Retirement

Banks vs. Credit Unions

Before starting a savings account, making investments, and making your own financial plan, you have one choice to make. Should you put your trust in a bank or a credit union? From the outside, the two financial institutions appear the same. What you do not know, however, could be the difference between becoming a member of a local bank or the local credit union.

Charles Funk, president and chief executive officer of MidWestOne Bank in Iowa City, Iowa delves into the subject.

“From the outside, banks and credit unions look basically the same,” Funk says of the two financial institutions. However, there is one distinct difference. Credit unions were created with the goal and mission to serve the under served. Taking a quick look at how credit unions have grown into a large brand shows how the original goal has been strayed from.

Banks have common stock and shareholders, whereas credit unions have members instead of shareholders. This also means that, unlike banks, credit unions do not pay income taxes. This allows them to use more of the money the collect for profit.

Banks and credit unions both offer similar services, from checking to savings accounts but how they operate on the inside is not as similar as the outside appears.

When it comes down to it, the choice between using a bank or credit union is up to the student. The thing to remember is to check all available options and find the one that works best for you.

My First Certificate of Deposit

Certificate of deposits are basically similar to a savings account that earns interest. The interest rates are only fixed interest rates. These types of accounts can only be set up through a commercial bank. When a person gets a CD, they will generally have it for only 1 month to 5 years. CD accounts benefits anyone who gets it, because you cannot withdraw any funds from that CD account. If you do, you will have to incur a penalty.

CD

If you want to setup one of these accounts you will have to visit a bank branch. Some banks even let you open these CD accounts up online. For example, if you open up a CD account with Chase, you will have to choose from a 6 month account, and up. These accounts require a $1,000 opening balance. If you have that, you will be on your way to go. Some banks require a opening balance of $5,000, or more to get started with them. The same rules will apply if you visit the branch in person, as far as the opening balance and information needed.

You will need information as far as your social security number, driver’s license or state identification, and checking, savings, or brokerage account and routing number to make your initial deposit. Some of these banks let you pick a term for as long as 10 years, but as stated before, it depends what bank you open it through.

Depending on the length of the CD term that you choose, that will determine the interest rate. The higher the term, the higher the interest rate will be. It doesn’t matter which term you choose, the opening amount will still be the same. All you would have to do after you have all the required information, is fill out the application, whether online or in person. These applications will not take much of your time. The entire process is simple, and before you know it, your CD account will be open in no time. They are good accounts to have, if you are looking to save some money with interest. You will just need to make sure that you have that opening balance already so that you won’t have to worry about anything else. Let the interest start building.

What is a Cafeteria Plan?

A cafeteria plan is an employee benefit plan that allows an employee to choose where he wants his money to be invested. Also sometimes known as or a business plan, it is called a cafeteria plan because it allows the employs to have certain budget to spend in line with the facilities available or that the company has options in.

The benefits can vary; different forms include cash, health insurance, adoption assistance, paid leave and other benefits. The employee gets to choose between different types of benefits and to create a mix and match sort of plan that can include cash and/or a qualified benefit plan.

Most cafeteria plans today are operated through a salary reduction agreement. This enables the plan to be able to include a tax saving opportunity that can be enjoyed by both employer and employee.

The cafeteria plan is easy to set up; all that is needed to start a formal cafeteria plan is a document summary and a plan description.

This starts by reviewing a company’s cafeteria plan policy and helps to outline the expenses that are eligible for reimbursements. For instance if an employee is considering child daycare to cater for their child while they are at work, they can work out or estimate the daily out of pocket expenses which would usually help to cover up the daycare expenses. These are then multiplied by the weekly charge and by the number of weeks the child is the system, inclusive of holidays and vacations.

It is important to note that all the deductibles are exhausted during the year. After this, include the respected annual expenditure you believe you will claim and divide the final figure by the number of disbursement intervals that the company has planned for it’s financial year. This final figure will be taken out of your paycheck every period.

As long as you are in an eligible year, you then get to send the eligible expenses you incurred. These are filled in against a reimbursement claim form, after which a copy is made and then it can be sent either by fax or mail to the cafeteria plan provider for reimbursements.

