All posts by Jacob A Irwin
4000 Site Visitors
Just this afternoon, My Money Blog rolled over another significant achievement – we passed the 4000 site visitors mark! Congratulations!
Thanks so much for reading! It is an honor to be a part of your life.
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
How Do Mortgage Payments Fit in to Account Hierarchy?
Recently, as I was reading through several personal finance/mortgage books, I realized that I hadn’t previously included in the My Money Blog Account Hierarchy an important factor in many people’s account prioritization decision-making process.
What is this component/factor? – It is how home mortgage payments fits in to the overall picture.
In order to keep the entire account hierarchy in one location, you can view the completed account prioritization list at the link shown below.
My Money Blog – Account Hierarchy
Let me know if you have any questions!
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
How To Create Your Own Home Mortgage Amortization Schedule and Calculate Your Monthly Payments
As some of you may know, I am planning on purchasing a condominium or townhouse during the summer/fall timeframe of this year.
In order to prepare for this undertaking, I have been digging out old personal finance/mortgage books from the shelves and from under my bed to make sure I have the appropriate information needed to make an informed decision regarding the mortgage that I take out to buy the property.
Recently, when I was reading one of these titles, I noticed that the author devoted a lot of time to discussing the various costs associated with homeownership and how to determine the price of a house you can comfortably afford.
However, several things that the book did not fully address were 1) how I could personally determine what my monthly payments would be, given a certain loan quantity, and 2) how to put together an amortization (or home mortgage loan payoff) schedule.
These two related topics will be the subject of today’s post.
First, just how are these two topics related? Well, it turns out that by putting together an amortization schedule in a format that is friendly to Excel’s Solver or Goal Seek, functions, we can then use that to solve for what the appropriate monthly payments will be.
So, let’s get started building an amortization schedule! I have put together an example Excel spreadsheet template, which can be found at the link below, that you can use as reference throughout this tutorial. To obtain a copy that you can edit, just click the file menu and select the “download as an Excel file” option.
Goolge Docs – Mortgage Amortization Schedule
Note: this amortization schedule assumes a fixed interest rate and monthly period payments. ARMS (or adjustable rate mortgages) and biweekly mortgage payment plans will be discussed in a future post.
Loan Specifics
First, you will need to input the specifics of the loan in to cells in Excel so that equations can be properly set up to calculate the amortization schedule. The specific pieces of information you need are shown in the purple highlighted cells of the spreadsheet, and are as follows:
• Loan Amount (please note: this is not the property value, just the amount that you borrow for the house. This can be calculated by subtracting your down payment from the price you paid for the property.)
• Interest Rate on Loan Amount
• Term, In Years, of the Loan (the default here is 30 years, but typical loan periods can also be 15 and 20 years).
Setting up the Amortization Schedule
To set up the amortization schedule, you will need a minimum of 5 columns set up in Excel, titled as outlined below:
• Column C = “Period.” – This is the designation of the monthly period in which your payment occurs. Since we are dealing with monthly payments, in this column, you will need Periods from the number “1” through n years x 12 months/year, where n represents the term in years of the loan as specified above.
• Column D = “Monthly Payment.” – This represents the fixed monthly period payment that you owe on the loan. If you already have been given your fixed monthly payment, just enter that in the first row of Column D after the column title. If you desire to calculate what your monthly payment will be, leave the first row blank, and then in each cell from period 2 through period n x loan term in years, input the equation to draw the monthly payment value from the cell directly above it.
• Column E = “Interest Payment Amount.” – This represents the portion of the monthly payment that consists of interest on the loan amount borrowed. It can be calculated by multiplying the fixed annual interest rate times the amount of the principal loan balance remaining in that specific period, and then dividing by 12 to determine the portion of interest owed in that specific month.
• Column F = “Principal Payment Amount.” – This represents the amount of the monthly payment that counts towards paying off the principal amount of money borrowed with the mortgage loan. It can be calculated by subtracting the interest payment amount in Column E from the total monthly payment in Column D.
• Column G = “Principal Amount Remaining After Payment.” – This represents the amount remaining on the principal loan balance after the monthly payment has been made. It is calculated by subtracting the Principal Payment Amount in Column F from the principal amount from the previous period.
