Speaking of EFs and Savings...

[Deleted]

...where should I be putting mine?

I have a 401k and rollover IRA for my retirement. I may increase the allocations in time, but for now all calculators point to senior citizen CraftySarah should be okay.

But I'm wondering what I should be doing with my short and medium term savings. (I only mention retirement so you don't all jump up and say I should be saving for retirement)

Right now, I have a basic checking account and an ING savings account. The latter seemed like a better deal when it paid 3-4% interest, but it is what it is.

When the balance on my savings was paltry and perpetually being raided to cover my checking account, that seemed like enough accounts. Now - I feel like such a grown up - my savings deposits are actually allowed to stay in savings, and I have a bit of a cushion built up (about $7k).

In the next 2-3 years, I am expecting to sell my condo and purchase a small house (so I need moving and decorating money, a bit of downpayment money beyond the equity in my condo wouldn't hurt either). And in the next 2-5 years, I will probably need to replace my car (I'm at 106k miles, so I want to be ready sooner rather than later).

When I make those purchases, I want to still have 3+ months of emergency expenses someplace that is liquid-ish and not my retirement. The $7k I have now meets this goal, but not the others.

I don't have kids or a spouse, so I only have to deal with my own self interest. Beyond those projected purchases, I'd be planning for my midlife crisis, the car after my next car and whatever else comes up - most likely 10+ years down the road.

So, having said all that - what should I be doing with my money? I honestly know nothing of money market accounts and CDs and stuff.

[Deleted]

Right now most CDs are not earning enough to be worth opening them, unless you go for a 2-5 year CD. I'd personally just put as much in your savings account as you can for those 2-5 year expenses. Beyond those projected purchases if you still have money left over you can open a taxable account. However, personally I would make sure you are maxing out your Roth IRA even if senior citizen Crafty Sarah will be fine because you can always remove the contributions to the Roth without penalty.

[Deleted]

I thought you could only take money out of a Roth if you were disabled or a first time home buyer? (See? Told you I don't know anything about this stuff)

[Deleted]

Nope, as long you have had the Roth open for 5 tax years (so it could have been opened in Dec 06 and be able to use it now), you can take any contributions (not gains/dividends) out.

[wodehouse]

I would not chase high interest returns right now on money like this. Sometimes a short term bond fund will pay more than a money market fund, etc. But there is market risk with the bond funds, even short term. When interest rates go up the principal value of the bond account will go down. This is of special concern now because interest rates are so low there is pretty much only one way to go...up.

These are currently scary days in a particular sense. Many money market funds chase higher returns by buying debts issued by those countries we've seen on the news....Greece, Portugal, Italy, etc. If those countries default that may hammer some of the money market funds. And our own US government is now racing towards the precipice like Thelma and Louise racing towards the Grand Canyon. I imagine all heck will cut loose if they keep screwing around with raising the debt limit. So those issues are *immediate*.

In fact, I am very tempted to move a lot of cash out of my Vanguard money market fund due just to this fear. I gave that no thought when things were catastrophic 2-3 years ago but this time I am concerned.

The problem with CD's right now is their rates are low and they are not liquid (for emergencies, etc). Why lock in for 5 years just to get a puny rate?

I am looking at some of the online banks like American Express that pay better rates than my local bank does. I'll probably just keep in savings account, not CDs, although I might ladder some CDs eventually.

I think the point I'm trying to make is that in these particular times I'm following the maxim of "I'm not interested in the return on my principal, I'm more concerned with the return of my principal"

[tallguy]

Jul 9, 2011 9:52:32 GMT -5 @gin1984 said:

Nope, as long you have had the Roth open for 5 tax years (so it could have been opened in Dec 06 and be able to use it now), you can take any contributions (not gains/dividends) out.

You are always allowed to take your contributions out without tax or penalty. You have already paid the tax on those monies, so no tax is due on withdrawal. The earnings are a different story. The five-year rule to which you refer is to determine whether the withdrawal of earnings is a "qualified" withdrawal under the rules. There are some conditions under which the earnings can be withdrawn prior to age 59.5 (like the aforementioned becoming disabled or paying for qualified first-time homebuyer expenses) but only if the account is "seasoned" can it be tax-free.

