Posts From January, 2014

401(k) vs. IRA: 5 Key Differences 

January 30, 2014 Categories: saving

For those looking into different ways to start saving for retirement, both 401(k)s and individual retirement arrangements (IRAs) are the most common investment options to explore. The beauty of these retirement savings accounts is that your contributions are made before taxation (therefore tax-deferred until withdrawn during retirement).

While 401(k)s and IRAs serve the same purpose, they have significant differences that can influence which one is right for you. Below are five comparisons outlined by FOXBusiness that can help you determine which one best serves your situation and financial needs.

1. Initiation

401(k): An employer or a sole proprietor of a small business can establish these plans; individuals can't start these on their own. If your employer offers such a plan and you participate in it, your employer will routinely withhold from your earnings and contribute to your account the amount you determine, with limitations (see below), but pre-tax. As far as the work required on your part, it's usually minimal.

IRA: An individual sets this up with a credit union, bank, insurance company, or other financial institution, and then adds money to the account themselves as desired pre-tax, though there are limitations here, too (see below). With an IRA, you're responsible for the account set-up and arranging your contributions.

2. Matching

401(k): Some employers offer to match part or all of what their employees contribute to their accounts. Experts recommend that if your employer provides this, you should take full advantage, as an employer match can greatly increase your retirement account's value. However, annual contribution limits, which the IRS sets each year, exist (maximum pre-tax annual contribution of $17,500 as of 2014). This applies collectively to all 401(k) accounts you might have in a given year. There's also a limit to the combined contribution of the employee and employer.

IRA: Because an IRA isn't employer-sponsored, matching contributions aren't an option.

3. Contribution limits

401(k): The IRS limits contributions to traditional 401(k)s to $17,500 in 2014, though participants aged 50 or older at the end of the calendar year can make catch-up contributions of up to $5,500 above the base restriction. The limit for the combined contribution to these accounts (employer and employee) is either 100% of the employee's compensation or $52,000, whichever is less. The latter number jumps to $57,500 if the participant is eligible for catch-up contributions.

IRA: For 2014, the IRS limits IRA contributions to $5,500-$6,500 if you're 50 or older—or your taxable income for the year. But you should note that some of those contributions may not be tax-deductible, depending on your income or if you or your spouse participates in a workplace-based retirement program, such as a 401(k).

4. Beneficiaries

401(k): According to the terms of the federal Employee Retirement Income Security Act, if you're married, your spouse automatically becomes your 401(k)'s beneficiary upon your death, regardless of whom you listed as the beneficiary. The one exception is if your spouse previously consented, in writing, to your naming someone else the beneficiary. If you are single, upon your death the individual you named on your beneficiary form becomes the beneficiary.

IRA: Whomever you designate as the beneficiary will, in fact, become the beneficiary upon your passing. This designation doesn't require spousal consent.

5. Loans

401(k): You may be able to take out a hardship loan against your 401(k) depending on the plan and if you're still employed by the employer that established it, according to the IRS. Loans must be for less than half of the account balance or, at the most, $50,000. If the plan allows for loans, you generally may take out a five-year loan without penalty—provided you pay it back on time.

IRA: You can't take out a loan against your IRA, but may access money from your account for a 60-day period via a tax-free rollover. In other words, you may withdraw money from your IRA free of taxes and penalties if you return it to the same or a different IRA within 60 days. Should you fail to do so, the withdrawal is subject to income taxes and a 10% penalty if you're under age 59 and a half.

Determining whether a 401(k) or IRA is best for you may feel overwhelming at first, but knowing a bit more about their major differences can help make the process much easier.

4 Things Your Teen Needs to Know About Debt 

January 24, 2014 Categories: debt

Upon graduation, many high schoolers are ready (or think they are ready) for college. They’re emotionally ready to spend time away from home, they’re prepared for the workload of classes, etc. But what many of them lack is financial know-how.

