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If you are fortunate enough to have enough spare cash to save for retirement, you may not know where to put it. Hopefully I will clear this up a little bit for you in this post. First of all, if your employer has a 401k program where they match your contributions, you should almost always contribute to that first. If you still have more to invest after that, you should probably invest your money in an IRA (individual retirement account). Both IRAs and 401ks have tax benefits that make them much better investments over regular, taxable accounts.

What’s the difference between Roth and Traditional?

Traditional IRA- Deposits into a traditional IRA are tax deductible. This means that you don’t have to pay taxes on any money that you contribute to the IRA. If you used money from your paycheck that you already paid income taxes on, you will get a refund at the end of the year when you file your taxes. Also, your deposits will grow tax free, and you will not pay taxes on them until you withdraw them in retirement.

ex: Let’s say you made $50,000 during the year, and you put $3,000 of it into a traditional IRA. You would pay income tax on only $47,000. Your deposit will grow tax free until retirement, then you will pay taxes on it as you take it out in the form of ordinary income tax.

Roth IRA: With Roth IRAs, your contributions are not tax deductible. This would mean you have to use money that you have already paid income taxes on to fund your account. Just like the traditional, the Roth IRA will grow tax free. The benefit of having a Roth is that you can withdraw from the account in retirement tax free.

ex: Let’s say you still make $50,000/yr. You will still have to pay taxes on all 50k. The good news is that your $3,000 deposit will grow over the years and when you take it out, you will not have to pay taxes on it. All the money sitting in the Roth IRA is yours, the tax man won’t take any of it if you are in retirement.

Which one will give me more money in retirement?

If all things are equal, meaning you stay in the same tax bracket your whole life and contribute the same amount to either account, then it makes no difference which account you put your money in. I will do an example in a minute so you can see what I mean, but the gist of it is in the rare, unlikely chance that everything stays the same, both accounts will have the same value after taxes at retirement. This almost never happens so for most people, you need to figure out which one is best for you.

ex: To simplify things, I am going to assume that you deposited $1,000 into an IRA and that you earned 5% return on this deposit for 5 years before retirement and we will calculate how much you have in the account after taxes in retirement. Also we will assume a 10% tax rate.

Traditional: With traditional, you will pay your taxes at the end. This is where the .90 came from (10% tax). The 1.05 is the 5% interest each year for 5 years.

$1,000 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x .90 = $1148.65

Roth: With a Roth, you pay taxes initially, this is why I multiplied by .90 at the beginning instead of the end.

$1,000 x .90 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 = $1148.65

As you can see you end up with the same amount of money after taxes in both accounts. Most people don’t stay in the same tax bracket their whole lives don’t only have $1,000 to contribute. These factors make a difference when it comes to choosing the right IRA.

Which one is right for me?

This depends on 2 factors:

1- Whether your tax bracket will be higher or lower in retirement.

2- How much money you have to invest

1) If you are going to be in a higher tax bracket in retirement, then the Roth IRA is better. This is because you will have already paid your taxes back when you were working and in the lower tax bracket. Most people are in a lower tax bracket in retirement since people usually spend as much money once they are retired. This would mean that Traditional would be the better route.

2) If you can afford to max out your IRA, then the Roth is better. This is because you can put more money in a Roth than in an IRA. Yes, the limit for both is $5,000 but with the Roth, you are essentially putting in more money because you already paid taxes on it. So if you already paid your 10% its like you deposited $5,555.56 while in a Traditional, you could only deposite $5,000.

Hope this cleared things up a little bit for people. I know it was long but maybe now you know where to put your money. If I confused anybody even more, contact me or comment and I will try to explain things for you.

Filed under: How to Save, Investing, Retirement by David - 3 Comments →

If you have great credit and have no plans on using it in the near future, this post may help you earn an extra $1,000 to $2,000 per year with relatively little work. I heard about it a while ago, but I felt it wasn’t for me, yet. I know there are probably a lot of readers who could benefit from this, so I decided I would give you a little background so you can look at the facts and figure out if it would be good for you.

