vermont, Washington, D.C. and Montana.
  3. Based on more than 28,000 hashtags, hygge was more commonly linked to home decor and interior design than anything else.
  4. Cities like Miami, Orlando and Atlanta ranked among the most prevalent for feelings and words associated with hygge, indicating traveling to warm climates could be a popular way to channel hygge in colder months.

Leading the way with the highest value of weighted tags we searched for was Santa Monica, Calif. This oceanside city proves you don’t need freezing temperatures to channel the hygge mood and ranked at the top of our list for hashtags like #comfortable, #content and #cozy. With several hygge-friendly beach boutique hotels and plenty of choices for dining out or eating in, you can savor the hygge atmosphere whether you live in Santa Monica or are just passing through.

Head north for a truly hygge lifestyle

While sunny beach paradises across the country — like Santa Monica and Miami Beach, Fla., (related hashtags included #happy, #love and #relaxed) — made the cut for our most hygge cities in America, many of the coziest environments were actually found in states known for more frigid climates.

Perhaps because comfy sweaters, crackling fireplaces and low-lit candles can be such an easy way to evoke the Danish concept, hygge can be a powerful tool in warding off the winter blues in cities like Missoula, Mont. and Minneapolis.

The state of Montana ranked second overall in Google search queries related to “hygge” and Missoula ranked fourth overall. With more than a few picture-perfect ways to spend the winter, from scenic nature trails to adventurous ski slopes, you can stay peaceful and relaxed while still embracing the cold weather in the Treasure State.

In Washington, with a similar fondness for both indoor and outdoor activities in the cooler winter months, we found Seattle ranked among the top 10 cities for #hygge, #autumn and #sweaterweather. According to the Danish, food (and especially eating with friends) is an integral part of hygge culture, and Seattle has locals and visitors alike covered on that front, whether you’re looking for a warm drink or a comforting bite.

A nationwide trend

Every state has a little bit of hygge in it, even if the cities there didn’t necessarily rank among our most definitive places to soak in the relaxed energy and contentment associated with the concept.

At least one city in every state earned the highest marks for the number of hashtags used in that area, including #hygge, #snug, #comfortable and #content (among others). While some of these cities (including Austin, Texas, New Orleans and Seattle) may be well-known locales, others may be embracing hygge under the radar. Coeur d’Alene, Idaho, is known for its scenic lakefront mountain views and comfortable balance between warm summer months and colder winter temperatures.

In Flagstaff, Ariz., there is a similarly elevated climate and mountainous landscape abound. With the second highest altitude among metropolitan areas, the typical desert heat is lost on people enjoying the hygge vibe in this small mountain city.

Ranking each state

While some warmer cities may have stood out among our most popular destinations for that comforting, intimate energy, the states specializing in hygge were largely clustered in regions that typically endure a more frigid winter season.

The cold winter months may look inviting on a postcard or a TV holiday special, but finding that glowing sentiment can take a bit of work when the temperatures start to fall. The physical sensation of putting on a comfy sweater or cuddling up with someone under a warm blanket does more than keep the harsh cool air away; it can help create a more balanced mental state and sense of well-being. The Danish know a thing or two about the cold, and even just sitting by the open fire with a warm drink or enjoying home-baked goods with pleasant company can do the trick.

As we learned, the states that have the best hygge energy may also have the most practice with these winter weather techniques. Vermont, Washington, D.C., Montana, New York and Maine ranked as the top five regions for their hygge status on social media.

Conclusion

Denmark isn’t just known for bracing the bitter cold in the winter months — it has also been called one of the happiest countries on the planet. Hygge may not be the answer to all of life’s problems, but if Denmark is any indication, it probably couldn’t hurt. Americans in both cool and warm climates are finding ways to bring that picture-perfect, cozy vibe out of magazines and into real life. While search trends for hygge were higher in northern regions, we found no limit to the types of cities and states that might be trying to take a slightly more comfortable and mild approach.

Methodology

We scraped Instagram for 17 different hashtags. We surveyed Danish residents on how closely each of the above terms relates to hygge on a scale of 1 to 7. The averages of these ratings were used to weight each term’s influence. Terms directly related (like “hygge”) were excluded and automatically given a 7. The weights, number of posts and dates collected for each are outlined below.

Data was cleaned and geocoded using shape files of the U.S. We pulled the populations of incorporated areas, with populations over 50,000 from the U.S. Census to calculate per capita numbers for each term and city. Each per capita ranking per term was then again normalized to a scale of 0 to 1.

The weights were applied to the normalized per capita for the related term and added together to get an overall ranking of hygge-related posts on Instagram.

We pulled the search interest for hygge from Google Trends over a 12-month span on Nov. 30, 2017. We then normalized the search trends on a scale of 0 to 1. The normalized trends were added to the Instagram posts score to get a meta ranking to represent hygge across the U.S. We used the search trends across the entire state for each city as city trends were limited to only 13 of the most populated areas. For more information on the methodology behind Google Trends, see here.

