Your emergency fund is foundational to any financial plan. Here I discuss what it is (and what it is not), why you need to have one, and how much should be in it. Also included in your financial foundation are wills, trusts, living wills, and guardianship arrangements, as well as basic insurances. Even if you are already retired this is just as, if not more, important.

The emergency fund – planning ahead
An economics professor once said that if you fall asleep in class and he calls on you just shout out, at the margin and you’ll likely have the right answer. The entire study of economics is about what happens at the margin: the next unit of production, the next unit of income. Think about it: bankruptcies happen when there’s just one dollar more due that you simply cannot pay. So in talking about an emergency fund, we’re talking about what happens at the margin of your financial life. You’re keeping cash set aside to make sure that you’ll never get...

One of the most popular ways to save for retirement is in a Roth Individual Retirement Account. The Roth IRA was first made available in 1997, after they were championed by former Senator William V. Roth of Delaware.

What is a Roth IRA?
Tax-wise, a Roth IRA is like a Traditional IRA in reverse. It may help to compare the two registrations.

In a Traditional IRA, as well as in a 401k, most people get tax deductions for contributing dollars up to certain limits every year. The account accumulates funds over time, perhaps generating some nice earnings, tax-deferred. When it’s time to retire, the full amount of the distribution is taxable at whatever your marginable tax bracket is at that time. Using simple math, if your tax bracket at retirement is 25% and you distribute $100 from your Traditional IRA you will get to keep $75. Remember, distributions from a Traditional IRA are fully taxable. Contributions are made before tax.

A Roth IRA is tax-favorable in the long term
By contrast...

Many of you have a 401k plan through your employer. We get a lot of 401k questions at CameronDowning. So here’s a post with some tips to make the most of this fantastic benefit.

401k plan basics
The technical name for the 401k plan is an employer-sponsored defined contribution plan with 401k provisions. Money goes into your account in different ways:

• You, the employee, defer (i.e. contribute) part of your salary on a pre-tax basis to invest for the future.
• Your employer makes profit-sharing contributions. These can vary year-by year. Employer contributions serve as an incentive for you, the employee, to work hard and make the company successful.
• Your employer may make matching contributions.
• You may receive forfeitures. Your plan has a vesting schedule, which tells you how much of the employer’s contribution you’ll be able to take with you should you go work elsewhere. If an account is not fully vested, typically the dollars that revert back are spread out to all...

Important ages
There are two important ages in retirement financial planning: 59 1/2 and 70 1/2. The former marks the age when you can distribute from your retirement account – IRA or 401k – without paying a 10% penalty on the distribution. The IRS, with this penalty, gives us all a reason to keep our long term savings in place for its intended purpose – retirement income. The second date is actually April 1st of the year after the year in which you turn 70 1/2. This is the date by which you must begin taking your required minimum distributions, or RMDs. As the name suggests, this distribution is required, whether you want to distribute or not. If you don’t, there is a 50% tax penalty assessed against the amount that should have been distributed.

How do I calculate required minimum distributions?
You use a factor from a table. Take the end of the year IRA balance, and divide it by the factor.

Age of retiree Divisor

70            ...

Isn’t it funny that we are expected to make the biggest decisions of our lives when we are young? The answer to when to start investing? It’s earlier than you think.

We get married, we pursue a career path, maybe have children. We have to make quite a few decisions that will affect us the rest of our lives and determine our future trajectory. The decisions we make now can lead to heartache and loss, or security and success down the road. Some of us are fortunate to have parents to steer us in a good direction, while others lean on friends, extended family, or (gasp!) blogs. When to start investing for the long-term is also part of this equation.

When to start investing? The answer could mean millions.
We know that the decisions we make now will have important consequences for the future – not only for us, but also our spouse, children, etc. It’s no wonder we delay establishing a long-term savings plan. If we start off on a bad foot we may choose a bad...

