Financial emergencies are common, but here's help! This week, TODAY financial editor Jean Chatzky tackles reader questions about retirement savings accounts and work-from-home jobs. Have your own question for Jean? E-mail us here.
Q: I have several 401(k) accounts from different jobs. Two are with former employers, one has been rolled into an IRA. I'm currently self-employed. Can you help us figure out how to simplify this? — Michelle, Houston
A: I recently went through this myself and rolled several old 401(k)s together into a single IRA rollover account. IRA rollovers are different from IRAs in that there's no limit to the contributions.
The benefit of a rollover IRA is that you can choose from as many stocks and mutual funds as you could in a normal brokerage account. Leaving the money in a former employer's plan gives you more limited options. Also, you can put all of the money in a single account that you can access with a click on a single Web site — which is much simpler than checking on various employer’s plans.
There are a few caveats, though:
- As you roll the money in, make sure your old plan provider knows you are moving your balance to an IRA, not withdrawing it — ask for a "direct transfer" to your new IRA provider.
- If you like your current IRA provider, it is simplest to have that provider set up your rollover IRA. I'm a fan of discount brokers for this purpose because their fees and expenses can be far less than traditional brokers.
- Make your regular IRA contribution. Your rollover does not count toward annual contribution limits, so make sure you make a 2008 contribution as well.
Q: For the past five years, I have contributed $10,000 per year to my 401(k). I am trying to decide whether to increase my contributions or buy a larger home. I doubt I can do both. With the market down, is it a good time to increase my contributions or increase my mortgage? —Jenny, Auburn, Ala.
A: I think this is a good time to talk about needs versus wants. I ran some rough numbers on your 401(k) contribution. Assuming that your employer is matching 50 percent of your contribution — as most do — and that you're investing in a portfolio that returns an average of 8 percent annually, continuing to contribute at this level will leave you with about $2,763,730 at age 65.
Keep in mind that most retirement experts advise pulling out no more than 4 percent a year, so that your money will last as long as you do. That's about $110,000 in the first few years — before taxes and inflation (which combined could take a 40 to 50 percent bite, bringing the value of that money down to about $55,000). So the first question is: Once you add Social Security to that $55,000, will it be enough?
Once you have the answer to that, deal with the house. Will this larger home be an investment? Is it something you'd live in long-term? Or are you speculating? You shouldn't buy a home unless you're planning to live in it for at least five years — and I think we learned that speculating in real estate is not at all a sure thing. But I also believe that a paid-off mortgage is akin to a second savings account. If that's your intention and you need the extra room for the long term, this could be a good time to buy.
Q: I work at home as an independent contractor as a customer service rep. I don't have a 401(k). What steps can I take in saving for my retirement? I do have a family and we want to secure our future. — Shanika, Williamston, N.C.
A: As long as you fit the requirements (which means you have adjusted gross income less than either $166,000 if married filing jointly; $114,00 if single, head of household or married filing separately), you can contribute to a Roth IRA. This is a great option because contributions are made after taxes and as a result, withdrawals are tax-free. You can also withdraw contributions (but not earnings) at any time without paying tax, if you need the money to finance your children's education or a down payment on a home, for example. The contribution limits for 2008 are $5,000 if you're under 50, and $6,000 if you're more than 50. Once you max that out, you can move to a traditional IRA, which has the same contribution limit.
You can also choose between a SEP IRA and an individual 401(k). SEPs are more widely offered and may have a broader range of investment choices, but an individual 401(k) may allow you to contribute more money. Both plans make contributions tax-deductible.
A SEP will limit contributions to 20 percent of your net self-employment income, up to a maximum of $46,000 for 2008. An individual 401(k) has the same maximum contribution for 2008, but you can contribute up to $15,500 PLUS 20 percent of your net self-employment income. So in general, you can contribute a lot more to an individual 401(k), and if you have the extra money to contribute, that would be the way to go.
Q: I'm trying to find work-from-home jobs that are real jobs. I currently work as a legal transcriptionist but work has been slow so I've been looking for other work. Do you have any advice? — Kimberly, Washington, N.C.
A: These work-from-home questions are never-ending! Here are some suggestions:
- Mystery shopping: Many ads you see are scams, but the National Shopping Service(nationalshoppingservice.com) offers legit opportunities. You can sign up online to become a shopper in your local area for all industries.
- Online tutoring: Companies like Sylvan Online (esylvan.com) and Tutor.com need individuals who can tutor students in general studies like English, math, science or social studies.
- Transcription jobs: Because you have prior experience, you should be able to easily pick up work in other areas of transcribing, such as medical records or office documents. Companies like Cyber Dictate (cyberdictate.com) are a good place to start your search.
- Virtual assistant jobs: Companies like Assistant Match (assistantmatch.com) and Office Details (officedetails.com) will pair you up with a business or person who is looking for a virtual assistant, which means you do general office, administrative and personal assistant work out of a home office.
Also, people shouldn't rule out simply telecommuting for the job they have now. More and more employers are allowing telecommuting a few times a week — it saves them money and saves you time. It's worth asking your boss if you can work out an arrangement.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .