Anybody under age 70 ½ who is earning an income can open an IRA. You can choose between a traditional IRA and a Roth IRA. Which one you choose depends on your income and the tax bracket you predict you’ll fall into in retirement.

Roth vs. Traditional

If your adjusted gross income is less than $116,000 and you expect that you’ll be taxed at a higher rate when you retire, you should think about opening a Roth IRA. Money you invest in a Roth IRA is not tax deductible now, but the funds you withdraw in retirement will be tax-free.

If you think you’ll pay less taxes in retirement, then think about a traditional IRA. The contributions you make are tax deducible now, but you’ll pay taxes when you take the money out in retirement.

The maximum you can contribute to either a Roth IRA or traditional IRA is $5,000 this year for everybody 50 and younger.

Where to Open an Account

Don’t delay opening an account just because you’re not sure where to start, or where to invest. You can open an IRA almost anywhere that offers banking or investments, but online brokers are a great place to open an IRA. Many don’t have minimum required account balances or opening depoists on IRA accounts, and you can start buying investments for between $5 and $15 a trade, depending on the broker.

• Start now: Compare recommended discount brokers for starting your IRA

For newbie investors, exchange traded funds (ETFS) and no-load mutual funds provide an easy way to start a diversified portfolio at lost cost and with just a few trades. To get started, research funds for free with Morningstar.

• Read more: 23 things beginners must know about saving for retirement

Related posts:

1. You Need a Roth IRA
2. Roth IRA or Traditional IRA: What Do You Do?
3. Don't Forget April IRA Contributions

Retirement Saving Basics

1. Don’t be intimidated. All the numbers and acronyms are confusing, but this stuff isn’t as scary as it seems.

2. Start now (you’re never too young). A 22-year old earning $40,000 who starts putting 10 percent into a 401(k) and gets a three percent employer-matching contribution could have a nest egg of $1.7 million at age 65. And that’s not accounting for any raises or increased contributions over time. If you wait until you turn 32 to begin saving, however, the same contributions will only grow to about $780k. A fun goal is to try to save as much as you earn in a year before you turn 30.

• Cool Link: Calculate how fast your 401(k) will grow.

3. Social Security won’t be enough. It’s a fact: Social Security benefit requirements will exceed contributions sometime around 2037. That’s long before most of us twentysomethings will retire. Chances are we’ll still see some kind of government-provided income when we retire, but it won’t be enough to live on. You must take charge of your own retirement!

4. The 401(k) is your friend. A 401(k) is a way to save for retirement through payroll deductions at work. The money you put in now is tax-free; you’ll pay taxes when you take the money out.

5. IRAs too. An IRA is an individual retirement account. You can start one of these anytime at almost any bank or investment company. A “traditional” IRA works like a 401(k) in that you can deduct the money you put in on your federal taxes, but will pay taxes when you take it out. A “Roth” IRA is the opposite; you don’t get a tax break for your contributions, but when you retire, all of your withdrawals are tax-free. (Hint: Roth IRAs are a great idea for young savers).

6. There are limits. The IRS sets the maximum amount you can contribute in tax-advantaged retirement accounts every year. In 2009, savers under 50 can put up to $15,500 in a 401(k). The IRA contribution limit is $5,000 for savers under 50.

7. But you can do both! If you contribute to a 401(k) plan at work, you can still open an IRA. That means in 2009, you can stash away up to $20,500 for retirement. A good strategy? Contribute to your 401(k) up to the maximum your employer matches, then max out a Roth IRA. If you have more to save, make more 401(k) contributions.

8. 401(k) contributions reduce your taxes! 401(k) contributions reduce your taxable income. If you’re in the 25 percent tax bracket and put $100 to your 401(k), you’ll save $25 in taxes. Your 401(k) account grows by the entire $100, but your paycheck only decreases $75.

9. 401(k) plans don’t have income limits. Although many tax-advantaged investments (including IRAs) have income limits, 401(k)s do not. That means that you can continue saving no matter how much you earn.