[Savoir Faire-Demogague in NJ]

About time you made it over here TallGuy. Not that you were missed...but welcome to the forum.

[Savoir Faire-Demogague in NJ]

In the next 2-3 years, I am expecting to sell my condo and purchase a small house (so I need moving and decorating money, a bit of downpayment money beyond the equity in my condo wouldn't hurt either).

This point stuck out like a sore thumb. Approaching retirement why would you want to unload a condo and buy a single family house and all the exterior maintenance involved? Not to mention much higher operating costs.

[Deleted]

Because I am 32. I am preparing for retirement, but it isn't something I plan to do for a while.

[tallguy]

Jul 9, 2011 15:50:53 GMT -5 Savoir Faire-Demogague in NJ said:

In the next 2-3 years, I am expecting to sell my condo and purchase a small house (so I need moving and decorating money, a bit of downpayment money beyond the equity in my condo wouldn't hurt either).

This point stuck out like a sore thumb. Approaching retirement why would you want to unload a condo and buy a single family house and all the exterior maintenance involved? Not to mention much higher operating costs.

I think you may have mis-read. There is nothing to indicate being close to retirement. This phrase in particular indicates the opposite.
" Beyond those projected purchases, I'd be planning for my midlife crisis, the car after my next car and whatever else comes up - most likely 10+ years down the road."

As she said, she mentioned her retirement accounts only to stop people from telling her to invest for retirement instead of answering her question. The "senior citizen CraftySarah" was in reference to what retirement projections show for her at that time....

And Thanks... I think.... ;D

[Peace77]

I suggest looking to see if there are any credit unions in your area that you can join. Credit unions pay much better interest due to the different, less stringent regulations.

Mine pays excellent interest on both savings and checking accounts. Credit unions also have money market accounts and CD's.

Although, right now interest rates on CD's are terrible.

If you don't like credit unions, American Express savings has been paying much better interest than ING.

[phil5185]

But I'm wondering what I should be doing with my short and medium term savings.

I keep ours in a SP500 Index Find at Vanguard, done that for over 35 yrs, we have a longterm average return of 11%/yr. The money is available in 2 business days, it grows tax deferred, and it gets favorable tax treatment if/when we sell some.

We cap our savings account at $5000.

For the house DP and for the next car, I would leave the your own cash in the Fund and borrow for both needs. Car loans are in the <5.5% range, house loans are at a 50 yr low, <5% for a 30-yr fixed rate. No need to tie up your own cash, keep it in reserve. (When you 100% finance cars/houses they often/usually go upsidedown - but it's not a concern when you have the money in reserve elsewhere - that eliminates that risk).

[SVT]

Jul 9, 2011 8:11:06 GMT -5 @craftysarah said:

...where should I be putting mine?

Depends on your risk tolerance. The extremes are:

1. Doing what Phil does
2. Doing what most everyone else does/suggests

Maybe consider doing a bit of both, depending on risk tolerance.

[Deleted]

Jul 9, 2011 15:32:00 GMT -5 tallguy said:

Jul 9, 2011 9:52:32 GMT -5 @gin1984 said:

Nope, as long you have had the Roth open for 5 tax years (so it could have been opened in Dec 06 and be able to use it now), you can take any contributions (not gains/dividends) out.

You are always allowed to take your contributions out without tax or penalty. You have already paid the tax on those monies, so no tax is due on withdrawal. The earnings are a different story. The five-year rule to which you refer is to determine whether the withdrawal of earnings is a "qualified" withdrawal under the rules. There are some conditions under which the earnings can be withdrawn prior to age 59.5 (like the aforementioned becoming disabled or paying for qualified first-time homebuyer expenses) but only if the account is "seasoned" can it be tax-free.

"If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions"- from the irs website. With-in the five years, if you withdrawal the contributions there is a penalty fee.

