topic Re: Savings Account vs. Other Options in Personal Finance

Savings Account vs. Other Options

gamegrrl — Sun, 30 Mar 2014 16:43:53 GMT

I need to make a decision about this prior to April 7th, due to the window of opportunity for making changes to my 401K contributions.

I spent several decades as a working artist. Great fun. Many adventures. But was never able to save a dime. My biggest accomplishment was that my house was paid off. LOL! No savings. No retirement plans/accounts. Just grateful to get from paycheck to paycheck with a tiny balance remaining in my checking account.

Five and a half years ago, I was offered a corporate job out of the blue. I saw the writing on the wall (bad economy graffiti!) and jumped at the opportunity. I've spent the past five years cleaning up some pesky credit stuff and getting my financial life in order.

I am 57 years old. I make about $58K/year. I sock $100/wk into a basic savings account, and have a $12K balance. Well, until next week when I will pull $3K out to put in a traditional IRA to lower my 2013 tax liability. So let's say I have a $9K balance in my savings account.

In March of 2013, I finally took the plunge and started contributing to a traditional 401K at work. I contribute 5% (the minimum) and they match 3%. As of today, I have $5,500 in that 401K, and a return rate of 13.91%.

I am trying to decide if I should just continue on as I am with $100/wk into savings and contributing to the 401K at 5%, or if I should be doing something else. Maybe $50/wk into savings and up my 401K contribution to 10%. My 5% right now means $119.58 out of my paycheck, so I'm figuring 10% would be $239.16. That $200+ would have to come from somewhere, and reducing my weekly savings seems like a logical place to take it from.

There is also a Roth 401K option at work. I can divide my contributions between the two if I wish.

I wish I had more money to save or tuck away for the future, but I just don't. Frankly, after all those years of not being able to save a penny, I get a great deal of satisfaction watching my savings and 401K grow. I'm just not sure what the smartest thing to do is. I feel I need to keep $12K liquid in my savings account as an emergency fund (6 months of expenses), but I hate that I'm essentially not "growing" that chunk of money at all because interest rates are so darn low.

Thoughts?

Re: Savings Account vs. Other Options

compassion101 — Mon, 31 Mar 2014 02:44:08 GMT

It's good that you have an emergency fund established and are investing from there out. There are certainly ways to make better money than a savings account but it comes with risk that might be unacceptable to your emergency fund. I would suggest you talk to a financial advisor. One that doesn't charge commisions based on investments but rather a service fee.

I listen to this guys podcast all the time and his firm has some sort of free starter service. I'd try it. Most people think they don't have enough moneyto warrant hiring a financial advosir but most are wrong. You definitely sound like you should get one to make sure you are on the track you want to be on.

Re: Savings Account vs. Other Options

coterotie — Mon, 31 Mar 2014 20:35:11 GMT

Because of your age you can essentially withdraw penalty free from your IRA. So I would park most of your emergency fund there. Secondly, pick some stocks that pay a nice dividend or maybe a fund like a rising dividend fund. You essentially put a floor under the investment because of the dividend and you get some capital gain appreciation and dividend increases over time (there is a fund called the dividend aristocrat fund) or you can simply go old school and buy DIA (diamonds) which will give you a nice dividend and diversification across the dow 30. Keep about 50% in cash equivalents and the rest in some of one of the above. Since you can deduct the IRA from your taxes, having it in your 401k doesn't really help you as much as other people and being able to access it easily is important. You're just losing 5 or 6% per year having it in a plain jane savings account.

And instead of putting 100/week into the savings account and then once a year tranferring, put 100/week into the IRA and dollar cost average into your investments. Doing it in April guarntees buying at market peaks each year.

@gamegrrl wrote:
I need to make a decision about this prior to April 7th, due to the window of opportunity for making changes to my 401K contributions.

I spent several decades as a working artist. Great fun. Many adventures. But was never able to save a dime. My biggest accomplishment was that my house was paid off. LOL! No savings. No retirement plans/accounts. Just grateful to get from paycheck to paycheck with a tiny balance remaining in my checking account.