Cities in Vermont are notably missing from these rankings because the most populated city, Burlington, only has a population of just over 42,000, which excludes it from the census population set.

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Life Events

The Ultimate Layoff Survival Guide

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Paul Catala, a 53-year-old entertainment reporter in Lakeland, Fla., knows firsthand about the struggles of unemployment. He was the victim of massive layoffs at a Tampa-area newspaper in December 2012. The result? A severance package of about $1,500.

“I was pretty much financially panicked,” Catala told MagnifyMoney, who also lost his health insurance. “All I had was my severance and nothing more than a couple thousand dollars in savings.”

As a single guy, he didn’t have a spouse’s salary to fall back on, but he made it work. During the year and a half that followed, he patched together a steady income by picking up a string of odd jobs and side gigs (more on this in a bit) before eventually securing a full-time job.

In 2017 alone, at least 255,000 planned job cuts have been announced, according to a report put out by the firm Challenger, Gray & Christmas. (The bright spot, however, is that the report also found that job cuts are on the decline.)

If you’re newly unemployed and not sure how to move forward, this ultimate layoff survival kit is for you. Here’s everything you need to know about weathering the storm.

What to do when you lose your job

Step one: Don’t freak out

If the financial implications and the stress of having to find a new job have your head spinning, you’re not alone. The longer you’re unemployed, the more likely it is to take a toll on your psychological well-being. According to a 2013 Gallup survey, roughly 20 percent of Americans who’ve been unemployed for a year or more have been affected by depression.

But while it’s certainly wise to make a plan, don’t take such a long view that you’re overwhelmed by the enormity of unemployment. As the old saying goes: “Inch by inch, life’s a cinch. Yard by yard, life’s hard.”

Do one thing at a time to avoid “analysis paralysis” (aka feeling so overwhelmed that you take no action at all).

Step two: Exit your current job with grace

Getting laid off hurts, but think twice before storming out in a blaze of glory.

“Anything you can do to leave on a good note is a good idea,” career coach Angela Copeland tells MagnifyMoney. “Thank-you notes and goodbye lunches all help to give positive closure.”

The last thing you want to do is burn bridges on your way out. When applying for new jobs, Copeland says you’ll be asked for references the hiring manager can call, which will likely include your previous employer. It’s in your best interest to keep these relationships positive.
Negotiating your severance package before hitting the road may also be on your to-do list.

“Some people have been able to negotiate an extra month of severance because they’ve been there longer and can quantify what they’ve brought to the job,” said Shannah Compton Game, certified financial planner and host of the “Millennial Money” podcast.

“Try and correlate it to something positive, like revenue or growth you’ve been able to do for the company,” she said. “Keep good records of the successes you’ve had because you just never know when you’ll be able to use that.”

On a similar note, you might be able to use rumors of impending layoffs to your advantage. Game says that it’s usually the people in the early rounds of layoffs who get the better severance packages. If you’re likely to be on the chopping block, volunteering to be let go sooner rather than later could be used as a bargaining chip to secure a better severance package.

Step three: Get your finances in order

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Before you panic, sit down and do a thorough audit of your financial situation. List all your monthly expenses, from fixed costs like rent and utilities to discretionary spending like entertainment costs. Then factor in any income you still have, like unemployment benefits (we’ll dive into how to apply in a minute), a severance package, and any cash you have coming from side gigs or passive income streams.

Now for the obvious question: What does your savings account look like?

“The goal marker is to have three to six months’ worth of fixed expenses saved in your emergency fund,” said Game.

To help curb temptation, she recommends parking it in an interest-bearing savings account that’s separate from your regular bank. (We’ve rounded up the best online savings accounts here.) If you’ve got an emergency fund, getting laid off is as good a time as any to dip into it — that’s what it’s there for. Of course, the idea is to make your savings last as long as possible. This is why Game suggests retooling your budget right out the gate.

“Is there anything in there you can cut, or at least make better?” she asked. “Can you negotiate a better cellphone or internet plan? Are you overpaying in some areas? When you’re unemployed, every dollar helps.”

Another thing to think about is your 401(k). Getting laid off makes you ineligible to take out a 401(k) loan, according to Game, but you can withdraw from it — for a hefty price.

“If you pull out of your 401(k) and you’re under 59½, you’ll have a 10-percent penalty, plus whatever you take out is added to your taxable income, so it could shock people if they took out a sizeable amount,” warned Game, who also recognizes that sometimes you don’t have any other choice.

Tapping your nest egg should be an absolute last resort. If it comes to that, Roth IRAs are a little more appealing because you can pull out your contributions at any time without tax or penalty (It’s just the appreciation you can’t touch until you’re over 59½). If you’re financially stuck between a rock and a hard place, a Roth IRA could serve as an extra backup emergency fund.

As for a 401(k) from your old job, Game says you have a couple of options. Some companies will let you do a direct rollover, which is a hands-off option that’s way easier than rolling it over yourself. This way, you won’t get a check for that cash.

“If you do, you have to have it deposited into your new account in a short time period so you don’t get taxed on that amount, which is why it’s better to do these things electronically whenever possible,” said Game.

