Retirement Plan and IRA Rollover Advice

When moving your retirement money to an IRA, you should follow this one rule of thumb.

If you fail to follow the rule I’m about to reveal, you can face two big problems.

• First, your check will be shorted by 20 percent.
• Second, you will be on the search for replacement money.

Here is this very important rule of thumb that you need to follow: Move the money using a trustee-to-trustee transfer. Nothing else.

There are two types of transfers that can be used to move qualified plan distributions into IRAs in a tax-free manner: (1) direct (trustee-to-trustee) rollovers and (2) what we will call traditional rollovers.

If you want to do a totally tax-free rollover, do nothing other than the direct (trustee-to-trustee) rollover of your qualified retirement plan distribution into the rollover IRA.

This is easy to do. Simply instruct the qualified plan trustee or administrator to (1) make a wire transfer into your rollover IRA or (2) cut a check payable to the trustee of your rollover IRA (this option is less preferable than a wire transfer).

Your employee benefits department should have all the forms necessary to arrange for a direct rollover.

If you want to discuss the trustee-to-trustee rollover with me, please don’t hesitate to call me on my direct line at (805) 264-3305.

Robert W Craig, EA Tax Services

P.S. Also use the trustee-to-trustee rollover when moving your IRA to another IRA.

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Got the Budget, Now What?

So what did you find out? What insights did you get into your spending habits? Did you find at least a few places where you might save some dough?

This is the fourth post in this series, if you missed any of the others visit to see all posts, or just click here for post #1, click here for post #2, and click here for post #3.

Well, you’re probably discovering that your finances fall into one of three categories:
1) a deficit position, that is, you’re spending less than you make, and are in debt, and that debt is growing,
2) a break-even position, no debt and spending everything that you make, or
3) a surplus position, there’s more money at the end of the month.

No matter which position you’re in, it can be improved upon. Now the mistake most people make who are in category #1 or #2 is thinking that the answer is to:

Make more money

They think that all they have to do to move out of the #1 or #2 slot is to earn more money. WRONG!!!

People in deficit and break even positions have what is called a bad habit. A habit of spending more that they make, or the habit of spending everything that they make. We are all creatures of habit. And habits, good or bad, become part of us by definition. Check out the definition of habit: A settled or regular tendency or practice, esp. one that is hard to give up.

Making more money is fine, but do not think that making more money will solve all your financial problems. So, what will solve the problems? The answer is to make new habits. How? You don’t try to force the bad habits out the back door, that’s too much work, and it focuses your attention on the bad habit.

No, you identify the bad habit and then replace it with it’s polar opposite, a good new habit. For example, if your identified bad habit is that you don’t take advantage of specials and coupons, the new habit is to be conscious of specials on things you wish to buy, and be on the lookout for coupons for things you spend money on.

Action Step #1: Look at your budget, your current spending patterns and write down the ones where you can see a benefit in creating a new habit with. Just get them on paper for now.

Action Step #2: Rate them in order of ease of dealing with, maybe 1 to 10, 1 being best. Then rate them in order of which ones will have the greatest financial impact for you, again from 1 to 10.

Action Step #3: Assess for yourself which have the greatest financial impact and have a fairly high rating on the ease factor. Remember, we are trying to create new habits here. Don’t overwhelm yourself and try to fix everything today. Also if one would be, in your opinion right now, very difficult to implement for you mentally, emotionally or physically, leave that one for later. If it’s too hard you may give up the whole process. Even small habit changes, when added together with other small changes will yield results far greater than the individual parts. Remember from post #1, little things really add up.

It can take from 21 days to a couple of months to change a habit and make it permanent so just work on those for now. You’ll start seeing results and more money in the bank. You’ll start feeling better about yourself and have less financial worry. At that point you will be impelled to attack the tougher bad habits with confidence and fearlessness. Slow and steady wins the race.

Here’s a bonus action step. Go back to your budget and right at the top of the list of expenses put, “Pay Myself First” and enter the figure of 10% of your income. Now, if you just don’t make enough or have cut your spending down quite yet, start with a smaller number but ultimately shoot for 10%. The habit is what we’re trying to develop so even $5 a week will be habit forming.