Matching and Vesting

10. Many employers “match” 401(k) contributions. If your employer has a 401(k) match program, they’ll help you save for retirement. The most common match is 50 percent up to a maximum employee contribution of six percent. That means if you save six percent of your annual salary, your employer will match half of it (three percent).

11. Not taking advantage of a match is like giving up “free money”. If somebody told you they’d put $5 into your savings account for every $10 you put in, you’d be stupid not to do it, right? That’s essentially what an employer match does, so if you don’t take advantage of it, you’re basically turning down “free” money!

12. Maximize your match. Many employers calculate their maximum match by calendar year (ask HR to be sure). That means if you haven’t been contributing to your 401(k) yet this year; you can contribute a much bigger amount for all the remaining pay periods to get more employer-matching funds.

13. Most employer-matched contributes are vested. This means that you have to work for your employer for a set number of years before all of that money is yours to keep. For example, if matched contributions are subject to a five-year vesting schedule, you’ll get to keep 20% of your employer’s matching contributions for every year you work there. All of the money appears on your 401(k) statement as soon as it’s invested, but if you leave early, the unvested amount will appear as a “forfeiture” when you withdraw or rollover your money. If you’re close to becoming fully-vested and are considering leaving your job, it might be wise to consider sticking it out a few more months.

Rollovers and Withdrawals

14. Don’t cash out! The government created retirement accounts with tax savings to encourage us to save for retirement,. That means if we withdraw the money before age 59 1/2, we’ll not only owe federal and state taxes on the amount we take out, but also a ten percent penalty. Ouch! So once the money’s invested, let it grow. Don’t withdraw it!

15. With IRAs, there are exceptions to the 10 percent penalty. There are very specific rules about IRA withdrawals. In most cases, if you withdraw your money before age 59 1/2, you must pay federal taxes and the 10 percent early-withdrawal penalties, but there are some exceptions. Two of note to younger savers: You may be able to withdraw money from an IRA penalty-free for qualifying higher education expenses and up to $10,000 to purchase your first home.

16. 401(k)s are tied to employers. When you leave a job, your 401(k) stays put until you decide what to do with it. The smart thing to do is to either roll it over to your new employer’s 401(k) or rollover to an IRA that you create anywhere you want. Simply ask your former employer’s HR person for the forms to initiate the rollover. You have some time, but don’t wait forever. Your employer or 401(k) may automatically give you cash dispersal if you don’t rollover your old 401(k) in a certain time period. This is especially true if you have a small balance. Unfortunately, you’ll pay taxes and that 10 percent penalty, so don’t let this happen!

Choosing Your Investments

17. Keep it simple. You don’t need to know much about investing to start saving for retirement. In fact, it’s best that you just ignore what the stock market is doing. The important thing is that you make the contributions. Most 401(k) plans offer what are called “target-date” mutual funds based upon the year you predict you’ll retire. These funds automatically adjust their investments over time; they start out aggressive and become more conservative as their target date approaches.

18. You can be aggressive while you’re young. If you won’t retire for 30 or 40 years, you can take big risks with your investments because you won’t need to access your money for a long time and you have plenty of time to take advantage of long-term growth. Allocate your investments in mostly domestic and international stocks.

19. Ask for help. Your employer can put you in touch with a representative from your 401(k) company who will be happy to help you choose investments at no charge. Take advantage of it.

• Cool Link: How does your employer’s 401(k) plan stack up?

20. Look for no-load mutual funds. If you open an IRA or rollover an old 401(k), you’ll have virtually unlimited investment choices. There are big differences in how much different funds charge, although determining mutual fund fees can be complicated. Look for no-load mutual funds, which will eat less of your returns.

21. Consider ETFs. Exchange-traded funds (ETFs) are a great simple way to invest and can be bought or sold anytime just like a singular stock. I’m a particular fan of index ETFs, which track entire markets with one fund. With ETFs, you can invest in the entire S&P 500, Dow Jones Industrial Average, and even commodity markets with just one investment.

