Beating Broke

What is the Roth IRA?

March 27, 2012 By Shane Ede 17 Comments

Retirement. Have you thought about that yet? Still think you’re too young to deal with that? Or, just assume that your company 401(k) is enough, so why even worry about anything else? Let me introduce you to the Roth IRA.

IRA is an acronym that stands for (I)ndividual (R)etirement (A)ccount. The Roth part is named after the Senator that sponsored the bill that created the Roth IRA. But, what really matters is that it could be really important to your retirement fund building. So, pay attention to the next few paragraphs. Do it for the retired version of yourself!

Source: goodfinancialcents.com via Jeff on Pinterest

Why is the Roth IRA so important?

Unlike the other versions of the IRA (Traditional, SEP, SIMPLE, Self-Directed), the Roth gets some special treatment when taxes come into play. Instead of being a pre-tax contribution, like a 401(k), or a tax deduction contribution, like other IRAs, the Roth is an after tax contribution. That means that you’ll be taxed on the income before you contribute it to the Roth IRA. That sounds terrible, doesn’t it? It’s not. And here’s why. All of the gains on the account are tax free. What that means is that, if you contribute $5,000 today, and gain $45,000 between now and retirement, you don’t pay any taxes on any of it when you start taking withdrawals. That’s pretty significant.

If you had your money in any of the other retirement accounts, you’d be taxed on the whole $50,000 as you withdraw it. At your then current tax rate. While we can’t know what our current tax rate will be when we retire, we do know that one will exist. Unless you think that your retirement tax rate will be significantly below your current tax rate, you really should consider adding a Roth IRA to your portfolio of retirement accounts.

How should I use a Roth IRA?

Why did I just say “adding a Roth IRA to your portfolio of retirement accounts”? There’s a couple of reasons. The biggest one, though is that the Roth has a contribution limit that is a bit low. As of right now, that limit is $5,000 if you’re under the age of 50, and $6,000 if you’re over the age of 50. Unless you really think you’ll be able to build a retirement nest egg that will be sufficient on $5k a year (hint: you won’t be able to), you’ll need to supplement with other retirement accounts. If you’ve got a 401(k) offered at your employer, use it. At the least, contribute enough to get the maximum match from your company. Once you’ve met the match, use the next $5,000 and put it into a Roth IRA. (I’ve got mine at Sharebuilder, but just about every investment house does Roth accounts.) Once you’ve got the full 5k in your Roth, you and your financial planner can decide what the next best idea is. If you’re happy with your 401(k) and the investments offered in it, you can continue to contribute any further monies into the 401(k). If you don’t like the 401(k), you might consider some other form of retirement account. Maybe a traditional IRA. The traditional doesn’t have the same tax benefit of the Roth. Taxes are still taken out before you contribution, in most cases, and you get a tax deduction based on those contributions. Any withdrawals taken after retirement are also taxed. The contribution limit is the same, however.

How do I structure my retirement?

How your retirement portfolio and where/when of your contributions is very important. There are tax codes to take into account, as well as changes to the way that you contribute. Everyone’s retirement situation is very unique to them. To really get a good handle on all of this, you really should talk to a financial planner who can get a good idea of what your unique situation is, and make suggestions based on that. It will likely cost you a little bit up front, but the difference could be life changing when it comes time to retire. (Check out these great tips on finding a great financial planner)

I’m writing this post as part of the Roth IRA Movement. It’s a great movement, headed up by Jeff Rose of GoodFinancialCents. He recently discovered that many of our youth are under-educated on what the Roth IRA is. He’s gathered well over 100 personal finance bloggers (including Beating Broke) and we’re all posting a Roth IRA post today to try and help with educating on the Roth IRA. You can read all about the movement as well as see a list of all the posts that are/were written as a part of it at Jeff’s Roth IRA Movement post today. You can also see a list of the posts over at RothIRA.com.

Earning Swagbucks and Saving with Coupons

March 23, 2012 By Shane Ede 10 Comments

Have you all seen those commercials for Coke Zero where the person is put into some crazy situation and then they drink a little Coke Zero and notice the and in the description, then start saying “and” and getting all these crazy things? That stuff doesn’t happen in real life. Right? That’s just some commercial mind’s crazy idea of what the melding of “Real Coca~Cola taste AND zero calories” can do for you. While I can’t vouch for the power of and in your soda drinking, I certainly can show you a way that and works in real life.

