Wire Transfer (3/21/06)

Wire transfers are something that everyone has heard but isn’t always sure what they are exactly and what the benefits are of using this form of electronic funds transfer (EFT).

What is a wire transfer?
A wire transfer is an electronic transfer of funds from one bank to another using the Federal Reserve wire system. It is the safest and fastest way to send funds between accounts at separate banks. There are businesses specifically designed to do this type of EFT, such as Western Union. Many people don’t know that you can do a wire transfer directly from your bank account.

Why would you do a wire transfer?
There are three primary benefits to doing a wire transfer instead of sending a check.
1. Speed: In many cases, a wire transfer takes less than one business day to reach its destination.
2. Reliability: In order to send a wire, there are many levels of verification so you can be confident that the funds reach their intended destination. Wired funds are much more reliable that sending a check through the mail. Especially if the funds are traveling overseas. International mail is very unreliable and recovering funds from fraudulently endorsed checks is a very big hassle. (a customer of mine sent a $5,000 check to Isreal. The funds were obtained through a fraudulent endorsement and it took nearly four months to recover the funds from the foreign bank.)
3. Security: There are additional regulations that bank representatives must follow when taking a request for a wire transfer. It takes more than just your signature to send a wire transfer.

Fees
Because there are additional levels of security in sending a wire transfer, there are fees associated with sending them. There are also fees to receive a wire transfer. Foreign wire transfers are more expensive than domestic. Fees to send a domestic wire transfer are often between $10 and $20 at your bank. You’ll pay more at Western Union and you’ll need to have cash in order to do it. If you’re sending a large amount or sending funds overseas, it’s worth it.

How do you send a wire transfer?
In order to send a wire transfer, you’ll need to have the following pieces of information:
1.Name and location of the bank you’re sending funds to.
2. Routing number of the bank you’re sending funds to.
3. Name and account number of the person you’re sending the funds to.
4. Some banks require the address of the person you’re sending the fund to.

If you have to send a large sum of money, or you need it to get there quickly and safely, send a wire transfer. Don’t roll the dice with the postal service (no offense to my postal worker friends).

Feel free to put your horror stories about lost checks in the mail in the comments section.

IRA isn't the name of an old man. (3/1/2006)

It’s tax season and the topic of IRAs has come into several recent conversations. Now, before I lose many of you by going into the particulars of Individual Retirement Accounts, I want to stress the importance of saving. The majority of the people that read the Banker’s Story are in the 25-40 age range and should have some sort of savings plan in place. If your job doesn’t offer a retirement plan, stock options, profit sharing plan, or pension, you should try to come up with your own facility for saving. Even if it’s just a monthly transfer from your checking to your savings account, it’s never too late to start building your nest egg.

I want to begin by telling you that the world of IRAs is very vast. I couldn’t possibly go over all there is to know about IRAs or even answer every question you may have. The rules and options change based on your income, if you’re self-employed, marital status, etc. As in most Banker’s Stories, I’ll simply comb the surface and provide what I feel are the most common points of interest.

You can invest a number of things in an IRA (CDs, mutual funds). An IRA is not a specific investment, it’s a set of rules that guide a specific investment. Many financial advisors call an IRA the “wrapper” for your investments. The primary benefit of an IRA is tax-deferred growth. I’ll illustrate this below (teaser). Before investing in an IRA, find the answer to the following questions.

Can I invest in an IRA?
How much can I contribute annually?
When can I withdrawal funds and are there penalties?
What are the tax benefits?

Feel free to contact me if you need help finding the answers to these questions based on your personal financial picture.

I’ll go over the two main types of IRAs, the Traditional IRA and the Roth IRA. Keep in mind, the parameters I state below are general and can change based on your age, marital status, and income level.

Traditional IRA
What: A traditional IRA was created in 1974 by President Ford and wasn’t “traditional” until the Roth IRA was created in 1997.
Contribution: You can contribute up to $4,000 per year, per individual. This figure changes based on marital status and income.
Tax Info: Contributions are tax deductible (subtracted from your adjusted gross income so you’ll pay fewer taxes) and withdrawals (contributions and earnings) are reported as taxable income. “Contributions” are what you put it and “earnings” are the interest and dividends you earn from the investments.
Withdrawals (aka Distributions): You can begin to withdrawal funds at age 59 ½ without penalty. If you withdrawal funds prior to age 59 ½, not only will you pay taxes on the total withdrawal, you’ll also pay a 10% penalty.

Roth IRA
What: Created in 1997 and the rules changed to encourage more saving.
Contribution: You can contribute up to $4,000 per year, per individual. This figure changes based on marital status and income.
Tax Info: Contributions are not tax-deductible. However, you don’t have to pay taxes on the withdrawals (contributions and earnings).
Withdrawals (aka Distributions): You can withdrawal contributions at anytime, tax free, penalty free. If you withdrawal any earnings prior to age 59 ½, you will have to pay taxes on those earnings. Any withdrawals made after age 59 ½ are completely tax free and penalty free.

Now, why would you invest in an IRA versus traditional investments such as CDs or mutual funds? IRAs benefit from tax deferred growth, meaning that they earn more interest because you don’t have to pay taxes on the earnings throughout the life of the IRA.

Here’s an illustration:
Fred is 30 years old and single. He works for a small company and earns $45,000 a year. In 2006, he has decided to begin contributing $1,000 a year to an IRA, which he pays in one lump sum each year. He makes these deposits to conservative mutual funds he purchased through XYZ Investment Company. We’ll assume an average annual investment return of 7% and we’ll also assume that Fred doesn’t touch this money until he’s 65 years old.

At age 65 (35 years from inception), here’s what his account will have (after tax values):
Roth IRA: $138,237
Traditional IRA: $127,241
Taxable investments: $98,967

Keep in mind, Fred only contributed a total of $35,000 ($1,000 a year for 35 years). The reason the taxable investments are much lower is because Fred had to pay a portion of his earnings in taxes each year. The reason the traditional IRA is lower than the Roth IRA is because he will have to pay taxes when he withdrawals funds from the traditional IRA. Fred doesn’t have to pay any taxes on the funds in his Roth IRA.

By this scenario, it looks like the Roth IRA is your best option for retirement savings. The only disadvantage to the Roth IRA is that it has stricter contribution limitations. If you’re married and filing taxes jointly, you can’t contribute to a Roth IRA if your total income is greater than $160,000. If you’re single, you can’t contribute to a Roth IRA if your total income is greater than $110,000. If your income falls above these limitations, you’ll be forced to go with the Traditional IRA if you want to contribute to an IRA at all.

I hope this helps most of you. At the very least, I hope that it got most of you thinking about a savings plan, especially if you don’t have one. Be sure to look into your employer’s retirement plans. If you’re a teacher or work in other fields in the public sector, be sure to do some research on your retirement plan. No matter what your employer provides, you may want to look into adding an IRA as a supplemental savings vehicle.

Feel free to contact me with any questions regarding IRAs or other retirement plans.