Roth IRA or Roth 401(k)?

Roth IRA or Roth 401(k)?

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The Roth 401(k) is becoming an increasingly popular option in employee savings plans. This article helps you determine the benefits and drawbacks of this plan, in comparison to the Roth IRA.

The introduction of the Roth 401(k) added an excellent new retirement savings strategy for workers.  It also added more confusion to the already-difficult retirement planning conundrum.  So which is better: the Roth 401(k) or the Roth IRA?

Roth IRA contributions were first accepted in 1998.  That year, $8.6 billion went into these retirement plans, with another $39 billion transferred from traditional IRAs to Roth IRAs.  By 2001, IRS data showed that contributions to Roth IRAs had surpassed the amount going into traditional IRAs.  Why the shift?

Money earned in a Roth IRA can be taken out in retirement tax-free.  Contribution limits for Roth IRAs are generally the same as with traditional IRAs, with one major difference: as long as you keep earning money, you can contribute to a Roth, regardless of your age.  In contract, the traditional IRA requires minimim withdraws at the age of 70 1/2. 

Roth IRA Plan

Advantages:  The earnings are tax-free.  This is very appealing to young account holders who open a Roth early and let the money grow for decades, as well as individuals who expect to be in the same or possibly higher tax bracket when they retire.  You can contribute at any age and can take money out on your timetable, not the IRS's age 70 1/2 withdrawal schedule required of Traditional IRAs.

Disadvantages: Contributions are not tax deductible.  There is an earnings limit which restricts higher-income taxpayers from contributing or converting traditional IRA money to a Roth IRA.  

Roth 401(k) Plan

These accounts combine the basics of 401(k)s with the tax-free aspect of Roth IRAs.  Essentially, workers put money into Roth 401(k)s after payroll taxes are withheld, meaning the account doesn't offer an immediate tax benefit.  But when the money is withdrawn, it is tax-free.

Advantages: Distributions are tax-free.  Contributions, as with regular 401(k)s, are higher than for IRAs.  Employer matching contributions increase your retirement savings.  There are no adjusted gross income caps, so higher-income workers who may not be able to open a Roth IRA can contribute to a Roth 401(k).  Also, you can leave the money in the account past age 70 1/2.

Disadvantages: These are not yet as available as regular 401(k) plans.  Because money goes into this account after taxes are withheld, you get no immediate tax break.

Whether your 401(k) is a regular or Roth account, ultimate responsibility for your workplace retirement savings rests entirely on you.  You generally must enroll in the account and then manage it, deciding which 401(k) offering best fits your personal financial situation. 

 

 

 


Medical Savings Account or Health Savings Account?

Medical Savings Account or Health Savings Account?

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A comparison of two popular tax-favored savings plans to help you determine which is best for you.

If you have some IRS refund money burning a hole in your pocket, you might want to check out the many other tax-free or tax-deferred ways to save.

Medical Savings Accounts

They might be called flexible spending accounts, or FSAs, but whatever the name, these workplace benefit plans can help you save on medical and child care costs.

With a medical spending account, you can put aside money to pay for health care costs that are not covered by your insurance.
Advantages: Employee money goes into the account before payroll taxes are figured, so your withholding taxes will be slightly less. FSA money pays for out-of-pocket medical expenses (co-pays, deductibles) you would have to pay anyway. You can use your FSA money even before you've actually put money into the account. For example, let's say you sign up to contribute $1,000 to your medical FSA, but have deposited only $100 when you are faced with a $300 out-of-pocket expense. You still can collect the $300 from your account. Also, you can use FSA money to pay for over-the-counter medications.
Drawbacks: Companies limit the amount you can put into your medical FSA. Under the recently enacted health care reform act, beginning in 2013 the maximum that can be contributed to an FSA will be $2,500. Unused FSA money does not roll over into the next benefit year, although some companies allow account holders a grace period that runs through March 15 of the following year to use the funds.

 

Health Savings Accounts

Money placed in a health savings account also pays medical costs, but these medical savings vehicles are different from FSAs.

