Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for the 'Reader Questions' Category

Money Market Accounts

Author: ScrapperMom
02.25.2009
Money Markets

Creative Commons License photo figure credit: pfala

A reader asks, “MITBeta often talks about money market accounts, can you tell me more?”

The simple answer is that a money market account offers you the flexibility to be able to write checks or make transfers, while having the benefit of earning interest like a savings account. All banks are different, but some things that make all money market accounts similar are as follows:

  • There is usually a limit to the amount of checks and/or transfers you can make. MITBeta pointed out that, with our accounts, you can only write three checks per month, but can make six transactions. So three of those can be checks, but you can also have all six be electronic if need be. Depending on the bank, this transaction limit can range from 3-6 per month.
  • The account is interest bearing, usually a higher yield than a regular savings account.
  • It typically has a higher balance requirement (typically $1000-$2500). 
  • Depending on your typical balance, your interest rate may increase.

Money market accounts are not for everyone, but if you typically have $1000+ in your checking account you might want to consider having a money market account. Our money market account is the main catchall for all our income. All monies get deposited into the money market (direct deposit of pay checks, our rental income, etc) and then MITBeta makes a couple of transfers per month to fund our regular checking account, which pays all the bills.

Money market accounts seem to be, in my opinion, a good stepping stone before opening a CD. The difference is, with a certificate of deposit (CD) your money is tied up for a certain term (6mos - 5 yrs typically) and the rate is based on the length of the term. Longer term = Higher rates.  There is also a penalty for early withdrawal. In order to make good use of the high rates available with a CD you can start a CD ladder.

Money market accounts can generate more interest for you, if you feel up to the challenge of limiting the transactions that come out of the account and also if you can carry a high enough balance. Take a look at what your current bank offers for rates and let us know. Do you think it would be a good idea to open a money market account and take advantage of higher interest rates? For more information on money market accounts you can visit “How Stuff Works.”

02.10.2009
Piggy Bank

Creative Commons License photo figure credit: ken +

Reader Jenn asks:

Are you planning to open a second 529 Plan for the new baby or maintain one account for both kids? We opened a 529 when we had kid #1 but when kid #2 came the financial planner we consult with said we can use the same plan for both kids?

Hi, Jenn, thanks for the great question.  Prior to your question I had not ever considered this and had plans to set up separate 529 accounts for each of our little dears.  I did some research on this and found a number of pluses, minuses, and rules that have swayed my ultimate decision:

Rules that seem to apply to this question:

  • “Each beneficiary must have his/her own account. Siblings or cousins can’t share an account. You can, however, roll any remaining portion of an account over to another child once the account’s beneficiary has completed college.” (source)
  • “If the child doesn’t want to go to college, you can roll the account over to another family member.” (source) You can also split the account into multiple beneficiaries.
  • “There are no restrictions on who can open an account for whom. You can open an account for your child, a friend’s child, a relative, the paper boy, or even yourself.” (source)

Advantages of saving separately for each child:

  • In our case, all of the money contributed to the plans, at least for the foreseeable future, will be money that has been given to the kids as birthday, Christmas, and other presents, so it’s more equitable to keep the accounts separate.
  • Individual accounts can be better tailored to the time horizon for each child — different investment choices can be made depending on age.
  • If it applies, you can contribute more in total before incurring the federal gift tax.
  • If you should die, the childrens’ guardian will know exactly what you intended.
  • Some states allow you to take a bigger tax deduction if you save in multiple accounts.

Advantages of saving jointly for more than one child:

  • You can start saving before you ever have kids, reducing the overall amount of saving that you have to do. (See The Beneficiary Loophole.)
  • Some plans charge a maintenance fee for each account.  A $25 annual fee per child would really ding our child’s account.
  • It’s simpler to deal with a single account than many.

One thing that doesn’t seem to matter at all is the amount of interest and compounding.  For the same investment choices, it does not matter whether you have a certain amount of money in one account or 100 accounts. J.D. at Get Rich Slowly demonstrated this recently.

For me, the only genuinely compelling reason to have just one account seems to be the idea that you can save before you have kids, but since we missed that boat already, it doesn’t apply.  So the bottom line is that I will be opening a new account for our new daughter.

I’d like to hear our readers’ thought and comments on this topic!

401k tip jar

Creative Commons License photo figure credit: _e.t

A reader writes:

“Due to current economic trends I have suffered a rather costly loss and one of my 401K’s dropped below the minimum of what they need to be to stay open.  I got a letter in the mail with options of what I can do with it. I was wondering what you would do in this situation?”

While the loss of value in your 401k is unfortunate, this situation forces you into a beneficial situation.  Generally 401k plans have fewer investment options and sometimes more restrictions on how frequently you can move into and out of those options.  Moving your retirement money to an Individual Retirement Account (IRA) opens up a lot of investment options.

The major question is what type of IRA to use: Traditional or Roth.  A Traditional IRA is very much like a 401k in that money is put into it pre-tax.  Money and earnings in a TIRA grow untaxed as well, and only withdrawals are eventually taxed.  A Roth IRA uses post-tax money.  Earnings and withdrawals from a Roth are non-taxable, and you can also withdraw principal (but not earnings) from a Roth IRA at any time without penalty (though this practice is not recommended by this blogger).

