Answer:  A 401(k) and a 403(b) are both retirement plans. A 401(k) plan is a very common type of retirement plan that many companies offer. In a 401(k), you specify how much you would like to contribute every pay period. Typically, this is either a % of your salary or a fixed amount. Often, your employer will match a certain portion of your contribution up to a certain amount. You can only contribute up to $10,500 (2001) per year to a 401(k). This amount is indexed to inflation. Any additional contributions must be returned or there will be substantial penalties.

A 401(k) often has a vesting schedule. This means that you must work at your employer for a certain period of time before you get to keep your employer’s contribution. When you satisfy that period of time, you are "vested" and can keep those employer contributions. Any contributions you make are always 100% vested immediately. Your contributions to a 401k are excluded from your income so you do not pay any taxes at the time you make the contribution. Any growth in your 401(k) is tax deferred. You only pay your taxes when you pull out the money from a 401(k). 401(k) plans have similar type of distribution rules that other qualified plans have. If you take money out before 59 ½, there is a 10% penalty in addition to paying income tax on the distributed amount. At age 70 ½, there are mandatory minimum distributions. You can also rollover a 401(k) to an IRA.

A 403(b) is also known as a TSA (Tax Shelter Annuity) or a TDA (Tax Deferred Annuity). It is usually only offered to employees of non-profit institutions such as schools or hospitals. A 403(b) is very similar to a 401(k) but there are a couple of important differences. More money can often be contributed to a 403(b) than to a 401(k). Also, a 403(b) is an annuity. Thus, the types of distribution options are usually different.

Answer:  Good question! If you are saving this money for retirement, you would be eligible for an IRA. As long as you make earned income and you are not contributing to any other type of retirement plan, you can contribute up to $2,000 per year into an IRA. For an extra $115 per month, this comes out to $1,380 per year. This would be perfect for an IRA.

You can choose a traditional IRA or a Roth IRA. In a traditional IRA, the contribution is deductible on your income taxes. Your money would grow tax deferred. At age 59 1/2, you can begin withdrawing your money without any penalties. You would still have to pay full taxes on any withdrawals. The amount of those taxes would depend on your tax bracket at that time.

In a Roth IRA, you are not eligible for an immediate tax deduction as with a traditional IRA. But, when you pull your money out of the Roth IRA, you will not pay any taxes at all as long as you have had the money in the Roth IRA for at least 5 years and meet the distribution requirements. Generally, a Roth IRA is more advantageous the younger you are. A Roth IRA also grows tax deferred. In either a traditional IRA or a Roth IRA, you typically direct your own investments. A very common investment is a mutual fund.

An IRA is designed for retirement. If you are going to need this money in the near future, you should probably not use an IRA. If you pull the money out of an IRA before 59 1/2, you will pay regular income taxes plus a 10% penalty. If you choose not to use an IRA, you can put the extra money into mutual funds in a regular account.

Without knowing more about you, I would recommend diversifying your portfolio and choosing multiple asset classes to invest in. For example, when building the stock portion of your portfolio, consider making large cap stocks the core portion of your portfolio but include other equity asset classes like mid and small cap stocks and international stocks. On the fixed income side, diversify your bond portfolio. If you are in a high tax bracket, consider tax-free bonds like municipal bonds. If you are in a lower bonds, consider U.S. Treasury Bonds, Agency Bonds, mortgage backed bonds, and high quality corporate bonds. For a portfolio with a long time horizon, a small portion allocated to high yield bonds may also be appropriate.

Diversification helps to reduce risk in your portfolio and gives you exposure to multiple asset classes.

Answer:  To answer this question better more information is needed. Can you please answer the following questions as well as provide any other information that you feel might be useful.

What are the terms of the divorce settlement?

In particular, what does each spouse have after the divorce?

I can answer your question after I understand what each spouse now has as the result of the divorce settlement. Also, please include your age and the age of your spouse.

