Money Management

Losing a job can be a huge financial blow. Read on to see if your IRA can come to your rescue in that situation. 

The purpose of an IRA is to build up a nest egg for retirement. And the IRS tries to do its part to encourage workers to save in an IRA by offering tax incentives.

The money you contribute to a traditional IRA will go in on a pre-tax basis. So if you put $3,000 into one of these accounts, that’s $3,000 of income you won’t pay taxes on.

Plus, when you invest funds in your IRA, you won’t be charged taxes on your gains year after year. Rather, those gains will be tax-deferred, so you won’t pay the IRS on your gains until you’re ready to take withdrawals.

But because there are so many tax breaks associated with IRAs, the IRS imposes some pretty strict rules on these accounts. One such rule is that you’re not allowed to tap your balance before age 59 1/2. Doing so will generally mean facing a 10% penalty on the sum you remove. So if you take a $10,000 IRA withdrawal at age 40 to pay for a car repair, you’ll lose $1,000 of that right off the bat.

Now, you may be wondering if there’s an exception to that 10% penalty if you lose your job and need your IRA to pay your bills. Unfortunately, there isn’t. So it’s important to have a better backup plan for that situation.

Unemployment doesn’t qualify for an exception

There are certain things you can take an early IRA withdrawal for without facing a penalty. For example, you can withdraw funds to pay for higher education and take up to $10,000 out of an IRA penalty-free to purchase a first-time home.

But unfortunately, there’s no rule stating that your 10% early withdrawal penalty will be waived because you happen to be unemployed and need your IRA funds to pay your bills. So if you take a $2,000 withdrawal at age 35 to make your rent and car payments, you’ll face that hefty penalty.

Now that said, one thing you can take a penalty-free IRA withdrawal for at any age is the cost of health insurance premiums while you’re unemployed. But that exception is limited to the cost of those premiums alone, and other expenses or needs related to unemployment don’t qualify.

Always have a separate emergency fund

You never know when you might lose your job unexpectedly. And unfortunately, your IRA isn’t a good account to tap in that sort of situation. Not only will you generally face a 10% early withdrawal penalty if you’re not yet 59 1/2, but funds you remove from your IRA will represent funds that won’t be available to you as a senior, when you might need them the most.

Remember, if you lose your job in your 30s or 40s, you might be unemployed for a couple of months. During retirement, you’re pretty much unemployed for the rest of your life. So it’s important to try to preserve your IRA balance as best as you can.

A better way to cope with unemployment is to build up an emergency fund to tap. Ideally, aim to put enough money into a savings account to cover at least three months of essential living costs.

If you end up losing your job, you’ll have the option to tap your savings without restriction. And that way, you won’t have to add insult to injury by getting penalized for accessing the money you worked hard to sock away.

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You don’t want to let your FSA funds go to waste. Read on to see how you can avoid that. 

Healthcare is an expense that’s pretty much unavoidable. And while you could always add money to your savings account to help ensure you’re able to pay for it, for many people, an FSA makes just as much sense, if not more.

An FSA, or flexible spending account, is a tax-advantaged account that can be used for healthcare spending. The money you contribute to an FSA goes in on a pre-tax basis, thereby exempting some of your income from taxes. You can then take FSA withdrawals to pay for expenses like medications, doctor visits, dental care, and eyeglasses as long as they’re prescription.

But there’s a downside to funding an FSA. These accounts typically require you to spend down your plan balance by the end of the year or risk forfeiting some of your money. And while some FSA do come with a grace period that allows you to carry money into the following year until mid-March, if your plan doesn’t allow for that, then it means you only have about two and a half months to spend down your balance.

That’s why now’s a good time to see how much money is left in your FSA. Once you get that number, you can make plans to spend it so it doesn’t go to waste.

When you’re able to use up your balance calmly and efficiently

Some people wait until December to see how much money is left in their FSAs. If you go that route, you might end up having to scramble to spend down your balance. So a better bet is to check up on it now.

But also, see what provisions your plan comes with. It may be that you get a modest grace period that gives you a little extra time to use up your funds in 2024. Or, you may be able to roll a limited portion of your FSA from 2023 into 2024. Figure those things out now so you can make a solid plan for your balance.

How to spend down an FSA balance

Let’s say you check your FSA balance and find that you have quite a bit of money left. Let’s also assume that your plan doesn’t offer a grace period or carryover. In that case, don’t panic. There may be plenty of ways you can put your remaining funds to good use.

First, think about medical appointments you commonly schedule every year. If you generally see the dermatologist in January, moving your appointment up to December allows you to pay your copay this year. That’s an FSA-eligible expense you won’t have to tap your bank account to cover.