22. Do some research. You don’t have to become a financial junkie, but the more you know about how investments work and which ones are best for you, the smarter decisions you can make. I use a free account with Morningstar to quickly research mutual funds.

Finally

23. Just do it! The most important thing is that you save for retirement. Something. Anything. Just start putting away today. Get help if you need it. Learn as you go. Just start saving!

• Get an IRA: Open an IRA online now

Related posts:

1. What to Do If Your Employer Cuts Its 401(k) Match Benefit
2. The 401(k) Retirement Plan: An Introduction
3. How Much Should Be in Your 401(k) at 30?

To qualify for the 20 free trades (worth $90), you must be a new Zecco customer, create an account before Sunday, Sept. 13th, and use the promo code “bonus1” on your application. The free trades must be used within 90 days of account opening.

About Zecco

Zecco is an online discount broker ideal for new investors who don’t need a lot of bells and whistles in their online investing platform but want to practice trading without paying big commissions. Standard trades cost just $4.50 at Zecco, and the broker doesn’t require a minimum balance or charge inactivity fees. Customers who either make 25 trades per month or have account balances of $25,000 or more also qualify for 10 free trades each month.

Learn more in my Zecco review or take advantage of the 20 free trades promotion: Open a Zecco account today »

Related posts:

1. $50 Bonus from TradeKing
2. Investing 101: How to Buy and Sell Stock

Defining Loans. Loans come in all shapes and sizes. If you’re out to dinner and your best friend forgot his wallet and asks you for $20 to cover his check until you get back to his apartment, you’re making a loan no less than if you lend him $25,000 over five years to start a business. Obviously, we handle small and large loans very differently. You’re not going to hire an attorney to draft a promissory note for $20, but you probably should for $25,000. Chances are you won’t charge interest on that $20 either, although in most cases it would be silly to lend $25,000 without some kind of financial reward. The fact is, a loan does not have to be between a bank and a consumer or business—individuals loan money to each other every day.

Should You Make a Loan? Deciding to loan your hard-earned money is never easy—specially if somebody close to you is asking. If you’re not comfortable loaning out your money, don’t think twice about saying “no”. It doesn’t mean you don’t care; it just means you don’t feel like running your own bank. If you’re open to the idea of lending money, however, ask yourself the following questions before green-lighting the loan:

• Can you afford the loan amount without jeopardizing your own emergency fund and cash flow?
• Do I trust the borrower to repay me?
• Is the loan being used for something worthwhile?
• Do I know what I will do if I have trouble collecting the loan?

If you answer “no” to any of those questions, you might not want to make the loan. If you can answer “yes”, however, consider moving forward.

Setting the Terms. The biggest mistake people make when lending money is not being crystal clear about the terms of the loan. How much is the loan for? How (and when) will the borrower repay it? What interest, if any, will be charged? What will happen if the borrower doesn’t pay? You may, for instance, want to ask for something of value as collateral that you can keep in your possession until the loan is repaid (and, if the borrower doesn’t pay, sell for cash).

Finally, always get the terms in writing. Although in most cases the law considers verbal contracts to be valid, they will never stand up in court (should it ever come to that) as well as a written, signed, and witnessed contract—even an informal one.

Lending Money With Social Lending. Even with a solid written contract and collateral in place, a loan between friends or family can still get messy. If the borrower doesn’t repay, one or both parties will hold ill feelings for a long time to come. If, however, you’re looking to lend money as an investment, social lending provides an ideal solution. They vet borrowers based on credit criteria and give you the opportunity to invest small amounts in dozens or hundreds of different loans.

The social lending network LendingClub lets you pick and chose which loans to invest in based on their risk level, potential return, and more. If you would rather not take the time to choose individual loans to invest in, another network, Pertuity Direct, provides a mutual fund representing a package of their entire loan portfolio.

As the recent credit crisis has shown us, lending money is a risky business. Done responsibly, however, lending money can help borrowers achieve their goals faster and individual lenders earn more than they could with traditional investments.