Answer:  It depends on your current tax bracket. You will be required to pay taxes on the money withdrawn from your 403(b) plan. Withdrawals from 403(b) plans are considered extra income so you will be taxed at your maximum tax bracket. On your tax form, you will add the amount of your 403b withdrawal to your adjusted gross income. You will now have a higher tax liability because of your higher income. But, you will also show that Fidelity withheld 20% of your withdrawal. This will be a tax credit that you will show. In the end, the amount of extra tax you owe due to the higher income may be more or less than the 20% tax that Fidelity withheld.

Also, are you under 59 1/2? If not, then you will also need to pay a 10% penalty on the 403(b) withdrawal. It does not make a difference whether it is a first time home purchase or not. You can only avoid the 10% penalty on a first time home purchase if the withdrawal comes from a traditional IRA or a Roth IRA. If you are over 59½, you can withdraw money out of the 403(b) plan and avoid the 10% penalty. Other special circumstances, like disability, may also let you avoid the 10% penalty as well. You still have to pay regular income tax on the withdrawal, though.

Answer:  The answer is "it depends". If it is a Traditional IRA or a Roth IRA, you can contribute up to $2,000 for yourself and $2,000 for a spouse. Each $2,000 must be in separate IRAs under separate names. If it is another type of IRA, like a Simple IRA or a SEP IRA, the limits are higher. All contributions must come from earned income, such as income from a job. There are certain other requirements as well.

There are certain limitations as to whether you or a spouse is eligible to contribute to an IRA and whether that contribution would be deductible. To answer that question for you, I would need more information. Please answer the following questions and I can help you determine how much you and a spouse can contribute:

1. Did you work in the year 2000? If so, were you self-employed?

2. What was your income in the year 2000?

3. Did you make contributions to a qualified retirement plan (i.e. 401k)

4. Are you married? If you are married, how much did your spouse earn?

5. What type of IRA were you looking to contribute to? Traditional, Roth, Simple, or SEP. Traditional and Roth IRA’s have a $2,000 maximum contribution. Simple and SEP IRA’s are often used for self employed workers or workers in small companies.

6. Are you under the age of 70 ½?

These questions will help me determine your eligibility and how much you can contribute.

Answer:  This is a very good question. There are so many different types of investments to choose from. It is difficult to answer this question without knowing more about your financial situation and your goals and objectives. To better answer this question, I would need some more information. Can you please answer the following questions. This will help me better decide what to recommend.

1) What is your eventual purpose for this $1,000/month? For example, is it money for retirement? Or is it money for a new home or a vacation?

2) What type of mutual fund do you own? In making recommendations, it is important to know what investments you currently own. This helps in building a well-diversified investment portfolio that is appropriate for you.

3) How are you currently invested in your IRA? Please be specific.

4) Do you currently have other investments. If so, what are they?

5) How would you describe your risk tolerance? For example, the more risk you take in an investment, the more return you expect over a long period of time. But, more risk usually implies more volatility and more downside potential. Are you interested in more aggressive investments that have higher expected return and risk levels? Or are you interested in more conservative investments that have lower expected returns but also lower levels of risk?

6) Does your work place currently have a retirement plan? If so, what type of retirement plan(s) are there? I know that you are leaving soon, but there may be an opportunity to save a considerable amount in taxes, when you take your deferred compensation.

7) Do you know your current tax bracket?

Thank you for your response to these questions. Also, if there is any additional information that you think would be useful, please include that.

Question:  My retired parents have several small traditional IRAs (under $5,000 each) that they have never started distributions from. My parents are currently 76 years of age. What penalties do they face for not starting withdrawals at 70½? What should they do now that will adversely affect them the least? Thanks!

Answer:  Let's see if we can save these IRA's. I will list several options you may want to consider. By IRS rules, for a traditional IRA, failure to make the required distribution results in a 50% tax on the amount that was not distributed on a per year basis. Based on these standards alone, your parents would probably lose most of the money inside the IRA's.