What I’m talking about is saving money with coupons AND earning Swagbucks. I’ve talked about Swagbucks a few times before, but, if you’re unfamiliar with them here’s a rundown. Swagbucks is a “paid-to-search” site, where you use their custom search engine, and occasionally win Swagbucks for doing so. They’ve got a bunch of other ways to earn Swagbucks, including taking a daily poll, watching SwagbucksTV, Tasks, and even games. One other way, that I’ve been taking advantage of, is their coupons feature. Using their coupons page, you print out coupons. They’re running the same system as Coupons.com, so if you usually use that, you’ll be getting the same coupons. The big difference here (the “and”, if you will) is that for each coupon that you print through the Swagbucks system, and then redeem, you earn 10 Swagbucks. Pretty cool, no?

Once a week or so, I’ll go through the list of coupons and print as many as we’ll use, then give them to my wife who cuts them out and sorts them for use. She’s in charge of that, because she’s got the coupon organizer, and is far better at actually remembering to use the coupons than I am. 🙂

My favorite use of my Swagbucks is to trade my Swagbucks in on Amazon.com giftcards. 450 Swagbucks gets you a $5 Amazon card. On average, I get a new card every other month. While it certainly isn’t going to make me rich, it feeds my Amazon habit, and helps me reduce my spending on books and such.

Give Swagbucks a try. (Join Swagbucks here.) After all, who wouldn’t like to make some extra cash and save with coupons?

If you sign up before April 2nd, 2012, and use the code MARCHSWAG during the sign up, you’ll get an added 70 Swagbuck bonus on top of the current 30 Swagbucks you get when you sign up, for a total of 100 Swagbucks to start off with.

The Struggle with Enough

March 21, 2012 By Shane Ede 18 Comments

If you’ve read any of the more popular personal finance blogs, books, or attended any of the seminars, one of the more pervasive themes is the idea of enough. Heck, I’ve even written about it before. Just what is enough, or how much is enough. They’ll tell you that you need to find your “enough”, and then hold yourself to it. Instead of using the inflated “enough” that the Joneses next door use, you’ve got to take a good look at your finances and find your own “enough”. Now, a show of hands, how many of you have actually found what enough means to you, and held to it?

I can’t actually see your hands, so maybe a show of hands wasn’t the right way to measure the tally. But, I’d bet that only a few of you actually would have put your hands up. Why? Because, you struggle with enough. I do too. Enough is an arbitrary measurement. What you think enough is today isn’t necessarily going to be enough tomorrow. So many factors go into what we believe enough is, and many of them change regularly.

A few years ago, if you’d have asked me what enough was, I would have told you that it was having a good paying job, a nice house with room for my family, and enough leisure time to enjoy the benefits of having those things. Today, my answer is a bit different. I quit my job a few months ago, and have had no other income besides what a part-time job and a handful of small sites provides. We still have my wife’s income, but, compared to what we were making before, it’s a fraction of what it was. Today, enough has a totally different feel to it. And, we struggle with it. Just like I’m betting you do to.

The struggle is rooted deep into our psyches. Growing up, we’re inundated with commercials touting the latest and greatest toys. As adults, the only difference is the price of the toys. Instead of a “Castle Grayskull Playset“, we want to have the newest credit card with all the fancy bonus miles, the new car with the rearview camera, or the house with the dedicated room for a library or mancave. And that doesn’t even begin to touch the use of money as a security device.

People fear being broke. A quick reminder that the name of this site is Beating Broke, will tell you that even I am not immune to the fear of being broke. I’ve got a small secret to let you in on though. Like “enough”, how you define “broke” makes all the difference in the world. For some, being broke means making less than $100,000 a year. If that’s the case, my family is way beyond broke. Even when I still had my job, we were a full-time income away from making $100,000 a year.

What does broke really mean to you? To me, broke is a place where you have tons of debt, and your income is the only thing keeping you afloat. You’re stuck in a job you don’t like, so that you can make money to pay your bills. The funny thing is, I feel less broke now that I don’t have a full-time job, than I did when I had my job. Part of that may be straight up delusion, but it’s true. But, I think a good part of that also comes from changing my definition of enough. Instead of the good paying job, nice house, and leisure time, my definition of enough is something that feels a little bit more like satisfaction. I’m satisfied with just barely making enough to pay the bills. I’m satisfied with finding free or low cost activities that will entertain us.

And yet, we struggle with it. For the last few weeks, I’ve been struggling with the idea of getting a new full time job. Partially because the income from this and other sites hasn’t scaled to the degree that I thought it might. Partially because with the amount that I’m making we teeter on that precipice of being able to adequately pay our bills. And, partially, because we still struggle with the definition of what enough is.

What is your definition of enough? How has it changed over the years, and do you feel that your definition of enough is enough?