Related posts:

1. Could Social Lending Provide a Way Out of the Credit Crisis?
2. Social Lending Networks Compared
3. Pertuity Direct Review

No-Load U.S. Stock Mutual Funds

• Baron Small Cap (BSCFX)
• CMG Focus (CGMFX)
• Dodge & Cox Stock (DODGX)
• Fidelity Contrafund (FCNTX)
• Longleaf Partners (LLPFX)
• Selected American Sahres S (SLASX)
• T. Rowe Price Equity Income (PRFDX)
• T. Rowe Price Mid-Cap Growth
• T. Rowe Price Small-Cap Growth

No-Load International Stock Mutual Funds

• Artio International Equity II A (JETAX)
• Dodge & Cox Int’l Stock (DODFX)

No-Load Bond Mutual Funds

• Dodge & Cox Income (DODIX)
• Harbor Bond Institutional (HABDX)
• Loomis Sayles Bond (LSBRX)
• Vanguard Infl-Protected Secs (VIPSX)

If you’re in your twenties and just starting out investing in an IRA or non-retirement account; I would think that a combination of three-four of these funds would make an ideal first portfolio (perhaps one or two U.S. stock funds, an international fund, and a very small investment in a bond fund).

Interested in learning more about a particular mutual fund? I recommend you set up a free account with Morningstar; my favorite source for mutual fund data.

What do you think? Do you have a favorite no-load mutual fund that is or isn’t included on this list?

Related posts:

1. Mutual Funds: Five Things You Should Know
2. Asset Allocation for Investors Under Thirty
3. Open Your First IRA

Social Lending Defined

What is social lending? In a nutshell, social lending is a bank without the bank. Individuals like you and I make loans to others (or get loans from others) directly through the network. One person may get a $5,000 loan from 100 investors who each front $50. As the borrower pays back the loan, each investor gets their principal plus interest back and the social lending network takes a small cut of the interest for acting as the intermediary and servicing the loan (billing the borrower and distributing payments to investors).

Social Lending Networks Compared

Here, I take a look at two of the biggest social lending networks, Lending Club and Prosper. You can also read more about my personal experience with Prosper.

LendingClub

LendingClub offers borrowers personal loans of up to $25,000 over three years (36 months) with rates starting as low as 7.88%. As a lender/investor, you can earn returns on your money ranging from 6.69% to 19.37%. To qualify as a borrower at LendingClub you need a credit score of at least 660 and meet other credit requirements. Although anybody can open a free lending account at LendingClub and browse available loans, only investors meeting specific requirements can fund loans due to SEC regulations.

When you invest with LendingClub, you actually choose which loans you want to fund. You can select loans that only meet certain credit criteria, are at a certain interest rate, or that are to be used for a specific purpose. That way, you have total control over how much risk you take (and how big of a return your could earn). For more, read my LendingClub review.

Prosper

Prosper is also accepting new borrower and lender applications. Lenders can get started with as little as $25, and borrowers can list loan applications regardless of their credit history, although borrowers with “B” grade credit or better will be most likely to get their loans funded at a competitive interest rate.

Prosper lenders can choose to invest in individual loans (thus hand-selecting what interest rates and risk levels they want) or invest in prepackaged notes that combine loans to offer built-in diversification. Learn more in my Prosper review.

Is a Social Lending Network for You?

Social lending provides great alternatives to both regular bank loans and credit cards for borrowers and high yield savings accounts and stocks for investors. If you have good credit but can’t get a traditional credit card or are looking for a way to earn more than the 2% interest savings accounts are paying these days, consider giving either LendingClub or Prosper a try today.

Related posts:

1. Could Social Lending Provide a Way Out of the Credit Crisis?
2. Zopa Loans Redefines Personal Loans Using Social Finance
3. Peer-to-Peer Lending Hits a Roadblock

Both traditional and Roth IRAs are tax-protected investment accounts. Because the government provides special tax incentives for saving money for retirement in both kinds of IRAs, there are also limits on how much money you can put into an IRA each year.