Five and a half years ago, I was offered a corporate job out of the blue. I saw the writing on the wall (bad economy graffiti!) and jumped at the opportunity. I've spent the past five years cleaning up some pesky credit stuff and getting my financial life in order.

I am 57 years old. I make about $58K/year. I sock $100/wk into a basic savings account, and have a $12K balance. Well, until next week when I will pull $3K out to put in a traditional IRA to lower my 2013 tax liability. So let's say I have a $9K balance in my savings account.

In March of 2013, I finally took the plunge and started contributing to a traditional 401K at work. I contribute 5% (the minimum) and they match 3%. As of today, I have $5,500 in that 401K, and a return rate of 13.91%.

I am trying to decide if I should just continue on as I am with $100/wk into savings and contributing to the 401K at 5%, or if I should be doing something else. Maybe $50/wk into savings and up my 401K contribution to 10%. My 5% right now means $119.58 out of my paycheck, so I'm figuring 10% would be $239.16. That $200+ would have to come from somewhere, and reducing my weekly savings seems like a logical place to take it from.

There is also a Roth 401K option at work. I can divide my contributions between the two if I wish.

I wish I had more money to save or tuck away for the future, but I just don't. Frankly, after all those years of not being able to save a penny, I get a great deal of satisfaction watching my savings and 401K grow. I'm just not sure what the smartest thing to do is. I feel I need to keep $12K liquid in my savings account as an emergency fund (6 months of expenses), but I hate that I'm essentially not "growing" that chunk of money at all because interest rates are so darn low.

Thoughts?

Re: Savings Account vs. Other Options

gamegrrl — Mon, 31 Mar 2014 20:39:48 GMT

I thought I couldn't draw from my IRA until age 59 1/2.

And income-wise, this will probably be the last year that I can fully claim my IRA deduction because of income limits.

Re: Savings Account vs. Other Options

mongstradamus — Mon, 31 Mar 2014 21:14:12 GMT

@gamegrrl wrote:
I thought I couldn't draw from my IRA until age 59 1/2.

And income-wise, this will probably be the last year that I can fully claim my IRA deduction because of income limits.

If its an Roth IRA you can withdraw your contributions tax and penalty free. Just be aware that your contribution will be taxed.

Re: Savings Account vs. Other Options

Revelate — Mon, 31 Mar 2014 21:44:55 GMT

@gamegrrl wrote:
I thought I couldn't draw from my IRA until age 59 1/2.

And income-wise, this will probably be the last year that I can fully claim my IRA deduction because of income limits.

If you're going to be constrained via income limits in the future for contributions, put as much as you can in today to a tax-advantaged account. I wish I'd done that, at some point during retirement I'm going to be at a lower tax rate, and it sounds like you will as well.

To clarify another post, the $100 / wk "dollar cost averaging" doesn't work out given the transaction fees most brokerages charge (between $5-$10); personally if it's more than 1% of the dollar amount I intend to transact on, I won't do it. My minimum transaction currently is $1000 for $7.95, doing that on $100 is a whopping 7.95% right off the top, or approximately a year of gains if we look at historical market averages: make certain that the amount you're investing in any one transaction makes sense.

Personally if I were you I'd simply be putting as much money as I could into the 401k going forward and calling it good. I'm also dubious on using the Roth IRA as an emergency fund (based on my read of the IRS regulations it just doesn't work but I am not a financial expert) but you're so near the no-penalty withdrawal age that it is likely moot regardless.

Re: Savings Account vs. Other Options

gamegrrl — Mon, 31 Mar 2014 22:38:02 GMT

The income restraints will just apply to IRA contributions. This $3K traditional IRA I am buying is just to pull my fat out of the fire for my 2013 taxes.

I've gone ahead and 1) set up the traditional IRA, 2) increased my standard (vs Roth) 401K contribution from 5% to 10% and I'm going to continue to feed my savings account until I get it back up to where I want it, which is $12K.

Once I get to that point, then maybe I will stop contributing to the savings account altogether, and start socking extra money into the Roth 401K at work.

PS - The Expense Ration for the fund where I invest my 401K money is 1.17.