No emergency fund or Roth IRA to tap into? You’re not out of options. Read on for more ways to access cash during unemployment.

Step four: Rev up your job hunting efforts

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“One of the biggest mistakes I see from people who’ve been recently laid off is that the experience is so stressful that they want to take a break,” said Copeland. “They think, ‘I need a few months to take some time for myself.’ What they don’t understand is that the longer you wait, the harder it becomes.”

Begin by dusting off your resume and updating it with any relevant new skills, accomplishments, and/or trainings you’ve completed. Do the same for your LinkedIn profile, which includes adding keywords that potential employers may be searching for (To get an idea of what these are, Copeland suggests browsing job postings you’re interested in). You’ll also want to follow companies on LinkedIn and connect with influencers within those organizations.

When it comes to references, Copeland adds that asking folks to leave you a written, public recommendation on LinkedIn can do wonders. Future employers are going to be looking at your profile. Seeing that people you’ve worked with have positive things to say is going to make them much less suspicious that something negative happened at your old job.

One other thing: Fine tune your elevator pitch so you’re ready to comfortably, and confidently, talk about yourself at a moment’s notice. After that, step away from your computer and get yourself out there (literally).

“A lot of people are told to apply online — ‘If you’re a good fit, we’ll call you ‘— but very rarely is that true,” said Copeland.

“It’s one-on-one personal connections that are going to help you find a job, and those people will be most helpful and empathetic very soon after you’ve been laid off.”

Let your network know you’re actively looking for work, attend industry events, and reach out to people for informational interviews. In some cases, this might mean cold emailing a colleague of a colleague and asking to pick their brain over coffee. They could always say no, or even ignore you, but Copeland says that when up against unemployment, this isn’t the worst thing in the world.

Step five: Protect yourself against the worst-case scenario

If your job hunt stretches past the one-month mark, you could end up draining your emergency fund faster than anticipated. According to the U.S. Department of Labor, the number of long-term unemployed workers (i.e. people who’ve been out of work for at least 27 weeks) held steady at 1.5 million as of December 2017. This makes up 22.9 percent of the unemployed.
If you find yourself in this boat, you’ll need to go beyond cutting cable and scaling back your entertainment budget to make ends meet.

“Can you call your student loan servicer and defer your loans for a few months?” suggested Game. “Remember, you’ll still be accruing interest when you do this, but it might help you out for a few months.”

Looking for other high-impact ways to free up cash? Game also suggests considering:

  • Taking on a roommate or renting out a room on Airbnb.
  • Getting a part-time job.
  • Taking out a short-term loan from a family member.
  • Using balance transfer offers to lower your credit card interest rates by moving debt to a 0% APR card.
  • Researching a personal loan. Going into debt is never advised, but if your situation’s getting dire, it may be your best worst option (It’s sure better than getting evicted or defaulting on your car payment).

This is precisely why Game says it’s so important to get your financial house in order while your career is going well. Flash forward to being laid off: Having a solid credit score is what’s going to enable you to get the best rate on a personal loan. The same goes for locking down a low-interest credit card, if it comes to that.

4 tips to help stretch your finances when you’re unemployed

How to apply for unemployment

Taking advantage of unemployment insurance can help stretch your savings and soften the financial blow of a layoff. Whether you qualify depends on a number of factors, one of the top ones being where you live; every state is different.

As long as you’re looking for work — and meet the qualifying criteria below — most states allow participants to collect benefits for up to 26 weeks (about six months). Just keep in mind that a severance package could impact how much you qualify for, depending on the state you live in.

  • Losing your job was out of your control: Being laid off generally ticks this box, but if you were fired or quit voluntarily, you’ll be ineligible.
  • You worked long enough and earned enough wages to qualify in your state: Every state’s threshold is different, but applicants must meet requirements for wages earned or time worked during an established time period in order to collect unemployment. You can research your state’s rules here.
  • You were laid off from a W2 job: In other words, you weren’t a freelancer or independent contractor. Since employers don’t pay unemployment taxes for these folks, benefits are typically off the table.

That said, there isn’t a one-size-fits-all answer when it comes to how much money you’ll actually get. What you were earning, where you live, and whether or not you received a severance package may all come into play. Your best bet is to contact your state unemployment office to start untangling the details.

How to apply for food stamps

Applying for the Supplemental Nutrition Assistance Program (SNAP), aka food stamps, is also a state-specific process. In order to qualify, you must meet resource and income requirements (SNAP provides this handy pre-screening eligibility tool to help clarify whether or not you qualify). Eligibility varies from state to state but is largely determined by your:

  • Resources: Things like bank accounts and vehicles fall into this camp. Some resources are generally off limits, like retirement plans and your home.
  • Income: You have to meet the income requirements outlined here. Some exceptions — like having an elderly or disabled person in your household, for example — may make it easier to qualify. Just keep in mind that any unemployment benefits you’re collecting will be factored in here.
  • Employment status: If you’ve been recently laid off, this one’s a biggie since SNAP eligibility is hinged, in part, on meeting work requirements. They include:
    • Registering for work
    • Not voluntarily quitting a job or reducing your hours
    • Taking a job if one is offered
    • Participating in your state’s employment training programs
    • If you’re an able-bodied adult without kids, you’ll also be required to either work or participate in a work program for a minimum of 20 hours per week to receive SNAP benefits for longer than three months in a 36-month period.

