Monthly Archives: November 2009

Why I Love Flexible Savings Accounts

Written by in Employment
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My employer offers me a Flexible Savings Account (FSA) and if you have the opportunity, you should take advantage of it.

What is an FSA?

The Health Care FSA allows you to set aside up to $5,000 of your income before any taxes are withheld for reimbursement of eligible health, dental, and vision expenses which are not paid by a health plan. The expenses must be incurred by you or your dependents (for federal income tax purposes). Anything you pay out of your own pocket for eligible medical care, such as deductibles, copays, eye exam fees, eye glasses/contacts costs, some over-the-counter drugs, and dental expenses such as orthodontia, are usually reimbursable expenses.

Why do I love it so much?

The FSA not only comes out of your salary pre-tax, but it is basically a way of budgeting for health expenses. Sometimes we should plan for them, such as dental appointments and regular doctor appointments. Others, however, we don’t see. In emergencies, we often have to pay out of pocket for certain expenses. I advocate setting aside a little bit of money for medical expenses so we’ll be prepared when something happens.

An FSA does the budgetting for us by taking out a little big from each paycheck and in return we get a debit card that we can use for health expenses. The best part? Instead of like my budget where I set aside money each money and after a year I have a hefty sum, the FSA gives you the money upfront and then takes money over the course of the year. So your mind is immediately put at ease and you don’t need to worry about coming up with cash should something happen.

Restrictions

When leaving an employer, the rules vary, but often times you can use the total amount designated for the FSA at the beginning of the year, while at times you may not use the remaining money in your FSA after the termination of your employment.

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Best of the Rest: ING Direct Black Friday Sale Edition

Written by in Best of the Rest, Saving
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Hopefully most of you did not go out this morning, I think that would have been a big mistake. I have friends who go out early and buy 10 DVDs for “only” $7 each. But in the end, they spend $70 on something they don’t really need. My suggestion is to stay in and only buy things if you know what you want AND find a good deal in advance.

I’ve been waiting all week for this, and ING has finally released it’s Black Friday Sale. Definitely not a disappointment Earlier in the week, it was announced that ING Direct would offer $683 off Mortgages ($683 is the average amount Americans will spend on gifts this holiday season).

The unannounced specials were released early this morning and here they are:

  • 2% APY for a 12-month Orange CD.
  • $121 Account Opening Bonus when you open an Electric Orange Account! ($121 is the average amount consumers pay in overdraft fees annually.) If you’re considering it, don’t wait another day. It’s only good until 11:59pm! There are a few restrictions, but that’s a substantial account opening bonus.

Here are my favorite articles from this week:

Twenty Something Finance presents The 5 Worst Twenty Something Personal Finance Blunders. How many of these have you made? So far, I’ve been able to stay away from these mistakes, and I’m hoping I can continue to do so.

20s Money is Pursuing Complete Independence and explains what he needs to do to achieve his goals. Then he begins Taking A Hard Look At Expenses In Order To Boost Savings.

I really enjoyed Financial Samurai’s post about Being Happy With What You Have. Everything is relative, and this is an appropriate time to put things in perspective.

Josh posts on Personal Finance Playbook about why healthcare makes him groan. It’s an extremely interesting story and it really bothers me that systems are set up to work like this.

Finally, Five Cent Nickel answers a question about Making Mortgage Prepayments. I had a similar situation recently when I tried to pay off one of my student loans. Instead of applying the entire payment to the loan with the highest interest, they split it up proportionally based on the balance of the loans. I had to call up and wait a week to get this switched.

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Calculating Interest On Loans

Written by in Debt, Student Loans
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My father was gracious enough to use his Home Equity Line of Credit to pay my 6.8% student loan, and instead let me pay him for his variable HELOC loan, which currently sits at 2.4%. We decided that I would pay $100 each month toward the HELOC, and if interest rates rise, it would be beneficial for me to make higher monthly payments.

What we didn’t do well, however, is plan out the specifics of how to handle interest rate changes. We figured out how much it would be at the current rates, but didn’t have a good formula for how to make changes. I was hoping to find an easy student loan calculator online to manage our payments and balance information, but couldn’t find anything useful. So I turned to excel. Well, to a spreadsheet in Google Docs.

Using the spreadsheet, I build a powerhouse of a loan schedule, showing how much I will owe each month at the given interest rate. When the interest rate changes, we’ll have to input it into the “Loan Information” tab, and the rest of the table will update to reflect any changes.