Next, think about your medications. If there’s a prescription you take regularly, you may want to try to renew your bulk supply before the end of the year. (If your prescription is filled monthly, you might have less leeway for filling it ahead of schedule, though it’s always worth checking with your health insurance company.)

From there, think about your dental and medical needs — and those of your family members. If you’ve been putting off that orthodontic consultation for your child, you may want to schedule it for the latter part of 2023 so that if you owe money, you can tap your FSA for it.

If your eyeglasses have seen better days, you may want to use your FSA to cover the cost of a new pair. And if you have a young child who wears glasses, it’s always a good idea to have a back-up pair on hand — just in case.

There are also numerous over-the-counter products you can use your FSA balance for. FSAstore is a good resource for FSA-eligible purchases.

You should do your best to avoid having any portion of your FSA balance go to waste. So take the time this month to see what yours looks like — and make a plan for spending it in time.

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The Federal Reserve has a couple more meetings in 2023. Is another rate hike in store? Read on to find out. 

U.S. consumers struggled with inflation in 2022. Living costs remained stubbornly high, and there seemed to be no end in sight.

Inflation has managed to cool nicely in 2023. But a big part of the reason stems from the interest rate hikes the Federal Reserve has been implementing since early 2022.

The Fed has raised interest rates 11 times since March of last year, and that’s driven the cost of borrowing upward in a very big way. Now, it costs more to sign an auto loan, personal loan, and just about any type of loan. And that extends to borrowers with excellent credit.

At this point, many consumers are tired of the Fed’s interest rate hikes and are hoping they’ll be over for the year. Seeing as how the Fed opted to not raise interest rates at its last two meetings, there’s reason to be optimistic that the central bank is done with rate hikes.

But the Fed still has two more meetings left in 2023 — one in late October and one in December. And the concern is that the central bank might opt to raise interest rates once more to really bring inflation levels down.

Why the Fed might still feel like it has work to do

In August, the Consumer Price Index, which measures changes in the cost of consumer goods and services, rose 3.7% on an annual basis. But the Federal Reserve has long maintained that it likes to see annual inflation sit at or around 2%. It’s this level, the Fed feels, that’s most likely to result in long-term economic stability and a healthy economy.

Now the Fed does recognize that persistent interest rate hikes have the potential to drive the U.S. economy into a recession. And a big reason it may have paused its rate hikes at its last two meetings was to avoid that very scenario.

But at this point, it’s become pretty clear that a recession isn’t likely for 2023. Not only has consumer spending held steady, but the labor market is thriving.

In fact, in September, an impressive 336,000 new jobs were added to the U.S. economy. But the Fed might use a positive number like that as a reason to justify an additional rate hike before 2023 is over. The logic there would be that the economy is strong enough to withstand another rate hike, which might help get inflation closer to 2% sooner.

How to prepare for another rate hike

As a consumer, you may be concerned about how an upcoming rate hike will affect you. So one thing to know is that if you’re thinking of signing a loan that can’t wait, now may be the time to do it. Wait another month or so, and you may find that borrowing costs are even higher on the heels of another rate hike.

It’s also a good time to try your best to whittle down an existing credit card balance. Credit card interest rates tend to be variable, so another rate hike on the Fed’s part could leave you spending more money on your debt than you want to.

On a positive note, an additional rate hike could lead to more generous interest rates for savings accounts. So if you happen to have extra cash at your disposal, it could be a good time to look at putting it into the bank. And also, if the Fed does raise interest rates, pay attention to CD rates, as late 2023 could end up being a good time to lock up your money for a period of time.

We don’t know whether the Fed will raise interest rates again this year or let things be. It’s easy enough to make the argument for either option. So for now, the best we can do is wait for an announcement and prepare our finances accordingly.

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National Retirement Security week is a great time to make sure you’re prepared for your future. Here’s how to get the security you deserve. 

Retirement security is a major issue in the United States. Many people will end up leaving work with too little money in their bank and investment accounts. Sadly, this could lead to financial struggles for millions of Americans who don’t have the savings they need to supplement Social Security.

National Retirement Security Week, which runs from Oct. 15, 2023 to Oct. 21, 2023, is designed to raise awareness of the importance of preparing for your later years. Since that’s going on right now, it’s a great time to take some concrete steps to ensure you have the money you need to enjoy life once you’ve stopped working.

But what exactly can you do? Here are three tricks to help ensure you’re ready to retire with plenty of spare cash in your brokerage accounts when your time comes.