There are steps you can take, though. Here they are. First, the IRS allows you to request to excuse the tax if it was due "to a reasonable error and you are taking steps to remedy the insufficient distribution". Go to http://www.irs.gov. This is the IRS website. Follow the instructions on the website for obtaining publications. Print out Publication 590, page 35. This will explain what you need to do. You will also need Form 5329 and the instructions for 5329. All these forms are downloadable. You will also need Adobe Acrobat. If you do not have Adobe Acrobat, I believe you can go to Adobe's website and download it for free. You can also download it from the IRS website.

Next, you will need to write a letter to the IRS explaining what happened. I would also recommend talking to a tax accountant. They can help with the process and offer suggestions on what to do. There will be a fee for this service. It may be well worth it considering the amount of money there is at stake.

You can also talk to the IRS directly. Their phone number is (800) 829-1040. Call them directly and ask their advice. Contrary to popular opinion, they are very good at answering questions and helping people.

Your parents IRA’s are with some investment firm. Did the investment firm that was holding the IRA's ever inform your parents about the need to take distributions? Often, they will. You may want to call them and ask for help on what to do.

The important point here is that there is hope. The IRS is going out of their way to work with people on paying taxes. I think they will work something out with you. Hope this helps. If you have any further questions, please ask. Thanks for your question. Please let me know what happens when the situation is resolved.

Answer:  It is nice to hear of your interest in planning for your retirement. It is a very important financial issue for you and one that not everyone plans for properly.

The type of investments that would be appropriate for you depends on many factors. These factors include your goals and objectives, time horizon, risk tolerance, liquidity needs, tax situation, and other important issues. As I do not know enough about your situation, it is difficult to give concrete recommendations. I will offer suggestions, which I hope you find useful.

Your investment portfolio must be appropriate to meet your goals and objectives. The most important part of your investment portfolio is your asset allocation. Asset allocation represents the different asset classes you choose to help build an appropriate investment portfolio to meet your goals and objectives. The three broad asset classes are stocks, bonds, and cash. Inside each of these broad asset classes are many additional asset classes. For example, you can have large cap stocks or small cap stocks, growth stocks or value stocks, domestic stocks or international stocks. Each asset class has its own unique characteristics including expected return, expected risk, correlations to other asset classes, and tax efficiencies. Your asset allocation that is appropriate for you will depend on the criteria listed in the above paragraph (goals, risk tolerance, time horizon, etc.).

Generally, the longer your time horizon and the more risk you are willing to take, the more you may want to allocate to stocks. Stocks carry more risk but also have higher expected returns. As your time horizon shortens or your risk tolerance drops or you have near term liquidity needs, the more you would want to allocate towards bonds and cash. Diversification into different asset classes is also important. Diversification can help increase expected return, reduce expected risk or do both.

Without knowing more about you, it is difficult to recommend an asset allocation. Based on the information that you provided, it appears that your investments are geared towards retirement and you have a long time horizon. Under these circumstances, an asset allocation geared more towards stocks may be appropriate.

Regarding investment choices, here are some suggestions. For retirement, a traditional IRA is an excellent vehicle as it allows tax deferred growth and contributions are deductible. The only negative about an IRA is that distributions are taxed at your maximum tax bracket when taken at future dates. If you have a long time horizon, you may want to consider a Roth IRA. While contributions are not tax deductible, the funds grow tax-deferred and the distributions are tax-free, assuming certain conditions are met. A maximum contribution to a traditional IRA or a Roth IRA is $2,000 per year.

Another interesting investment vehicle is the 403b plan or TSA (tax-sheltered annuity). These are investment plans open to employees of certain institutions such as schools. I do not know if you are eligible because you are self-employed. A 403b plan is a retirement plan that offers deductible contributions and tax-deferred growth. The investments are usually placed inside an annuity and larger contributions are allowed.

Another interesting retirement vehicle is a Keogh plan. These are available for self-employed workers. They work like IRA’s but allow you to save up to $30,000 per year depending on your salary. I believe you would be eligible because you are self-employed but I am not sure.

As you begin investing, I would recommend using mutual funds. They offer professional management with relatively low fees. A growth fund is typically an appropriate choice inside an IRA, when you have a long-term horizon. While growth funds are riskier, they offer higher expected returns over the long term. Inside an IRA, they can also grow without paying any taxes until you withdraw funds. One problem with qualified retirement plans like IRA is there lack of liquidity. If you need the funds early (before age 59 ½), you may be penalized.