Ready to apply? Find your state here to get the ball rolling.

How to get help with a job search

There are a number of federal government programs in place to help see you through a stint of unemployment. CareerOneStop (backed by the U.S. Department of Labor) is packed with free job search assistance and training resources. Here you’ll find everything from job openings and resume guides to salary data and interview and negotiation tips.

COBRA might also make sense for newly unemployed folks. The program allows you to keep your employer-sponsored health plan after getting laid off. Before pulling the trigger on enrolling in a new health plan, be sure to check if COBRA makes sense for your health care needs and budget.

Pick up part-time work

Another way to unlock cash is to think of out-of-the-box ways to make money. Before Catala secured a new full-time job, he picked up a ton of side hustles to fill in the missing income. This included everything from tutoring at a local community college to cutting lawns to booking music gigs (He happens to be a pianist.). The takeaway? Look beyond your 9-to-5 skill set to pay your bills.

“At one point, I was doing like five different things and just making money,” said Catala, who earned too much from the gigs to collect unemployment.

“If you’re creative and willing to hustle, you’ll be fine. Even if it’s just $50 a week, that’s better than nothing.”

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Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Best of, Life Events, Personal Loans

Top 4 Personal Loans for an Engagement Ring

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Engagement ring

Updated November 08, 2017
Getting engaged is an exciting yet nerve-wracking milestone. You’re eager for your partner to say “yes” and hoping she’s impressed by what she sees when you open the box.

The best way to afford the ring of her dreams is planning early and saving up. Financing an engagement ring should be your absolute last resort. After all, there are other larger expenses that come after marriage including moving, buying a home or starting a family that you could spend that money on instead.

Still, if you decide financing is right for you, here are a few personal loans that provide funds for engagement rings:

Earnest

Rates from 6.99% to 18.24% APR

Earnest has the lowest interest rate of the loans on our list and no origination fee.Loan terms are from 36 to 60 months. Earnest will lend you $5,000 to $75,000. Other than your credit score, Earnest will look at your income, education, earning potential and other factors to decide if you’re eligible for the loan. There’s No origination fee and no prepayment penalty. There is, however, a Hard Pull of your credit report.

Earnest could be a good option if you have limited credit history, but an offer letter or current position that pays you more than enough money to cover loan payments. After submitting an application, you’ll get a response within 2 business days.

Earnest
APR

6.99%
To
18.24%

Credit Req.

680

Minimum Credit Score

Terms

36 to 60

months

Origination Fee

No origination fee

SEE OFFERS Secured

on LendingTree’s secure website

Instead of offering credit-based loans, Earnest has taken a very nontraditional approach using a merit-based system.... Read More

LendingClub

Rates from 6.95% APR

LendingClub is a peer-to-peer loan marketplace where people who need to borrow money are matched up with investors. You can get a loan for 36 or 60 months. You can borrow up to $40,000. The origination fee is 1.00% - 6.00%. Your origination fee is assigned based on your credit profile. The higher your credit score the less you’ll pay for origination. You can check to see if you’re approved and your rate without harming your credit score.

After applying for LendingClub, peer investors will see your profile in the marketplace and hopefully fund your loan. Once your loan is funded by investors and your application documents check out, you’ll get the money wired to your account.

To get the very best rates through LendingClub you’ll need an excellent credit history, low debt-to-income ratio and a high credit score among other factors.

LendingClub loans are not available in Iowa or West Virginia.

APR

6.95%
To
35.89%

Credit Req.

600

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

1.00% - 6.00%

SEE OFFERS Secured

on LendingTree’s secure website

LendingClub is a great tool for borrowers that can offer competitive interest rates and approvals for people with credit scores as low as 600.... Read More

Karrot

Karrot is not currently offering new loans. Should you have an outstanding loan, Karrot states they are still servicing those loans.

Karrot gives out personal loans at a maximum of $35,000. Loan terms range for 60 months. The loan has an origination fee of 1.05% - 4.75% that’s non-refundable and deducted from the loan upfront. Karrot doesn’t charge prepayment penalties. Other than origination, fees will only come into play if you skip out on a payment, have a check returned or request copies of your loan documents.

Shopping for loan rates on the site won’t ding your credit score. Karrot doesn’t go into specifics about the credit score you need to qualify, but you do need to at least have a credit history and a bank account to verify your income.

Prosper

Rates from 6.95% APR

You can borrow as little as $2,000 and up to $40,000 from Prosper, another peer-to-peer lending marketplace. Loan terms are 36 or 60months. Prosper loans have a 2.41% - 5.00% origination fee, but no prepayment penalties.