While the cafeteria plan reduces on income tax payments for employees and employers, it is not a benefit that you will find typically with every firm. This is because it is not a federally enforced requirement for employers. As a result, not all companies offer a cafeteria plan or have a cafeteria plan policy but it is suitable for a wide range of businesses; even small business enterprises are eligible for this kind of policy.

However, it does pay to have one, apart from the usual tax savings advantages it offers; a job prospect certainly appears more competitive when a cafeteria plan is an option.

What is a Living Will

Imagine a man who was in a serious accident with injuries so severe that he was being kept alive by a respirator and a feeding tube. His family has been at his bedside for weeks with no response from him and prospects for his recovery are grave at best. His family and doctors are helpless to do anything but wait because he can not speak for himself and let them know that he would rather they pull the plug and let him go peacefully than to exist like this. This situation could have been prevented if this man had a living will.

living will
Always be careful when signing important documents!

A living will is a legal document that lets a person inform their family and doctors of his/her wishes regarding life-sustaining procedures in the event that they are incapacitated or rendered permanently unconscious. People don’t really expect this to happen to them, but the fact is that it happens all the time. Most people don’t want their family to be burdened with the choice about “pulling the plug”, and in some states, if there is no living will stating a person’s wishes, the doctors are not permitted to discontinue life-support. For this reason, it is important for everyone to draw up a living will.

Because laws surrounding living wills vary from state to state, it is advisable to seek out the help of an attorney who specializes in estate planning. A lawyer can answer all questions and make appropriate recommendations as to what documents should be set up and whether a Medical Power of Attorney should be named. (A Medical Power of Attorney is a person who will make medical decisions on someone’s behalf if they are incapacitated, but their medical condition is non-life threatening.)

The living will contains a list of directives for doctors and family to follow relating to resuscitation, life support, breathing tubes and feeding tubes. The person writing a living will has the right to decide how they want their medical care to be handled in all of these situations and others not mentioned in the scope of this article. The decisions made in the living will are not automatically acted upon in any life threatening situation. A heart attack, for example, is life threatening, but the prospects for recovery are good after a heart attack, so medical personnel will resuscitate and do anything possible to revive the person. The living will usually comes into play for a person with either a terminal illness or someone who has been declared permanently unconscious with no prospects of recovery.

After a person takes the steps to set up a living will, the most important thing to do is make their doctors and family aware of the document. It can be a difficult discussion to have, especially with family members, but the living will only works if the right people know it exists. After the document has been completed, copies of it should be provided to the family doctor and immediate family members so that they can carry out its directives.

 

How a Target-Date Fund Works

A “target-date” fund is a mutual fund consisting of typical assets such as stocks, bonds, cash or cash equivalents. The percentage mix of assets is reshuffled automatically by the fund to meet the objective of the investor by a certain future date, such as retirement.

The main advantages to a target-date fund are: low minimum investment which provides for greater diversification of outside investments, the fund is managed by a professional fund manager, and there is low investor maintenance or monitoring once the initial investment has been made.

As the preselected date approaches, a target-date fund will shift assets towards more conservative investments to avoid or attempt to mitigate any downturns in the economy. This re-allocation is done with no direction or input of the investor but by the mechanics of the fund itself.

When selecting a target-date fund, it is important to examine the initial composition of the fund assets. All funds typically have different percentage allocations based in equities or stocks, bonds, and cash. The difference between the funds rests in the make up of the allocations. One fund may be made up strictly of domestic equities and treasury bonds, while another fund may have a portion of the equities and bonds based internationally. There can be other differences among funds, such as what type of equities are in the asset mix, whether they are large, small or mid-cap stocks, or if the equities are from emerging markets, or the type of bonds and cash equivalents that make up a portion of the fund.