In a previous entry I discussed the difference in taxation of capital gains property and ordinary income property. That piece discussed what happens on your form 1040. But what happens when you die and bequeath these assets to your heirs?

An example
Previously I used the example of a stock that I bought at $100. Now say I leave it to my daughter at my death, and it is trading at $120 on the day I die. How is she taxed? Since stock is capital gains property, she gets a step up in basis to the date of death value. This means that she does not inherit my original basis of $100 – on the date of my death the stock is worth $120, so $120 becomes her new basis. That $20 gain is therefore never taxed! She could turn around and sell the stock the next day for $120 and have no taxable event. She could sell it after one month for $130/share, and have a $10 long term capital gain. Remember, her basis is $120. How is the gain long term when she old held the shares for a month? The gain is...

In the previous installment of this 2-part series, I discussed how you can prepare yourself for a mortgage application in terms of your credit report and credit score. In this installment I’ll talk about most lender’s criteria for lending to you.

Where can you get a mortgage?
You may obtain a mortgage from a commercial bank, a savings and loan institution, a mortgage company through a loan originator, or even a private individual.

How much will they lend you?
To answer that, let me give you a term and define it. The term is PITI: Principal, Interest, Taxes, and Insurance. PITI is, in other words, the out-of-pocket expense that it takes to keep you living in the home you buy. PITI also includes association maintenance or condo fees.

Mortgage qualifying ratios
Lenders use two qualifying ratios in determining how much mortgage you can afford. They will loan you 28% to 36% of your monthly gross income for PITI expenses, and 36% to 41% of your gross income for PITI plus other...

In this post I’m tackling a tax topic: The difference between ordinary income taxation and capital gains taxation. What’s the difference and why is it important to know? One word: taxes.

The IRS taxes your income, as you know, but it also taxes profits. If you buy a stock for, say, $100/share, and then sell it for $120/share, you have a $20 gain which is taxable. The original $100 purchase price is what’s called your basis in the stock. Basis is increased by sales taxes paid on the item, any legal fees associated with its purchase – even inbound freight costs. When you sell at a profit, you want your basis to be as high as possible, to reduce your taxes on the gain.

A tax example
Let’s look at how that $20 gain is taxed. It all depends upon your holding period for the asset – how long you owned it. If you held the asset for more than one year, then it is taxed at a capital gains rate. That rate is 0% for those in the 10% and 15% marginal brackets,...

So you’re getting ready for your first home purchase. This is the first in a two-part series. The second is entitled, How Much Mortgage Can I Afford? To qualify for a mortgage you need a good credit score.

Down payment and qualifying for a mortgage
In buying your first place you’ve got two main considerations: Coming up with a down payment is number one. Number two is being able to qualify for a mortgage loan. In this post, I hope to help you get ready to obtain your first mortgage. Specifically, you’ll learn how to get a good credit score in order to qualify for a mortgage.

Good credit is accurate credit
Your first project is to make sure that your credit report is accurate. I say project, because it may very well be just that – a project. There are three major credit bureaus: Experian, Transunion, and Equifax. Each time you make a reportable event with one of your credit grantors – say Macy’s – that event shows up on your credit report. So...

Who should consider a Roth conversion?
In a previous post we went into the Roth IRA – how it works, and how to make it work for you. In this blog post we want to delve into the topic of Roth conversions. Before lauching in, though, we’ll begin with a brief review of IRS rules on getting money into your Roth IRA. Your contribution limits are $5500 per year or $6500 if age 50 or older (2017). You must have earned income to contribute. This is W-2 income or income from a trade or business. In other words, investment earnings and social security income do not count. Additionally, the IRS begins to phase out a taxpayer from making a Roth contribution if his adjusted gross income, as a single taxpayer, exceeds $118,000, or $186,000 for married taxpayers filing jointly.

I’m over the income phaseout!
You still have options. You can convert your Traditional IRA into a Roth without limit. Conversion means that you transfer funds into your Roth. The dollars transferred are...