If you choose the investments yourself, you can go with no load mutual funds and save some money. There are some excellent no load mutual fund families such as Vanguard and Fidelity. A broker or financial planner can also help you. They typically will use loaded funds, which cost more. The expertise they can provide may be well worth the extra cost.

As your wealth grows, you may want to consider individual money management. Here, a portfolio of individual securities in different asset classes is constructed for you. They allow for greater control especially when it comes to taxes. Of course, you can always manage your own investments. This is not difficult, but it is important to learn and study. Asking advice from others, such as using this website is a great way to learn.

I hope this information helps. It is difficult to make additional recommendations without knowing more about your financial situation. If you are interested in continuing this investment process, e-mail back to myfreeadvisor@myfreeadvisor.com. I will ask you some financial questions. Based on your answers, together we can build a financial plan designed to help meet your financial goals.

Answer:  Please never refer to yourself as "stupid". This is self-demeaning and unproductive. Have confidence in yourself. I do not know who you are but I know that you are not "stupid". You sound like a very nice person. I am very happy to see that you are being proactive in trying to find answers for your financial issues. Seeking the advice of a financial advisor is an excellent idea.

There are many ways to get financial help. Here are some different ways:

1. Contact the Financial Planning Association (FPA). This is a nationwide financial planning organization that many Certified Financial Planners (CFP) join. The phone number is (800) 322-4237. They can give you more information and may be able to refer a financial advisor in your area.
2. Many companies (especially the larger ones) offer free counseling services to their employees. Check with your human resources department to see if they offer such services.
3. Ask people you know or professionals that you work with such as an accountant for referrals. They may be able to refer you to a financial advisor that they know and trust.
4. Check with your state or local government (look in the White Pages). They may offer financial counseling services.
5. Check the Yellow Pages. If you look under "Financial Planning Consultant", you should see many names that offer financial advisory services. I would stay away from advisors, like stockbrokers, that are just interested in investments. At this point, reducing your debt seems to be your primary goal. You need to work with someone that can help you with reducing debt and working on your overall financial picture first.

What is very important here is that you have a job with good standing. This will provide you with cash flow that you can use to help take care of your financial situation. Here are some basic ideas that I am going to suggest now to help improve your financial situation:

-  Contact your credit card company and tell them you are having trouble paying down the debt. They will often work with you on a plan to lower your debt, which may often include lowering your interest rates. They are much more concerned with getting their money back even with lower rates from you then by not getting the money back at all.

5.  You mentioned that you have had several heart attacks. Work on fixing your medical health. For yourself and your children, it is most important to take care of this first. With improving your health and our advanced medical technology, you can live many healthy and productive years. It is important, though , to have financial matters in order just in case. This includes having a will and other important documentation like a medical power of attorney, if anything ever did happen. Your financial advisor can help with that.

Answer:  This is a good question! I have done some research and I can only give you a partial answer as of now. Here are some answers that I can tell you.

All distributions from either a 403b plan or a traditional IRA are taxed as income. This is another way of saying that the distributions are taxed at your maximum tax rate. Thus, you are going to have to pay some taxes. The only way that a distribution may not be taxed is if you made a non-deductible contribution, which probably does not apply here. So, there is really no way to avoid paying the income tax on your distribution.

What are you trying to do is to avoid paying the 10% penalty. In an IRA, you can withdraw up to $10,000 and avoid the 10% penalty, if the funds are used towards a purchase of a first time home. (Remember, you still have to pay income tax on the amount that is withdrawn.) Based on what I have read, you can not do this from a 403b plan. If you do this from a 403b, you would pay full income tax on the distribution and pay a 10% penalty. In an IRA, you would still pay the income tax, but avoid the 10% penalty.

Now, what you want to do is move your 403b to an IRA and take advantage of that feature. You are allowed to rollover a TSA into an IRA. I do not know if you can rollover a TSA into an IRA while you are still employed. Also, at this point, I do not know if you are allowed to use that $10,000 exemption once the rollover is complete.

