Defining differences in IRAs: choosing what is right for you

KJ: An IRA stands for “Individual Retirement Arrangement” (you thought I was going to say account, didn’t you?). It’s a way to help you save for your retirement in a tax-advantaged way. Sounds simple, right? While you could walk into a bank or brokerage/investment company to open an IRA in a matter of minutes, it’s best to know the different types and uses of each kind. So, we’ll break it down for the IRA basics on what you need to know. A professional financial advisor or CPA can help you navigate which may be best for your situation.

With the compounding effect of your money over time, you’re just throwing money away each year if you don’t take advantage of these accounts as a twentysomething (or thiry- or forty-something)! We were fortunate enough (my background and studies) that we opened our first IRAs in our teens. It now doesn’t seem like a whole lot, but at the time, it was a lot of money! And, it was less about the actual contribution itself than it was about the act of saving and thinking about future savings that has helped us today to create, set, and accomplish our goals.

There are all kinds of IRAs (Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs to name a few), and understanding the differences is important, so we prepared a handy-dandy chart for you to reference. Enjoy!


Traditional IRA Roth IRA SEP-IRA (Simplified Employee Pension) SIMPLE IRA
Current Taxation Deduct current year contributions on your tax return (as able) No tax deduction Deduct current year contributions on your tax return Deduct current year contributions on your tax return
Ongoing Taxation Interest and gains are tax-deferred Interest and gains are tax-deferred Interest and gains are tax-deferred Interest and gains are tax-deferred
Future Taxation Distributions are taxable as ordinary income Distributions are NOT taxable Distributions are taxable as ordinary income Distributions are taxable as ordinary income
Contribution Limits for 2013 $5,500 $5,500 The smaller of 25% of income (20% for self-employed) or $51,000. Employee contributions cannot exceed $12,000.
Contribution Limits for 2014 $5,500 $5,500 The smaller of 25% of income (20% for self-employed) or $52,000 Employee contributions cannot exceed $12,000
Catch-Up Contributions for Over Age 50 $1,000 $1,000 N/A $2,500 (as allowed by the plan)
Contribution Deadline April tax filing deadline of each year April tax filing deadline of each year Personal return tax filing due date of each year (including extensions) Business return tax filing due date of each year (including extensions)
Required Minimum Distributions (RMD) at Age 70 ½ Yes No Yes Yes
Phase-Out for Contributions Varies depending on whether you are covered by an employer’s retirement plan. See IRS website for more details.(1) $178,000 – $188,000 for Married Filing Jointly for 2013 N/A N/A
Withdrawals Before age 59 1/2 Earnings and deductible contributions subject to income taxes AND a 10% penalty. Withdrawals are proportional to all lifetime deductible/non-deductible contributions. Earnings are subject to income tax and a 10% penalty. Generally, withdrawals are treated as your contributions being withdrawn first (which are not subject to tax or the 10% penalty). Subject to income taxes AND a 10% penalty. Subject to income taxes AND a 10% penalty.
Notes: Great if you think you will be in a lower tax bracket in retirement. Great if you think you will be in a higher tax bracket in retirement. Also, these assets are good for “generational” monies to pass to heirs/children. Cheaper, easier alternative to a 401(k) or other expensive employer retirement plan. Cheaper, easier alternative to a 401(k) or other expensive employer retirement plan.

Note that with a traditional IRA, you could have deductible and/or non-deductible contributions to the account. However, with a Roth IRA, once your income gets above the phase-out, you are no longer able to contribute to the account. See also the IRS website on IRAs for more information.

(1) Read more: IRA deduction limits.
Since Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) aren’t common, see also the IRS website for more information: SEP IRAs and SIMPLE IRA. Note that if you participate in an employer plan (401(k), 403(b), etc.), your SIMPLE contributions apply to the $17,500 annual contribution limit for 2013 and 2014.

    Tell us about your retirement plans.
    Do you have an IRA?
    What types of IRAs do you use?
    What is preventing you from using an IRA?

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Icepocalypse 2013

Live Love Budget Snow Day #IcepocalypseAJ & KJ: Since we’re stuck at home in this #icepocalypse, we thought it would be good to spend a little extra time taking care of the finances, so we’re dusting off those e-mails, downloading our statements, and setting some goals – a little “winter cleaning” if you will.

So, in this snowed in environment – less emphasis on snow and more emphasis on ice craziness – how will you chose to spend your time?

Head on over to Quicken, Mint.com, Yodlee!, Personal Capital, or just good old Moleskine notebook? Pick your budget software of choice and let it loose! You’ll be a budgeting fiend before you know it.

Happy icepocalypse everyone! We hope you stay safe and warm.