A disadvantage of a target-date fund is that they are not independent. The target-date fund is usually a compilation fund made from the offering company’s other funds. This compilation of other funds can lead to higher expense fees depending upon how a fund company computes their charges, the fee for managing the target-date fund may include all or part of the fees charged for the component funds. Hence the investor in the target-date fund is paying a fee for the cost of managing the component fund as well as the target-date fund.

Whether an investor should or should not invest in target-date funds depends upon how much the investor wants to be actively involved in the management of his or her retirement fund. If the investor wants to be an active participant continuously until retirement, then a target-date fund is not the best investment choice. Conversely, if an investor does not want to be involved in the direction or management then a target-date fund offers that convenience, however, the more passive investor will need to investigate, compare, and analyze the target-date fund before committing to invest in the fund in order to assure that the retirement goals will be met.

An investor must perform due diligence with any fund. With a target-date fund the diligence and investigation must be in depth and up front. With a more traditional self-directed fund the investor must continually monitor during the entire investment in the fund.

What is a Pension?

A pension plan is a specific type of retirement plan in which the employer will make a contribution to funds that have been put aside for the employee’s future benefit. This money is then invested on behalf of the employee permitting benefits to be received at retirement. As a general rule, a pension plan is tax exempt, is built up over numerous years, and consists of money that was contributed by both the employer and the employee.

retirement

How Do I Get a Pension Plan?

A pension plan comes with the job. All you have to do is show up to work and work. When you become an employee, you are enrolled in the pension plan with your employer automatically. However, some companies do require that you are employed for a full year before you are officially enrolled in the pension. And just because the pension is yours does not mean that you have any say so in the investment decisions.

When Can I Have Access to My Pension?

You cannot obtain early access to your pension plan. You will be unable to gain access to the funds from your pension until you have retired from the company. As a general rule, retirement age is 65; however, some companies may allow you to begin payments at 55 for early retirement. If you choose to begin receiving early retirement benefits from your pension, you won’t receive as large of a monthly payment as you would if you were at full retirement age.

Upon retirement, you will begin receiving monthly installments of the same amount each month until the funds have been depleted. The payout will generally depend on your length of time with the company as well as your salary.

What to Know About Pension Payouts

When you do begin receiving payments from your pension plan, you will be responsible for paying taxes on the funds received throughout the tax year. Because of this, a pension plan is considered as a form of a retirement plan.

Now, while most individuals opt for the monthly installments, those with a pension plan do have the option to choose a lump sum payment upon retirement. However, by choosing the lump sum option, you are given all the funds at once meaning that taxes must be paid on the entire amount at the end of the tax year. In addition, you could leave yourself with no money in the long-term by spending too much upfront. The wiser option is the monthly installments; however, the choice is ultimately yours to make.

Don’t Rely on a Pension Alone

When it comes to planning your retirement, you should never rely on one individual retirement plan to carry you through your retirement years. This is extremely true with pension plans since a pension is not going to be enough to carry you through.

Investing in Bonds

Have you ever thought of making some extra money with the money that you already have? If it could take no work at all and the interest rate on your money is insane. You really can earn money for simply investing and it will be easy and is a great option for anyone. The most common bought bond and the one you will most likely want to purchase are individual bonds.

Individual bonds are usually sold in $5,000 dollar parts and they are considered OTC bonds. OTC simply means over-the-counter. You don’t have to get anything special to buy these bonds except the initial cash investment. Bonds are not quoted at the $5,000 ratio, most are quoted as if they were sold in $100 increments. They are rated based upon this. According to the ratings if your bond was quoted at 98 it would be $98 per $100. In the $5,000 bond this means you payed $4,900 for your bond or 2% less than it is worth for selling. Now this is a good thing because you can essentially buy bonds for a cheap price and wait a while to sell them for a profit.

Bonds are not a short term money maker, they require quite a bit of long term investment and good choices. You always want to try and buy bonds in an area that you feel knowledgeable and comfortable. This greatly increases your chances of knowing what you are investing in and making some money off of your bond.

Next, there are some bonds that are called bond funds. This is essentially the same as a stock fund in that a professional manages a bond fund for you and gives advice on things such as reinvesting bond interest and where to place your next bond. Bond funds are initially a service provided to you so they do require a management fee. This fee can be either an initials start up fee or a periodical management fee. When investing this fee should come into account as it will lower the overall money you are making from your bonds.