At a minimum, you must have a 640 FICO score to qualify for Prosper. You also need to have a debt-to-income ratio less than 50%. Shopping for rates with Prosper won’t impact your credit score either.

APR

6.95%
To
35.99%

Credit Req.

640

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

2.41% - 5.00%

SEE OFFERS Secured

on LendingTree’s secure website

Advertiser Disclosure

Prosper is a peer-to-peer lending platform that offers a quick and convenient way to get personal loans with fixed and low interest rates. ... Read More


For example, a three-year $10,000 loan with a Prosper Rating of AA would have an interest rate of 5.31% and a 2.41% origination fee for an annual percentage rate (APR) of 6.95% APR. You would receive $9,759 and make 36 scheduled monthly payments of $301.10. A five-year $10,000 loan with a Prosper Rating of A would have an interest rate of 8.39% and a 5.00% origination fee with a 10.59% APR. You would receive $9,500 and make 60 scheduled monthly payments of $204.64. Origination fees vary between 2.41%-5%. APRs through Prosper range from 6.95% (AA) to 35.99% (HR) for first-time borrowers, with the lowest rates for the most creditworthy borrowers. Eligibility for loans up to $40,000 depends on the information provided by the applicant in the application form. Eligibility is not guaranteed, and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. Refer to Borrower Registration Agreement for details and all terms and conditions. All loans made by WebBank, member FDIC.

Honorable Mention – LendingKarma

LendingKarma isn’t a lender. Instead, it’s a site that manages loans between people who know each other. As a rule of thumb, you should avoid borrowing or lending money to friends and family since involving money in relationships tends to cause drama.

But, if someone you know agrees to help out and you’re both on the same page, LendingKarma can make your life easier. LendingKarma takes care of the logistics of borrowing including the contract, payment schedule and friendly reminders. The fee for contract administration is paid one time and $50 to $100 per loan.

Final Thought

Financing an engagement ring is not something we recommend. It’s just not worth going into debt over. Explore all of your options instead. Here are a few:

  • Get what you can afford in cash now and upgrade when you have more money.
  • Try unclaimed diamond and discount jewelry stores to get a deal.
  • Skip the diamond altogether for gems that are a little more affordable like amethyst or sapphire. These gems are popular now anyway.
  • Buy a stone similar to a diamond like moissanite or a replica until you can get a real one. If you choose a “fake” starter ring, make the decision as a couple. You don’t want her to find out from another source that her ring isn’t a true diamond.

At the end of the day, an engagement ring is supposed to symbolize commitment. Sadly in some ways it’s morphed into a symbol of status. That doesn’t mean you should feel pressured to get a ring (or ask for a ring) you can’t afford. Do what’s best for you.

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Taylor Gordon is a writer at MagnifyMoney. You can email Taylor here

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Life Events

How to Make a Career Change in Your 40s

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

 

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Chandrama Anderson was the senior director at a technology start-up in the heart of Silicon Valley when she decided it was time for a career change. At the time, she was in her early 40s and grieving the recent deaths of her daughter and grandparents.

She decided she wanted to do what she called “work of the heart.” For her, that meant pursuing a career as a family therapist.

Having earned her undergraduate degree in journalism and creative writing, she would have to go back to school for a master’s in order to transition to psychology. She quit her lucrative job at the tech firm and enrolled at John F. Kennedy University in Pleasant Hill, Calif., where she earned a master of arts in counseling psychology/holistic studies over the course of three years.

Going back to school after working for 25 years was daunting, but she didn’t let the intimidation factor stop her.

“A person said to me, ‘You’ll be 48 when you’re a therapist,” she recalls. “I replied, ‘I’ll be 48, or I’ll be 48 and be a therapist.’”

Fifteen years since she quit her job, Anderson, now 57, is the president of Connect2 Marriage Counseling, a couples counseling practice in Palo Alto. She oversees a team of therapists who see people primarily for marriage counseling, premarital counseling, grief and relational issues.

Running her own team of therapists wouldn’t have been possible if Anderson hadn’t taken a risk and made a career change later in life, when she truly felt it was time.

As Anderson’s example shows, switching careers in one’s 40s is definitely doable. But it does require the right amount of planning and forethought.

Kerry Hannon, a retirement, personal finance and career change expert — and the author of numerous books, including “What’s Next? Follow Your Passion and Find Your Dream Job” — says there’s been an uptick in the number of people switching careers in their 40s and even their 50s.

Indeed, a 2014 study from USA Today and Life Reimagined, an organization dedicated to helping people reimagine their lives, found that 29 percent of people ages 40-59 were planning to make a career change in the next five years. Numerous factors are at play in such findings, but Hannon believes that among the biggest, it’s easier to start a business and ramp up one’s education online today.

Many people who change careers at this stage in life, Hannon says, do so because of defining and often tragic life experiences, such as a death in the family or a serious illness. That played a factor in Anderson’s metamorphosis.

“They pause and they say: ‘Is this what it’s all about? Is this what I really want to be remembered for? Is this how I want to spend the rest of my life?’” Hannon says.

