Written by DR
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Recently a reader e-mailed me with the following question:
I definitely do want to open a Roth IRA as soon as possible because I hear it’s typically better than the Traditional IRA. However, I’m not certain whether one should be putting money way in one’s 401K or Roth. As you can tell, I’m not that financially knowledgeable. I do have some credit card debt that shouldn’t take too long to pay off and of course I have some student loans. I’m guessing you’re recommending me to pay off my credit card debt first before opening a Roth IRA. My student loans on the other hand will take a while to pay off.
I receive questions like this a lot, and so today we’ll walk through an approach you can use to answer these questions for yourself.
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Written by DR
That’s right, the words helpful and IRS sometimes go together. The IRS has produced a chart showing whether a rollover between 401(k), 403(b), 457(b), IRA, Roth IRA, SEP IRA and SIMPLE IRA accounts is permitted. Clicking on the chart or here will download a pdf version of the chart. The chart includes hyperlinks to additional resources on the IRS website. Read the rest
Written by DR
Year end is a perfect time to give your retirement and other investments an annual tune-up. Each year at this time I evaluate my 401(k), rollover IRA and taxable investment accounts to see if I should make any changes to my asset allocation plan for the next year. Generally, I look at five things: (1) whether my asset allocation plan should be adjusted, (2) whether my investments are tracking to my planned asset allocation or need rebalancing, (3) whether my investments are distributed between my retirement and non-retirement accounts in the most tax efficient manner (known as asset location), (4) whether any changes to the mutual funds I own have been made that might cause me to reconsider my investment, and (5) how my investments have performed over the past year. From this information I decide what changes, if any, need to be made to my current investments and contribution choices for next year.
This annual checkup takes a couple of hours, but is time well spent. Over the next five days we will walk through each of the five steps above. In the process I will show you everything I invest in and my rationale behind each choice. Of course, my investment decisions may not be right for you, but the process will show you how to go about designing an asset allocation plan, selecting mutual funds, and monitoring your choices. Today, we will look at how to build an asset allocation plan, using my asset allocation plan as a guide. Read the rest
Written by DR
Image credit: OhioProgressiveAsset location involves dividing investments between taxable and tax deferred accounts in the most tax efficient manner. As a general rule, mutual funds that generate a lot of dividends or capital gains should be placed in 401(k), IRA or other retirement accounts. Those investments that do not generate a lot of dividends or capital gains can be placed in taxable accounts. Following this strategy, I’ve put all my bond funds, REIT funds, and most of my small cap funds in retirement accounts. And what has happened to REIT mutual funds this year offers a hard lesson for some as to why asset location is so important. Read the rest
Written by DR
Sound personal finance and investing decisions flow from two things: (1) knowing the numbers and knowing ourselves. If we know the numbers but not ourselves, our decisions will look good on a spreadsheet, until our real world decisions deviate from the plan. If we know ourselves but not the numbers, our decisions may feel right, but lead us down the wrong path. So what’s the answer? We need to think like Mr. Spock, but act like Captain Kirk. Allow me to explain. Read the rest