• *Extra Column, Column H* = “% of Monthly Payment as Interest.” – While this column is not technically a part of the amortization schedule, it is interesting to see the magnitude that you are paying towards the interest on the home loan, especially in the first few years. This can be calculated by dividing the Interest Payment Amount in Column E by the Monthly payment amount in Column D.
Once you have created these formulas in the first few rows of cells in each of the columns, just copy the formulas down the entire column until you fill up the table as needed for your loan term.
Great job! You have just built the framework for your amortization schedule. The hard part is done!
Calculating Your Monthly Payment
While in many cases, the monthly payment quantity will be calculated for you, it is nice to be able to know how this number is generated. And, once you have created all of the formulas as explained above, Excel does the rest of the work for you! Here’s how.
To calculate your monthly payment, complete the following steps:
1. In the spreadsheet you have created, click on the cell in Column G that represents the final loan payment on your mortgage. This will be either Period 180 or Period 360, depending on if you have a 15 or 30 year home loan term, respectively. In the spreadsheet I created at the link above, this would be cell G361 for a 30 year mortgage.
2. Next, in Excel 2003, on the top menu, click Tools –> Solver
3. What you will now do is use Excel’s iterative calculation Solver function to “solve” (similar to solving a complex algebraic equation) for the appropriate monthly payment amount that will cause the principal loan balance to go to $0 at the end of the mortgage loan term.
- To do this, set the “target cell” discussed in step 1 to a “Value of” “0” by changing the cell that represents the first monthly payment in Column D. In the spreadsheet I created, you would “Set target cell G361 to a value of 0 by changing cell D2.”
- Next, click solve. Excel will automatically change all of the values in Column D to the appropriate monthly payment value that makes your principal loan balance go to 0 after the loan term.
There you go! You have created your own mortgage loan amortization schedule and are now able to calculate your monthly payment accordingly.
Other Uses of This Amortization Schedule
After you have created the schedule and solved for your monthly payment, you should not abandon this extremely useful tool. By entering the purchase price and down payment you paid for the home in the purple cell area in Column A, you can use this tool for the following purposes:
• Keeping track of the total value of home equity (ownership) you have built up in the house. This can be calculated by adding up the down payment in Column A with the sum all of the principal payments you have made to date.
• Keeping track of the percentage of ownership you currently have in the house (this is also called percent equity).
- Why would you want to keep track of this? Easy! If you’re like most of us and didn’t have the cash for a 20% down payment on the house, you were required to purchase Private Mortgage Insurance, or PMI, in order to insure that the lender would be covered if you default on the loan. However, this PMI insurance is no longer required once you have built up greater than 20% equity in your house. So, this is a handy way to keep track of this and will save you money in the long run!
• Also, in Column D, as you pay off your monthly payments, record the monthly payment amounts in this spreadsheet. You’ll be able to play around with the effects and savings you can incur if you decide to overpay each month on your required monthly payments (sometimes called pre-paying the loan – more on this subject later).
Please let me know if you have any questions. And, as always, keep on learning!
Jacob
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Comparison of Wine Prices and Taste
Is that picture above not just making your mouth water by looking at it?! 🙂
Since wine is one of my personal favorite drinks as well as being a popular selection among the general population, I figured it was high time that I devoted a blog post to the financials surrounding this most delectable of drinks.
So, let’s get started!
First, let’s assume that you, as a loyal, free thinking wine connoisseur, drink the recommended 2 glasses of wine per day that is supposed to improve your health, prevent cancer, and extend your life.
OK! Two glasses of wine per day. Assuming that it takes the normal 5 glasses of wine to make up a bottle, this equates to drinking a bottle of wine every 2.5 days, on average.
Now that we have our bottle consumption rate, let’s look at our different options for wine bottles available to the everyday consumer!
• Trader Joe’s sells Charles Shaw brand wine (known “on the street” as Two Buck Chuck) for $2.99 per bottle
• Wal-Mart sells Oak Leaf brand wine for $2.97 per bottle
• On the other hand, you can get a perfectly drinkable bottle of good wine at the wine store for $10 per bottle
Let’s now assume that you drink wine each night at the previously mentioned rate of 2 glasses per day from when you are 24 years old until you are 65 years old.