According to DailyFinance, within five years of leaving home, most teens are faced with the decision of taking out student loans, buying a car, signing up for credit cards, or even taking out a mortgage. And it's up to parents to instill some wisdom in those bright-eyed, bushy-tailed youths before they learn it the hard way.

Your teens shouldn't be burdened with your financial stress, and they definitely don't need to know all of your misdeeds. But they should know the basics of the common financial situations they're soon to encounter. Whether you've done right with your money, made a boatload of financial snafus, or a little bit of both, here are some worthwhile discussions to have with your kids:

Student Loans: While student loans are oftentimes a necessary debt, they're still money owed to someone else. And unlike many other forms of debt, this one cannot be discharged in a bankruptcy. If you had student loans, you can help your teens by telling them how long it took you to pay them down, as well as what you had to sacrifice along the way.

Car Ownership: If you don't have a car loan, you should let your teenager know your motives for paying in cash or your journey in paying down your car. If you do have a car loan, it might be helpful to explain that it's more than just a monthly payment. Sit down and run the numbers with them, demonstrating the money lost to interest. And it just might be the extra motivation you need to pay it off for good.

Credit Cards: If your 18-year-old has a pulse and a mailing address, credit card companies will find him. That's just a fact of life in the good ol' U.S. of A. Your teenagers should know the responsible ways to build credit and the dangers lurking behind every unnecessary swipe.

You can try to convince them that credit cards, like debit cards, should be paid off in full each month. If you've ever had credit card debt, your teen doesn't need to know the details, but he should know all the work that went into paying it off.

Mortgage: While a mortgage usually isn't seen as a mistake, the timing in getting one can be. Make sure your teen knows the various considerations that go into buying a home, such as the ebbs and flows of the housing market, private mortgage insurance, and interest rates. It's important to stress that there should be no rush.

What might be second nature to you is a whole new world for your soon-to-be independent teen. The more he knows about finances, the better. And sharing your personal financial experiences—the good, the bad and the ugly—will help. Yes, even that time you bought tickets to Twisted Sister on credit for you and your roommates. Let them learn from your mistakes—and, in the process, keep them from making a few of their own.

Jackson Memorial High School Freshmen Get Hands-On Money Management Lesson Through Reality Fair Program 

January 22, 2014 Categories: financial literacy

 

 

Over 200 Jackson Memorial High School students were exposed to the world of “real-life” budgeting at a Financial Reality Fair brought to them by New Jersey credit unions on Wednesday, January 8th. The students that participated are part of the school’s Freshman Seminar program, a full semester course that satisfies the graduation requirements for financial and computer literacy. The students just finished up their budgeting lessons last semester, so the Financial Reality Fair this week gave them the opportunity to apply what they had learned.

Click here for the full article. 

The Millennial's Guide to Personal Finance 

January 07, 2014 Categories: financial literacy tips

The need for financial literacy is finally catching on at the high school level across the country, but what about for those in the “Millenial” generation who missed out on this new proliferation of required personal finance classes?

For starters, understanding basic financial terms can help this, and any generation, make the most informed choices about their fiscal path.

In a recent article, Mashable, a leading source for news, information, and resources for the “Connected Generation”, which includes Millenials, listed commonly used terms and their definitions that Millenials can use to navigate their personal finance world:

401(k)
A popular retirement plan offered by many employers, a 401(k) allows you to set aside a certain percentage of your paycheck into a retirement fund, before taxes.

Some companies will match a portion of your yearly 401(k) savings as an incentive for participating in the program. The funds in your 401(k) are then invested into different ventures, such as bonds, money market accounts, and stocks. However, you will not lose your savings if your employer files for bankruptcy.

You will receive the money as an annuity once you retire, but if you choose to withdraw the funds before turning 59.5 years old, you will have to pay taxes on it.