In order to open an HSA, you must be covered by a high-deductible health insurance policy, which means you paid medical costs of at least $1,150 for self-only coverage or $2,300 if you had family coverage in 2009. For 2010, the deductible limits are $1,200 and $2,400. Once you have the requisite insurance coverage, you can open an HSA and contribute up to the amount of your insurance policy's deductible. Individuals age 55 and older can make additional catch-up contributions to the HSA each year until they enroll in Medicare.
Advantages: You get an immediate deduction on your Form 1040 for contributions to an HSA. You do not have to itemize to claim this deduction. Even if someone else, for example, a relative, makes the contributions to your HSA, you still get the tax deduction. HSA earnings grow tax-free. As long as HSA funds pay for eligible medical expenses, you owe no tax on the distribution. Any money in the account at year end can be carried forward to the next year.
Drawbacks: You have to pay a high deductible for medical care, meaning you'll have to come up with the doctor and pharmacy payments and then be reimbursed from your HSA, rather than having your bills go directly to the insurer for payment as with traditional health policies. If you get a high-deductible policy during the year instead of at the beginning, the amount you can contribute to an HSA is prorated by the number of months you've had the policy.

Top CD Rate Drops to 3.31% APY - Savings and CD Averages Down

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Savings and CD rates continued to drop last week, although the decline in average savings rates slowed to a crawl. Some of the top CD rates dropped though, effectively lowering the best rates available.

Savings and CD rates continued to drop last week, although the decline in average savings rates slowed to a crawl. Some of the top CD rates dropped though, effectively lowering the best rates available.

Savings Rates

Average savings rates dropped by only 1 basis point last week from 1.37% APY to 1.36% APY. The top rates also remained the same with Southern Community Bank's Ready Saver 2% APY Savings Account leading the pack of non-promo rates. For promotional rates, Everbank remains on top with their 3-month introductory bonus rate of 2.25% APY. After the three-month period, the rate drops down to 1.26% APY for a blended one year APY of 1.51% APY. Banks that dropped their rates include:

  • Franklin Synergy Bank falling from 1.7% APY to 1.65% APY.
  • Palladian Private Bank falling from 1.55% APY to 1.5% APY
  • Savings Square from 1.35% APY to 1.25% APY

CD Rates

The average 1-year CD dropped from 1.63% APY to 1.61% APY. First City Bank continued to hold the top spot with a 1.80% APY CD.. First City Bank is in bad financial shape and has been operating under a FDIC Cease and Desist Order since 10/09. Southern Commerce Bank which last week had the second highest rates dropped its 12-month CD to 1.50% APY, moving Tennessee Commerce Bank into the second spot at 1.70% APY.

The average 3-year CD rate had the biggest drop last week, falling from 2.52% APY to 2.47% APY. The top rate also dropped from 2.75% APY to 2.65% APY. Bank United which held the top rate dropped its CD to 2.50% APY. The top spot is now occupied by USAA Federal Savings Bank, which requires a minimum deposit of $175,000. The next highest rate is Acacia Federal Savings at 2.65% APY and a $500 minimum deposit.

The average 5-year CD dropped from 3.19% APY to 3.16% APY.

The top two rates on the 5-year CD fell with USAA lowering its rate from 3.41% APY to 3.31% APY. It's still the highest rate even though it's 10 basis points lower than last week. Everbank continues to have the second highest rate at 3.30% APY versus the 3.39% APY it was offering last week.. One thing to note about Everbank is their penalty for breaking a CD early. According to their terms:

"This penalty will be equal to one-fourth of the total interest that would have been earned on the principal balance of the account if funds had not been withdrawn prior to the maturity date."

On a 5-year, 60 month CD, that's 15 months of interest.

Savings,CDRateAnalysis

The spread between average savings rates and 3-year CD rates dropped again for the sixth week in a row. To me, that constitutes a trend. Savings rates have slowed their descent while 3-year CDs have been plummeting lately. Thus, the spread has been narrowing. This is not consistent with an economy that expects to see inflation and interest rates increases anytime soon. The other spread we follow is between the 1-year CD and 5-year CD. It has remained relatively flat, dropping from 1.56 to 1.55 after hitting a record high last week of 1.56. Shorter term CDs continue to fall while longer maturity CDs have held up. It also seems that we are close to a bottom in savings and money market account rates.

SavingsandCDSpreadAnalysis