Given these assumed conditions, just how much would you save if you opted to be a religious $3 per bottle wine sampler? Let’s take a look.
At the wine consumption rate of 1 bottle of wine every 2.5 days, this corresponds to 146 bottles of wine per year! Pretty crazy when you calculate it all up eh?!
Now, take a look at the Google Docs spreadsheet at the link below. Assuming that this consumption pattern continues until age 65, you will end up spending the following total amounts for wine:
- $61,320 for the $10 per bottle wine
- $18,396 for the $3 per bottle wine. This represents a real cost savings of $42,924 total! Wow!!
Google Docs Spreadsheet – Cost Comparison of Wine Purchases
Even though a cost savings of $42,924 total is a pretty impressive total, for the sake of interest, let’s see what happens when we throw Time Value of Money (or the idea that money grows over time exponentially when invested properly) in to the mix.
Assuming that the $1,022 cost savings that results each year from buying the $3 bottle instead of the $10 bottle is invested at a 10% rate of interest each year, we see in the spreadsheet at the link above that at age 65, this results in a savings of $549,465.01. This is even more impressive for sure!
Key Takeaways
This findings are no doubt impressive, but what does it mean overall for the every day consumer? Well, what it means for me are the following key takeaways:
- First, it definitely makes me even more cognicent of the fact that every day expenses add up quite greatly over a long period of time.
- The second key takeaway relates to the topic of wine taste. Essentially, what we all need to consider is this – Is the increased “quality” of taste of a more expensive bottle of wine absolutely necessary for you to have in a wine you drink every day?
- What I like to do is to have several good quality bottles of wine at my apartment for sharing with friends when they come over or for entertaining guests for dinner. However, on the days when it is just me at my apartment, and I feel like having a glass or two of wine with dinner, I prefer to drink more economical wines.
I hope this helps to get you thinking about little things you can do to restructure your spending and save money. And, as always, please let me know if you have any questions!
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
Best Investment Options for the Cash Portion of Your Retirement Account
Recently, my dad and I were chatting about finance, and we started talking about how he currently has invested the cash portion of his IRA (Individual Retirement Account) in a money market mutual fund. He then proceeded to tell me that the current yield he is earning on this cash is 0.01%.
In all seriousness, I was shocked when I found out that this interest rate was so low, considering that the current interest rate on my high yield savings account (taxable account) with Dollarsavingsdirect.com is 1.30%. In doing a quick search, I confirmed that not only was the rate indeed this low at the brokerage he uses, but that the money market mutual fund offered by Vanguard.com (Vanguard.com Money Market Mutual Fund Page) was very low as well (0.01%).
So, this begs the question, just what should an investor do with the cash portion of his/her retirement account?
In a previous post, I detailed an investigation in to the different taxable cash savings account options (see post My Money Blog – Savings Account Options).
However, it is clear that the landscape changes significantly when your options are limited to the selections inside your IRA or 401k. And, since the My Money Blog asset allocation rules (can be seen at the following link – My Money Blog – Asset Allocation Targets) dictate that I need to keep 5% of my retirement holdings in liquid cash assets, this is one detail that simply cannot be overlooked.
So, let’s take a look at the choices by looking at each of my two account types:
401k Cash Savings Options
- My 401k is administered via my employer through Fidelity.
- There is only one option for cash savings within this account. It is an institutional Fidelity money market mutual fund with the following attributes:
- 7 day yield of 0.21%
- 1 year return of 0.53%
- YTD return of 0.05%
Roth IRA Cash Savings Options
- As I have mentioned previously, my Roth IRA is managed through Vanguard.com.
- There are several money market options here, but the only one that I am really interested in / that applies to my circumstances is the Vanguard Prime Money Market Mutual Fund (Ticker Symbol VMMXX). It has the following attributes:
- 7 day yield of 0.01%
- 1 year return of 0.28%
As you can clearly see, the returns available at this low interest rate period in the US will not even be able to keep pace with inflation, which averages around 3.2% per year.