There are certain roadblocks to changing careers in middle age: Financial readiness is one, and workplace age bias another. One 2013 AARP study found that three out of five older workers said they had experienced or witnessed age discrimination at work.

Hannon believes making a career switch at this age can be done if one takes the right steps.

Move for the right reasons

Before anything else, take a long, hard look at why you’re intent on making this change.

“First, do your soul-searching about why you want to make this jump, this transition to something new,” Hannon says. Put another way: Really drill into your motivation and figure out if this is your passion, or if you’re simply in a rut at your current job.

To say Mounir Errami put some serious thought into becoming a doctor in his 40s would be an understatement. After working several different jobs over the course of his career, Errami — now a doctor at University of Texas Southwestern Medical Center in Dallas — knew he wanted to return to medical school at the age of 38. He had initially started medical school at 18 in Lyon, France, but dropped out. He then pursued a Ph.D. in biochemistry and bioinformatics, as well as an MBA, and started two business.

His first business went under and once he was in his late 30s, he sold his second one, a software company. He then took a few years off to spend with his family.

After a reset, he knew he wanted to return to medical school, lest he always have regrets.

If he hadn’t made that choice, he says, “it would’ve been sort of an unfulfilled quest that I had started and never finished.” He adds, “I’m very happy I’ve done it.”

Once you’ve identified your intended path, take a look at the marketplace, Hannon says. “What’s the market for it? What’s out there? Who’s currently doing it? Reach out to those people. If possible; network with people who are currently doing the kind of work that you would like to do.”

Just because you think you know your new life is calling, that doesn’t mean it’ll fulfill your every dream. After all, it’s still a job. Figure out if you’re OK with the inevitable downsides of a new career before diving in.

“If possible, it’s really, really important to do the job first,” Hannon says. “Volunteer or moonlight. Something might feel dreamy and like, ‘Oh my gosh, I always wanted to do this,’ but when you’re actually doing it every day, it might not have that glamour to it that you thought.”

Facing a pay cut

For some workers, the whole point of pursuing a new career in their 40s is to leave one low-paying field for a job with better financial prospects. But in reality, the opposite may be true.

“You absolutely have to get financially fit,” Hannon says. “It’s really critical.” She says it’s likely you’ll earn less when you begin your new job — either because you’re a newcomer or you’ve started your own new venture, in which most of the money goes into the business. Coupled with the fact that most career changes occur on a three- to five-year timeline, factoring in a return to school and additional training, you’ll want to save up.

If you’re taking a substantial pay cut, focus on paying down lingering debts or downsizing your lifestyle to fit your new, reduced income.

“At a certain life stage, you might also be able to downsize your home,” she says. Indeed, some people in this demographic might have children who have already left home.

Anderson and Errami were both fortunate to be in a solid financial condition before entering school. Anderson says she inherited some money from her mother and grandmother, while Errami used funds saved from his previous business.

Not having to worry about finances when switching careers means you can focus on the path ahead, in all its nuance.

“If you’re financially fit, then you have options,” Hannon says. “Then you give yourself the opportunity to try different paths, to try new things and move in a different direction without that burden of a must-have salary.”

Don’t quit your day job just yet

Changing careers after decades in a certain field isn’t something to be taken lightly. As previously discussed, it’s vital to make sure you aren’t just restless in your current position. Hannon says you should really identify your “why” before making any drastic decisions.

“What’s the motivation?” she asks. “Is it that you’re just bored with your job right now? Because there are lots of ways to fix that.”

Perhaps you need to work in the same field, but move to a different company. Or perhaps you need a new position within your existing field.

And if you ask yourself these questions and are still fairly certain you want to switch careers, do not quit right away. Saving up around six months’ worth of salary is a great way to ensure you’re financially ready for a change. If you don’t have this much money in the bank, stay at your current job for a bit longer and try moonlighting or working a side gig in your desired field.

Going for it

Once you’ve decided you’re ready to switch careers, Hannon suggests taking these four steps:

  1. Go slow. Take your time and do one thing every day toward making the change. Start out by asking someone in your intended profession for coffee.
  2. Again, don’t be so quick to quit your day job. There are exceptions to the rule, but most people shouldn’t quit their job. Instead, volunteer or get a side job.
  3. Take baby steps. This doesn’t mean you can’t get started right away. Just don’t spend a huge portion of money or dedicate an immense amount of time to your new career path until you’re absolutely certain it’s the right fit.
  4. Don’t be afraid. Hannon says she has spoken with hundreds of people who have made later-in-life career transitions. She says they invariably say, “I wish I had done it sooner.”

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

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Health, Life Events

You Could Be Paying for More Insurance Than You Need

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Tiffany Hamilton knew as a college student that she would one day be an entrepreneur. With that in mind, she made sure to enlist the help of a financial planning company when she bought her first life insurance plan at 21, as she was just getting her start in real estate.

That first policy was a $20,000 term-life plan that cost her about $80 a month. When her salary increased, she decided she needed more coverage than that. As a single woman with a burgeoning business, she wanted to make sure she had enough coverage to take care of any debts and leave something for her mother..