In some cases however this professional advice is worth the amount out of bond profit. Options like the bond funds are great for beginning bond investors who are still assessing the market and aren’t very experienced with investing in bonds for a profit. Thirdly there are market bonds. These are the quick cash bonds that are high risk. They require an initial investment of anywhere from $1,000 to $10,000 on fast moving bonds. The investor can withdraw at any time and these usually offer the highest profit per time period.

Lastly there are Bond unit investment trusts. These are by far the most stable bonds as the investor knows exactly how much they will make because the portfolio of bond profit is a constant rate. These trusts are good for large investments or investors who want security with their bond.

Starting a Roth IRA

A Roth IRA is a tax- deductible fund that was introduced by Senator William Roth of Delaware in 1997, as part of the Taxpayer Relief Act. Putting one’s money into a fund of this type can be a very profitable way of investing for retirement. Absolutely anything can be invested in such a retirement fund, and all of the money so invested may be withdrawn at any time free of tax. Opening a Roth IRA is likewise a very simple and easy process: The customer simply goes to the bank and ask for the forms he or she needs to fill out. Having done so, he then returns the forms to the bank and deposits money into the newly- opened Roth IRA account, by one of three ways: a check, cash, or a transfer from one’s savings account.

Constant fund monitoring is crucial. It is also possible to open a Roth IRA with an online brokerage. Fidelity Investments is an example of such a company. Registering for an account in this way is even simpler, requiring the customer to give some personal information. Once the applicant has given this information, he can deposit money into his new account. The funds in the account can then be invested in almost anything, including mutual funds, stocks, and bonds.

Tax refund money should be invested in one’s Roth IRA. There is a limit on the amount that can be invested in the account each year, depending on one’s age (those over 50 can pay an additional “catch up” contribution). This maximum changes each year, and so it is important to check this upon starting the account. How much one can invest also depends on one’s tax- filing status, that is, whether the holder is (1) single; (2) married, filing separately; or (3) married, filing jointly. Contributions can never be made with investments; they can only be made with cold, hard cash. And over the age of 70 1/2, there is no minimum to how much can be deposited in the account.

For anyone far- sighted enough to think about planning for the future, opening and investing in a Roth IRA can be a secure, intelligent path to take.

What is a 401k?

What is a 401k

By – Richard Adams
A 401K is a savings plans that is offered to employees by employers as a means of encouraging investing for the future and retirement. They differ from an Individual Retirement Plan (IRA) in that they are only offered through the workplace and both the employer and the employee can make contributions toward them. A 401K is a great investment opportunity, especially for people who are starting young and may have several hundred thousand dollars available to them when they retire. If you are at least 21 years old and are employed by a company that offers a 401K, you would be wise to take advantage of the opportunity.

Employer Matches

Most employers offer an even greater incentive for employees to save by providing matching funds up to a certain percentage of the employee’s contribution. For example, if you have five percent of your paycheck withheld every two weeks for your 401K, your employer may choose to donate half that amount, or 2.5 percent, into your account. In order to be eligible to keep the employer contributions, you usually need to stay with them for a set amount of time to be vested. Your vesting increases by the number of years you have worked for your employer, and after a set number of years, you are fully vested and are able to keep all money that your employer contributed to your 401K.

Tax Benefits

The amount of money you contribute to your 401K is done on a pre-tax basis, meaning you pay no tax on it until you make a withdrawal at retirement. Your 401K contribution for the year will show on your annual W2 statement, but you are not required to report it to the IRS.

Early Withdrawal Penalties

If your company allows you to borrow against your 401K before retirement, the amount you borrow will be subject to both a penalty and taxation.

Read more at:
Smartmoney 401(k) Center – 401(k) information center with various articles and tips and advice.
NPR : True Value: The Young Worker and a 401(k) – A talk about the value of 401(k) retirement savings accounts for young workers and retirees.