Surely, there have to be better options available! I mean, come on capitalism! Right? 🙂
Alternative Options
A quick search on Google.com of investment options for cash in retirement accounts does not reveal any substantial information.
Next, I then thought back on the 1st IRA I ever opened up. It was a fixed interest rate CD with Bank of America. I really opened it on accident with only several hundred Dollars, and closed it a few months later (yes, I incurred the taxes and withdraw penalty of 10% – it was a mistake!).
1) IRA CD
A quick search at Bank of America’s website revealed the following 30 month term CD for IRA accounts. Bank of America – 30 Month Term CD for IRA Accounts, with the following attributes:
- 2.10% annual yield
- $2000 minimum balance to open
- 30 month fixed term (penalty incurred if taken out of CD before 30 months is up)
- FDIC insured
2) IRA Money Market Savings Account
I also found that Bank of America offers a money market savings account designed to fit in IRAs that can be found at the following link Bank of America – Money Market Savings Account for IRA and has the attributes below:
- 0.60% APY, with a variable rate (meaning that rate will increase or decrease as the prime rate changes)
- $100 minimum balance to open account
- FDIC insured
- No fixed term. Money can be moved in and out of money market account as desired (as long as stays in IRA).
Note: In my research, I found that the banks that offer high yield savings accounts, such as the one from Dollarsavingsdirect.com, do not offer their savings account to be housed in IRA account.
So, knowing this information, what does it mean for me?
Well, in my particular case, the 30 month fixed term CD IRA does not suit me because I don’t want to have that much money tied up for the fixed term, even though it does have a higher yield. Furthermore, since the yield on the money market IRA account with Bank of America more or less matches the interest on the money market mutual fund in my 401k, I would proceed to invest my cash in the money market mutual fund in my 401k account with Fidelity. You can compare CD rates online to find the best option for your financial situation.
It is not the best return, but it also saves the hassle of having to open up yet another IRA account and keep track of it. Next, it would just be a game of hoping that the interest rates in the US increase at some point, and take this interest rate to higher levels!
Additionally, and maybe even more important, is the key takeaway that there are other investment options in IRA accounts that could yield higher returns for cash reserves than merely what is available in your pre-existing IRA or 401k account.
Please let me know if you have any questions.
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
Should You Buy Company Stock In Your Retirement Account?
Picture this!
You have been working in a dead-end government job where you are underpaid, over-worked, and under-appreciated for the past 3 years. You then get word of a job opportunity available at a hot new start-up company in Colorado. It is basically the future of the industry in which it operates. The company currently only has 20 employees, and therefore, you have the possibility to get in at the ground level of this huge happening!
You land the job, move to Colorado, and get started in your new position. After two weeks or so, it comes time to get all of your benefits, insurance, and finances in order. This includes deciding how you want to invest your 401k funds. In the 401k exist the normal options of actively managed and index mutual funds. However, since this is a hot new start-up, you also have the opportunity to buy stock in the new company at an 8% discount of the market price.
The question then becomes, “What do you do?”
Even though it is very tempting to buy stock in the hot new company with a very promising future, you absolutely should never buy stock in the company from which your salary comes for your 401k account. Say that again with me, NEVER! This even applies to company stock in larger companies on the S&P500 as well! It is never a good idea.
Why is this exactly? Basically, it all comes back to the issue of diversification and not putting all of your eggs in one basket. The whole reason I prefer purchasing index mutual funds is due to the fact that it gives you broad exposure to hundreds, if not thousands, of companies. Since there are large number of companies, if one company goes bankrupt, you will not lose large amounts of money.
Additionally, let’s take a look at an example. Let’s say that this employee at the hot new company in Colorado currently has the average US net worth of $93,100, and makes an annual salary of $50,000 at the new company. By doing the division, the first year you work for the new company, already 53.7% of your total net worth is going to be dependent on the company. This is ALREADY a very high percentage! You absolutely do not want any more dependence on this one source than you already have.
Therefore, you should try as much as possible to invest in other investment vehicles through your 401k account!
When Would You Purchase Company Stock?
