A Roth IRA is an IRS approved retirement account which allows participants to deposit after-tax money into an account that will grow tax-free.  Once the participate reaches the age of 59 1/2, they may withdraw all funds (contributions and earnings) tax-free.  The potential downside of this account is the early withdrawal penalty of 10% if the funds are taken out before the age of 59 1/2.  Despite this downside, there are several tricks & tips that make participating in a Roth IRA a lot more appealing.

Here are 3 things that most potential participants don’t realize about a Roth IRA:

1. Withdraw Contributions Anytime.  That’s right, one of the advantages of a Roth over a Traditional IRA is that no matter how old you are, you can always withdraw your contributions, penalty and tax free!  Keep in mind that this does not apply to your earnings (returns made off of your contributions).  Because of this, several investment advisers suggest funding a Roth as your “emergency account” – as you’ll get the long term tax benefits while being able to withdraw the contributions at any time.
2. Short-term Loan.  Also known as a “Tax-free Rollover”, you can withdraw funds (contributions and earnings) from your Roth IRA as long as you put it back within 60 days.  You’re allowed to do this once every 12 months.
3. Qualified Withdrawals.  The IRS allows several instances where qualified withdrawls may be made before age 59 1/2.  These include:

• First-time home purchases, subject to a lifetime limit of $10,000 in pre-tax dollars.
• Higher educational expenses for you and your immediate family.
• If you’re disabled.
• If you use the funds to pay unreimbursed medical expenses in excess of 7.5 percent of your adjusted gross income (AGI).
• To pay health insurance premiums for yourself, your spouse, or your dependents if you’re unemployed for at least 12 weeks.
• If you elect to receive your funds on a regular distribution schedule, which the IRS calls “substantially equal periodic payments.”

Interested in contributing to a Roth IRA for 2013 (or 2012 before 04/15/2013)? Here are the latest eligibility requirements for 2013:

There are several other advantages to participating in a Roth IRA.  What are some holdbacks that you’re facing?  Are there any other advantages you’d like to share?  Please feel free to express yourself in the comments section below.

Wealth is not about making money, it’s about saving money.  Good habits are what separate a wealthy individual from a bankrupt one (and independence from dependence) .  In the consumer-based society we live in it’s easy to judge one’s wealth based upon the toys they have in their garage, the size of their house or the exclusivity of their country club membership. 

The reality is that those “rich people” who are leveraged out the wazoo are no more wealthy (nor happy) than those living paycheck to paycheck.  Here are some realistic first steps to increasing your wealth in 2013:

1. Make your nuts smaller.  Pardon me?  Thanks right, you need to decrease your fixed costs for 2013.  Write down exactly how much you’re spending per month on fix payments such as mortgage, car, utilities, school debt, etc.  Chances are at least one of those items will be paid off this year.  Instead of getting a new car as soon as your old one is paid off, keep driving payment free for a year or two.  Instead of getting a bigger house when you payoff your school loan, direct those payments to savings.  Look back on 2013 as the year that your payments decreased and your savings increased.
2. Let your material possessions go…  If you’re like most Americans you have way too much crap in your house.  By crap I mean material possessions which you’re not using, which are taking up space, and which you probably purchased as an impulse rather than a real need.  Start the new year differently this year by making a list of what you can get rid of – not what you want to accumulate.  Shrinking your basis of material possessions will free up both your mind and your wallet.  Living a substance based life is one of the 18 Financial Tips I Wish Someone Told Me When I Was 18.
3. Reverse your buying cycle.  Most of us run up our credit card to then pay it off when we get the money.  Start the new year by reversing this cycle.  Try delaying your spending by one pay cycle so that instead of putting your purchases on credit, you put them on your debit card.  By spending the money you already have, you’ll force yourself to think twice about impulse buys.

A Reverse Mortgage provides a means for an individual or entity to take the equity out of their property.   The lender provides the borrower either a line of credit or a monthly payment which is due at a later date.   This type of loan was primarily designed for senior citizens who have a bunch of equity in their homestead but are running low on cash.  In this instance, the borrower would get cash each month from the lender which would be repaid usually upon the death of the borrower.  Factors such as the amount of equity in the home and life expectancy would be examined to determine the amount of the line of credit or monthly cash payment.

As specifically defined by the U.S. Government Department of Housing and Urban Development (HUD):

“A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.  However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.  You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.”

While (currently) a reverse mortgage does not legally have to meet certain requirements, 99.9% of lenders require that the borrower comply with requirements as created by the Federal Housing Authority (FHA).  The most relevant requirements include:

• Be 62 years of age or older
• Occupy the property as your principal residence
• Have the property be a single family home (or approved condominium)
• Own the property outright (or have it significantly paid off)

The  debt outstanding will not become due until a triggering event, including death of the borrower(s), sale of the property or change of primary residence status, occurs.