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The joy of compromise

AJ: We recently received a question from a reader that sparked an interesting conversation for us. We both willingly make sacrifices for the greater good, but what happens when sacrifices begin to outweigh each other or spending seems imbalanced? Chaos, obviously :)

Talk it out
AJ: As always, you HAVE to be in communication with your partner with regards to what you’re spending and sometimes even more importantly what you’re not spending! Kirby often has to remind me that I am not solely responsible for building our future nest egg and that killing myself today won’t ultimately make a huge difference in the long run. I’m like a budgeting martyr, I suppose, but sometimes I start to feel like I’m suffocating by limiting what I want so drastically. Oftentimes I don’t even realize the pressure I’m putting on myself until Kirby calls me on it.

KJ: Disagreements about money can often build up very significantly over time, and money is one of the leading causes of divorce, so why let something so toxic build up without speaking about it? Being open about your spending with your spouse is critical to developing a good, long-term relationship. Some couples have a dollar threshold that they consult their significant other with ($50, $100, etc.). We don’t exactly clear every purchase with one another, but we don’t have to. We set budgets for the month and our anticipated expenses, so if groceries, shoes, household items, gifts, etc. fit within the overall budget, then no arguments. For anything significant, we plan for the purchase, so there are no surprises. And, with our focus on saving, the unexpected items that come up don’t immediately push us over the edge and create tension.

I don't do compromise. I'm too cute.

Pick your battles
AJ: Kirby rarely splurges, but if he suddenly needs a $400 ladder, I’m not splurging on lavish meals and more expensive bottles of wine that month. If he decides he’s going out for guy’s night and spends $600, that might be a different issue!

The reader who wrote to us seeking guidance was struggling with this very issue. It can be hard to know when to hold and when to fold. Sometimes spending on something that’s generally good (a gym membership, a crop share, monthly charitable giving) still puts a strain on your overall financial situation, and you have to decide as a family what makes the most sense for you all collectively. If there isn’t an alternate option that would meet your needs at a lower cost threshold, can you sacrifice one thing here or there to make it work?

KJ: Knowing when to pick your battles is key to long-term success. Just because you feel the spending on an item for your spouse is “wasteful” doesn’t mean that they don’t have the same feelings about one of your favored expenses. Take a moment to step back and think about what it is that upsets or frustrates you about their spending. If the money wasn’t spent in that way, how would it be spent – saved for a joint goal, saved for gifting, allocated to another expense? That can help frame the discussion to help you approach your significant other.

Keep the balance
AJ: It’s not all about you. And it’s also not NOT all about you. Don’t be the one who refuses to spend or the one that always spends. Since we make everything work within our budget and refuse to put anything on credit month to month (that we can’t pay off), we have to make sacrifices. Some months we both have needs, and one of us has to bow out until the following month in order to maintain what we agree is right for our family.

Share the wealth
AJ: Just because you budget doesn’t mean you can’t be thoughtful. Find ways to alleviate pressure within the areas that you control. I often do this with our food and shopping budgets. Just because I ultimately maintain those categories for us doesn’t mean that it’s mine, it’s still ours and it’s crucial to not lose perspective of that. I control the outflow, but I’m not entirely responsible for the inflow, which can be a hard thing to keep in check.

KJ: If you’re in charge of a certain area of your finances (maybe you do most or all of the financial dealings in your house – though I would highly recommend splitting duties), then periodically let the other know what you’re doing and share with your partner – both your problems and your successes – but don’t always just focus on the negative aspect!

    Do you have any expenses that are only on you and not your spouse or significant other?
    Have you ever hid an expense from your spouse? Why or why not?
    Tell us about a time you disagreed about a purchase and what you did to resolve it.

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Dream Job, A Continuation

AJ: I previously wrote about finding the dream job and was stunned by this article that states that 60% of millennials are leaving their “dream job” typically after just three years of employment (MSN article). So what gives, millennials? Where is the sense of obligation and desire for future growth? While most companies are no longer offering pensions, companies certainly offer programs and financial incentives to stay employed with them.

The Dream Job (With Fireworks)

What changed?
KJ: With such a high percentage of millennials leaving their “dream job” so quickly, my immediate reaction is to dig into “what caused them to leave?” Was it something related to the pay not being what they thought, did the hours take up more than they planned, or was the promised flexibility nonexistent? Maybe there weren’t enough questions asked by the employee (or employer), or maybe the answers provided aren’t what happened in reality. Part of what is clearly evident in this article though is that in today’s fast-paced world of change, today’s “dream job” may not be the same “dream job” for tomorrow.

When shorter stints = making less
AJ: A longer stay at a company can translate to extra vacation time, bonuses, long-term bonus incentives, stock options and more that can be quite substantial and are nothing to sneeze at. If millennials are staying at jobs for shorter periods of time, it makes perfect sense that millennials would be making less than their parents did at the same age (Millennials earn less than their parents, and the recession isn’t to blame), but why? We’re living longer, we’re demanding more from life and we’re making less. So what does it all mean? Maybe we’re willing to admit that what we had once thought qualified as a “dream job” really doesn’t fit the bill, all things considered, and maybe we’re willing to make a little less for overall quality of life.