So, you’re probably wondering right now if there ever exists a time when buying company stock is an acceptable behavior.
For me, the only time that I would ever buy stock in the company for which I work is in the following scenarios:
- If I used part of my alloted “play money” to buy the company stock. See post on play money for more information on this topic – My Money Blog – Play Money
- If your supervisor gave your stock options as part of a yearly bonus, and you cannot renegotiate for a cash bonus/raise instead.
- In this case, I would exercise the stock options as soon as they reached the eligible exercise price and cash out my earnings. I would not remain in company stock.
- If I was already wealthy enough to have secured a comfortable retirement for myself.
- It is perfectly fine (and actually preferred) for you to buy stock in the company for which you work if you are rich (for example – if you were a Board of Directors member) and already have made enough money to know you will live comfortably in retirement. The key takeaway with company stock is that you do not want your RETIREMENT dependent upon one company. In fact, directors of companies should own stock in the company for which they work in order to show that they have a vested interest in seeing the company do well!
As always, please let me know if you have any questions.
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
Verdict Is In On Amazon Prime Program
One month ago, I wrote the post at the link below supporting a potentially incredible new program that Amazon started offering named Amazon Prime. In this post, I encouraged everyone to sign up for the free 90 day trial that is being offered.
My Money Blog – Review of Amazon Prime Program
However, after giving the free trial a go, I regretfully have to withdraw my support for this program.
Before I explain my reasoning for this, let’s do a quick recap on what the features of the Amazon Prime Program are. Essentially, what happens is that after the free trial ends, you pay $79 per year to Amazon, and you then receive the following benefits associated with the service:
- Unlimited FREE 2-day shipping
- The ability to upgrade to one-day shipping for only $3.99 for domestic US purchase destinations
- No minimum order size.
- You can even share your membership with someone else in your household (they just have to know your birthday).
Why Is the Amazon Prime Program Not Suited To My Needs?
In my first post about the program, I added up the total amount I spent on shipping during the past year to an amount of $101. I was thinking that since the program only costs $79 per year and would give me free shipping, I would recover this initial outlay of cash in savings throughout the year. Boy, was I wrong!!!
After signing up for the free trial, I was anxious to make my first Amazon purchase and use the benefits of the program. However, what I soon found out was that for the most part, the Amazon Prime Program ONLY works for NEW items that are being sold BY AMAZON. Because I principally purchase used items from 3rd party sellers on Amazon, I soon realized that the amount I would save using this program would greatly decrease.
As an example, let’s take a look at a scenario of wanting to buy a Harry Potter DVD. Since you are a penny-pinching consumer, you want to watch the movie, but you don’t particularly need it to be brand new in the shrink wrapping.
A quick Amazon search yields the page result at the link below. In examining the page, you can either 1) buy the DVD brand new from Amazon for $9.49 (and get free 2 day shipping with Amazon Prime) or 2) buy the DVD used for $7.10 + $2.98 shipping = $10.08. As you can see from the used DVD search results, none of the used products qualify for the Amazon Prime program. So, you are really only saving ~ 50 cents overall buy using the Amazon Prime program. This to me, is not a significant enough savings to warrant the initial cash outlay of $79.
Amazon.com – Harry Potter and the Half Blood Prince DVD
This was merely a small-scale example. In the example at the link below, you actually end up spending approximately $6 more in order to buy the new version of the book through Amazon and take advantage of the Amazon Prime Program.
Amazon.com – Jim Cramer Mad Money Book
Even though the Amazon Prime program is not well suited for me, it would be appropriate for the following types of Amazon purchasers:
- If you are a consumer that demands to buy new versions of everything on Amazon
- If you are a consumer that wants items shipped VERY quickly (2 day or overnight), and cannot wait for standard shipping.
So, if the Amazon Prime Program is well suited to your needs, just keep your membership active, and you will be charged the normal yearly fee at the end of the 90 day trial. However, if you are like me, and you will not be continuing using the program, you will want to do the following to make sure you aren’t charged the $79 fee at the end of the 90 days:
- Go to Amazon.com, sign in to your account.
- Click “Your Account” link in the top right corner.