I am going to recommend that you talk to an accountant or call the IRS directly. Their number is (800) 829-1040 and contrary to some opinions, they are very helpful and courteous. As of this writing, I have called the IRS and they are going to call me back within 3 days. I will ask them if a person can rollover a 403b into an IRA, while they are still employed. And if they are then eligible for that $10,000 penalty free distribution. I will contact you when I receive their message.

Follow-Up Answer:  The IRS called back. This is what they said. First, you can rollover your 403(b) plan into an IRA only under certain circumstances. These include attainment of age 59½, hardship, separated from service, death, and disability. If you are still working at your job where your 403(b) is held, it does not appear you can rollover the 403(b) into an IRA.

Once the 403(b) is rolled over into an IRA, the IRS agent felt (although I do not feel she was 100% confident) that you could use the funds penalty free for a first time home purchase even though the source of the funds came from a 403(b) plan. Remember, though, that you are still responsible for paying normal income taxes on the distribution. The benefit comes in that you avoid the 10% penalty. Also keep in mind, to qualify for this penalty free distribution, you can not have owned an interest in the home for two years before the purchase.

If you end up rolling over your 403b into an IRA and taking a distribution, I would still consult with an accountant or reconfirm with the IRS that everything is okay. This is a challenging question!

Answer:  The answer is no. But there is an exception. If you convert a traditional IRA to a Roth IRA in a certain year, you have until the time you file your taxes in the next year to convert back to the traditional IRA. This is known as recharacterization. This is beneficial to do if the investments after the conversion to the Roth IRA have dropped in value.

For example, let's say in the year 2000, you convert a traditional IRA to a Roth IRA. In 2001, you file your taxes on April 16. You could recharacterize the Roth IRA back to a traditional IRA by April 16, 2001. This information came from a call to the IRS. If you have similar questions, you can call them at (800) 829-1040.

Question:  I know that one can deduct from 1% to 18% out of one's salary in order to have it placed in your 401(k) savings plan. My math has always been horrendous and I am wondering if there is a web site or some way to figure out from one's salary, how much is 1% to 18% of that salary?

Let's say I make $20,000.00 a year and I want to figure for myself what I wish to have deducted from my salary so I don't overextend myself - so how can I figure out of a salary of $20,000.00, what is 1% extracted, 2% extracted all the way to 18%?  Thanks!

Answer:  Here are the numbers for $20,000.

1% of $20,000 = .01 * $20,000 = $200/year.

2% of $20,000 = .02 *$20,000 = $400/year.

3% = $600/year. 

4% = $800/year. 

5% = $1,000/year.

6% = $1,200/year. 

7% = $1,400/year. 

8% = $1,600/year.

9% = $1,800/year. 

10% = $2,000/year. 

11% = $2,200/year.

12% = $2,400/year. 

13% = $2,600/year. 

14% = $2,800/year.

15% = $3,000/year. 

16% = $3,200/year. 

17% = $3,400/year.

18% = $3,600/year.

Let's do this using a calculator.

Example #1  - 12% becomes 12.

- Then 12. becomes .12

- Multiply .12 times $20,000 on calculator.

- You get $2,400.

Example #2   - 5% becomes 5.

- Then 5. becomes .05

- Multiply .05 times $20,000 on calculator.

- You get $1,000

In figuring out what to contribute to your 401k, does your employer offer matching funds for your contribution? If yes, try to contribute at least that much. For example, if your employer matches up to 4%, try to contribute at least 4%. The employer's contributions are basically free money.

If you can afford it, save more. The more you contribute, the more you can save on taxes this year. Contributions to your 401k are not considered income for the year that they are made. The taxes on the contributions are deferred until when you withdraw the funds later on in life.

Please keep in mind that once the money is placed in a 401k, it is meant to be saved for retirement. If you want to pull the money out early, you will pay full income taxes in addition to a 10% penalty in most cases if before age 59½. Sometimes, you can borrow from a 401k as well.