401(k) or Roth IRA for catching up on retirement savings?
401(k) contributions amount to $280,000 for couple in their early 40s, who want to boost retirement savings. Is a 401(k) the right answer? That's question No. 2 in this reader mailbag.
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Where to keep emergency funds?
2. Catching up on retirement savings
3. Negative items on credit report
4. Head over heels
5. Helping a child in trouble
6. Preparing for career switch
7. Renting in retirement
8. Disability and ethics
9. Student loan concerns
10. Swimming pools
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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I picked up a nasty case of conjunctivitis from one of my infant son’s friends. As I type this, my eyes itch terribly and one of them feels like there’s some grit in it.
Thankfully, I have an abundance of cold, wet washcloths. Every once in a while, I’ll go sit in a chair and hold them over my eyes for a while and this soothes the itching and grittiness – for a little while, anyway.
Q1: Where to keep emergency funds?
We have six months expenses as an emergency fund. “High yield” savings accounts are at about 1% these days. Money market accounts seem to be .05%. Do you have a recommendation for a good type of account for an emergency fund?
High yield savings accounts really are the place to keep emergency funds, because they’re the only place available to most people that have the factors needed to hold an emergency fund.
First, it must be liquid. You have to be able to pull your cash out at any time. This eliminates things like CDs and real estate.
Second, it must not put the balance at risk. Quite often, you need the money most when the markets are down. This eliminates things like stocks.
When you keep peeling things away like that, you’re eventually left with high-yield savings accounts and money market accounts. Unfortunately, the rates on them are poor right now, but that’s not the point. You just need a place that’s liquid and your balance is not at risk.
Tracy also had a second question worth discussing.
Q2: Catching up on retirement savings
Also, we are in our early 40s. I have almost 200,000 in 401ks, but my partner has about 80,000. We plan over the next five years to save most of her income to try to catch up. Do you have any other advice for us on how to get her retirement savings on track?
Maxing out your 401(k) contributions is one path, which it sounds like you’re following.
Another way to do it – one that I’d suggest doing, actually – is to open a Roth IRA. With a Roth IRA, you contribute after-tax money (which means it comes out of your take-home pay), but if you just leave it there until retirement, you don’t have to pay taxes on the money you’ve gained in that account.
Having some of your money in a Roth IRA and some in a 401(k) puts you in great shape with regards to taxes now and taxes later. Plus, you have the power to control your own investments if you use a Roth IRA (I invest through Vanguard in a Target Retirement fund).
Q3: Negative items on credit report
I pulled my credit report and found that there was one potentially ‘negative’ area – it looks like a credit card with Chase Bank was opened in 10/2005, and was closed at credit grantor’s request. The last report was Mar 2006, and it looks like there was marked a 60 days past due, with a ‘high balance’ of $125. This seems strange to me, only because I was living in Japan from 2004-2007, and was not in the US at this time to open an account with Chase.
Additionally, there are no charges listed, and it doesn’t look like this was used.
I’m wondering how this could have been opened in my name – I did not receive any credit card offers at my address in Japan. Should I dispute this? Does it matter?
I’m trying to build credit – I have 3 credit cards, with no late payments and I pay off the balance each month. I have never taken out a loan, however, so my only way to build credit is through credit cards.
I took the FICO score estimator and got a range of 720-770, which seems good, but it bothers me that a credit card went past due in my name when I was out of the country.
That seems rather unusual. Given that the card seems to have been used ethically, my first suspicion is that someone in your family opened the card for some reason, perhaps because their own credit was in a bad situation at the time.
It’s also possible that there was an error with the Social Security number at some point.
If the account is closed, I wouldn’t worry about it too much, although it is strange.
Q4: Head over heels
My boyfriend lives in Boston. I live in Los Angeles. We met on New Years weekend and since then one of us has flown to see the other almost every single weekend. This is getting really expensive, but a day doesn’t go by when I don’t really really want to see him. What should I do?
Do you have an easy opportunity to professionally transfer to Boston? Does he have an opportunity to professionally transfer to Los Angeles?
If either one of you has this option available, it’s worth considering. You may also want to consider job searching in Boston (and he can look for lobs in Los Angeles).
In short, if you’re single and unencumbered, this is the kind of thing that you should try to make work. This is one of those things that, if you don’t run with it, you’ll find yourself regretting it for the rest of your life. Don’t let it pass.
Q5: Helping a child in trouble
We have an employed 29 year old son who is beyond a spendthrift. He puts himself in situations that put us in jeopardy financially. I am looking for the pyscology articles of why he does what he does. Any suggestions. And yes he has had a substance abuse problem. Supposedly he is in rehab.
You don’t know if he’s in rehab or not, yet he has the ability to make financial moves that put you in jeopardy?
For starters, I would not allow him any access to any of your assets. If he has a credit card of yours, cancel it. If he has the ability to draw on your funds, deny him that ability.
For another, it sounds like he has an addictive personality, which can be incredibly financially dangerous. People with deeply addicitve personalities (of which I know a few) will spend every dime they have and every dime given to them by anyone and any dime that they have access to in order to chase their addictions.
The only solution to this is professional help, and a key part of that is their own desire to want that type of help. Until then, I would not allow him access to anything that could harm your financial position.