This exercise taught me a lot. First, it taught me a ton about excel. I love the functions, but I am now more familiar with dates and using multiple conditions. It also taught me just how much my loan is going to cost me. The interest rate is extremely low right now, and if I could lock it in, I most certainly would, but I also know that when I am ready, I will be able to make larger payments and instead of 9+ years, I may be ready to pay it off in 6 or 7. Of course it depends on the rates and whether I would be better off investing some of that money instead of paying off loans, but at a certain point, I will probably be ready to make larger monthly payments.

I think taking a step back and looking at how long you’ll be paying off your loans can put things in perspective. Credit card debt obviously has the highest cost, but when you realize that you’ll be paying for your car for the next 7 or 8 years, maybe you’ll think twice about whether it’s worth it or whether you’d rather have some of that money (plus all the interest you’ll be giving away) for other things over those years.

Here is a link so you can see the formulas behind the numbers: Student Loan Schedule.

Plese feel free to take a look, double click on the cells to view the formuals behind them. I’d be happy to explain how I got some of the numbers and how I did a few of the crazy formulas.

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Retirement Accounts Explained

Written by in Investing, Retirement
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We hear a lot about retirement accounts, but I wanted to spend today’s post explaining the different types of accounts.

Traditional IRA – Individual Retirement Account

Individuals can set up these accounts and invest for their retirement. Individuals put away pre-tax income in these accounts so that when they retire, they’ll have income saved up.

Advantages

The big advantage of putting money away in an IRA is that all money deposited into the IRA is tax deductible, so instead of paying taxes and then investing, as you do with regular investments, the money goes straight into the account without being taxed first.

Distributions

That doesn’t mean that tax is never paid on that money. When it is time to take distributions in retirement, all the investments and all interest earned is taxed as ordinary income at your normal tax rate.

Limits

For 2009 and 2010, the contribution limit on IRAs is $5,000 each year, although depending on your filing status and job status, the limits are phased out beginning at an income of $55,000 for individuals and $89,000 for couples. In addition, those who are 50 or older can make an additional catch-up contribution of $1,000.

401(k)

These accounts are similar to IRAs in that contributions are pre-tax. These plans are usually employer sponsored plans where employees have a portion of his or her wages paid directly to the 401(k) account.

Advantages

401(k)s have similar tax advantages to IRA in that all contributions are pre-tax. Additionally, some employers choose to “match” part or all of the employee’s contribution. (This ranges, but employers often give a 50% match on employee contributions, of up to 6% of his or her salary.)

Distributions

Distributions work in similar ways to IRAs, and all distributions of contributions and interest income are taxed. There are heavy penalties for withdrawing funds before the permitted age of 59 1/2.

Limits

Another advantage of 401(k) accounts is that the contribution limits for 2009 and 2010 are $16,500, over 3 times that of traditional IRAs. In addition, employees who are 50 years old or over are allowed to make additional pre-tax catch-up contributions of up to $5,500 in 2009.

Roth IRA

This retirement savings plan consists of after-tax contributions.

Advantages

Contributions are made after taxes, so all earnings made over the life of the IRA are tax free upon disbursement. In addition, contributions may be withdrawn at any time without any penalties, something that can’t be done with traditional IRAs.

Distributions

Direct contributions can be withdrawn at any time. However, there are restrictions on when earnings can be withdrawn without tax or penalty. First, 5 years must have elapsed since the opening of the Roth IRA. In addition, the individual must be 59 1/2 years old.

Limits

The contribution limits are similar to that for traditional IRAs, $5,000 for 2009 and 2010. Single filers earning up to $105,000 qualify for a full contribution, while joint filers earning up to $166,000 qualify for a full contribution. After that, the contribution limits are phased out.

Roth 401(k)

This employee-sponsored option combines the features of the Roth IRA and tradition 401(k) plans. This is typically the best options for those who are eligible.

Advantages

Contributions are made after-tax, and all contributions and earnings can be withdrawn at any time tax and penalty-free. These plans are best for younger workers who are currently taxed in a lower tax bracket but expect ot be taxe din a higher bracket upon reaching retirement age.

Distributions

Required distributions begin at age 70. All contributions and earnings can be withdrawn at any time tax and penalty-free after they meet the two restrictions: they must be open for 5 years and the individual must be 59 1/2.

Limits

Contribution limits are the same as for traditional 401(k) plans.

Next week, I’ll go over which plans are best for individuals in different situations. Plus, we’ll talk about options for those who have 401(k) accounts when they leave their employers. Send in your questions, I’ll try my best to answer yours!

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