It’s back to school across the nation and I want to give credit where credit is due.  Well intended parents are sending their kids off to college usually with a credit card.  I want to help you be sure they steer clear of some common credit card mistakes.

The average consumer has nine credit cards.  Don’t let your student get caught in the crosshairs of potential debt.  Collecting too many credit cards is absolutely not a good thing.  Even if the cards have zero balances, multiple open accounts mean the account holder is ripe for the potential temptation to max out on all the plastic.  So school them well before they get to school and are confronted with all those offers of free giveaways if they just sign up for yet another piece of plastic.

The credit card introductory rate isn’t forever.  But how many young consumers remember that?  If they do their homework, they’ll know that once that (usually) six month teaser, introductory rate is over it’s not unusual for the rate to jump to 18 or 20%.  That is an ugly and unexpected surprise for the uninformed.

A big lesson to be learned about credit cards is the importance of reading the fine print.  That’s where the (devil and) details of the offer are printed in tiny but all inclusive explanations.  Most credit cards have limitations about balance transfer fees, amounts and new purchases.  Your student should be well-schooled about the importance of knowing those tiny details.

Be sure to choose a credit card for the right reasons.  By this I mean, don’t let your student choose a card just because it has other attractions such as a rebate or rewards program or is offered by a well known icon or celebrity.  Remind your student that credit card granters aren’t their friend.  It is a business that wants to earn as much money as it can.  So make it your student’s business to shop for the card that has the best interest rate rather than the most interesting look.

Regardless the credit card that’s chosen as being the right one for your student – make sure they understand that even with the right credit card comes ongoing responsibilities:

• Credit card bills should be paid off at the end of every month.  Making a minimum payment only will get them in trouble for a very long time.  For example, if your student has a $1000 balance with a 17% APR and pays the minimum $25 monthly amount, it will take them 57 months to pay off that debt and cost $452 in interest charges. 
• Always pay on time, every month.  Be sure your student knows to check their account statement for the due date and pay at least 3-5 business days ahead of time

It’s vital that your student assume responsibility for their own money management.  Yes, it is time for them to understand it’s their financial thumbprint from now on.  It gives new understanding for them when they’re told:  It’s your money so take it personally ™ .

The idea of estate planning is taking on more importance because multiple generations are more openly discussing money issues and realizing/acknowledging that since money flows up and down generations,  how it  flows between generations should always be a consideration (and is the reason I so strongly suggest finding a good estate planning attorney sooner than later).

This made me think about my 11/19/2009 post “IRAs – The Basics” (http://thethinpinkline.com/2009/11/19/iras-the-basics/) which talked about traditional and Roth Individual Retirement Accounts.  I thought I should add a basic postscript about what you need to know if you inherit someone’s IRA.

Inheriting an IRA is more involved than inheriting a savings account or a valuable piece of jewelry or an expensive painting.  If someone leaves you their IRA, the decisions you have to make regarding what you’re going to do with it can be tricky and they can be taxing – as in having an impact on your tax bill.

There are several options.

You can choose the “cash out” option and get the money in one lump sum but since you will owe taxes on it all at once – most financial advisors would say the “cash out” option is rarely the right choice.

If you inherit an IRA from someone other than your spouse, you have two options:

• Starting December 31st of the year following the death of the original IRA owner, you can establish a beneficiary IRA and take annual distributions based on your life expectancy as calculated by the Internal Revenue Service and have the option to take a lump sum payout at any time.
• Or, you can opt to take no distribution and cash out the IRA completely by December 31st of the fifth year following the original owner’s death but you cannot continue making contributions.

If you inherit an IRA from your spouse, things are much simpler:

• You can claim the IRA as yours by just rolling it over into a new IRA in your name.
• Or, you can merge it with an existing IRA of your own
• Unlike non-spouse beneficiaries, you can keep contributing to it.

As you make your decision on which option is right for you, a couple of positive consequences you need to remember.  The longer you stretch your distributions over time, the longer you have to deal with any tax bill payments.  And, the more money you leave in a traditional IRA, the longer the funds have to grow tax-deferred which affords you the benefit of the magic of compounding.

It’s your money so take it personally!

Here’s to your health and wealth.

TAGS: estate planning, IRAs

An I-R-A is an Individual Retirement Account although for many Americans it stands for Involved or even Inexplicable Retirement Account.  

According to a recent survey by a subsidiary of AARP, 44% of adults don’t really understand how IRAs work and more than a third aren’t sure or don’t know whether they’re eligible to contribute to one. 

So let’s take a look at IRA basics. 

An IRA is simply a personal account that gives you tax advantages for saving for retirement.  There’s a wide range of IRA investments.  There are certificates of deposit, stocks, bonds, and mutual funds (and even more choices under what’s called self-directed IRAs). 

There are actually eleven types of IRAs but the two people hear about the most are the traditional IRA and the Roth IRA.  Both will allow you to accumulate wealth without paying taxes on your profits along the way.  But the basic big difference between the two: 

• the traditional IRA offers tax-deferred savings  meaning the money you deposit isn’t taxed until you withdraw that money (hopefully many years later)
• the Roth offers tax-exempt savings  meaning you never pay taxes on your gains as long as you follow the rules).

Translation:  the traditional IRA ultimately sticks you with a tax bill for those profits.  The Roth doesn’t.

With the traditional IRA:

• you may be eligible to deduct your contributions
• if you can’t deduct contributions, earnings grow tax-deferred until withdrawn
• withdrawals are taxable
• withdraw before age 59 1/2, in most cases you’ll have to pay both income tax and a 10% penalty
• people age 50 and older can make an additional $1000 “catch up” contribution each year (though two-thirds of Americans in the recent survey didn’t know this).  

With the Roth IRA:

• contributions are never deductible
• available to single filers earning up to $95,000 annually
• to couples making up to $150,000
• great flexibility
• withdrawals (including earnings) are tax free
•  if the IRA has been open for at least 5 tax-years
• and if you’re older than 59 1/2
• as long as you follow the rules, you never pay taxes on your gains.

Many people unfortunately, believe they have until the October 15^th tax-filing extension deadline to contribute to their IRA.   This is unfortunate and incorrect.  If you’re going to make an IRA contribution for this year, it must be made no later than April 15^th, 2010.  

Here’s to your health and wealth.

TAGS: IRAs, Money Basics, Roth IRA, traditional IRA