- In the “Orders” rectangle at the top of the page, you will see a “Manage Prime Membership” hyperlink. Click it.
- Then, click the button half way down the page to instruct Amazon to not automatically upgrade your account after the 90 day trial.
Please let me know if you have any questions.
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
What Do You Do with Your 401k Savings If You Are Leaving Your Current Employer?
In previous posts, I’ve discussed in great detail the following topics related to retirement accounts – IRA’s (Individual Retirement Accounts) and 401k’s:
- Differences between 401k’s and IRA’s
- Different types of IRA’s – Roth vs. Traditional
- Ways to use money out of your IRA or 401k to finance home purchases
- Additional ways to use money from your tax sheltered accounts without withdrawal penalties.
The posts associated with these topics can be found at the links below.
My Money Blog – 401k Posts
My Money Blog – IRA Posts
However, I didn’t discuss the options that are available to you regarding your 401k funds if you are leaving your current job/company, and you have 401k savings that you would like to have access to afterwards.
Note: This post will assume that you have leaving your current company before normal retirement age (you are younger than 59 1/2 years old).
Options for 401k Funds
To begin, let’s look at the general options that are available to you for your 401k funds if you are leaving your current employer. The link below is a great resource/website from Vanguard that explains the process and available options.
Vanguard.com – Options for 401k Funds When Quitting a Job
1. Withdraw Money –
The first, and probably the most apparent option, is to to sell all of your current holdings, convert them to cash, and transfer them to your checking account. However, this route should only be used as a last resort because you will incur a 10% early withdrawal penalty from the IRS, as well as be fully taxed on your earnings as income.
2. Remain in Your Current Employer’s 401k Plan –
Depending on the company, it is possible that you can remain having a 401k account with your present company after you resign/are let go. You will just need to call the HR department/benefits service center that your company has to explain the situation and see if this is a possbility.
Personally, I would steer away from this option for the following reasons:
- Employer sponsored 401k plans generally have higher expenses / fees. An interesting fact that comes to us from Lipper Inc is that the average expense ratio for Vanguard Funds (Vanguard offers IRA accounts as well as taxable accounts) is 0.23%, while the industry average is 1.19% (as of December 31, 2009).
- Employer sponsored plans have far fewer options than Vanguard or Fidelity. For example, my Vanguard Roth IRA has hundreds of mutual fund options, while my current 401k account has less than 10, many of which are not even index funds (I steer away from actively managed funds).
- There are account minimums (usually $5000) that you have to meet once you leave the company.
- Future plan contributions are either restricted or not allowed.
3. Transfer to Another Employer Sponsored Plan –
If you are leaving your company and know that you are heading to another one, this option is available to you as well. However, as with Option 2, I would steer away from it as well.
Overall, IRA’s are a far superior retirement savings instrument compared to 401k’s. The only reasons I use a 401k are to 1) take advantage of company matching (free money) and 2) to have another tax-sheltered account available to which I can add funds after I have maxed out my IRA funding for the year. Since IRA’s are superior, I always want to take opportunities that present themselves to get out of 401k’s and in to IRA’s.
4. 401k Rollover to an IRA –
Lastly (and my favorite option), 401k’s can be converted, or “rolled-over,” to IRA’s. This phenomena is called a Rollover IRA.
What Exactly Is A Rollover IRA?
Rollover IRA’s are fairly easy to understand. Essentially, they are Traditional IRA’s that are funded through a different process, and therefore, have a different name. However, once they are set up, they act the same as Traditional IRA’s in that they have the following characteristics:
- Pre-tax contributions to the account
- Self directed investment operation (you can choose your own mutual funds)
- Tax-deferred growth – earnings are only taxed when withdrawn
What’s the Process for Setting Up a Rollover IRA?
At a high level, the key to successfully converting your 401k with your employer plan to a Rollover IRA is to keep in close communication with both your employer’s HR department and the investment company to which you are rolling over your account. The process can vary depending on the company you work with, but the general flow will be as shown below:
- Notify your company and the investment company where you will set up the Rollover IRA of what you want to do.