What is it?

It’s called credit card arbitrage by most bloggers and websites I have read. The idea behind it is you rack up a lot of credit card debt. A lot of credit card companies will allow you to write a check to yourself. Then you transfer the balance over to a 0% introductory card and put the money from the check in the bank. You will then leave the money in the bank and accrue interest while paying no interest or fees to the credit card company.

What are the risks?

There are relatively few risks, but they are important to know. This plan is definitely not for most people. First of all, this will probably hurt your credit rating a little bit. You will be carrying a lot of debt and have a pretty high credit card utilization ratio. This looks bad on your credit report. So if you are looking to buy a home or new car in the next 2 years or so I would not recommend trying this as it could possible cause you to get a higher interest rate on your loan which would probably not be worth it.

Also, this could cause problems if you don’t have good self control. When you get that big check in the mail from the credit card company I could see some people wanting to go on a shopping spree instead of putting it in the bank. If this sounds like something you would do, do not try this. It only works if you are able to pay the balance off in full once the introductory period is over.

What are the rewards?

The rewards are pretty decent for the amount of work you do. If you have good credit, then you could probably obtain $50,000 worth of credit. If you were able to earn 3.5% interest in a high yielding bank account, you would earn $1,750 in one year.

Do you know anyone who has tried it?

Yes, I read a lot of blogs. Like I said earlier, this was not my idea. I had heard about this long ago. Here are a few people who have successfully tried credit card arbitrage:

Bargaineering earns $444 a year - he got really small lines of credit.

Stop buying crap also does this - he even tracked his FICO score so he could see the effect of the extra credit cards on his score.

Filed under: How to Save, Retirement, Uncategorized by David - 8 Comments →

For a while now I have been posting about how I was trying to come up with new ideas to make money. Well I have finally decided on something. I plan to build my own internet arcade. Considering how much time I spend playing these games online, I think I am overqualified for this position. I have a natural talent for playing these games. If only somehow I could get paid a reasonable amount for playing the games besides just owning them. Well, until then I will just try to make my own arcade so others can enjoy the games too.

Why an arcade?

Honestly, I don’t know a lot about anything. I know a fair amount about everything. This makes it hard for me to make a lot of types of websites because I would like to be a master of the topic before I considered starting my own website on it. Blogs aren’t bad but for regular websites, people don’t want my view on things. They want content. So I decided upon an arcade because there are many places where you can get free games to add to your website.

How will you make any money?

I plan on putting up ads on the website like everyone else. The tricky part will be getting the traffic. I can probably produce a quality site with lots of good games, but getting people to it is not so simple. I have been reading a lot on getting traffic and optimizing websites for search engines so hopefully I can put all this into place and slowly but surely build a highly trafficked, quality site.

When will it be up?

I don’t really plan on starting on it until the beginning of next month. I have exams coming up and I don’t want to give myself another excuse to study. I doubt I will be financially independent by the time I graduate so a degree with a high GPA will help me land a job until I am financially free.

I figure now is the best time to try all these new crazy business ideas of mine while I still have all the free time to put into them. I can afford to make mistakes now, once I am out and completely on my own, I won’t have anywhere to go if I fail. So I figure now is the perfect time.

Start up costs?

I am trying to stay in a budget of $1,000. I see all these pre-made arcade scripts with games costing upwards of $800. It all depends on what level of quality you want. I could save a lot more if I went for some of the cheap ghetto scripts but I really want this to be good so I may spring for the quality. Also there is the advertising budget. I may try the free advertising route and do things the old fashioned way. It is a little harder but I feel I can still get plenty of traffic without spending money on advertising.

I will definitely keep everyone informed as I continue on with this project. Wish me luck as this will be my first undertaking of making a website (besides a blog).

Filed under: Investing, business by David - 8 Comments →