See the HUD site for additional details.

I don’t like investing in individual companies – they seem to go up when you think they’re doing poorly and go down when you think they’re doing well. Individual companies possess something called “Company-Specific” Risk which means their stock price is susceptible to risks such as lawsuits, management changes and other non-market factors.

While I don’t recommend exposing yourself to company-specific risk, you can decrease the chances of being burnt by individual companies by purchasing proven quality and diversifying.  Here’s a list of 10 Companies that Everyone Should Own Stock In:

1. Wal-Mart Stores, Inc.
2. Coca-Cola.
3. International Business Machines Corp.
4. Chevron Corp.
5. PepsiCo, Inc.
6. Procter & Gamble Co
7. Exxon Mobil Corp
8. United Technologies.
9. McDonald’s Corp.
10. 3M.

Why own each of the above companies?

I’m sorry to tell you, but nature has programmed you to be a bad investor.  It’s true, investing is counter-intuitive.  Your brain wants you to sell when a stock is going down and buy when it’s going up.   Even worse, some of the best investors in the world have learned this fact and actually make money by betting against what retail investors like you are going to do.  Warren Buffet said it best: “Be greedy when others are scared and scared when others are greedy”.

Don’t worry, there’s hope for you.  Here are 12 things you should quit doing when it comes to investing and how to fix them:

1. Quit chasing sexy investments.  As humans we want to be part of the “In Crowd”.  Whether it’s the latest gossip, the hottest style, or definitely the hottest stock – we want in.  Facebook was a great example of this.  Most retail investors ignored (if they even looked at) the fundamentals and shockingly low earnings to be apart of the hype.  How to fix this:  Simple, if your uncle, co-working or momma, tells you to buy a stock just because they did – get as far away from the stock as you can.  I promise, you’ll hear all about their sexy stock…until the bubble bursts.
2. Quit buying or selling after it’s too late.   Most of us remember when we had the idea to buy a stock, only to see it go up after we passed on buying it.  Then some of us made the critical mistake of buying it after the move already occurred.  Fight this urge, it’s too late.  How to fix this:  If you’ve missed your opportunity, take note but move onto the next investment.  However, it’s ok to continue to monitor the investment to see if it drops back down to your attractive buying range.
3. Quit 0wning individual stocks.  Unless you are an employee of the company and involved in their stock purchase/option program, don’t own individual stocks!  Plain out crazy right?  No. Individual company stocks have something called “Diversifiable Risk”, or risk that can be eliminated by diversifying your assets.  Think of a scandal within the company or their key patent expiring.  How to fix this:  Target sectors as a whole.  Say you like ConocoPhillips because you think think energy will go up.  Instead of buying the stock, buy an energy ETF which tracks multiple stocks in that sector (Vanguard Energy ETF, ticker VDE, in this case).
4. Quit paying too much in fees.  Investing really pays off when your returns start to compound upon the returns you’ve earned the previous years.  Every percentage you pay in fees will result in less of a return, ultimately lessening your compounding effect. How to fix this:  Only pay a fee when you can answer exactly what you’re getting.  Paying a fee to a mutual fund for their expertise in the bond market can be ok.  Paying for a mutual fund which replicates the S&P 500, when you can just buy an ETF which accomplishes the exact same thing, is not ok.  This is one of the 18 Things I Wish Someone Told Me When I Was 18.
5. Quit being too proud to sell.  This is a common one so pay attention…Just because a stock went down does not mean it is going to come back up.  Pause and ponder this.  I’m not saying to emotionally sell when your investment goes down, I’m saying to recognize when the environment has changed and it’s time to get out.  How to fix this:  If you bet wrong or were hit by an unforeseeable event, cut your losses and move on.  There are plenty of other investments out there, don’t let emotion take influence over your money.

The personal finance habits you develop when you’re young will determine the standard of living you enjoy (or regret) when you’re older.  Take it from me, adding just a couple of these to your financial routine can make a big difference at the end of the year when you look at your bank statements.

How many of these 50 ways to be smarter with your money do you commit to (most admit to less than half):

1. Maintain only two forms of debt:  Mortgage and (minimal) car payment.
2. Donate your time, not your money.  Getting involved is far more valuable to yourself and the organization.
3. Don’t panic when good investments go down.  Investing should not be based on emotion, stick with your strategies.
4. Avoid any fees – they take from principal and reduce compounding.
5. Get your spouse involved in family finances – it’s better for your marriage and for future financial decisions.
6. Renting is cheaper than owning – we have a good 10 years of this staying true.
7. Have a 3 month cash reserve for unexpected emergencies.
8. Save up for your big purchases, don’t put them on credit – helps determine what you need/want and what was just an impulse buy.
9. Lend family members your time and expertise, not your money – sorry.
10. Max out company matching/contribution to 401(k).