- Be prepared to give specific account information (account numbers, routing numbers, etc) to both parties in order to complete the transaction.
- You will then set up an IRA account online with the investment company (I prefer Vanguard) and elect which mutual funds you want to purchase with the 401k holdings.
- Your employer sponsored 401k account holdings will be liquidated, and the cash will be transferred directly to your Rollover IRA.
- And, you’re done! Not too bad right?
What are the Benefits and Drawbacks to a 401k to IRA Rollover?
- You have a lot of flexibility within your IRA account to invest in different mutual fund options
- You can set up the account with a company like Vanguard or Fidelity, which will have lower fees and a more numerous fund selection than your employer’s 401k plan.
- No fees to set up the Rollover IRA with Vanguard. There may be some small fees associated with transferring your 401k to Vanguard.
- No account minimums and no restrictions on future contributions.
- Drawback – For all practical purposes, if you have company stock (which I greatly discourage), you will have to sell it before converting your 401k account to a Rollover IRA. What is the reason for this? Typically, accounts with mutual fund companies like Vanguard and Fidelity work better if you use them for only mutual funds. It is possible to have a brokerage account within your Vanguard account, but the fees are generally pretty high.
Below is the Rollover IRA website from Vanguard.com. It is a great resource to get started converting your 401k funds to an IRA. I would highly recommend using them! Please let me know if you have any questions.
Vanguard.com – Converting a 401k to a Rollover IRA
Keep on learning!
Jacob
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3000 Site Visitors
Good Friday Morning Fellow Readers!
Last night, we passed the 3000 site visitors mark. This is quite an exciting milestone! Thanks everyone so much for tuning in and reading.
Remember: this site is for you, so if you have any post/topic requests, just post them as a comment on one of the blog’s postings. I’ll immediately receive an email notification that someone shared something.
Also, to celebrate this exciting site milestone, I wanted to share a great link/resource that one of our readers sent my way. At this link, you have free access to the most complete set of financial calculators that I have ever seen in one website. They offer the following types of calculators:
- Insurance calculators
- Mortgage calculators
- Should I rent vs. own?
- Retirement calculators
- Savings calculators
- Investment calculators
- Business calculators
Jeff Williams, CPA – Financial Tools / Calculators
All are in a java-script format, so they are easy to understand, run, and use.
Please let me know if you have any questions. Thanks for reading.
Keep on learning!
Jacob
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog:
Ways to Use Your IRA or 401k Without Withdrawal Penalties
In a recent post titled, My Money Blog – Innovative Ways to Obtain Cash for a Downpayment, I discussed how it is possible to use funds from your IRA or 401k to assist in a “first-time” home purchase.
In investigating this, I actually found out that there are quite a few other ways that funds from your retirement accounts can be used without incurring the normal 10% withdrawal penalty.
However, before going in to these “innovative” uses for, let’s talk about what the age threshold is that you are able to withdraw funds from your retirement accounts under normal circumstances. This age threshold is 59 1/2 years old.
Aside from performing an IRA or 401k withdrawal at this “normal” age, government rules allow an individual to tap in to retirement (IRA and/or 401k) reserves for the following reasons:
- If the person works for the Army Reserve and is called in to duty after the date, Sept. 11th, 2001.
- To pay for medical insurance premiums if you are unemployed.
- For unreimbursed medical expenses (in other words, not covered by your insurance) greater than 7.5% of an individual’s income.
- If a person retires after age 55.
- If the person’s life expectancy is cut short (example – due to cancer, a person only has 1 year to live), and the distributions are made as part of equal payments over the account holder’s life expectancy.
- To pay for college/higher education. However, only IRA funding can be used for this purpose.
Truthfully, I was not aware of most of these uses that do not incur withdrawal penalties. However, it is very nice to know that rules are set up around retirement account withdrawals that can help individuals through hardships.
The use that sticks out most in my mind is the idea of using the funds to pay for higher education. For example, if I ever plan to take continuing education classes online or go back to school part-time through night classes, I’ll have another option for paying for the cost of tuition if funding in my cash accounts is running low.
Hope this information was helpful to you. Please let me know if you have any questions!
Keep on learning!
Jacob
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