Re: Savings Account vs. Other Options

mongstradamus — Mon, 31 Mar 2014 23:05:48 GMT

@gamegrrl wrote:
The income restraints will just apply to IRA contributions. This $3K traditional IRA I am buying is just to pull my fat out of the fire for my 2013 taxes.

I've gone ahead and 1) set up the traditional IRA, 2) increased my standard (vs Roth) 401K contribution from 5% to 10% and I'm going to continue to feed my savings account until I get it back up to where I want it, which is $12K.

Once I get to that point, then maybe I will stop contributing to the savings account altogether, and start socking extra money into the Roth 401K at work.

PS - The Expense Ration for the fund where I invest my 401K money is 1.17.

With an expense ratio that high i would think about contributing to ira first since you can choose what investment you want to use. This is for me personally I would not like to invest in anything that is above .5% for expense ratio.

Re: Savings Account vs. Other Options

gamegrrl — Mon, 31 Mar 2014 23:24:58 GMT

I wanted to keep the expense ratio around 1.0, but I've been really pleased with the returns and have been reluctant to change anything. The returns I can get on any of the IRAs I looked at weren't anywhere near to what I'm getting from my 401K. It's like 1.45% (IRA) vs 13-16% (401K).

Re: Savings Account vs. Other Options

mongstradamus — Tue, 01 Apr 2014 00:00:47 GMT

@gamegrrl wrote:
I wanted to keep the expense ratio around 1.0, but I've been really pleased with the returns and have been reluctant to change anything. The returns I can get on any of the IRAs I looked at weren't anywhere near to what I'm getting from my 401K. It's like 1.45% (IRA) vs 13-16% (401K).

Are you looking at returns for IRA from Bank? Ira you can use to buy stocks, mutual funds , etf or target retirement funds. If you wanted you could match the exact same mutual funds/stocks you have in 401k. For me i opened an ira and just used an very cheap Target retirement fund. I just picked what assett allocation i wanted and was done with it.

Re: Savings Account vs. Other Options

gamegrrl — Tue, 01 Apr 2014 00:09:52 GMT

I've been looking at what's offered by Navy Federal Credit Union (NFCU). I just needed to do something fast (before April 15th), for just a three year term. They're offering $100 right now for opening the IRA, too.

I don't really see myself getting too deeply involved with IRAs because after the 2013 tax year, I won't be able to take a full tax deduction for them as I can my 401K.

Re: Savings Account vs. Other Options

gamegrrl — Tue, 01 Apr 2014 00:11:22 GMT

BTW, my 401K is Target retirement fund. I'm really happy with how it has performed over the past year.

Re: Savings Account vs. Other Options

coterotie — Tue, 01 Apr 2014 14:08:36 GMT

You are correct, 59.5, however given that you're 57+ your risk is only 2 years at most. I would take that risk given what you posted in your original posts. I'm not saying put all of your emergency fund there, but given the tax advantages (25% return on ivestment the year the contribution is made, and the tax deferred return) I would take the risk, especially if you have some credit lines that could bail you out of an unexpeced car breakdown or ER visit.

@gamegrrl wrote:
I thought I couldn't draw from my IRA until age 59 1/2.

And income-wise, this will probably be the last year that I can fully claim my IRA deduction because of income limits.

Re: Savings Account vs. Other Options

coterotie — Tue, 01 Apr 2014 14:12:12 GMT

Sharebuilder.com doesn't charge any transaction fees for dollar cost averaging IRA accounts. There is also a no-commission trading web site that just started up as well. For education savings upromise doesn't charge commissions either.

@Revelate wrote:
@gamegrrl wrote:
I thought I couldn't draw from my IRA until age 59 1/2.

And income-wise, this will probably be the last year that I can fully claim my IRA deduction because of income limits.

To clarify another post, the $100 / wk "dollar cost averaging" doesn't work out given the transaction fees most brokerages charge (between $5-$10); personally if it's more than 1% of the dollar amount I intend to transact on, I won't do it. My minimum transaction currently is $1000 for $7.95, doing that on $100 is a whopping 7.95% right off the top, or approximately a year of gains if we look at historical market averages: make certain that the amount you're investing in any one transaction makes sense.