Now open up an investment account at your bank, brokerage firm or online account like ETrade and invest the money there and DON’T TOUCH IT!!! Just invest it and watch it grow. It is not to be spent. This will become clear in a later article.

Another thing along these lines is to get a piggy bank, one that’s impossible to get into and put $1 or $5 or $10 or your spare change into it each day. Again, this develops a habit of saving the money we might otherwise piddle away on something we can’t even remember at the end of the day. Then at the end of three months, open it up, count it out and see how much you’ve saved. Now take 10% or 20% of it and just go out and blow it as frivolously as you wish. Take the rest and put it into your investment account. You can play with the percentages, the key here not only to build more cash, but to reward yourself for doing the program.

Some people always come back and say, “I can’t do this.” “I can’t” almost always translates into “I won’t.” Just try it for 60 days, test drive it, if it doesn’t work you can always go back to the old way but, if you’ve read this far, the old way has probably not been satisfactory for you.

Robert W. Craig, E.A.

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How Money Works, or How $100 = $143

Yesterday I talked a bit about harnessing and taking control of the money you earn or have.  Today I want to take it a step further and explain how money works.

You’ve no doubt heard the saying, “a penny saved is a penny earned.”  Ol Ben had it right but, being a tax guy, I’d like to toss in a variation, “a hundred dollars saved is a hundred forty three dollars earned.” Or, “if I have $100 and decide to blow it, I’ll need to go back to work and earn an extra $143 to get that $100 back.”

Now you’re wondering if I should be doing taxes with math like that.  Well Mr. Franklin said that saving a penny, that is, not blowing it, is the same as earning a penny.  Makes sense until we realize we have to pay taxes, and to have a penny, you need to earn more than a penny before taxes.

You see to get $100 net pay, you need to earn $143. That, less taxes, equals about $100. This is assuming that you are in the 15% federal bracket and 6% state. Also deducted is the Social Security, Medicare, and state disability taxes. In this scenario, this equals about 29.65% of your earnings going to taxes. So if I spend $100, I would need to work and earn $143 to replace it. Your tax rate may be higher or lower, but this scenario covers a whole lot of people in the U.S.

This adds a new twist to yesterdays article about watching little things as well as big things when it comes to spending your hard earned cash. Most people probably do their homework when buying a car, or big screen tv, or a two week vacation, but most of us go out almost mindlessly and buy, say a soda or coffee every day. We don’t think too much since it’s only a couple of bucks, what’s the harm.

Well, check this out. Spending $2 on a soda or coffee every day is $60 a month, and $730 a year. Now that we know $730 does not equal $730, but more like $1,045, we realize that $2 soda or coffee really costs close to $3. That’s about 2% of a $50,000 income. Maybe doesn’t sound like much but remember, the little things add up. And remember that the soda or coffee is just one area of expenditure.

If you took economics you most likely remember the term ‘opportunity cost.’ That’s the cost of choosing one action over another. If I spend my $730 on a soda every day, that’s $730 I can’t use to invest, or to pay down my debt, or buy new needed clothes.

Besides money, in the case of a soda, it’s really a bunch of sugar or artificial sweeteners, and other chemicals that are probably not really good for the body. I think most of us could agree with that. So let’s look at this. I’m spending almost $3 for a soda that cost $1.79 plus sales tax, which is in reality maybe fifty cents worth of value, for stuff that is most likely harmful to my well being. And I have to earn $1,040 a year for the priviledge.

Lets look at this another way. If you check around online or with agents and save $50 per month on your insurance policies, you save $600 cash. You’ve in effect just given yourself an equivalent raise of $875 this year.

Again, these are just a couple of examples. Look for ways to save on; groceries and household supplies, clothing, home furnishings, insurance policies, entertainment, gifting for birthdays and holidays, cable, utilities, etc.

One almost surefire way to save is, don’t carry your credit cards with you. It’s so easy to overspend on things you need and spend on things that you don’t even need. Lock em up if you have to.

We also need to talk about interest on credit cards if you carry a balance. Interest rates could be anywhere up to over 30% in extreme cases. So if you’re paying 15% remember the rate is really higher since you must pay with after tax dollars. $100 paid in interest required you to earn $143 to pay it.

I hope this makes sense. I am not advocating living like a monk or anything. Life is meant to be lived to the fullest. And money, being nothing more than a medium of exchange, is meant to be spent, just not recklessly. It is also meant to be employed in investing to earn more money through the investment, so your money is working for you.