[achelois]

I have never thought of Phil as being an extreme before

[tallguy]

Jul 9, 2011 20:18:25 GMT -5 @gin1984 said:

Jul 9, 2011 15:32:00 GMT -5 tallguy said:

You are always allowed to take your contributions out without tax or penalty. You have already paid the tax on those monies, so no tax is due on withdrawal. The earnings are a different story. The five-year rule to which you refer is to determine whether the withdrawal of earnings is a "qualified" withdrawal under the rules. There are some conditions under which the earnings can be withdrawn prior to age 59.5 (like the aforementioned becoming disabled or paying for qualified first-time homebuyer expenses) but only if the account is "seasoned" can it be tax-free.

"If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions"- from the irs website. With-in the five years, if you withdrawal the contributions there is a penalty fee.

That does not refer to regular contributions to a Roth. Only to those funds which were contributed to a traditional IRA or other qualified plan and then converted or rolled over into a Roth. Yes, there is a five-year rule for any conversion or rollover amounts, but there is no such waiting period for any monies which were in fact "contributed" to the Roth.

[sparktz]

I agree with TallGuy on the Roth IRA.

If I were to open up a Roth IRA today, contribute $1,000, then one week later withdraw $1,000 (assuming that the account balance is at least $1,000 still), then there are no penalties/taxes.

[Tiny]

CDs have pathetic interest but then so do savings accounts. You could always play around with the interest calculators at bankrate.com and see what nets you more dollars - 5K in a savings account type vehicle over 3 years or 5K in a short term CD (a year? or some special term your local bank is offering a smidge more interest on) which you renew over and over the 3 year period.
I just picked 5K and 3 years cause of the numbers/time frame you described. You probably want to keep 1 or 2K very liquid while making the rest work alittle harder.

I tend to keep some of my EF money in CDs mostly to keep me from spending it.

[Deleted]

Jul 10, 2011 15:19:45 GMT -5 sparktz said:

I agree with TallGuy on the Roth IRA.

If I were to open up a Roth IRA today, contribute $1,000, then one week later withdraw $1,000 (assuming that the account balance is at least $1,000 still), then there are no penalties/taxes.

Within the year you contribute it is considered a non-contribution, if it is from year 2-4, yes it does have a 10% penalty.

[phil5185]

I don't see the Roth as having much advantage over a Taxable index fund for this purpose.
They are both bought with posttax dollars, they both compound tax deferred. The Roth is tax free when you sell, the Taxable fund is taxed at the favorable rate of 15% max on your profit. And if there is a loss, unlike the Roth, it is tax deductible. But mainly - the Taxable has no restrictions, you buy/sell based on your needs, not the gubbinet's needs.

[Deleted]

Phil, I use my Roth for part of my "EF" that is in cash. I have about a month of cash in my savings account, a bond and a small taxable account as well as a EF. I also have money set aside for repairs, vet visits etc. For growth stocks I would not mind leaving it in a taxable but for some bonds and some dividend stocks I prefer my Roth.

[Deleted]

Thanks for the information and suggestions everyone. It is nice to know that Roth contributions aren't completely off limits until I'm in my sixties. That could be comforting in the event of a true emergency.

But for more mundane expenses like home maintenance and car repairs and stuff, I wouldn't want to use anything labeled "retirement" so I may go for the taxable fund option. I have had to learn some financial lessons the hard way in the past, and I wouldn't want to chance having lessons yet to learn when I retire.

[GRG a/k/a goldenrulegirl]

I am confused (not all that uncommon for me these days -- I am in the throes of parenting teenagers, LOL).

So, I can contribute to a Roth IRA with after-tax money and withdraw it at anytime for ANY reason WITH penalties or fees or WITHOUT penalties or fees???

And, a related question: Doth contributions are NOT tax deductible, correct?

[GRG a/k/a goldenrulegirl]

Dang Autocorrect! "Roth" not "Doth"!!!!!

[SVT]

Jul 11, 2011 9:19:20 GMT -5 GRG a/k/a goldenrulegirl said:

Dang Autocorrect! "Roth" not "Doth"!!!!!

damnyouautocorrect.com/ ;D

[Deleted]

Jul 11, 2011 9:16:38 GMT -5 GRG a/k/a goldenrulegirl said:

I am confused (not all that uncommon for me these days -- I am in the throes of parenting teenagers, LOL).