APR
Annual Percentage Rate (APR) is the rate of charge or interest, usually as it applies to credit cards. Different cards have different APRs. It's important to know which rate you're agreeing to, since it will affect the price you have to pay. Credit card companies can apply APRs to late payments, purchases, and cash advances.

"APR financing" refers to the price you pay with the APR rate included, a price added on top of taxes, essentially. For example, if an ad indicates a car costs $30,000 with 0% APR for 60 months, it means your payment (with taxes, dealer's fees, and tags included) will not include APR during those first 60 months, as you pay off the car. If the deal instead comes with an APR rate of 0.8%, you'd add about $2,400 to the lease, which will be integrated into the car payments.

Annuity
An annuity is a continuing, fixed annual payment for a certain amount of time. You can receive annuities from insurance companies or retirement funds. For example, one may receive an annuity from a deceased family member's life insurance policy.

Assets
Assets are anything you own that can be sold or converted into cash. Some assets include real estate or personal property, cars and other vehicles, jewelry, or investments, such as a 401(k). Unless your stamp collection or old action figures are super rare, those don't count as assets, however.

Credit Score
Your credit score indicates to lenders how trustworthy you are, in other words, how likely you are to pay back your loans and debts (and do so on time). Your credit score can affect your ability to make bigger purchases down the road, such as cars or houses.

The easiest way to build credit is to qualify for a credit card and pay off the balances on time. The most common score is the FICO score, which is determined by payment history, credit use, types of credit use, length of credit history and applications for credit. The score ranges from 300-850.

The three major official reporting companies are TransUnion, Equifax, and Experian. You are allowed, by law, to receive one free credit report a year. If you need to check it more than once, be wary of "free" credit score sites that might ask for a credit card and include hidden charges/fees.

DTI
Your Debt-to-Income (DTI) ratio is especially important for mortgages. There are two types of DTI: the front-end ratio and the back-end ratio. The front-end is the percentage of your income that would go to paying housing-related costs, such as mortgage and real estate taxes, while the back-end represents how much of your income is going to other debts, such as credit card bills and car payments. If either of these ratios is too high, it might keep you from getting a mortgage.

IRA
An Individual Retirement Account (IRA) is a retirement plan that is not sponsored by an employer. Since you are solely responsible for adding money to an IRA, you have a wider ranger of investment options. Like the 401(k), most IRAs are tax-deductible.

Liability
A liability means you owe money or payments to another person or establishment. For example, student loans are a liability—you have to pay back the sum of the loan, plus interest.

Liquidity
Liquidity is the degree to which you can sell or convert your assets into money, when needed. Liquid assets refer to those assets that can be easily bought and sold, making them easy to convert. It's often smarter to invest in liquid assets, like bonds and stocks, than assets that can take longer to sell, called illiquid assets (real estate, huge blocks of stocks, collectibles).

Net Worth
While the concept seems a little abstract, every person is worth a monetary sum. Your net worth is actually your value if you were to sell all your assets and pay off all your debts. It can be useful to know how much you're worth when considering big financial decisions.

Calculate net worth by subtracting your total debt from the sum of your total assets. If you get a negative number, you have more debts than income (don’t worry if this happens; this is typical for many recent grads). A positive number means you're making or have more than your debts, meaning you have more of a budget for paying off loans.

Savings Account
A savings account works a little differently than a checking account. While your money is still accessible, there are often fees and time delays associated with savings withdrawals. The advantage of having a savings account, however, is that you compound interest (and you are less inclined to take money out, and more inclined to let it alone).

Common types of savings accounts include basic, certificate of deposit (CD), and money market. The basic savings account allows your money to grow at a set interest rate, though often a relatively low one. The CD account has a high, usually fixed rate of interest, but it also has to grow for a set amount of time. If you take money out of the account before the appointed time, you will have to pay a penalty. It's best used for saving money for a big expense down the road, like buying a car or returning to school. A money market savings account will have a high rate of interest that will vary with the market, and your withdrawals from this account may be limited.

 
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