The question of choosing one type of IRA over the other can be very complicated, but the general rule of thumb is to consider whether or not you have yet reached your full earning potential, and therefore whether you are yet at your highest tax burden.  If the answer is “yes”, then a TIRA is probably your best bet, since you will likely have a lower tax burden in retirement, and therefore you want your earnings taxed then.  If the answer is “no”, then a Roth is probably a good choice because your retirement earnings will likely be higher than they are now, so you want your contributions taxed now.

With all that said, I think there are a few questions that you have to ask yourself to make the best choice:

1. How much money is in the 401k that you are about to roll over? My presumption is that it’s not that much, otherwise the plan custodian would not be closing your account.  In the grand scheme of things, this probably means that it will not make that much difference one way or another which option you choose.  However, the amount you have to invest may have some effect on what fund options are available to you in the particular option you choose.

2. Are you currently contributing to an IRA and/or do you plan to contribute to one soon? Related to Question 1 above is the issue of how much money you have to invest.  The fund option availability issue can be mitigated very quickly if you’re already contributing to an IRA or plan to do so soon.

3. How much money do you make? Your income determines your eligibility for TIRA and Roth IRA contributions, which relates directly to Question 2 above.  If you’re covered by a 401k plan at your current employer, then your Adjusted Gross Income (AGI — income after tax exempt deductions such as 401k contributions and Health Savings Accounts) has to be less than $53,000 if filing singly or $85,000 if filing jointly (there’s another pesky marriage penalty…) to be eligible to contribute to a Traditional IRA.  The AGI limits are $99,000 for single filers and $156,000 for joint filers for Roth IRA contributions.  Both types of IRAs allow up to $5,000 per person in contributions in 2008.  There are a number of little nuances to these rules, so you should check the link at the top of this paragraph to see the relevant tables pertaining to your particular situation.

With all that said, here is how I see your options:

1. Roll your 401k straight to a Traditional IRA.  This is the most common and straightforward move you can make.  The biggest problem that you could run into is not being able to meet the minimum amount required to buy into a particular mutual fund.  I’ll talk more about this in my next post on this subject.

2. Roll your 401k to a TIRA and then recharacterize it to a Roth IRA.  This may be a good option if your AGI is less than $100,000.  The downside to this option is that you will have to pay taxes on the money you have invested as if it were income, and you will have to file some additional paperwork with your tax return next spring.  Since it’s not a lot of money, the taxes won’t be that great.  You can pay the taxes out of the principal or out of pocket.  The latter option is preferred so that you keep the greatest amount of money working for you, but means you may have to come up with the cash in April if you’re expecting a refund but it doesn’t cover the taxes owed on the conversion.  Example: If you have $3,000 in the plan and you’re in the 25% tax bracket, then you’ll owe $750 in taxes.  You can reduce your principal balance to $2,250 to cover this, or you can come up with $750 on your own.  The bonus to the 2nd option is that you get to keep that extra $750 in the plan and growing tax free for the next 30-40 years.

3. You can take a distribution on the money.  This is probably the worst option (I like nuance, otherwise I would have said, “This is, by far, the absolute worst thing you can possibly do with this money.)  If, for example, you happen to have a credit card that is currently charging an exorbitant interest rate, like in the 30% range, then it may be in your best interest to use this money to help get out of that pickle before refocusing on retirement.  The downside to this option is that not only will you have to pay taxes as in Option 2, but you will also face a 10% penalty on the early withdrawal of 401k funds if you are under 59 1/2.  So that $3,000 turns into $1,950 just like that (imagine fingers snapping).  Just to be clear: Option 3 is nearly always a bad idea.

In my next post on this topic I will cover how to pick a new custodian for this money, how to set up an IRA, how to move the money from the 401k to the IRA without incurring expenses or taxes, and some thoughts on good fund options to get you started.

What would you do if you found yourself in this reader’s shoes?  Do you prefer to use Traditional or Roth IRAs for your non-401k retirement investing?  Let’s hear your thoughts in the Comment Section!

Hotel Pool

photo figure credit: ScrapperMom

Michelle asks:

"How was the vacation?"

In a word: Fantastic!  We got to meet the newest member of our extended family (on that side, anyway…) who is already one and half!  We got to catch up with family that we haven’t seen in over 2 years.  We got to know new wives, girlfriends, and old friends a lot better.  Thanks to all of them for taking the time out of their busy schedules, providing places to stay, cooking dinner, etc.  This picture is the pool at the hotel in Orlando, which the kids loved.

As a follow up to my original post on this topic, I thought I would offer a post-trip analysis on how we did financially. It’s important to note that while we put nearly everything below on our rewards credit card, it will all be paid off by the end of the month because we had already set aside the funding for this trip.