Her insurance representative at the time encouraged her to up her coverage. So at 25, she converted her policy to a $1 million whole life policy.

“I thought by going to a financial planner, sitting down and answering the questions, and then going off of their recommendations, I thought I was doing the right thing,” Hamilton told MagnifyMoney. “Yes, the $1 million would give my mom X, Y and Z, but was that in my best interests?”

Now 35 and running her own real estate business based in Tallahassee, Fla., Hamilton has lately been wondering: Is it possible to be overinsured?

How much insurance is too much insurance?

As we grow in our careers, home life and families, paying for life insurance becomes another one of those obligatory items on our financial to-do lists, like establishing a 401(k) or an emergency fund. But the sheer volume of life insurance options available may have created a unique problem: Some of us might be overly insured. That is, our insurance coverage may be wildly disproportionate to our salaries and overall net worth.

Joel Ohman, a Tampa, Fla.-based certified financial planner and founder of Insuranceproviders.com, said it’s also easy to end up with a policy that has more bells and whistles than you genuinely need.

Generally speaking, life insurance is a type of coverage that provides a payout to a selected beneficiary in the event of the policyholder’s death. This is often called the “death benefit.” Many people aim for a death benefit that includes a payout substantial enough to cover a few years of the deceased’s salary, funeral expenses and any outstanding debts.

Those with families may also want to include money to pay off a house, children’s college funds and more.

Of course, there are other options for anyone who has a large estate, want to make charitable contributions, needs special tax breaks or has other complicated financial circumstances to consider.

“Unless there are complex estate planning requirements or the insured has exhausted all other investment options, then typically the idea to use life insurance outside of a straightforward death benefit payout is a fool’s errand that will only result in a fancier car for your insurance agent,” Ohman said.

The cost of being overinsured

The difference in premiums between insurance plans can be striking, and if you’re not sure precisely what to get, it’s easy to throw up your hands in frustration. But if you simply choose a plan that may “sound right” without carefully exploring all your options, you could easily wind up paying for more coverage than you need.

Most insurance websites include insurance calculators to make it easy to figure out what your costs could be for a variety of different plans. Using State Farm’s calculator for example, a $500,000, 20-year term policy for a 30-year-old woman in Arizona is about $33 a month. Comparatively, a whole-life policy is $460 a month. That’s a difference of nearly $5,000 a year.

In Hamilton’s case, she realized she was paying thousands of dollars more for insurance than she needed to. In 2016, she converted her $1 million whole-life policy into a $500,000 universal-life policy.

“That cut my budget down by almost $10,000 a year,” she said.

John Barnes, a certified financial planner and owner of My Family Life Insurance, said those cost savings can be important for families.

“My take is, you can be doing something else with that money,” he said. “Families today are squeezed. I’m not about to overextend them, I’m going to get them the right amount.” The additional savings, he said, could go toward retirement, college tuition or other financial need.

Ohman said that a simple term-life policy is a great way to get inexpensive insurance that will still take care of most families’ needs.

“When people are looking for pure life insurance, they want to protect their loved ones if something should happen to them, and they want them to be financially taken care of in a worst-case scenario,” he said. “Ninety-nine percent of the time, then, that cheaper term life insurance product is going to be the best fit.”

Chris Acker, a chartered life underwriter, chartered financial consultant and independent life insurance broker in Palo Alto, Calif., said he almost always recommends term-life insurance to his clients, particularly young families.

“If you’re talking about people in their 30s,” Acker said, term insurance “is hands down the best way to go.”

That’s because it’s an inexpensive way to get insurance that provides coverage for your entire family. Plus, you can always get additional insurance later. But he cautions against applying one piece of advice across all situations.

“The bottom line is, there’s no right answer,” he said. “No two cases are the same.”

Types of life insurance

There are two main types of life insurance: Term insurance and permanent insurance. When consumers typically think about life insurance, they are looking for an option that will provide their families with financial stability if the unthinkable happens. If you work full time for a company, it’s possible that your workplace has a some type of life insurance policy, often equal to one year of the employee’s salary.

But some experts recommend that families purchase their own insurance plan outside of their employer because employer-sponsored life insurance typically falls short of their family’s actual needs.

Permanent insurance does exactly what the name implies: It provides lifelong coverage. In addition to the death benefit also provided by term-life insurance, permanent insurance also accumulates cash value. But with that added benefit comes pricier premiums.


Whole Life


Variable life


Universal life


Variable universal life

Whole life is the most common type of permanent insurance. With a whole life policy, the premium never changes. Part of the premiums goes into a savings component of the policy, which builds cash value and can be withdrawn or borrowed. That cash value also has a guaranteed rate of return.

Variable life offers the same death benefit, but allows consumers the option to seek a better return by allocating premiums to investments like stocks and bonds.

Universal life lets you vary your premium payments and gives a minimum death benefit as long as the premiums are sufficient to sustain it.

Variable universal life insurance is a sort of mix between variable and universal life, meaning consumers can vary premium payments and can also allocate them among investment subaccounts.