1. Take full advantage of tax savings

One of the best tricks to ensure you have security as a senior is to take advantage of the help Uncle Sam offers. Specifically, the government gives you some tax savings if you contribute to certain kinds of retirement accounts.

You can invest up to $22,500 in a 401(k) in 2023 or up to $30,000 if you’re 50 or over. When you contribute to your account, the amount you invest is deducted from your taxable income in the year you invest. That means each contribution won’t actually end up costing you as much out of pocket.

Let’s say, for example, you’re in the 22% tax bracket and you contribute $6,000 to your 401(k) this year. You don’t pay the 22% tax on the $6,000 so you save $1,320 on your taxes. Your take-home income isn’t reduced by $6,000 — it’s only reduced by $4,680.

And, in some cases, your company may match part of your contributions. If your employer offers a 50% match, it would invest another $3,000 if you contributed $6,000. You’d end up with $9,000 saved for retirement and only have $4,680 less to spend.

If you don’t have a 401(k), you can also take advantage of tax breaks for retirement savings by investing in a traditional IRA or a Roth IRA. A traditional IRA works just like a 401(k) (although with lower contribution limits) and you get to deduct the money you contributed. A Roth IRA doesn’t allow that upfront contribution but allows you to take money out tax-free as a senior.

You should be using these accounts if you care about your retirement security. Sign up for your 401(k) at work today by talking to HR, or open an IRA with any brokerage firm if you don’t have a workplace plan.

2. Automate your contributions

The next big trick to try is to automate contributions to your retirement accounts. This simply means you make sure the money moves to them automatically without you having to manually move it over.

You can sign up with HR or your 401(k) plan administrator to do this easily if you have a workplace plan. The funds can be contributed before you even get your paycheck. If you’re contributing to a Roth or traditional IRA, you can also do this with your brokerage firm or from your bank account.

Making contributions automatic means you won’t miss one and you won’t have to think each month about when and how to invest for your future. It will just happen by default.

3. Buy assets using dollar-cost averaging

Finally, you should strongly consider investing money in the stock market. One of the easiest ways to do this is to use dollar-cost averaging. This involves investing a set amount of money in an asset on a regular schedule. For example, you might buy $1,000 worth of an S&P 500 index fund on the first of every month.

If you take this approach, you’ll naturally buy more shares when the price is lower since your $1,000 will purchase you a larger number of shares in a lower-priced investment. You won’t have to try to time the market, which can be tricky even for professionals.

Most brokerage firms and 401(k)s allow you to set up automatic investment purchases, so you should be able to do this easily. Just research what you want to invest in and sign up to purchase your desired amount on a set schedule.

By taking these three steps during National Retirement Security Week, you can ensure you set yourself up to have the security you deserve as a senior.

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A Costco membership could make sense even if you only use it for a limited time. Read on to learn more. 

For many people, getting a Costco membership is truly an easy call. A $60 outlay gives you a basic membership, which includes access to warehouse club stores and member-only items sold online. For $120, you can upgrade to an Executive membership, which offers perks like 2% cash back on your Costco purchases (with limited exceptions).

If you expect to shop at Costco regularly for things like groceries and household supplies, then a Costco membership might easily pay for itself in the form of savings during the year on those items. But what if you’re contemplating a Costco membership for the express purpose of being able to save on holiday purchases? Is it worth spending the money? It might very well be.

A single purchase could justify the cost of a membership

Costco tends to offer a host of deals in the months leading up to the holiday season. You can find everything from Christmas decor to gift-wrapping supplies available at low prices from roughly October through the holidays themselves.

Not only that, but Costco tends to offer its fair share of deals on Black Friday. So if you know you want to purchase something like a TV or laptop for someone special as a holiday gift, that alone could be a good reason to join Costco. You might save well more than $60, or even $120, on a single electronics purchase during the holiday season, thereby covering your membership fee and coming out ahead financially.

Plus, you should know that electronics purchased at Costco come with a free second-year warranty and tech support. With another retailer, you might only get a one-year warranty.

Meanwhile, if you’re planning to do a lot of hosting for the holidays, then it could also pay to join Costco so you can load up on food and snacks in bulk. The savings you reap from a cartload of appetizers, snacks, and desserts could actually exceed what you spend on a membership.

But if you’re not sure whether a Costco membership makes sense for holiday shopping only, find a friend with a membership to tag along with, visit your local Costco, and take notes. See what prices are available in store on the things you’re interested in buying and compare them to what other retailers have available.