Define your factors that make it a dream job
KJ: Make a list of what is most important to you, and rate your job for each category. Some top considerations are often: vacation time, flexibility (or rigidity) of hours, overtime required/recommended/nonexistent, ability to work from home, commute, pay (in all its potential capacities – salary, hourly, bonus, long-term incentive, ownership opportunities, etc.), ability to “turn work off” when you go home, etc. As you can see, pay is but one factor in the decision, so don’t think that the best paying job is going to be the best choice for you and your family. Whether you’re newly in the workforce or are searching around for the “dream job” later in life, then take a look at each company you’re reviewing and rate them on the above criteria. It may help you come to the conclusion that there could be several “dream jobs” for you or it may turn out that one company is a better fit for your current lifestyle. There’s little to no chance that a job can be perfect in every category, so learn what’s negotiable for your situation.

What are millennials after?
I think one reason why millennials may choose to leave a career is often for increased flexibility – as outlined in the above referenced article. Time with parents, time with a significant other, ability to watch your child’s milestone memories – you know, the overall quality of life decisions. We’ve seen our grandparents and parents work tirelessly their entire lives and maybe miss some important family moments, yet still get trapped by bills and unexpected items that come up, that it makes you really want to reflect on what is most important in your life. Keeping a balance is a challenging thing to find in life, so it’s always good to revisit your priorities and see if you’re on the path that you want to be.

Work smarter, not harder
AJ: “Work smarter, not harder” has become the mantra of the working man these days and perhaps there’s something that millennials are living by along those lines.

    What do you value most in your career?
    What do you hope to get out of your career?
    Tell us what factors would cause you to re-think your “dream job.”

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Black Friday and Cyber Monday…it’s upon us!

Black Friday Image
KJ: It’s that time of year again: Black Friday & Cyber Monday are just around the corner. As a kid, I never participated in the Black Friday craziness, but in my adult life, I have come to enjoy the tradition of waking up early (surprising, but it’s really not much earlier than when I wake up for work…), and braving the crowds at the stores. Fortunately, the crowds just aren’t that thick in most of the places we choose to go which means I’m not waiting in line or pushing through crowds, but I’m willing to sift through racks to find a good deal. In fact, most of the last few years we’ve used Black Friday as our main shopping day for clothes and items we’ve been meaning to get that we just haven’t had the time or budget to pursue. It’s almost as shocking to write this down and make this comparison as it is to actually participate, but Black Friday has some eerie parallels to building a good budget and getting on the right financial track:

Plan ahead
KJ: The last thing you should do on Black Friday is to just randomly go to a store and hope to find what you are looking for. It takes careful, strategic planning of which store(s) you’re going to and what product(s) you are going to grab. Know the layout of the store and what time you need to get there to get the product. Some items you are looking for may not be what others are really coveting, so be aware of the locations that won’t be an issue getting the item(s) on your list. Just like building a good budget and sticking to it, you have to make a plan, and follow-it. Don’t get side-tracked by any little thing that crops up, and instead keep your eye on the prize. Knowing how to plan for the deals and avoiding those quick, impulse buys are more than half the battle!

AJ: Getting a good deal while shopping is the jelly to my peanut butter. It is the key to success in our holiday spending and the necessary day to our overall desire to give to others. Making the effort to purchase items on Black Friday ultimately means we’re able to give more for less which is really what we’re all about in our family.

Know the deals
KJ: Do your research and know all of the fine print of the deals you’re getting. Use sites like bfads.net to do your research ahead of time and know what’s available.

AJ: Finding deals earlier than Thanksgiving day used to be a real challenge, but that’s no longer the case. Most companies provide sneak peeks to loyalty club members and specific media outlets up to two weeks in advance. If there’s something you’re interested in specifically, search broadly for the item as opposed to looking only at specific stores. Even small shops offer incredible deals on Black Friday.

Create a list
KJ: The last thing that can derail a plan are unexpected expenses or impulse buys that crop up, so know what it is that is on your list (maybe it’s something for the house or presents for the family) and stick to it. The last thing you need to do is buy a bunch of things you think you “need” or “just have to have.” Creating a list will give you that extra will-power to say, “I can’t get that, it’s not on our list!”

Plan for down time
KJ: I feel like half of the fun of Black Friday is getting to come home at 9 or 10 in the morning, feel like you’ve spent all day running around, and wind down on the couch watching TV. Be realistic, and plan for a nap to break up your day…your work-self will thank you come Monday!

    Do you participate in the craziness of Black Friday/Cyber Monday?
    What are your top picks for this year?
    Tell us what you do to save a few bucks!

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