The smartest way to invest for your retirement is to avoid paying taxes when you take the money out (as Roth IRAs allow you to do) or to avoid paying taxes on money you contribute (as traditional IRAs and 401k plans allow). If you didn’t contribute to an IRA in 2008, you should consider doing so now, and then contributing more in 2008. Put another way, if you didn’t fund an IRA last year, you have until April 15th to double the allowed contributions you can make this calendar year!

So get those savings in! Opening an IRA account is easy to do with just about any online broker. Shop around or open an IRA at E*Trade now†.

Related posts:

1. You Need a Roth IRA
2. Roth IRA or Traditional IRA: What Do You Do?
3. Year-End Tax Tips

Now that my Prosper loan is almost paid off, I decided to get some experience on the other side of the social lending coin as a lender. Since Prosper is temporarily not accepting new accounts as it awaits SEC registration, I decided to open a lender account with another big player: Lending Club. For those considering doing the same, here’s a step-by-step look at what it takes to open a Lending Club lender account.

Starting a Lending Club Application

Beginning the Lending Club application process is easy. Simply visit Lending Club and enter your basic information including your name, e-mail, security question, and password.

After confirming your email address by clicking on a link in an email, you can choose to proceed with either a lender or a borrower application.

When you continue with the lender application, Lending Club asks you to verify some basic information about your identity and agree to certain terms.

There are four steps to the Lending Club lender application:

• Verifying your identity
• Agreeing to terms
• Linking your bank account
• Searching for loans to fund

During the first step, verifying your identity, you simply provide your name, address, and social security number. In the second step, you’ll review three different notices that explain how lending club works for investors (lenders). You’ll then have to click “I agree” for each clause in order to continue.

The third step is to link your bank account to Lending Club so that you can make deposits to your lending account (and withdraw earnings down the road). Lending Club asks for the name on your bank account, your financial institution, and your routing and account numbers. Lending Club takes the additional step of verifying your bank account by depositing a small amount (less than $1) into your account. You’ll then need to report back to Lending Club what that amount was in order to activate the linked account.

After you have completed all these steps, you’ll need to wait for your bank account to be verified to start investing in Lending Club loans unless you want to make a deposit via other available methods like PayPal.

Finally, you’ll have a chance to search for borrowers in the Lending Club network that are related to you, either by location, employer, or educational institution…a great way to start lending is to start lending to people in your own networks!

That’s all there is to opening a Lending Club lender account. In a future post, we’ll look at how to select a portfolio of social lending notes to meet your investment/saving goals.

Related posts:

1. Win $100 from Lending Club
2. Social Lending Networks Compared
3. Perks of Using a Lending Club Loan to Buy a Car

What is a Roth IRA?

A Roth IRA is a type of retirement savings account with one extremely attractive tax benefit: Your contributions and interest earnings grow tax-free and, at retirement, withdrawals are 100% tax-free.

This benefit distinguishes the Roth IRA from the traditional IRA, in which contributions are tax deductible, but withdrawals are taxed at retirement time. If you can get money into a Roth IRA at an early age and let it grow for 25 or 30 years, you’ll earn a lot of money in interest tax-free!

Another reason Roth IRAs are great is because IRAs have a leg-up over the 401(k) plans you may have at work. Unlike 401(k)s, IRAs let you invest your money virtually anywhere: mutual funds, exchange-traded-funds, individual stocks, and so on.

Other Things to Know About a Roth IRA

When you make IRA contributions, your goal is to leave that money untouched until retirement so it can reap compound returns year after year. Another perk of the Roth IRA, however, is that you can withdraw you contributions at anytime, tax-free and with no penalties (unlike traditional IRAs and 401(k) accounts). This allowance applies to your contributions only, not the interest you earn, which is subject to the same federal taxes and 10% penalties as withdrawals from traditional IRAs and 401(k) accounts.

Another perk is that you can use up to $10,000 in contributions (and earnings) tax-free and penalty-free from a Roth IRA to purchase your first home. The only requirement is that your IRA account must have been open for five years.