So, I can contribute to a Roth IRA with after-tax money and withdraw it at anytime for ANY reason WITH penalties or fees or WITHOUT penalties or fees???

And, a related question: Doth contributions are NOT tax deductible, correct?

They are not, unless your income is low enough to qualify for the saver's credit.

[sparktz]

Jul 10, 2011 18:07:08 GMT -5 @gin1984 said:

Jul 10, 2011 15:19:45 GMT -5 sparktz said:

I agree with TallGuy on the Roth IRA.

If I were to open up a Roth IRA today, contribute $1,000, then one week later withdraw $1,000 (assuming that the account balance is at least $1,000 still), then there are no penalties/taxes.

Within the year you contribute it is considered a non-contribution, if it is from year 2-4, yes it does have a 10% penalty.

No. Wrong. Here is a link which has links to several other sources that show that withdrawing your contributions (not gains) from a Roth IRA are without penalty. One of the links on there is straight from irs.gov.

www.fivecentnickel.com/2006/05/02/withdrawing-your-roth-ira-contributions/

[tallguy]

Jul 11, 2011 11:15:55 GMT -5 @gin1984 said:

Jul 11, 2011 9:16:38 GMT -5 GRG a/k/a goldenrulegirl said:

I am confused (not all that uncommon for me these days -- I am in the throes of parenting teenagers, LOL).

So, I can contribute to a Roth IRA with after-tax money and withdraw it at anytime for ANY reason WITH penalties or fees or WITHOUT penalties or fees???

And, a related question: Doth contributions are NOT tax deductible, correct?

They are not, unless your income is low enough to qualify for the saver's credit.

goldenrulegirl,

You ARE able to withdraw your own regular contributions to a Roth at any time without taxes or penalties. There is a five-year rule on any converted or rollover amounts. The earnings MAY be able to be withdrawn after five years under certain circumstances (as I outlined briefly earlier) but generally not before age 59.5.

Roth contributions are NOT tax-deductible. It is after-tax money. The Saver's Credit mentioned gives a tax credit to lower-income taxpayers for contributions to retirement plans. The credit is based on a percentage of the first $2000 contributed. The percentage is based on both AGI and filing status. But contrary to what was posted in another response to you, the Saver's Credit is just that, a credit. It does not make the contribution deductible.

[Plain Old Petunia]

<< I suggest looking to see if there are any credit unions in your area that you can join. Credit unions pay much better interest due to the different, less stringent regulations. >>

Credit unions pay better interest because they are non-profit. On-line banks are for profit, but they do not have the huge expense of physical buildings and so often pay better than credit unions. My credit union is currently paying about 1/17th of 1% interest on savings, though I can get a whole 1/2 of 1% on a CD. I can double that at any on-line bank on a regular savings account, triple it if I am willing to do a CD. Granted, 3 times not much is still not much.

Gin, you are mistaken about Roths. Please see www.irs.gov/taxtopics/tc451.html

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). Refer to Publication 590 for additional information on Roth IRA(s).

[Deleted]

Jul 11, 2011 23:02:21 GMT -5 tallguy said:

Jul 11, 2011 11:15:55 GMT -5 @gin1984 said:

They are not, unless your income is low enough to qualify for the saver's credit.

goldenrulegirl,

You ARE able to withdraw your own regular contributions to a Roth at any time without taxes or penalties. There is a five-year rule on any converted or rollover amounts. The earnings MAY be able to be withdrawn after five years under certain circumstances (as I outlined briefly earlier) but generally not before age 59.5.

Roth contributions are NOT tax-deductible. It is after-tax money. The Saver's Credit mentioned gives a tax credit to lower-income taxpayers for contributions to retirement plans. The credit is based on a percentage of the first $2000 contributed. The percentage is based on both AGI and filing status. But contrary to what was posted in another response to you, the Saver's Credit is just that, a credit. It does not make the contribution deductible.

I was not getting into the difference between credit and deductible, for someone new at this, it does not matter. Especially if she is using software to do her taxes.