Re: Savings Account vs. Other Options

Revelate — Tue, 01 Apr 2014 18:05:30 GMT

@coterotie wrote:
Sharebuilder.com doesn't charge any transaction fees for dollar cost averaging IRA accounts. There is also a no-commission trading web site that just started up as well. For education savings upromise doesn't charge commissions either.

@Revelate wrote:
@gamegrrl wrote:
I thought I couldn't draw from my IRA until age 59 1/2.

And income-wise, this will probably be the last year that I can fully claim my IRA deduction because of income limits.

To clarify another post, the $100 / wk "dollar cost averaging" doesn't work out given the transaction fees most brokerages charge (between $5-$10); personally if it's more than 1% of the dollar amount I intend to transact on, I won't do it. My minimum transaction currently is $1000 for $7.95, doing that on $100 is a whopping 7.95% right off the top, or approximately a year of gains if we look at historical market averages: make certain that the amount you're investing in any one transaction makes sense.

That's handy information, thanks!

Re: Savings Account vs. Other Options

bobebob — Mon, 07 Apr 2014 22:48:36 GMT

@mongstradamus wrote:
@gamegrrl wrote:
I thought I couldn't draw from my IRA until age 59 1/2.

And income-wise, this will probably be the last year that I can fully claim my IRA deduction because of income limits.
If its an Roth IRA you can withdraw your contributions tax and penalty free. Just be aware that your contribution will be taxed.

~~That is true. But only IF the Roth account has been open for a minimum of 5 years.~~

My understanding of the 5 year rule is that to be considered a "qualified distribution" (I.E. tax and penalty free for contribution only or contribution and earnings if over 59.5), you must have held the account for a minimum of 5 years before the distribution is made.

So if the OP is just now opening a Roth account at age 57, he will have to wait until he is 62 (or 63 depending on his birthday and when the account was opened) to withdraw ANY of the contributions OR earnings tax OR penalty-free.

Given that traditional 401K withdrawals can be made penalty-free at 59.5, it seems pointless to me to have the OP put his money in a Roth account where he will be penalized for withdrawing it for 2-3 years longer than in a traditional 401k.

I applogize for the incorrect information. According to IRS publication 590, withdrawals from the Roth IRA contributions are not subject to the 5 year rule.

Re: Savings Account vs. Other Options

compassion101 — Sun, 06 Apr 2014 20:44:01 GMT

@bobebob wrote:
@mongstradamus wrote:
@gamegrrl wrote:
I thought I couldn't draw from my IRA until age 59 1/2.

And income-wise, this will probably be the last year that I can fully claim my IRA deduction because of income limits.
If its an Roth IRA you can withdraw your contributions tax and penalty free. Just be aware that your contribution will be taxed.
That is true. But only IF the Roth account has been open for a minimum of 5 years.
My understanding of the 5 year rule is that to be considered a "qualified distribution" (I.E. tax and penalty free for contribution only or contribution and earnings if over 59.5), you must have held the account for a minimum of 5 years before the distribution is made.

So if the OP is just now opening a Roth account at age 57, he will have to wait until he is 62 (or 63 depending on his birthday and when the account was opened) to withdraw ANY of the contributions OR earnings tax OR penalty-free.

Given that traditional 401K withdrawals can be made penalty-free at 59.5, it seems pointless to me to have the OP put his money in a Roth account where he will be penalized for withdrawing it for 2-3 years longer than in a traditional 401k.

Incorrect. The 5 year rule only applies to the earnings that the account made, not the contributions (unless they are rolled over from a traditional IRA)

She can withdraw all contributions without tax implications at any time.

Re: Savings Account vs. Other Options

Anonymous — Mon, 26 May 2014 05:10:40 GMT

I'm surprised no one yet mentioned that this should be a high-yield savings account. I use Barclays which has one of the best APRs of 0.9%. Better than your money just sitting there doing nothing!

Also, think about taking $25 a week and buying alternating logn and short-term CDs. That way they'll start maturing consistently every week in a couple of years in case... I have some 10-year and some 1-year which will start maturing end of this year and I can use it or re-invest it.

These ideas might sound simple (and they are, since I'm just starting over in this game... also after years of attempting to get ahead as an artist), but I think they are a good balance for the IRA/401K ideas.