If you see that you’re able to save $80 on your Christmas decorations at Costco compared to what other retailers are charging for the sort of items you want, then you might tell yourself you’ll spring for a basic membership. Doing so lets you come out $20 ahead. And from there, you might enjoy added savings if you visit Costco a few more times in the weeks leading up to the holidays.

A reasonable alternative to a membership

While Costco.com designates certain purchases as member-only, you don’t necessarily need a membership to buy things online. Granted, you’ll pay more as a non-member, but you might still enjoy a fair amount of savings compared to another retailer.

However, the prices you’ll find at Costco stores are generally even lower than the online prices you’ll see. And you do need to show a membership card to get in the door. But if you’re thinking you’re only going to make a single Costco run during the holiday season, then you may want to just see if you can go to the store with a friend and get in on their membership.

Costco members are allowed to bring guests. And if you have a friend with an Executive membership and you use their account to check out, they’ll get to enjoy 2% back on your purchases — even if you pay for those purchases with your own credit card. So chances are, if you’re not ready to buy a membership of your own, you can convince someone in your life to bring you to Costco for a one-time holiday haul.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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Sitting out the stock market may be riskier than taking the plunge. Find out how to invest money the right way. 

The stock market can scare the socks off young savers like me. It shoots up and down like a rollercoaster. Watching it go, it’s easy to conclude that investing is super risky. During the pandemic, many stock values dropped by more than half! What’s up with that?

Yeah, you can sit out the stock market. It’s easy — just don’t invest. You’re 100% correct that investing in the stock market could lose you money.

But can you afford not to? Unless you possess a low risk tolerance (many of us do), you probably can’t afford to sit out the stock market entirely. There are too many money-making opportunities to take advantage of — and the alternatives are not so great.

The dollar loses value over time

Inflation eats into the value of your savings. Because of inflation, cash in the bank buys less and less over time. Even just 20 years can make a big difference.

Example: Say you had $10,000 in savings back in January 2000. You stuck that money in a 0% APY checking account and left it there. As of January 2020, you still have the $10,000. But you can buy much less with it. According to the CPI inflation calculator, you’d need over $15,000 saved to match your old buying power. Your money doesn’t go as far as it used to.

You can combat this by investing. Investing in bonds, savings accounts, and certificates of deposit earn you interest. Sometimes, it’s enough to beat inflation — but often, it’s not. Bank deposit accounts are good at keeping money safe, but they’re not great at growing wealth.

The stock market has earned 10% yearly on average

Keeping dollars valuable is important, but what about earning you even more? The stock market is good at this. In fact, the stock market has returned an average of 10% per year over the past 50 years. You can quickly put your money to work by investing in an S&P 500 ETF.

Example: Say you had invested $10,000 into the stock market in 1972. After 50 years, that $10,000 would have been worth $442,000. And that assumes you never added a dime.

Don’t worry about fancy money shenanigans. Only a fraction of fund managers beat investing the easy way. You can keep things simple and profitable by investing in top-performing indexes like the S&P 500. But there’s a catch: investments must match your risk tolerance.

Measure your risk tolerance

When I began investing, I thought I had the mental fortitude of a rock. Then COVID-19 hit, and suddenly, I wasn’t so sure. Why was this investment down while this one was up? Had I chosen wrong? Hold up, my portfolio’s value dropped over 30% in just weeks! I panicked. I sold good stocks and purchased “better” ones…that promptly flopped. Oops. My bad.

My mistake was failing to measure my risk tolerance, which is my ability to tolerate uncertainty. If I had, I might have hedged my bets so the pandemic didn’t freak me out so much. Had I been calmer, I might have made savvier investment decisions.

Two ways to measure risk tolerance:

Take a risk tolerance quizHave a financial advisor measure risk tolerance

Once you know your risk tolerance, you can invest the right amount of money in a portfolio that suits your needs. For many, that means investing in the stock market.

How to save money the right way

To save money correctly, know when you need it. Do you need it tomorrow? Keep it in an easy-access checking account. Need it for a rainy day? Keep it in a high-yield savings account. Need it when you retire? Invest it. You can open a brokerage account in minutes.

The tricky part of investing is staying level-headed.

Here are three ways to improve your risk tolerance:

Diversify investments. Diversification lowers profile volatility.Avoid leverage. Leverage may shrink your tolerance for volatility.Lengthen your investment horizon to five or more years. That way, volatility bothers you less — your stock’s values have time to rise. (As opposed to investing next month’s rent money.)

After losing money to the pandemic, I did all three to improve my risk tolerance. And it’s worked — I’m rarely stressed, and I’ve held all my investments. Things aren’t perfect, but I’m glad not to sit out the stock market. I can’t afford to let inflation eat my money in the bank.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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