It’s great to have all these things available for purchase for basic security, comfort and enjoyment. But do not confuse having stuff with freedom. By overspending, you don’t own what you buy, it owns you. Freedom is not having a ‘financial noose’ around your neck.

Simple questions can be: Do I really want this (at this cost)? Do I really need this? If I buy this will I respect myself in the morning (or when the credit card bill comes due)?

This is a long post so I’ll stop here. Be sure to check back tomorrow.

Robert W. Craig, E.A.

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It’s The Little Things That Add Up

We always seem to be focused on the ‘big things’ like a new house, a new car, a big raise or promotion. It’s natural and it’s good to have these goals. The problem is that we sometimes focus so much on the big prize that we forget that it’s the little things that, when added together and stacked one upon the other, that bring us to our goals.

You may really want a new car, and think you can’t afford it, not realizing that you fritter away much more than the car payment would be…only because you are not willing to look at what you are spending on a daily basis. Going out to eat more than you need to, throwing that extra gadget into the shopping cart that wasn’t on your shopping list, not shopping for better car, home, health or life insurance rates, these are all things that seem small or of not much benefit to watch, but try adding them up over time and see what happens.

Just $2 every day adds up to $60 a month, or $720 per year. $10 a day is $300 a month and $3,600 a year. $20 a day blown can add up to $600 a month! Can you see how this adds up?

What would $300 a month do for you? Pay down debt, needed car or home repairs, a finer, more professional or fun wardrobe. How about $3,600 a year?

You might say, “I don’t blow $20 a day.” I don’t know you and maybe you don’t. But do you really know that you don’t? Have you done a budget? Have you charted your spending for a month to see where it all goes? Have you checked with your insurance agent or looked online for insurance savings? I’ve met many who thought they couldn’t possibly spend that much, but upon humoring me for a month, they found out that they spend much more on the average.

You might have to change some habits or give up a few things you think you ‘can’t live without’ but you will find that what you gain (that new car, no more credit card debt, a new wardrobe, new furniture, a dream vacation, or a savings plan to accumulate larger sums) will more than change your perceptions about that $2 soda or $4 latte or whatever. Try it for 30 days and see what happens.

Check out this blog tomorrow for some insights on How Money Works and how this can make this 30 day trial even more juicy.

Thank you for reading.

Robert W. Craig, E.A.

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Lack of Decision

There is a single mental move you can make which, in a millisecond, will solve enormous problems for you. It has the potential to improve almost any personal or business situation you will ever encounter…and it could literally propel you down the path to incredible success. We have a name for this magic mental activity…it is called DECISION.

You can virtually eliminate conflict and confusion in your life by becoming proficient at making decisions. Decision making brings order to your mind, and of course, this order is then reflected in your objective world…your results.

The greatest stumbling block to achieving anything of importance in your life is circumstances. We let circumstances get us off the hook when we should be giving it everything we’ve got. More dreams are shattered and goals lost because of circumstances than any other single factor.

How often have you caught yourself saying, “I would like to do or have this but I can’t because…?” Whatever follows “because” is the circumstance.Successful people use circumstances to catapult them on toward their goal, while the masses use them as road blocks. A circumstance may cause a detour in your life but you should never permit it to stop you.

George Bernard Shaw is quoted as saying, “People are always blaming circumstance for what they are. I do not believe in circumstance. The people who get on in this world are the people who get up and look for the circumstance they want and if they can’t find them they make them.”

Napoleon said, “Circumstances hell, I make them.”

The next time you hear someone say they would like to vacation in Paris, or purchase a particular automobile but they can’t because they have no money. Tell them they don’t need any money, your reward will probably be a blank stare followed with, “What do you mean I don’t need any money?”

Explain they don’t need the money until they make a decision to go to Paris or purchase the car. When the decision is made, they will figure out a way to get the amount needed. They always do.

The circumstance they are using is one of the most common: a lack of money. The real cause of their problem is lack of decision. You always attract what you need when you decide it must be done. Try this yourself today. You know the task you have been putting off “because…” Make a decision, forget the circumstance or adopt Shaw’s theory, but get it done!

Bob Proctor

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