I’ll start with the area in which I feel we did the worst from a frugal perspective: Dining out.  In total we purchased 9 meals out and they totaled $378.  This breaks down to $42 per family-meal, or $17 per person per meal if we count dear daughter #1 as a half person who shared what we ate most of the time.  Given that we ate a total of 22 meals, 9 represents only 40%.  We easily could have converted a couple of dinners out into dinners at home, but then again, we were on vacation…  We did manage to convert a couple of these meals into lunches the next day since the portions were often too big! I should also point out that this total included drinks with meals as well, which as you know can get pretty expensive.  During one meal we paid close to $9 for an 8 ounce rum and coke!

Relating to dining, our grocery bill came in at $141.  As described in the initial article, we had a lot of opportunity to prepare meals, especially breakfasts and lunches.  If you put all of our food spending together, the per person per meal average comes down to $9.50.  The grocery bill includes a 12 pack of beer that we brought to a party, as well as a lot of bottled water that we wouldn’t normally buy at home, but the local water was terrible!

In the category of transportation, we got a great deal on airline tickets: we purchased 3 seats for $597 on JetBlue.  The in-flight entertainment, especially Animal Planet and the XM station for Radio Disney went a long way to keeping our 21 month old busy on the flight each way.  In total, we spent $378 (Yes, exactly the same as on dining out!) on the rental of a mini-van and the fuel we needed for a week.  We drove the van over 500 miles since we went down to Disney, and much of the time the van was nearly at capacity with 4 adults and 2 toddlers in car seats.

Our short jaunt to Disney cost us both on the ticket side and on lodging.  We somehow thought that we still had tickets that we could use at Disney, which would have given us “free” entry to the park.  Unfortunately this was not the case, and we ended up having to buy 2 adult, single day passes for a total of $160.  Yes, that hurt.  The Magic Kingdom is a great place, but honestly I think it’s looking a bit dated, and I’ve been to a number of better parks in recent years that cost a lot less than this.  But it’s the American Way to take your kids to Disney, right?  The lodging for one night was not bad at $90.  This was our share of the split on the condo that we shared with my cousin and his family.

We spent a total of $23 on items that didn’t fit into any of these other categories.  This included a Christmas ornament from Disney, and a couple of magazines at the airport.  We successfully resisted the urge to spend $17 on a fan-assisted squirt bottle in Disney on a 93 degree, scorching hot day.  We also avoiding having to purchase every cute stuffed animal that DD#1 got her hands on.

Last, and far from least, we spent $720 at the Dog Kennel.  As outlined in this article, our dogs are expensive.  It definitely hurts to have to budget 30% of every trip we take to kenneling the dogs, and it’s the first thing that pops into my head whenever we consider a trip.  We spent a few years trying to find the right mix of costs for kenneling.  In this business, the saying is true: You get what you pay for.  We were horrified upon retrieving our dogs from a budget kennel on one trip, and they didn’t want to come home when we tried to get them from a super-expensive kennel.  Eventually we found a “just right” kennel that treats them well — but not too well.  This is certainly an area that will factor into any future pet decisions.  It’s a good argument against having two pets.

In total, we spent $2487.  This is a lot less than ScrapperMom and I spent on a lavish Quebec trip a number of years ago, but more than we have spent on a vacation in some time.  Was it worth it?  It’s hard to put a price-tag on the experiences that we had.  If pressed, however, I would have to say that the cost was worth it since it meshes with our values: notice that we have only a couple of magazines and a Christmas ornament to show for this expenditure.  We don’t place a high value on “stuff”, but rather experiences and time spent with family and friends.  You can’t put a price on that.  This trip would have been a lot less fun if we just went to Florida by ourselves…

We’re already looking forward to a mini-vacation in November as we travel to New Jersey to celebrate a wedding!

Frisbee

A reader recently asked me for more information about opening an ING Direct account.  I have mentioned ING in the past, and recommend this bank for anyone who:

  • Is looking to establish a savings account
  • Wants to earn a better interest rate on existing savings
  • Likes free money
  • Wants to allocate separate pools of money to separate savings goals

What’s so great about ING?  Well, there’s nothing particularly spectacular about any one aspect of ING, but it has a lot of really great things going for it, including:

  • A rate of return far higher than the national average for savings accounts, currently 3% — although it’s not typically as high as some other online banks
  • No fees
  • The ability to create “sub-accounts”, which is useful for categorizing savings goals
  • Anecdotally popular customer service*
  • Ease of use; link your current checking account to your ING account to move money back and forth as necessary
  • FDIC Insured
  • Signup bonuses

So, if you have any of the desires listed at the top of the article, and enjoy any of the features listed above, then an ING account may be for you.  If you would like to sign up, then you may want to act quickly.  By using one of the referral links below, you will get a $25 bonus if you make an initial deposit of at least $250.  That’s an instant 10% return on your money.  At the same time, I will get a $10 bonus as well for the referral.

These links work just once, so if you use one, let me know so I can remove it.  If a link doesn’t work, let me know and I will remove it.  If there are no more links, let me know and I will add more.  Contact me if you have questions or concerns.  Happy saving!

ING Referral Link 1

ING Referral Link 2

ING Referral Link 3

ING Referral Link 4

ING Referral Link 5


* The personal finance blogosphere seems to agree on this point.