When distinguishing the differences between Roth IRA rules for withdrawals and the regular types, you will see that there is a big one. In Roth IRA, no deductible contributions are noted and additionally, withdrawals are known to be tax-free.

One of the biggest benefits that a person can claim upon having a Roth IRA withdrawal is the type when no taxes are included. However, this can only be achieved if that certain person is at least 59 ½ years old and his or her Roth IRA account is open for five or more years.

Early Roth IRA Withdrawal

Following the five-year IRA Withdrawal Rules for those individuals with Roth IRA accounts is not that simple as indicated in the IRS definition. As a matter of fact, there are countless members who withdraw considering that their opened accounts have not reached the required number of years and there are even those with ages below 59 ½. When this happens, taxes will then be issued upon withdrawal.

A tax free Roth IRA withdrawal does not only apply to those who are at least 59 ½ years old or having their accounts opened for at least five years already. In fact, this is also possible should the person have a withdrawal of an amount which is lesser to the previous amounts he or she contributed during the past years. For example, a withdrawal will not be taxed if the person withdraws $5,000 and he or she has a history of a $20,000 contribution.

Withdrawals of Roth IRA Funds After a Conversion

If a Roth IRA conversion was used upon contributing funds, taxes will not be issued only if the converted funds will be withdrawn for at least five years after the contribution. Should the person fail to follow the five-year rule, the benefit of acquiring a tax-free withdrawal will be nullified.

The 10% Early Distribution Penalty

Aside from issuing taxes, there is also the 10% early distribution penalty which are performed on those distributions where the account holder’s age is lesser than 59 ½. Nevertheless, this early distribution penalty can only be applied should the withdrawal be taxed. Tax-free withdrawals and those that are returns of basis are exempted from the assessment of the 10% early distribution penalty no matter what the age of the account holder is.

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Many people assume that since fixed income investments are relatively conservative that there is no risk in owning them. While bond funds can achieve some degree of diversification by holding many different bonds at one time, there are a few risks that you should consider before investing in them.

Interest Rate Risk – Economics 101 states that if interest rates increase, then bond prices usually decrease. If interest rates decrease, then bond prices will usually increase. If you are planning on holding the bonds to maturity, then you have nothing to worry about. Unfortunately, when you are invested in a bond fund, some young hotshot manager will make the decision of when to sell for you. If you sell during a time of rising interest rates, you may experience a loss on your bond. So much for the safety of owning bonds!

Inflation Risk – As our government continues to print more and more money, the risk of inflation increases. The real effect of inflation is not some theoretical guestimate. Inflation erodes the value of your money. If you are depending on this money to put food on the table, inflation can prevent this from occuring. Investing in Treasury Inflation-Protected bonds (known as TIPs) can help offset some of this risk, since the principle invested is adjusted for increases in inflation.

Credit Risk – As with any fixed income investment, bonds carry the risk of default. What this basically means is that the issuer is no longer able to make the principle or interest payments. Many people have learned this lesson the hard way with Fannie Mae and Freddie Mac. Once considered to be of high quality, now most would consider them extremely dangerous. Fixed Income Funds, such as bond funds, reduce this risk by diversifying across many different types of bonds. While your risk is somewhat reduced, you are still subject to losses due to poor managament decisions made by the fund manager. Always read the fund’s prospectus before investing. This will help ensure that you understand the fund’s credit standards.

Do you own any fixed income funds? How are they performing for you? I would love to hear from you.

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Lately I have been considering how to invest my cash. “Invest your cash?”, you may ask. Yep! Invest my cash.

I realize that bank accounts are insured by the FDIC for up to $250,000 per tax payer ID. But at what cost? Interest rates are extremely low, making the amount of money you can earn seem hardly worth the time or risk.

You can actually get a better interest rate with CDs, if you don’t mind not having immediate access to your funds. Did you know that Federal law REQUIRES a penalty of at least seven days’ interest for any early withdrawals on accounts classified as time deposits (which is what a CD is)? Additionally, since there is no maximum penalty documented, banks can, and usually do, charge more.

Recently, I have learned of a different alternative: Treasury-only money market funds. What sets these types of fixed income investments apart from others is that they only invest in short-term US Treasury Bills. Currently, Treasury Bills are the safest investments available. What I like about Treasury-Only funds is the fact that they do not invest in other fixed income investments such as corporate debt or mortgage backed debt. They only invest in items that are 100% backed by the US Government. The amount of interest that they pay is slightly less, but it is well worth it for the security it provides in our current economic environment.

Most of these types of funds use banks as a custodian for the securities. If the bank fails, the money you have invested in short-term Treasuries is completely safe. Additionally, Treasury-only money funds provides you with check writing privileges. What other fixed income investments offer this? None that I know of!

With all of these benefits, I have began to wonder if it would not be a great idea to use this kind of fund as my banking account. As I began to research this a bit further, I discovered a few more advantages:

1. Higher Yields – The yield offered on an average personal checking account is pathetic. I am not even sure I earn ANY interest on my checking account; my savings yes, but my checking – I do not think so! Treasury-only money funds give you more bang for your buck.

2. Only One Account Needed – Currently, I have 1 savings account, 1 checking account and 1 money market account. I am constantly moving money from one to another as my cash flows in and out (mostly out). With a Treasury-only fund, all of my cash can be kept in one account (no matter how much I have). I always hate it when my money market account drops below some magical threshold where the bank starts charging ME money.

3. Instant Access – You maintain complete access to your account at all times. You can withdraw the entire amount at anytime you want with absolutely no penalties. Since you have check writing privileges, you can either write a check or wire the money to some other bank or destination.

4. Your Money is Always Working – Many times I will move money from my checking account to my money market account so that my cash is not just sitting there goofing off. I hate to see it earning zero percent interest when it should be producing something. I guarantee that the bank is making money from it. In a Treasury-only fund, I do not have to worry about this. My entire balance is working, earning interest for me on a daily basis.

5. Interest is Exempt from State and Local Taxes – At the end of the year you will have to pay tax on the interest you have earned to the federal government, but not your state and local governments. If you had money tied up in CDs, you would have to pay taxes to both.

As with anything good, there should be a few disadvantages to using Treasury-only money funds. The bad thing is, I can only think of two.

1. Rigid thinking – It is difficult for me to think of Treasury-Only money funds as anything other than a normal fixed income investment. I am having a hard time believing that I can actually use them like a bank AND earn more interest, while paying less fees.

2. Check Minimums – Most funds that I have researched impose minimum amounts allowed for each check. This amount is typically $50 to $100. If you write numerous checks each month for less than this amount, using a Treasury-only money fund may not be for you.

I am interested to here what you think about this idea. Has anyone tried doing this before? What I am missing?

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