Don’t have an IRA? Maybe now’s the time to start saving. Can you believe that individual retirement accounts (IRAs) have been helping individuals save for retirement for more than 30 years? These accounts extend the tax advantages of employer-provided retirement plans to many people who either don’t have retirement plans at work or who want to supplement their other plans.

Since their inception, however, IRAs have changed in many ways, including restrictions on who can contribute, as well as the types of accounts you can contribute to. Given this evolution, you may not be familiar with all the options and benefits available to you. To help bring you up to speed, I’ll highlight three primary types of IRAs:

• Nondeductible IRAs
• Deductible IRAs
• Roth IRAs

The one thing that remains consistent, regardless of the type of IRA, is the contribution limit allowed. In 2007, it is $4,000 ($1,000 more if you are age 50 or older); in 2008, the limit increases to $5,000.

Nondeductible IRAs

This IRA is perhaps the simplest to understand—you contribute after-tax income to the IRA, and your assets grow on a tax-deferred basis. When the money is withdrawn, you don’t have to pay taxes on your original contribution, but any earnings will be taxed at your ordinary income tax rate at that time.* Nondeductible IRA owners are required to take minimum distributions starting at age 70½.

Deductible IRAs

This type of account has more variables for consideration than the nondeductible IRA. Individuals meeting IRS deductibility requirements can deduct any IRA contributions from their income for tax purposes. In addition, earnings in the account accumulate on a tax-deferred basis. So, when you meet a qualifying event, your total distribution amount will be fully taxable at whatever your marginal tax rate is at that time.* Deductible IRA owners are required to take minimum distributions starting at age 70½.

Roth IRAs

Roth IRAs, which were introduced in 1998, allow for after-tax contributions, as well as potentially tax-free distributions when you meet a qualifying event. The IRS has set specific eligibility requirements for individuals to contribute, but those who are eligible benefit from tax-free access to their contributions at any time.* Roth IRAs are generally considered the most tax-advantageous of the IRA options, and they can play a significant role in your retirement savings strategy. Roth IRA owners are not required to take distributions.

As the end of 2007 approaches, it may be helpful for you to use IRAs to your maximum advantage. As a starting point, you should first evaluate whether you are eligible for a Roth IRA this year. If you are, I hope you seriously consider making a contribution. If, however, your income level makes you ineligible for a Roth IRA, a traditional IRA may be best for you. Your financial advisor can provide more information and help you evaluate which IRA makes the most sense for your individual needs.

*Withdrawals of taxable amounts are subject to ordinary income tax and, if made before age 59 ½ , may be subject to an additional 10% federal income tax penalty.

Labels: IRAs, withdrawals

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FICO Scores: Why They’re Important, How They’re Calculated, and What You Can Do to Improve Them Whether you’re applying for a credit card, a personal loan, or a mortgage, the lender you choose looks at many things when deciding what type of offer to make to you, including your income, how long you have worked at your present job, and the kind of credit you are requesting. To help them gain a better understanding of your credit risk level, lenders often start by looking at your FICO scores.

You have three FICO scores, one from each of the three credit bureaus: Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you. In the simplest terms, good FICO scores generally result in your receiving the best interest rates on all types of loans. Bad FICO scores, on the other hand, can cost you thousands of dollars over the life of a loan.

How your score is calculated

FICO stands for the Fair Isaac Corporation, which is a leading monitor of consumer credit. Fair Isaac develops FICO scores based solely on information in consumer credit reports maintained at the three major credit reporting agencies.

An individual’s FICO score can range from 350 to 850—850 being the best. In determining your FICO score, the corporation evaluates information in five categories:

• Payment history (35%): This includes information on specific types of accounts, such as credit cards, retail accounts, student loans, installment loans, finance company accounts, and mortgages. It also captures any presence of adverse public records, such as bankruptcy, judgments, suits, liens, wage attachments, collection items, and any delinquent or past-due items.

• Amounts owed (30%): This category assesses the number of accounts you have and the amount you owe on each. Additionally, the proportion of balances to total credit limits on certain types of revolving accounts is considered.

• Length of credit history (15%): This information examines the time that has elapsed since a specific type of account has been opened.

• Types of credit used (10%): This data relies upon recent information about the number of credit cards, retail accounts, installment loans, mortgages, and consumer finance accounts you have.

• New credit (10%): This category includes the number of accounts you have recently opened.

Keep in mind, your FICO score considers all of the above categories of information. No one piece of information or factor alone will determine your FICO score. For some people, one factor may be more important than it is for others with a different credit history. As the information in your credit report changes, so does the importance of any factor in determining your FICO score. What matters is the mix of information, which varies from person to person.

Good and bad breaks

If your FICO score is 720 or higher, you are likely in good shape. If it’s lower than 720, you may need to brace yourself for some frustration. Most mortgage lenders have firm breakpoints. For example, if your FICO score is 699 and the lender’s breakpoint is 700, that minute difference could mean an extra half-point on a mortgage loan.

How can you improve your score?

Your FICO score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your FICO score.

You can also do the following to help increase your score:

• Pay down your credit card debt to zero and your score can go up by as much as 20 points in 60 days.

• Get a copy of your credit report and look for errors. This may include payments that appear as late but you can prove were paid on time, accounts that aren’t yours, and old debts that shouldn’t be on your report anymore (i.e., negative debts that should be taken off your report after seven years and bankruptcies that should be removed after ten years).

• Maintaining multiple credit cards may help you in some circumstances. It is better to have four cards at 20-percent to 30-percent capacity than to have one card that’s maxed out.

Rapid rescoring

If you’re applying for a mortgage, ask whether your lender uses a rapid rescoring service. If so, you can have your credit score rescored in 72 hours; if you’ve recently improved your score, rescoring may save you money. Rescoring generally costs about $50 per credit account.

Even if you’re not in the market for a mortgage or another loan, it is always wise to have a good handle on your FICO scores. It is easier to correct mistakes and improve your score when you don’t have an immediate deadline to meet. For more information or to obtain your FICO scores, visit www.myfico.com.

Labels: credit, FICO, mortgage

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