Best for: Those who want a policy that offers cash value and stable premiums. There are also tax advantages to this type of policy.

Best for: Those who want the same advantages as a whole-life policy, plus the option of allocating premiums toward different stocks and bonds.

Best for: Those who want the same advantages of any permanent policy with the option of varying premium payments. For example, those who may want to start with a lower premium that increases as their finances do

Best for: Those who want the option to vary premium payments, but also the option to allocate those payments toward different stocks and bonds.


Term-Life Insurance

Term-life insurance provides coverage for a specified amount of time — let’s say 15 or 20 years. Customers pay a premium each month and are covered through the specified term. This is typically the cheapest insurance option.

Best for: Those whose need for coverage will disappear or change at some point, like when a debt is paid or children reach adulthood and go to college. Also good for those looking for a low-cost option.

Even within term- and whole-life insurance, there are additional products you could be offered, like mortgage life, return of premium (in which your premium is returned if you outlive your initial term) and final expense (which covers just funeral expenses). There’s even an option that would provide lifetime protection for your estate upon your death. With all the available options, it’s easy for the costs to add up.

Tips to choose the right life insurance

Use a life insurance calculator. Wealthy families, those with special-needs family members and others in unique situations will also have different insurance needs. Most insurance websites offer calculators to help consumers decide how much coverage to take. The consumer website lifehappens.org also offers step-by-step guidance on choosing insurance, along with a needs worksheet.

Get multiple free quotes. Consumers can also get free quotes from multiple insurers from sites such as My Family Insurance, InsuranceProviders.com and http://myfasttermquotes.com/, which are independent-agent sites for Barnes, Ohman and Acker. Keep this in mind: Getting a quote doesn’t obligate you to work with a particular company or insurer.

Choose the right advisor. It’s also important to understand that hiring an insurance agent or financial planner is just like any other relationship: You want someone who works best for you and inspires comfort. Hamilton said she not only interviewed potential reps this last go-around, she also requested references and asked them about their company philosophy before making a decision. LifeHappens suggests that consumers use referrals to find an insurance provider.

Seek out independent agents. When it comes to actually choosing an agent or financial planner, Ohman suggests looking into independent agents that aren’t tied to a particular insurance company. That’s because a “captive” agent can only recommend those products that his/her company provides, whereas an independent agent can recommend any number of companies. That doesn’t mean they don’t have your best interests in mind, just that they aren’t able to provide customers with options outside their company offerings.

“The only products that they know about, the only products that they’re even allowed to bring to your attention,” Ohman said, are “their own products.”

Understand what it means to be a fiduciary. Another thing to consider is whether the company or adviser you’re working with is a fiduciary. “One of the big advantages you get with working with an insurance agent who has that CFP designation is that they are supposed to be working as a fiduciary, which means they put your financial interests first,” Ohman said.

Those who hold a CFP designation like Ohman are expected to provide fiduciary care to their clients. It’s also perfectly OK to ask your agent if he or she is, in fact, a fiduciary.

By the way, this doesn’t mean that other agents can’t or won’t provide clients with the type of insurance that works best for them. But don’t hesitate to ask if they’re paid on commission and whether a bonus or trip is tied to a particular transaction.

Check the insurance company’s ratings. Once you get a recommendation, he says, make sure the company has at least a A rating or better from independent agencies that rate companies’ financial strength. There are four independent agencies that provide this information: A.M. Best, Fitch, Moody’s and Standard & Poor’s. Do your research and find the ratings from each of the four agencies, because some companies may highlight a positive rating from one agency and play down a lower rating from another agency.

Trust your gut. Barnes said regardless of whom you choose to represent your insurance needs, make sure you have a level of comfort.

“Don’t be discouraged, there are some great independent agencies,” he says. “If it doesn’t feel right during the process, trust your gut.”

That means continuing to be open-minded, but also not allowing yourself to purchase an insurance product you don’t want or can’t afford. During that first meeting or so, Barnes says the agent should spend time getting to know you and your situation without necessarily trying to sell you on a product.

Similarly, Acker says it’s OK to question your agent to make sure you’re getting the best policy for your needs and lifestyle: “Don’t be bullied into buying what someone else says you should buy.”

For her part, Hamilton says she also looked into whether companies were commission- or fee-based. That’s because a fee-based company will charge a set rate, which can ease the worry of having an overzealous rep who may offer expensive products to boost his or her commission.

Because many good policies also offer a conversion option, you’re not “stuck” forever with something that doesn’t actually work for you. That means you have the option to change policies, as Hamilton did. Some consumers also choose to buy additional policies down the road.

But, and this is key, you shouldn’t let uncertainty or the fear of overpaying keep you from getting at least a simple policy.

“Think about today — the immediate need; protect that right this second,” Acker says. “Then that gives you time to work on your financial planning. Then you can figure out if you want to keep the insurance.”

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Crystal Lewis Brown
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Crystal Lewis Brown is a writer at MagnifyMoney. You can email Crystal here

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