Over the past few weeks, several of the Birchwood team members have been polling their peers, family members, neighbors and even clients, in hopes of identifying some of the most common financial questions people are afraid to ask. We have compiled a list of these questions and will be answering them in a regular series.

We have all been there before – afraid to raise our hand out of fear we’ll stick out like a sore thumb. Our hope is that by identifying some of the more common questions people are afraid to ask, we can help put some of our reader’s minds at ease and let our clients, family members and friends know they aren’t alone.

Question 1 – What is the difference between an IRA and a Roth IRA?

• A Traditional IRA is funded with pre-tax money and the account grows on a tax-deferred basis. When distributions are taken after age 59½ they are taxed at ordinary income tax rates. Ordinary income tax and a 10% premature withdrawal penalty may apply if distributions are taken before age 59½, unless certain exceptions are met. Required Minimum Distributions must be taken starting April 1st, following the year the account owner reaches age 70½. There are income limits associated with pre-tax contribution eligibility, but anyone can make non-deductible contributions, regardless of income.
• A Roth IRA is funded with after-tax money and the account grows on a tax-free basis. An account holder can withdraw their contributions at any time without taxation or penalty. As long as the account has been open for 5-years and the account owner has reached age 59½, distributions (including the growth portion) can be taken tax-free. Contrary to Traditional IRAs, there are no lifetime withdrawal requirements beginning at age 70½. Similar to Traditional IRAs, there are income limits associated with contribution eligibility.
• For additional information about IRA contributions and distributions visit: https://www.irs.gov/retirement-plans/traditional-and-roth-iras

Question 2 – What do low interest rates mean for me?

• Benefits of Low Rates – if you are a borrower, low interest rates create access to cheap money. If you are looking to buy a home, refinance an existing mortgage, buy a car or consolidate debt, low interest rates should make you feel great since lower monthly payments and potentially the ability to afford “more” are a direct result.
• Down Side of Low Rates – if you have a size-able emergency fund or you prefer to sit on a high level of cash reserves, low interest rates mean you aren’t earning much (or any) interest income. For many of today’s retirees, low interest rates have been a significant obstacle and have forced these individuals to tap into their principal instead of relying on the interest to fund a portion of their lifestyle.

Question 3 – What is a credit score and how is it determined?

• A credit score is a three digit number that helps lenders determine how likely you are to repay your debts and liabilities in a timely fashion.
• Your score is based in part on the following factors:
  • How much of your total available credit card limits are used. Typically, if you keep your balances well below what you may have available, the higher your score will be.
  • The percentage of your payments that are made on time directly impacts your score.
  • The number of negative marks on your record (i.e. bankruptcy, late payments, accounts in collection, liens, etc.) all factor into establishing your score.
  • The number of hard credit inquiries. This happens when a bank or financial institution runs your credit report in order to make a decision as to whether or not you will receive a loan. Too many hard inquiries may indicate that you are desperate and/or being turned down in other places for credit.
  • For further information go visit: http://www.myfico.com/crediteducation/whatsinyourscore.aspx