How to Open a Roth IRA

Don’t let the recent scary stock market news deter you from investing in a Roth IRA this year (in fact, just ignore the stock market). It’s actually a great time to buy stocks. So if you don’t have a Roth IRA (or haven’t contributed to your account in 2008 yet), do so now! That is, before April 15th.

There are federally-imposed limits on how much you can contribute to an IRA each year—in 2008 and 2009 the limit is $5,000 per year. But, you can make 2008 tax-year contributions up until April 15, 2009. Meaning you could invest $5,000 now for 2008 and $5,000 before April 15, 2010 for 2009.

If you don’t already have an IRA account, I recommend opening an E*Trade IRA account which will give you access to almost unlimited investment options and extremely low trading fees. And don’t worry if you don’t know where to invest…just pick one or more exchange traded funds (ETFs) that follow one of the stock market’s averages like the Dow Jones Industrial Average or S&P 500. As your balances and investing savior faire develops you can tweak your asset allocation accordingly.

Related posts:

1. Roth IRA or Traditional IRA: What Do You Do?
2. Don't Forget April IRA Contributions
3. 401(k) With Company Match or Roth IRA?

About Pertuity Direct

Pertuity Direct is a social lending network registered with the U.S. Securities and Exchange Commission (SEC). Like other social lenders, Pertuity lets consumers make loans to others and earn a return on their money that’s better than most high yield savings accounts. Alternately, consumers can choose to borrow money with Pertuity and secure a personal loan at lower rates than with most credit cards and banks.

Borrowing with Pertuity

Pertuity Direct is best suited for borrowers with good credit. In fact, a minimum credit score of 660 is required to borrow from Pertuity. During our review of the Pertuity Direct social lending network, we also learned that unlike some other social lending sites, Pertuity handles the credit application process. At some other sites, a portion of your credit profile is available to lenders (not so with Pertuity). In addition to your credit score, Pertuity Direct will examine applicants’ credit history, debt-to-income ratio, and other factors.

If an applicant is approved as a borrower, Pertuity Direct will set the interest rate based upon the applicant’s credit profile and loan amount (loans are available between $1,000 and $25,000). Borrower interest rates range, at the time of this review, from 8.9% to 17.9%. Applicants may then decide whether to accept the loan terms.

Additional fees include a 1-2% closing fee (depending on credit), and a $15 fee for failed and late payments. There is a 1% rate discount for electronic funds transfer.

Lending with Pertuity Direct

With some social lending networks, lenders actually choose which borrower loans to invest in themselves. Pertuity is different. Pertuity takes its portfolio of borrower loans and offers it as a mutual fund (called the National Retail Fund).

In other words, Pertuity manages the risk, and you get the returns. This makes it simpler to get started as a lender, although it gives you less control over how much risk you want to take in exchange for expected returns. One major perk of Pertuity’s lending system, however, is that you can withdraw you money at any time. With other social lenders, you have to wait until your loans are repaid over a course of 36 months to collect your principal and interest.

Pertuity advertises that its portfolio contains loans with an average interest rate of 13.9%, an average balance of $9,300, and an average credit score of 740. The minimum to invest as a lender with Pertuity is just $250.

Pertuity Direct Review Summary

I’m a huge believer in social finance because it gives the power to make responsible lending and borrowing decisions to real people, not large banks. So I’m glad to see Pertuity grow as an important player in the social lending network. For borrowers, Pertuity Direct offers a very similar product as other social lending networks. The one difference is that Pertuity makes the credit decision regarding whether or not you’ll be approved and what your interest rate will be rather than a group of individual lenders.

For lenders, Pertuity provides the ability to invest in a mutual fund representing a portfolio of loans rather than individual loans. This will minimize lender’s losses but may also discourage some more aggressive lenders who want to swap higher risk for greater returns. Finally, Pertuity does give lenders the chance to withdraw money at any time rather than waiting for loans to mature.

Have you used Pertuity Direct? What did you think?

Related posts:

1. Social Lending Networks Compared
2. How to Lend Money The Smart Way
3. How to Open a Lending Club Lender Account